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Costco CFO: 1st China store blew past 'very high expectations'

Costco Wholesale Corp.'s first store in China is doing better than the company's internal projections, but don't expect that to change the retailer's strategy in the world's second-largest economy.

The Shanghai store, which had to close four hours after its grand opening on Aug. 27 due to crowds, has attracted about 20,000 new members, CFO Richard Galanti told analysts during an Oct. 3 call to discuss Costco's fiscal fourth-quarter results. The average Costco store has about 68,000 members, he added.

"Clearly, it surpassed all of our very high expectations," Galanti said of the store in China.

But the company is not changing its broader expansion plans in China, the CFO added. He confirmed that the company plans to open a second store in Shanghai by early 2021, but did not point to any additional store openings planned for China.

Galanti said Costco is focusing first on building its management team in China and will make more decisions about its plans after a couple of years in the country.

"We're going to be pretty methodical about it, as we have been in other countries," he said. The retailer is planning to roll out e-commerce websites for its stores in Australia and Japan by the middle of its 2020 fiscal year.

Costco's quarterly comparable sales rose 5.1%, in line with analyst estimates. But its as-reported EPS and net income came in below expectations, held back by a $123 million pretax reserve.

The reserve relates to taxes that Costco may owe for certain products it sold between 2009 through July 2016, but Galanti declined to specify which products the tax allegedly applied to or which authority is attempting to collect it. Costco is protesting the tax collection, he said.

U.S. tariffs on imports from China are "a slight negative impact," Galanti said, adding that sales volumes of some high-value items, such as furniture, have declined as the company has raised prices to offset the duties. In some instances, Costco has decided to drop certain items and replace them with similar ones as a result of tariffs.

The most recently announced round of U.S. tariffs, which will target olive oil and cheese imported from certain EU member states starting Oct. 18, will add further pressure to the company's financials.

Despite continuing to accumulate cash on its balance sheet during the fourth quarter, Galanti said Costco has no plans to strike deals in the near future. "I don't think there's any dry powder or M&A-related dry powder," Galanti said of the cash reserve.

Costco's cash and cash equivalents rose 38% from the year-ago period to $8.38 billion during the fourth quarter.