On the surface, much of Costco Wholesale's (NASDAQ:COST) recent earnings results for fiscal year 2015 looked weak. The Sept. 29 release showed little same-store sales growth, among other headwinds. However, there were a few highlights that show why things could get much better for Costco in the near future. Here are four positive takeaways from the results.
However, the company points out that declining oil prices and the strengthening dollar contributed to the slow sluggish growth, and excluding those two components, total same-store sales growth came out to 7% for the year. Traffic to Costco locations rose 3.5%, following six consecutive years of a roughly 4% annual increase in traffic. Clearly, the operation of the stores isn't the issue, and as oil and fluctuating currencies even out in Costco's favor, sales growth should start to look much better than it does now.
Costco keeps margins on its products incredibly low as part of its business model to provide cheaper products to customers, and it makes most of its income through the annual membership fee that members pay. Thanks to membership revenue that rose 4.3% year-over-year, as well as other cost-saving initiatives and a favorable tax impact regarding a special cash dividend paid in the second quarter, Costco was able to grow net income 15.5%. Membership retention for fiscal 2015 grew to 91%, which should help that membership revenue to continue growing as the company brings in more members and keeps them longer. The company also hasn't raised its membership fees in over four years, but it has a history of raising it in five-year increments. Another small raise could significantly boost earnings some time in the near future.
While we don't know exactly what this investment in IT will produce, from the company's previous statements about the need to maintain relevance with a multi-channel shopping experience, it's likely to involve upgrades to online shopping in the places where it already has the service (North America and the U.K.) and introducing it to new markets in the coming years.
Costco has nearly one-third of its 686 locations outside the U.S., and that number is set to increase. In the earnings release, the company said that by the end of the calendar year, it plans to open 12 more locations, four of which will be outside the U.S. in Spain, Canada, Australia, and Japan.
However, in 2016 and beyond, expect Costco to continue increasing membership revenue, to grow its number of locations, and to start to taper off its SG&A expenses while making gains from its investment in technology. Regardless of whether oil prices start to tick back up or currency fluctuations reverse, expect Costco's income to continue rising at a steady pace.