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Should You Buy Latin America's Costco?

Friday - 8/30/2013, 6:09am  ET

PriceSmart  owns and operates membership shopping warehouses and clubs in Latin America and the Caribbean, and it is widely considered to be Latin America's version of Costco . Discount retailers, by and large, have performed well this year, in line with the fact that consumers are spending more.

Year-to-date, PriceSmart has appreciated around 11%. With the company having declared its quarterly report last month, let's take a look at how it performed and what lies ahead.

PSMT Chart

PSMT data by YCharts

A mixed showing

PriceSmart reported total revenue of $571.7 million in the quarter, and this was 13.1% higher than the year-ago quarter. It managed to beat the consensus estimate of $570 million by a whisker.

PriceSmart reported adjusted earnings of $0.61 per share, and hence failed to beat the consensus estimates of $0.64. Despite reporting better than expected top-line figures, the EPS miss was primarily due to lower gross margins.

Latin America comps (comparable warehouse sales) saw a growth of 16.4% in the quarter due to increased traffic following the Easter season and the Semana Santa celebrations, while new club openings also boosted sales. Net warehouse club sales moved up 12.3% to $555.8 million as a result of overall decent comps growth.

Prospects

PriceSmart implemented higher membership fees about a year ago, and as a result of this income from membership fees grew 26.5% compared to the year-ago quarter. The company did not witness any increase in the attrition rate, so one can conclude that the increase in membership charges worked out well for the company. Renewal rates dropped to 84%, but that is still considered a very good number.

Early this year, in February, PriceSmart announced property acquisition for opening its sixth new warehouse in Costa Rica. The opening of Cartago Club is anticipated in the fall of 2013, and this would add to the top and bottom-lines. The company also has plans to open two more stores in Columbia. The timeline is not very specific, as there are lot of hassles going through the compliance procedures in Columbia. But, PriceSmart has expansion plans in place, which show that it has its eyes set on growth and expansion.

However, PriceSmart shares the same trend as other discount stores. There's pressure on pricing, so sales of low-margin consumables grow while sales of high-margin items decline. The company is vulnerable to currency exchange rate fluctuations as well.

A look around

Sears Holdings  has been in trouble for quite some time now. From the way share prices and dividend have moved down during last few years, it is apparent that Sears lacks any major initiative that could move this company forward. This is demonstrated by Sears spinning off its subsidiaries recently, and by the fact that the latest reported quarter saw yet another abysmal performance. Results were affected by the decline in number of operational stores, and also the after-effects of the spinoff of Hometown and Outlet Stores.

In the recently reported quarter, its loss per diluted share worked out to $1.83, as compared to $1.25 in the year-ago quarter. Considering the lack of any visible strategy for a turnaround, a high beta of 2.79, and change in consumer tastes with proliferation of e-commerce websites, it would not be wrong to say that investing in this retailer could be the worst investment to make in retail right now.

On the other hand, Costco currently operates 627 warehouses, with 449 of them in the U.S and the rest in Canada, Mexico, Australia, U.K., Japan, etc. In the last reported quarter, it logged net sales that were 8% higher than the year ago quarter at $23.55 billion. It operates as a 'member only' store with three levels of memberships, and consumers don't mind paying that if performance of the company is the parameter to judge on.

Costco has plans to open up 9 new stores before the end of fiscal 2013 in September, and it also operates several e-commerce web sites. Costco's growth story is based on new memberships and being able to retain members. An aggressive expansion plan is reflected in the fact that Costco is looking to expand its square footage by 4.5% this year, while it had grown its square footage by 3% last year.

Over the last decade, Costco has performed well by and large, with the exception of the recession hiccups from late 2008 through 2010. It is also a pretty defensive stock to have in your portfolio, with beta of 0.49.

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