PriceSmart (PSMT 85.25, -8.15, -8.73%), which is known as the Costco (COST) of
Central America and the Caribbean, is trading lower today after reporting Q3
(May) earnings results last night.
The company operates membership shopping warehouse clubs in the style of U.S. retailers such as Costco or Walmart’s (WMT) Sam’s Club chain. Headquartered in San Diego, PriceSmart’s stores and client base are situated in twelve Latin American and Caribbean countries. 41 warehouse club locations are operated throughout the region: seven each in Colombia and Costa Rica; five in Panama; four each in Trinidad and Dominican Republic; three each in Guatemala and Honduras; two each in El Salvador and Nicaragua; and one each in Aruba, Barbados, Jamaica and the US Virgin Islands. Additionally, PriceSmart operates subsidiary Aeropost, which provides logistics, payment, and ecommerce services in 38 countries in Latin America and the Caribbean.
In many respects, comparisons between PriceSmart's membership club model and that used by Costco or Sam’s is well-earned, but the company introduces a few deviations from standard U.S. models in order to better align with its target markets. PriceSmart offers smaller store sizes (50,000 to 75,000 sq. ft.), lower membership fees averaging around $25, and merchandise tailored to local preferences. PriceSmart believes it is well positioned to profit from growth in developing markets due to its purchasing power and experience operating membership warehouse clubs in these areas. Its typical no-frills, warehouse club-type buildings are located primarily in urban areas to take advantage of dense populations and relatively higher levels of disposable income.
Its warehouse clubs sell basic, high-quality consumer goods at low prices to individuals and businesses. PriceSmart sells Hardlines (electronics, office supplies, appliances), Groceries (food, detergent, wine, health & beauty) and Fresh Food (chicken, meat, fruits, vegetables). The products in its stores are typically sourced half and half from US/international sources and from locally sourced merchandise. Close to 15% of the company’s sales are to wholesale customers such as restaurants, convenience stores, hotels, and bakeries.
Its members tend to be on the higher end of the income scale, and renewal rates are equivalent with major U.S. club operators. Also, a highly efficient distribution system for U.S. product importation helps to keep costs down. (PSMT expanded into a new distribution center in the Miami area in 2017.) A big reason PSMT has been doing well is that it's dominating its space. It's the largest player in its niche by far, which provides economies of scale, and there is a lack of worthy competition as the major U.S. club operators do not have a heavy presence in the company's markets.
Turning to the MayQ earnings results, EPS was roughly flat year/year at $0.61, which was slightly better than market expectations. Revenue rose 7.1% year/year to $782.2 mln, which was slightly below market expectations. Membership income rose 6.8% year/year to $12.85 mln. In terms of same store sales, PSMT reported that June comps came in at +0.6%. The company, in a reporting style somewhat unusual and rare among retailers, though helpful, provides details about monthly same store comps and thus had already released data for previous months: May +3.1%, April +1.9%, March +3.5%. Clearly, the June comps came in a bit lower than did those of recent months. That seems to be weighing on the stock today.
PSMT provides no revenue or EPS guidance for upcoming quarters or years. Also, there is little analyst coverage of the stock, so there are not many estimates available. All of this combined with its monthly comps reporting structure makes PSMT's earnings reports a bit unpredictable. Also, the company is known for providing little color in their press release, so investors could not count on getting much detail before the noon ET call.
In sum, the stock is lower today as the MayQ revenue and June same store comps are being seen as a disappointment. That June comp of +0.6% was the lowest for PSMT since January came in at +0.5%. The stock had risen from around $82 in mid-May to close at $93.40 yesterday, which tells us that expectations were running pretty high. However, the results/comps did not live up to expectations. On a final note, the two closest comps are fellow warehouse clubs Costco (COST) and recent IPO BJ's Wholesale Club (BJ). The end markets are quite different as COST and BJ have little exposure to Central America and the Caribbean, but this report could affect them in trading today.
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