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Costco's business model is showing major weakness for the first time in years

Kate Taylor
Costco Supermarket

(AP Photo/Elise Amendola)
Costco has been one of the most reliably successful businesses on the market for much of the past 30 years. On Wednesday, however, the company reported its
second straight quarter of earnings declines.

While sales increased 3% in the second quarter, profit fell 8.7% to $546 million, down from $598 million in the same quarter last year.

Total sales reached $28.17 billion, short of forecasts for $28.42 billion.

In recent quarters, Costco's performance has been negatively affected by currency fluctuations and lower fuel prices, as well as by a rise in merchandise costs and overhead expenses. The discount retailer's split from American Express and coming switch to Visa credit cards have additionally led to decreased profit in the short term.

Despite this, analysts have recently applauded Costco's business model.

A Costco shopping cart is shown at a Costco Wholesale store in Carlsbad, California September 11, 2013. REUTERS/Mike Blake

(Thomson Reuters)

In a recent research note, Morgan Stanley analysts wrote that Costco operated "one of the best business models in our space. According to the analysts, the retail giant succeeds by offering customers low costs with minimal markups and by providing "differentiated and high quality" products.

In December, Deutsche Bank's Paul Trussell upgraded the company’s rating to buy from hold, calling the company "Amazon-proof," thanks to Costco's membership model and ability to incentivize visits to brick-and-mortar locations.

Costco has assets that retail competitors from Walmart to Amazon lack. But because of the impact that gas prices and currency fluctuations have on the company, these advantages haven't been enough to drive growth at the retail giant in 2016.

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