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Costco says it could mix up supply chain if tariffs prove

painful

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Company misses Wall Street expectations for second-quarter

earnings

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Retailers throughout US bracing for potential trade wars

as

tariffs ramp up

By Neil J Kanatt, Nicholas P. Brown

March 6 (Reuters) - Costco Wholesale ( COST ) would

consider making changes to its international supply chain if

tariffs from U.S. President Donald Trump lead to big price

hikes, Chief Executive Officer Ron Vachris said on a conference

call on Thursday.

The membership-only retailer, which on Thursday missed Wall

Street expectations for second-quarter profit, organizes its

stores in a so-called treasure hunt structure that allows it to

adjust its merchandise mix more easily than other retailers -

and possibly source products from countries that are not subject

to tariffs, Vachris said.

"With our flexibility, there are not many items we can't

find something else to replace, or something else to bring in,"

Vachris said on Costco's second-quarter earnings call.

Vachris added, though, that Costco would work with existing

suppliers to keep prices low, and aim to avoid charging

consumers more at a time when they are getting choosier about

how to spend their money.

Costco earned $4.02 per diluted share, missing analysts'

estimate of $4.11 per share, according to data compiled by LSEG.

The company's quarterly revenue rose 9% to $63.72 billion,

compared with analysts' average expectation of $63.13 billion.

Costco's shares fell nearly 1% in extended trading.

Retailers are struggling to navigate an uncertain environment

amid fears of trade wars. Target ( TGT ) and Walmart ( WMT )

both recently issued cautious forecasts, bracing for

tariff-driven price hikes and retaliatory measures by affected

countries.

Vachris said that about one-third of Costco's U.S. sales are

products imported from other countries, less than half of which

are from China, Mexico and Canada.

Soaring egg prices, a result of rising bird flu cases in the

U.S., also hit Costco's margins, alongside coffee and cocoa

price inflation.

Higher costs of eggs are boosting prices in Costco's bakery

section, where eggs are a key ingredient in cakes and breads,

overshadowing its lower costs for sugar, butter and flour, Chief

Financial Officer Gary Millerchip said on the call.

Merchandise costs for the quarter ended February 16 rose 9%,

compared with a 5% rise a year earlier.

Costco is also facing political headwinds over a decision to

keep its diversity, equity and inclusion programs, which some

big consumer brands and retailers have dropped since the Trump

administration threatened to investigate companies that maintain

them.

In January, 19 Republican U.S. state attorneys general demanded

that Costco repeal the DEI programs within 30 days or else

explain why it hadn't. It was unclear on Thursday whether Costco

responded to the demand.