Costco’s Employee Healthcare Costs Rise 25%

Costco (COST) reported a 25% increase in healthcare costs in its fourth quarter conference call. This increase created an additional 4 cents per share hit to earnings over and above expectations (fourth quarter EPS was $0.85/share). The company cited three main causes for the soaring costs (from Seeking Alpha transcripts):

  1. “Normal” health care inflation (“that we all hear and read about”)
  2. Increased utilization per person
  3. Greatly reduced employee turnover

COST did not provide numbers that separate out the individual impacts. The company did speculate that employees have increased utilization out of fear of losing their jobs resulting in a loss of healthcare coverage (although COST has not had layoffs) and perhaps higher levels of stress from the pressures of the overall economy. Reduced employee turnover increases costs because of the higher number of employees who are eligible for coverage. In the past year, the percentage of eligible employees has spiked to 92% from a previous range of 80-82%.

COST management further explained that it does not “…see benefits costs changing dramatically…it’s going to continue to be relatively high but we’ve worked that into our numbers this coming year.” There are no current plans to pass on the increased costs to employees, but there could be downward pressure on wages for some employees.

On the retail side, COST claimed that the abnormal deflationary pricing pressures it saw in various consumer products has now largely come to an end. For example, deflation in electronics goods has returned to a more normal 10-15% from as high as 45% last year.

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