Costco Wholesale Corp posted a lower quarterly profit on Thursday that fell just short of Wall Street's expectations, as shoppers cut spending on discretionary items like clothes and jewelry.

Costco's sales have slipped recently as the economic slump douses demand for unnecessary items. Still, the No. 1 U.S. warehouse club chain has said it intends to keep prices low to win market share, even if that crimps profits.

As the recession squeezes household budgets, consumers have focused more on buying only everyday items like food and toiletries.

That has helped warehouse clubs like Costco, Wal-Mart Stores Inc's Sam's Club and BJ's Wholesale Club Inc lure customers who are seeking low prices on those necessities.

That trend has also helped close-out retailer Big Lots Inc , which posted a better-than-expected quarterly profit and raised its full-year forecast, as it saw an unwavering demand for basic household items.

Customer shopping patterns have likely changed, and discounts and saving money are likely here to stay, Big Lots' Chief Executive Steven Fishman said in a conference call.

COSTCO MISSES

But in its latest quarter, Costco faced ongoing weakness in sales, particularly sales of higher-ticket, discretionary items, CFO Richard Galanti said in a statement.

For warehouse clubs, lower gas prices are hurting comparisons from a year earlier, when high prices boosted sales at their gas stations. A stronger U.S. dollar has added to the pressure on Costco, hurting its international results.

Costco's profit fell to $209.6 million, or 48 cents a share, in the third quarter ended May 10 from $295.1 million, or 67 cents a share, a year earlier.

Excluding litigation costs, Costco's profit was 52 cents a share, a penny shy of the 53 cents that analysts on average were expecting, according to Reuters Estimates.

Quarterly sales fell about 5 percent to $15.48 billion, excluding membership fees, which dropped about 6 percent to $328.4 million.

Costco's sales at clubs open at least a year fell 7 percent, but would have risen 2 percent without the impact of gasoline deflation and foreign exchange.

A year ago, tax rebates had been a general tailwind for retailers, making comparisons tough this time around for companies like Costco, said Jefferies & Co analyst Daniel Binder. Consumer thrift, however, was not a surprise, he said.

Citing the weakening in Costco's quarterly earnings, William Blair analyst Mark Miller said in a note that we continue to recommend investors swap out of Underperform-rated Costco into Outperform-rated Wal-Mart, Target , and/or Kohl's .

A day earlier, Costco said it would start accepting food stamps at its two New York City stores.

BIG LOTS TOPS

Big Lots' net profit rose to $36.2 million, or 44 cents per share, in the first quarter ended May 2 from $34.5 million, or 42 cents per share, a year earlier.

Analysts on average expected 40 cents per share.

Sales fell 0.9 percent to $1.14 billion, while sales at stores open at least two years at the start of the fiscal year fell 0.5 percent.

The retailer, which buys excess inventory in bulk and sells it at low prices, expects a second-quarter profit of 26 cents to 32 cents per share from continuing operations.

Analysts were expecting earnings of 29 cents per share.

For the full year, Big Lots forecast profit of $1.85 to $1.95 per share from continuing operations. Its prior forecast called for $1.75 to $1.90 on that basis, while analysts were expecting $1.88.

Big Lots expects full-year sales to be flat to a 1 percent decline, and said it is on track to open 45 stores this year.

The company, which has decided to close a distribution unit in California, will have further opportunities to lower costs through the year even if sales are slightly down, Barclays analyst Ivy Jack said in a note.

Costco shares were down 4.5 percent at $46.62, while Big Lots' shares were down 3.3 percent at $22.86, amid a wider market decline as new housing data pointed to more weakness in the housing market.

(Reporting by Aarthi Sivaraman in New York and Esha Dey in Bangalore; Editing by Jon Loades-Carterm, Lisa Von Ahn, Dave Zimmerman)

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