PSMT - PriceSmart's Q3 2023 Earnings: Resilient Business Model Shines Through

2023-07-12 08:19:40 ET

Summary

• PriceSmart's Q3 2023 earnings showed strong growth despite missing estimates, with net merchandise sales rising 7.1% and total net merchandise sales and revenues surpassing $3.2 billion.
• The company's expansion plans include the construction of three new warehouse clubs and the ongoing remodeling of existing ones, as well as increasing its digital presence and omnichannel sales.
• Despite strong earnings and growth, PriceSmart faces financial headwinds in markets like Colombia and Honduras, a shrinking non-food segment, and a stagnant dividend history, which potential investors should monitor closely.

Thesis

PriceSmart, Inc. (PSMT) recently reported Q3 2023 earnings with an EPS of $0.94 , missing estimates by $0.10, and a revenue of $1.10B, falling short by $4.50M. Despite these shortcomings, I argue in the following analysis that PriceSmart's business model remains resilient, reflected in its remarkable net merchandise sales growth and ongoing expansion efforts.

Company Overview

PriceSmart, Inc., with roots stretching back to 1994, has crafted an empire that weaves through the United States, Central America, the Caribbean, and Colombia. Their business model is firmly rooted in the operation of US-style membership shopping warehouse clubs, exhibiting a blend of corporate and consumer-focused elements, that serve as bazaars for a miscellany of goods. They peddle everything from established brand name products to private label consumer goods, encompassing the entire spectrum of consumer needs.

Beyond the aisles of goods, PriceSmart also ventures into the realm of service provision. Optical and tire center services, along with a plethora of other ancillary services, are woven into their offering tapestry, solidifying their role as a comprehensive provider.

Furthermore, in a nod to the digital era, PriceSmart demonstrates its adaptability through its e-commerce platform, Click & Go . This innovative feature facilitates online orders, curbside pickups, and delivery services, evidencing PriceSmart's commitment to convenience and the evolution of consumer habits.

PriceSmart's Bullish Q3 2023 Earnings Highlights

Navigating a path of astounding growth, in the third quarter, the firm's revenue and net merchandise sales shattered the $1 billion ceiling , representing a historic milestone. When you factor in currency fluctuations, net merchandise sales enjoyed a rise of 7.1%, or 5.6% in terms of constant currency. Similarly, comparable net merchandise sales mounted a growth trajectory of 5.8%, or 4.3% in constant currency.

Since transitioning into 2023, the company's performance has been nothing short of astounding. Total net merchandise sales and revenues surged ahead, surpassing $3.2 billion and close to reaching $3.3 billion respectively. The escalation in net merchandise sales was evident, registering a rise of 8.7% or an impressive 9% in constant currency, while comparable net merchandise sales charted a growth of 6.5% or a constant currency increase of 6.7%.

Dividing this performance by region, the Central American area stands out as a powerhouse, with a constellation of 28 clubs driving an 11.8% or 6.1% ascension in net merchandise sales in constant currency. The Caribbean region also put on a robust display, with 14 clubs fueling a 7.3% or 6.9% lift in net merchandise sales in constant currency. Despite the headwinds of currency depreciation buffeting the Colombian market, constant currency sales still demonstrated positive momentum.

Year-on-year, membership accounts climbed 2.2% to crest at 1.79 million, with Platinum Membership holders forming 8.6% of the total membership base. The substantial increases in gross margin, operating income, net income, and adjusted net income reveal a narrative of growing profitability.

Simultaneously, the company experienced a surge in cash flow while the average inventory per club decreased, pointing to heightened operational efficiency. The firm's robust balance sheet, together with its $75 million share buyback scheme, signals an unwavering confidence in its prospective expansion.

The company's expansion ambitions are taking physical shape with the construction of three new warehouse clubs and the ongoing remodeling of several existing ones. This tangible growth is complemented by a significant upturn in omnichannel shopping alternatives, with total omnichannel sales soaring 18% to reach a record 4.9% of total net merchandise sales.

