AXP American Express Company

By Sarah Nassauer 

Costco Wholesale Corp.'s June switch to Visa Inc. is paying off.

The warehouse club chain reported higher quarterly profit Thursday boosted by lower credit card fees and other terms from its new deal to accept Visa-brand cards, replacing a long-term alliance with American Express Co.

For the quarter ended Aug. 28, Costco's profit rose 1.6% to $779 million despite higher wages, lower gasoline sales and deflationary pressure on food items including meat and eggs. Those expenses were "offset in particular with everything related to this credit card transition," Chief Financial Officer Richard Galanti said on a conference call.

He said some 11.4 million co-branded American Express cards, representing about 7.4 million accounts, had been transferred to new Visa Citi cards, and about 85% of those accounts have now been activated with Costco. Another 1.1 million members have applied for the new card since June 20.

Mr. Galanti said the company hopes co-branded Visa cards become a "top of wallet" card for shoppers, something that was tricky with American Express, which isn't accepted in as many locations. Mr. Galanti also said shoppers are spending strongly on discretionary items like electronics and apparel. Costco's shoppers generally skew higher income than Wal-Mart Stores Inc. or mainstream grocers.

The better-than-expected profit lifted shares of the bulk seller by 1.9% to $150.270 in after-hours trading. Before that, the stock had fallen 8.7% in 2016.

Sales in existing stores were flat over the quarter ended Aug. 28, but rose 3% excluding negative impact from lower gas prices and the strong dollar. Net sales, which exclude membership fees, rose 2% to $35.7 billion.

The August quarter report is the second since Costco said it would raise its minimum wage for store workers for the first time in nine years. The company had said it would boost what it paid those workers starting in March, and the move helped to nudge total operating expenses higher.

The company's selling, general and administrative costs jumped 5.6% from a year earlier to $3.7 billion, while merchandise costs increased 1.8% to $31.65 billion.

Costco opened or remodeled 23 locations last year, and the company plans to open about 31 in the next 12 months, including 17 in the U.S. and seven in Canada. Mr. Galanti said the company has found that its warehouse stores have fared better in smaller markets than it once expected.

"As we have gone into New Orleans and Birmingham and Rochester and Toledo, these are markets that again were not high on the radar seven or eight years ago and what we have seen is that our deal works," he said. The Issaquah, Wash.-based chain currently operates 715 warehouses, including 501 in the U.S.

Anne Steele contributed to this article.

Write to Sarah Nassauer at sarah.nassauer@wsj.com

(END) Dow Jones Newswires

September 29, 2016 20:14 ET (00:14 GMT)

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