Costco To Take $118 Million Charge For Accounting Change

Costco said today it will change its accounting method for membership-fee income in anticipation of new Securities and Exchange Commission rules that will require the income to be recognized on a "deferred" basis rather than the "cash" basis that Costco and others have been using.

The Issaquah-based warehouse retailer will make the change in the first quarter of its 1999 fiscal year ending Nov. 22, 1998. It expects to take a one-time, noncash after-tax charge of about $118 million.

The accounting move is not expected to affect Costco's financial condition, cash flow or ongoing operating results, said Jim Senegal, president and chief executive officer. If the change had been in effect over the past fiscal year, earnings would have been about 3 percent lower, while cash flow would not have been affected, he said.

Costco, the country's ninth-largest retailer, was flooded with telephone calls from investors in early September following speculation the SEC was investigating its accounting methods for recognizing membership fees. Costco officials said the company hadn't been questioned by the SEC, though they added that in previous years the regulatory agency had asked about some of the warehouse club's accounting policies as part of its normal review process.

"It is one of those situations where the rumor and fear create more anxiety than the reality," said John Rogers, an analyst with D.A. Davidson in Portland. "It is a change in accounting. It does not affect how much cash they take in or the financial strength of the company."

Costco also announced today that:

-- Sales for the four weeks ending Nov. 1 increased 10 percent to $1.96 billion from $1.78 billion in the same period of the prior fiscal year. Warehouses open at least a year showed a 7 percent gain.

-- The board authorized a common-stock repurchase program worth up to $500 million over the next three years. Costco expects to repurchase shares using cash and money from short-term investments. As of Oct. 30, the company had about 218 million shares outstanding. They have been trading in the high $50s in recent days. At today's close, the stock was up $3 to $62.75.

-- A Costco online Web site, http://www.costco.com, has begun operation. Products for sale include electronics, cameras, computers, office machines, toys, sporting goods, kitchen and housewares, home furnishings, collectibles, diamonds, watches and other jewelry. Initial services being offered through Costco Online, available to executive members, include discounted auto and homeowner insurance, mortgage and real-estate services, and residential long-distance telephone services. For businesses, it offers credit-card processing, employee health care, business checks and forms printing, and long-distance phone service.