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The Seattle-area company said earnings for its fiscal fourth quarter ending Aug. 31 would be "well below" the current forecast of $1 a share. Prior to the announcement, Costco was on track to earn $2.99 a share for the full fiscal year, according to a Thomson Reuters analyst poll.

Costco's financed chief, Richard Galanti, declined to offer more specific guidance during a Wednesday conference call. "While I would like to have been more definitive on our current expectations for the fourth-quarter earnings per share, there are many margin and expense items that remain moving targets," he said.

Despite rising energy costs, Costco has kept prices for gasoline, food and other merchandise steady to retain its penny-pinching customers. While the strategy has pushed same-store sales up 8% year-to-date through June, the sales gains have come at the expense of profitability. The International Council of Shopping Centers reported that the entire industry saw comparable sales rise only 2.4% during the same period.

But inflation has outpaced management's expectations, and that's left Costco unsure of its final quarterly numbers.

"Primarily, it's rising energy costs and its many impacts," Galanti said. "It has impacted our gasoline profitability, although in the very recent couple of weeks that has improved. It's impacted our freight costs at all levels of the merchandise distribution chain. It's impacting the direct cost of merchandise frankly at a faster and higher rate of increase in the past six to eight weeks than before that."

The Analysis

If your best customers are people who buy 48 frozen burritos at a time, then you know something about long-term vision, and Costco's sticking to one, even if it takes a short-term hit.

Dan Geiman, an analyst at McAdams Wright Ragen, said in a preview note that June sales would continue to be strong, and that "the company continues to benefit from consumers' more value-conscious shopping behavior. As in prior months, food sales as a whole, including food and sundries and fresh foods, likely outperformed some of the more discretionary product categories," he wrote.

Galanti, the CFO, emphasized the importance of food sales and the need to keep prices steady.

"Everybody's got to eat," he said. "Food still drives the business."

And keeping the business in gear has been more important than simply meeting numbers for Wall Street, says John Gabriel at Morningstar. While Costco can't do much about rising energy prices, it can take a stand and minimize the impact on its customers.

"In a sense, I would say it is actually under their control, because they made the decision that they wanted to be more competitive in terms of pricing, and they're competing against Sam's Club and Wal-Mart," he says. "That's a decision to keep the top line growing and the [membership] renewal rate trending upward. They're not going to sacrifice their business to hit one quarter's earnings."

Costco didn't offer guidance on fourth-quarter revenue, which is expected to reach $22.8 billion, an 11% increase from the year-ago quarter.

In a nod to shareholders hit by the inflation battle, Costco also authorized a $1 billion share buyback.

"For someone who owns [the stock], it tells you they're sticking to the game plan, really, and that should instill some confidence," says Gabriel.

The Bottom Line

Discount retailers tend to do well in hard times, and Costco was showing the evidence of that principle up until its profit warning. But a company that's willing to take a hit for a 12-week stretch of results is also a company that can see past the next quarter. long-term investors should take note.

"For someone who likes the stock but thought it was a little pricey, they may see this as a buying opportunity," Gabriel says. "It's certainly a difficult market to issue a profit warning in, but you don't lump this in with all the rest of the companies that have. There are no liquidity concerns here financially they're still rock solid."

If the inflationary environment subsides, Costco's customer-retention strategy will help drive profits a bit more quickly than competitors. Meanwhile, the stock buyback should help soothe the ruffled feathers of longtime shareholders.

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