Here is some of my old research on PSMT. IMHO, over the long term, Pricesmart
will be okay. May be some additional near term volatility. If so, may even reverse
course and add to position on further weakness.
PriceSmart Brings Warehouse Stores To Latin America
By KEVIN HARLIN, IBD Sept 22, 2011
Colombia's middle-class consumers have pesos in their pockets, and a U.S.-based retailing pioneer is giving them a place to spend them. PriceSmart (PSMT) is the Caribbean and Central America's largest warehouse-style retailer, with 29 stores in 12 countries and one U.S. territory, the U.S. Virgin Islands.
Now the so-called Costco of Latin America is bringing patio furniture, luggage, groceries and other items to Colombian shoppers. PriceSmart opened that 29th store, its first in South America, in Barranquilla in August, and said it's under contract to buy land in Cali for a second Colombian store.
The grand opening of PriceSmart’s latest warehouse-style store in Barranquilla, Colombia. The stores are usually smaller than U.S. stores.
Analysts think PriceSmart could eventually transplant the warehouse model in other South American markets, including the continent's economic powerhouse, Brazil.
But in the near term, Colombia gives PriceSmart plenty of runway for growth. "Colombia offers them the capacity to potentially double their store footprint," Singular Research analyst Greg Garner told IBD. "It's a tough market, and that's why it's so important for them to get it right."
Que Es PriceSmart?
Most U.S. consumers don't know the San Diego-based PriceSmart, which has no stores in the States. But they're familiar with the warehouse-membership concept and names such as Costco (COST) and Wal-Mart's Sam's Club.
Those retailers can thank Price-Smart's founder, the late Sol Price.
In 1954, the retailing innovator created the first membership-based retailing chain, FedMart. He sold that business and opened Price Club in 1976. That business merged with Costco in 1993. Shortly after, he created PriceSmart. His son, Robert Price, is PriceSmart's chairman.
The company now has more than a million members at its stores and online sales site.
Though the no-frills warehouse sites are similar to warehouse clubs in the U.S., PriceSmart adjusts the model for the local markets. The stores are usually smaller — 48,000 to 84,000 square feet vs. more than 140,000 sq ft for the typical Costco. Annual dues are usually about $30 vs. $50 for Costco.
About half of each store's inventory is sourced locally or regionally, with most of the rest shipped in from the U.S. In fact, Costco is one of PriceSmart's largest suppliers. Its stores carry Costco's house brand, Kirkland Signature. The stores also sell local foods, household goods and often gas, tires and other items. The concept seems to work.
Sales, Earnings En Fuego
PriceSmart has posted double-digit sales and earnings growth in recent years. In its fiscal third quarter, which ended May 31, sales climbed 24% to $431.1 million. Earnings per share rallied 38% to 55 cents.
For August, the company said sales climbed 21.5% from a year ago to $148.3 million. Same-store sales over the past 12 months were up 18.1%. "They're leveraging these growing economies," Janney Capital Markets analyst David Strasser said. "They're getting greater share while there's also a build toward the middle class and upper-middle class."
And there's huge potential in the Colombian market. Colombia's population of 46 million is South America's second-largest behind Brazil. It has the third-largest GDP on the continent after Brazil and Argentina. The nation's central bank predicts GDP growth of 4.5% to 6.5% this year, driven in part by increased oil production — Colombia is a net exporter — and strong consumer spending.
Retailers there reported continued year-over-year sales growth for August, according to the latest survey from Colombia's Federacion Nacional de Comerciantes — National Federation of Merchants. And retailers were mostly upbeat on prospects for the rest of 2011, too.
That makes it potentially fertile ground for PriceSmart. The company's multination footprint also creates challenges, analysts say. No two Latin American markets are identical. Cultures, customs and codes are different. "For them to grow they need to navigate these different countries, different codes and laws," Strasser said.
The company also needs relatively large patches of urban real estate for stores. That can be hard to find in many cities. And because the economy is stronger in Colombia, real estate is more expensive.
Competition is more intense, too, with well-stocked supermarkets and large general merchandise retailers.
Though margins tend to be higher than U.S. warehouse retailers, they've compressed in recent quarters as the company has lowered prices to lure new members in.
More Stores, Higher Margins
But analysts think its margins, particularly in Colombia, will grow as it adds more stores, which better leverages its distribution network. And Strasser thinks PriceSmart's success in neighboring Panama bodes well for expansion to the south in Colombia. He estimates the country could support 10 to 20 PriceSmart stores, which could contribute another $1 to $1.50 in full-year EPS. And he thinks success in Colombia could lead to expansion in markets such as Chile and Peru.
Singular's Garner says management has figured out a simple formula for success. "They're just really good merchandisers," Garner said. "That's key to success in any retail environment. What do customers here want? What's selling? What's moving quick? They're very good at doing that and adjusting their buying for that store." |
