PSMT - PriceSmart: An Attractive Priced Club Operator

2024-01-10 03:09:39 ET

Summary

• Warehouse club operator, PriceSmart, has a significant international operating presence. Among other benefits, this insulates the company from meaningful competition from the larger operators.
• Though shares have lagged since my last update on the stock, investors appear to be cheering the company’s first fiscal quarter results.
• One key factor that drove the quarter’s results was the more favorable currency environment in PSMT’s operating regions.
• At current trading levels, I view PriceSmart as attractively priced relative to other warehouse operators.

International club operator, PriceSmart ( PSMT ), traded higher in the after-hour trading session immediately following the release of fiscal Q1 results that surpassed expectations .

In prior coverage , I expressed reservations about regional weakness in the Colombian market, a critical operating segment for PSMT. In my view, more measurable progress needed to be made in the market to warrant a bullish pivot on the stock.

Since my update, shares have lagged, down nearly 5%. The stock, however, has performed stronger in recent periods, with gains of nearly 4% over the past month. The stock also rose about 8% in the after-hour trading hours.

With shares near the midpoint of its 52-week range, I believe the stock now presents value to those seeking a Costco-like ( COST ) company without the top-end valuation.

PSMT Stock Key Metrics

At period end, PriceSmart operated 53 warehouse clubs primarily located in Central America, the Caribbean, and Colombia. The company also operated one warehouse in the U.S. Virgin Islands.

With 10 warehouses, the Colombian market accounted for PSMT’s most significant geographic operating segment. This is despite Central America's larger weighting in terms of total net sales. Weakness in the market in prior periods, therefore, was one reason warranting a bearish or neutral stance on PSMT.

Given the international operating environment, currency fluctuation has been one of the most significant variables affecting PSMT’s overall sales and profit performance. In prior periods, PSMT was dogged by an unfavorable currency and market environment in Colombia. This has since changed with the peso up about 23% against the dollar over the past year.

The changing market environment in Colombia has provided a boost to revenues and earnings in recent periods. Near-term growth rates are now competitive with the U.S.-based club operators .

Despite the promising growth rates, PSMT still trades at a sizeable discount to their larger counterparts.

This has attracted attention from both Wall Street and the broader Seeking Alpha analyst community, both of whom remain bullish on the stock.

PSMT’s Topline Sales Strength

In its first fiscal quarter, PSMT reported total net merchandise sales growth of 10.7%. This included comparable sales growth of 8%. Driving total net sales growth was strength in PSMT’s Colombian and Central American markets. Each of which reported double-digit growth of 19.3% and 11.3%, respectively.

Positive volume trends also provided an uplift to overall sales. During the quarter, total transactions increased 8.3%. This far surpassed the 2.3% increase in average prices. The volume strength is notable, especially given that PSMT was able to achieve this while increasing prices at the same time.

The standout in the quarter, however, was PSMT’s Colombian market. Unlike last year, the currency dynamics have been providing a significant tailwind to total sales growth. For example, of the 19.3% increase in net sales growth, 15.3% was attributable to the favorable foreign exchange environment.

PSMT's Stable Gross Margins

PSMT’s current period results reflected the loss of a COVID premium that had been included in the price of sold merchandise. It also reflected a lower liquidity premium on items sold in Trinidad. The two together contributed to a 30bps decrease in overall gross margins.

But despite the negative externalities, margins were down just 10bps overall due to stronger margins realized on PSMT’s food service and bakery offerings.

On a similar note, PSMT noted rising SG&A expenses due primarily to additional warehouse openings. Yet, the rise in total SG&A expenses as a percentage of revenues was a relatively neutral 20 basis points. This pales in comparison to the overall growth in total revenues.

The stable margin performance ultimately contributed to positive operating and net income growth during the period. YOY operating income grew just under 5%, while overall net income was up 15.5%.

Is PSMT Stock A Buy, Sell, Or Hold?

I expect a more favorable currency environment to continue supporting strong top and bottom-line results for PSMT. In the first fiscal quarter, for example, PSMT realized a 390bps benefit from net currency fluctuations. This compares to a 210bps headwind in the same period last year.

And more notable is the reversal in the Colombian peso relative to the dollar. The currency swung from creating a negative impact of 20% in the prior year to a 15.3% contribution in the current.

While the Colombian market represents just 11% of total net merchandise sales, it carries weight in terms of strategic value to PSMT. And looking ahead, I can see the region continuing to outperform on the heels of positive currency traction. With this in mind and given the strategic importance of Colombia to PSMT, the ongoing turnaround in the region in terms of sales growth warrants additional attention, in my view.

Investors seeking to diversify their warehouse holdings from Costco may find an attractive bid in PSMT. Unlike others, PSMT benefits from limited competition in their operating regions. The company has also sustainably expanded their warehouse portfolio, particularly in key geographic segments. A more accommodative currency environment should also carry operating results in the new fiscal year. At just under 17x forward earnings and at the mid-point of its 52-week range, I believe PSMT provides investors a Costco-like business without the premium Costco valuation.

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