PriceSmart Profits Hold Up Despite Volatility in Key Markets

By Markets Fool.com

One of PriceSmart's newest Colombian locations. Image source: PriceSmart.

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International membership warehouse club PriceSmart (NASDAQ: PSMT) posted quarterly earnings this week that didn't include much movement on its operating results. In fact, the top and bottom lines barely budged.

Here's how the headline results stacked up against the prior-year period:

Metric

Q3 2016 Actuals

Q3 2015 Actuals

Growth (YOY)

Revenue

$686 million

$677 million

1%

Net income

$22 million

$22 million

N/A

Earnings per share

$0.74

$0.75

(1%)

Data source: PriceSmart's financial filing.

What happened this quarter?

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PriceSmart's business continued to groan under the weight of currency devaluations in its biggest market, Colombia. Growth was weak overall, but did show hints of slight customer traffic improvements.

Highlights of the quarter include:

  • Overall revenue ticked up by 1% as the company ended the quarter with one additional store in its footprint (38 warehouses are now in operation).
  • Comparable-store sales fell by 1.2% to mark a slightly worse result than last quarter's 1% drop.
  • Membership income rose by less than 1% to $11.6 million.
  • Gross profit rose 1.2% in total, but profitability held steady at 14.7% of sales.
  • Operating income slipped $2 million lower to $33 million.
  • For the full fiscal year, PriceSmart's 4% growth consisted of a 6% increase in customer transactions that was offset by a 2% decline in average spending.
  • Renewal rates held steady at 87%, excluding the Colombian market, which has been rocked by economic volatility.

What management had to say

Currency devaluation in the Colombian market continued to push PriceSmart's results lower, management explained in the 10-K report. As an example, they detailed how exchange rate shifts have resulted in annual membership fees falling to the equivalent of US$20 there, down from $30. The drop hurt membership income because the company left prices unchanged. "We have not raised the Colombian peso price of membership in Colombia because our business is new and we want to avoid decisions that could negatively impact member satisfaction," management explained.

The economic struggles in that market also impact profit margins, since PriceSmart needs to lower prices to stay competitive. Executives are again willing to take that trade-off, they said. "We are prepared to accept lower merchandise margins and profits in Colombia in order to solidify our market position for the future."

Looking forward

CEO Jose Luis Laparte and his executive team have no intention of giving up on the Colombian market. In fact, they just opened a new warehouse in the country to bring their total commitment to seven locations -- the most of any of its countries.

PriceSmart is taking steps to mitigate losses in Colombia while it waits for conditions to begin improving there. These include expanding the use of local suppliers and promoting locally sourced, private-label brands.

In the meantime, the retailer is heading into the key holiday season with lukewarm sales growth. Comps ticked up by less than 1% in September, and while that marked an improvement from the prior month's 1.5% decline, it still implies sluggish traffic growth and falling average spending.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends PriceSmart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.