Looking towards future expansion endeavors, PriceSmart has a blueprint that includes the inauguration of additional pharmacy and audiology centers, while also aiming to amplify its digital presence via pricesmart.com and their dedicated app. The current picture, painted with the strokes of these results, depicts a resilient company on a growth trajectory, shrewdly investing for enduring prosperity.

Expectations

PriceSmart is followed by two Wall Street analysts who have an average "Buy" rating on PSMT stock with a modest upside potential of +11% projected for its share price.

Performance

Starting off with dividends, there is a marked stagnation over the years (see data below). The dividends per share remained static at USD 0.700 from FY 2016 through to FY 2021, with no growth. That's a period of five long years with zero progress. Finally, in FY 2022, we witnessed a sudden, surprising jump of 22.86% to USD 0.860. This growth, though welcome, felt more like a fluke than a well-orchestrated, sustainable progression considering the sudden drop to USD 0.460 in FY 2023. The average growth rate over seven years stands at 3.27%, and frankly, that's underwhelming.

Moving on to share performance, the starting price was USD 82.50 in September 2015, and as of July 2023, it stands at USD 77.19. This indicates a decline over 7.8 years, contrary to what we'd ideally want to see. The annualized Rate of Return (ROR) without dividends is at a negative -0.84%, far behind the S&P 500 Index , which has an ROR of 11.18%. Even when you factor in growth and dividends, PriceSmart's performance pales in comparison to the broader market.

Valuation

One of the first thing that jumps out at me is that PriceSmart initially appears to be quite reasonably valued (see chart below), if not slightly undervalued, at a current share price of USD 77.19 (the time of my analysis) and a blended price-to-earnings (P/E) ratio of 19.97x. This compares to its normal P/E ratio of 26.96x, suggesting that the stock is trading at a discount relative to its historical norms.

The reported adjusted earnings growth rate is a modest 3.5%, which could account for some of the more cautious sentiment, as investors might be seeking companies with a faster growth trajectory. That being said, PriceSmart's 5.01% earnings yield (outside of the aforementioned medium-term "Performance" data above) is attractive and indicates that the firm is generating a decent return on its capital.

Lastly, I believe that the modest growth rate coupled with the currently depressed P/E ratio may provide an opportunity for potential upside. That is, if PriceSmart can achieve a sustained uptick in its earnings growth rate, or if market sentiment swings back towards its historical average P/E, we could see a significant price appreciation.

Risks & Headwinds

Looking at the latest economic trends, it is becoming increasingly clear that Colombia is grappling with serious financial headwinds. Their net merchandise sales dropped by a staggering 15.7% , though a slight uptick of 0.6% can be seen when assessed in constant currency terms. The sharp decrease has cast a long shadow over total consolidated comparable net merchandise sales for the quarter. This downturn in Colombia has single-handedly created a 190 basis point drag on the consolidated figures, which is a concern worth a second look.

Diving further into the different sectors, it's evident that the non-foods segment is also going through a rough patch. Compared to the third quarter of fiscal year 2022, this category has shrunk by an unsettling 5%. The root causes of this decline are not entirely clear yet, but it's undeniably impacting the broader picture and creating additional pressures.

Complications have also arisen in Honduras. A financial barrier put in place by the Honduran Central Bank has created a bottleneck for currency conversion, particularly from Honduran lempiras to US dollars. This has effectively trapped around $15.9 million of the company's cash and cash equivalents in lempiras, which could potentially paralyze the fluidity of the company's cash flow, as these funds cannot be easily converted for general use.

Also, average basket items have seen a decrease of approximately 3.2% when compared with last year's same period. While seemingly minor, this drop could signal weakening consumer spending habits and should be monitored closely as this could point towards wider changes that compound challenges faced by PriceSmart in the near term.

Final Takeaway

Given the strong Q3 2023 earnings and continuous growth trajectory, as well as the company's expansion ambitions, I'm inclined to rate PriceSmart as a "Buy". However, potential investors should keep an eye on ongoing financial headwinds in markets like Colombia, non-food segment shrinkage, and currency risks in Costa Rica and Honduras. The company's stagnant dividend history and underperforming share price also require close attention, but the current undervaluation suggest potential upside moving forward.

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