PSMT - PriceSmart: Currency Tailwinds Partially Offset Regional Weakness

2023-07-12 17:51:14 ET

Summary

• Warehouse club operator, PriceSmart, reported generally positive results, which were aided in part by currency tailwinds.
• Margins compressed due to regional weakness in Colombia. Though expected, earnings slightly missed estimates, suggesting costs may have been higher than desired.
• To justify a further run in the share price, the company should demonstrate more measurable progress in this key market.
• At current trading levels, shares are viewed as a "hold."

PriceSmart ( PSMT ) is the club of choice in emerging and developing markets. But for the stock to trade to new 52-week highs, the company will need to demonstrate further progress in their Colombian market.

Q3FY23 Currency Tailwinds

Warehouse club operator, PSMT, reported 6.4% YOY growth in total revenues, in-line with expectations . Net merchandise sales, their largest category of revenues, increased 7.1% and 5.8% on a same-store basis, driven by a 2.8% increase in transactions and 4.2% increase in average tickets. This represented a deceleration from Q2, which saw net merchandise sales up a respective 10.3% and 8.5% on greater volume and average tickets.

A weakened dollar also factored more notably in current period results. Stripped out, net merchandise sales, overall and same-store, were up 5.6% and 4.3%, respectively, on a constant currency basis. The 150 basis point (“bps”) favorable impact compares to a negative 20bps impact last quarter.

Driving the currency impact was the strengthening in the Central American region, PSMT’s largest market, accounting for about 60% of net sales. The biggest contributing factor to the fluctuation was the significant appreciation of the Costa Rican Colon in relation to the dollar. Overall, the fluctuations provided a 570bps tailwind in the region’s net sales. This translates to a positive 340bps impact on overall net merchandise sales.

Continued Weakness In Colombian Market

The positive adjustments were offset in part by Colombia, whose currency and market environment remains weakened. These ongoing challenges could be mostly to blame for the slight miss on adjusted earnings. While headwinds in the region were expected , perhaps the weakness was greater than expected.

PSMT’s total merchandise gross margin percentage in Q3 was 15.3%. While up 110bps from last year, this was 80bps lower on a sequential basis. CFO, Michael McCleary, did note in their previous earnings call that the second half of the fiscal year would be marked by some margin compression due in part to their strategic pricing decisions in Colombia.

More time may be necessary to determine if these actions are having their intended effect. Net merchandise sales on a constant currency basis were up just 60bps during the quarter. And membership income was in the negative, though to a lesser extent than in Q2.

Why Is The Colombian Market Important To PSMT?

A turnaround in the Colombian market is key to the future direction of the stock price. PSMT sees the region as a key market for future growth. Though the market represents just 12% of total net sales, it accounts for PSMT’s largest footprint by storefront. The company is also committing capital to future store openings. Later this year, for example, construction is expected to complete on a new warehouse club in a more affluent area of the country.

Thus far through nine months of the fiscal year, PSMT has spent just under +$100M on capital expenditures (“CAPEX”). Aided by working capital improvements, the company has generated about +$185M in operating cash flows over the same period. Combined with a low degree of term debt, PSMT has the necessary capacity to engage in their expansion efforts.

Their stronger financial positioning also enabled the Board to authorize a repurchase of up to +$75M in common stock.

Is PSMT Stock A Buy, Sell, Or Hold?

Repurchasing shares makes sense in some regards. YTD through fiscal 2023, PSMT has generated $3.01/share in unadjusted EPS. This represents a compound growth rate of nearly 15% since FY19 . In addition, revenue and operating margins persist at or above pre-pandemic levels. This is despite the inflationary environment and acute weakness in their Colombian market. Another promising growth trend is growth in their platinum members, which has grown at a compound rate of 27% since FY19.

On the flip side, any repurchases would come at a time when shares appear fairly valued, given current operating trends. Though up YOY, net merchandise margins did decline sequentially as PSMT stepped up pricing initiatives to address regional weakness.

While this was expected, the higher costs and associated miss on earnings may have disappointed markets, as evidenced by the after hours share price decline immediately following the release and the flat finish on the day after.

Overall sales growth was also impacted more heavily by a weaker dollar. While currency fluctuation is a fact of PSMT’s operating considerations, stronger performance in topline sales is preferable. And though PSMT’s membership accounts have grown, renewal rates are down from prior years.

Near the top end of their 52-week trading range with a forward multiple of about 21x, I view shares as adequately priced. This is consistent with a prior update on the stock shortly following their Q2 release. The stock has seen little movement in price since then.

A turn to a more bullish stance would require a more measurable turnaround in their Colombian market. The region accounts for their largest property footprint and is commanding continued attention in capital priorities, despite significant market headwinds. If management is unable to move the needle via pricing, the stock is unlikely to move beyond its current trading level. A pullback may even be warranted. I, therefore, maintain a neutral view on the stock following their recent results.

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