PriceSmart Inc. Grows Despite Economic Challenges

By Demitrios Kalogeropoulos Markets Fool.com

International subscription warehouse club PriceSmart (NASDAQ: PSMT) posted quarterly earnings results this week that showed steady sales and profit growth. The company also revealed a slight acceleration of revenue gains headed into the second half of its fiscal year.

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More on that speedup in a moment, but first, here's how the headline results stacked up against the prior-year period:

Metric

Q2 2017 Actuals

Q2 2016 Actuals

Year-Over-Year Change

Revenue

$793 million

$778 million

1.9%

Net income

$27.2 million

$25.9 million

5.0%

Earnings per share

$0.90

$0.85

5.9%

Data source: PriceSmart's financial filing.

What happened this quarter?

PriceSmart's results benefited from stabilizing business trends in Columbia, its biggest single market. Impressive gains there helped offset tough declines in the Caribbean segment, which was pinched by a weakening economy in Trinidad.

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Image source: Getty Images.

Highlights of the quarter include:

  • Comparable-store sales rose 2.1% to mark PriceSmart's second straight quarterly improvement on the metric. Comps were flat last quarter and declined by 1% in each of the prior two quarters.
  • Overall revenue rose by slightly less than 2% as a 38% spike in the Colombian market was offset by a decline in the Caribbean geography, which is anchored by the struggling Trinidad market.
  • Membership income rose 4.9% to $11.8 million.
  • The Colombian market benefited from an additional warehouse in the store base, and a spike in both average spending and customer traffic at existing locations.
  • Gross profit expanded at a faster pace than revenue, which pushed profitability up slightly to 14.6% of sales.
  • Operating profit held steady at $39 million.
  • The membership renewal rate rose to 83% from 80%.

What management had to say

In its 10-Q report, executives noted that an extra warehouse in the Colombian market helped sales spike in that country, but said that the broader positive trend there revolved around currency shifts. "With the stabilization of the exchange rate between the Colombian peso and the U.S. dollar," management explained, "we have seen an improving sales picture in all of our warehouse clubs in Colombia. The company also cited success in sourcing more products from local suppliers in the quarter, which helped result in a 16% rise in customer traffic.

However, the worsening picture in the Trinidad market nearly offset all of those gains, the company said. "Trinidad is our largest market [in the Caribbean], and the difficult economic environment, including the company's decision to limit shipments during the period, resulted in a 9.6% decline in net warehouse sales."

Looking forward

PriceSmart's fiscal third quarter is off to a solid start. The company revealed that comps for the month of March rose 2.9%, compared to a 2.6% uptick in the prior month. The slight acceleration is likely due to more relief coming from a stabilizing Colombian market.

Once economic trends there return to steady growth, investors can expect not only rising revenue, but also strengthening profits. That's because management for the past two years has resisted hiking product prices and membership fees in Colombia, but will have more flexibility to do so as market conditions improve.

Meanwhile, the focus over the next few quarters will be on Trinidad since it is growing into another stubborn economic challenge just as Colombia, which has been a drag on PriceSmart's results over the past few years, begins to turn the corner.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends PriceSmart. The Motley Fool has a disclosure policy.