Costco

Source: Costco.com

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.

1. Weak sales growth isn't as bad as it looks
Costco's net sales increased by 3% over fiscal year 2014 to nearly $114 billion. That 3% figure isn't so bad necessarily, but what does look bad is that sales growth seems to be slowing further, as revenue for the fourth quarter was up just 1% year-over-year. Even worse, that same-store sales growth, which was up just 1% for the entire year, was down 1% year-over-year for the quarter.

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.

2. Net income growth is still impressive
Regardless of the issues affecting the top line, Costco's net income continued to grow at an impressive rate, with signs of even stronger profits in the next few years.

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. 

3. Investments in digital infrastructure look positive
One expense that has been growing is SG&A, which jumped 5% for the year to nearly $11.5 billion. This rising expense is actually a good thing, because much of that increase in spending seems to be focused on technology upgrades that will support sales in the coming years. Oppenheimer analyst Brian Nagel reported in July, after his firm set a buy rating on Costco with a $160 price target, that these incremental expenses should peak in fiscal 2015 and start to decline through 2017. As that expense tapers off in the next year or so, earnings will benefit as a result.

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. 

4. International expansion continues
Even though international sales were much of the concern around weak same-store sales growth due to the strong U.S. dollar, the company is still expanding overseas. It can do so now relatively inexpensively, since those lower-valued currencies now make building in those countries cheaper than it would have been a year ago. 
 
Screen Shot

Source: Costco.com

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.   

Costco looks like a buy 
Issues with foreign currency and oil have hurt Costco's sales this year, and as a result, Wall Street has lost some of its confidence in the company. Costco didn't get much of a boost from the full-year results, even with the 15% increase in earnings per share. 

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.

Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.