Costco Warns of Material Weakness in Controls

Costco reported better-than-expected quarterly results but its disclosure of a weakness in its information technology drove its shares down more than 2% in extended trading Thursday.

For the fourth quarter, the warehouse shopping leader earned $2.34 per share, an increase of 13.4% on the year-ago period, while revenue rose 5% to $44.41 billion. Analysts had expected earnings of $2.34 per share on revenue of $44.05 billion.

Same-store sales grew 7.2% overall, matching estimates, with gains of 7.8% in the U.S., 4.6% in Canada, and 6.9% in other international markets. E-commerce sales climbed 26.3%.

Wall Street had expected another quarter of robust sales for Costco, which has defended itself from online encroachment by keeping a lid on costs and using the annual fees from its 93 million members to offer lower prices than competitors.

“The strong performance in August gives us more confidence in Costco’s ability to sustain top-line momentum even as compares become more challenging,” Oppenheimer senior analyst Rupesh Parikh said in a research note.

Costco’s share price has increased by more than 20% so far in 2018 but it dipped 2.4% to $226.20 in the extended session Thursday as investors absorbed the news that the company it expects to report a material weakness in internal control in its upcoming annual report.

“The weakness relates to general information technology controls in the areas of user access and program change-management over certain information technology systems that support the company’s financial reporting processes,” Costco said. “The access issues relate to the extent of privileges afforded users authorized to access company systems.”

Remediation efforts have begun, according to Costco, but the material weakness will not be considered remediated until “management has concluded, through testing, that [the applicable] controls are operating effectively.”

Costco also reported that net sales increased 5% in the fourth quarter but operating expenses rose 5.2%, causing the company’s operating profit to decline by $4 million to $1.45 billion.