To The Moon

$Pricesmart(PSMT)$

Company Overview

Business Model:

PriceSmart operates on a membership-only model, where members pay annual fees to access goods at discounted prices.The company sells a wide range of products, including groceries, electronics, household items, apparel, and furniture, and also offers services like pharmacy and optical services in some locations.

Geographic Focus:

The company operates over 40 warehouse clubs in 13 countries, mainly in Central America, South America, and the Caribbean.Some of its primary markets include Costa Rica, Panama, Colombia, and the Dominican Republic, where PriceSmart is a prominent player in the retail sector.

Product Range:

PriceSmart's stores offer a mix of local and imported goods, typically featuring items not readily available in these regions.The company’s inventory is known for bulk offerings and high-quality products, often sourced from the United States and other international markets.

Earning Overview

In its fourth-quarter earnings for fiscal 2024, PriceSmart (PSMT) reported total revenue of $1.23 billion, marking a 9.6% year-over-year increase, which exceeded analyst expectations of $1.22 billion. The company's earnings per share (EPS) came in at $0.94, slightly below the consensus estimate of $1.01. This lower-than-expected EPS was attributed to certain costs impacting the company during the quarter.

Total Revenue

For the full fiscal year 2024, PriceSmart's revenue reached $4.91 billion, and adjusted net income was $138.9 million, or $4.57 per share. This adjusted net income reflects improved profitability compared to the prior year. PriceSmart also continues its expansion plans, including the development of new warehouse clubs in Central America, with a new site in Guatemala expected to open in 2025.

PriceSmart remains focused on its core Latin American and Caribbean markets, leveraging membership growth and consistent revenue from merchandise and memberships, despite facing certain economic challenges across its operating regions.

Fundamental Analysis

Revenue Growth: PriceSmart has consistently demonstrated solid revenue growth. In fiscal 2024, the company reported a 10% increase in total revenue, reaching $4.91 billion, up from $4.41 billion in the previous year. The growth was driven primarily by strong merchandise sales, which accounted for the majority of total revenue, alongside rising membership fees. The company’s growth was particularly supported by expanding its footprint in Latin America and the Caribbean​.

Profitability: PriceSmart has shown strong profitability trends, with a notable increase in adjusted net income, which reached $138.9 million in fiscal 2024, compared to $126.5 million in the previous year. This growth in profitability is despite certain costs, such as a minimum tax settlement, which impacted earnings. The company's adjusted EPS was $4.57 in 2024, compared to $4.06 in 2023.

Membership Model: PriceSmart operates on a membership-based warehouse club model, which generates a steady stream of recurring revenue. In fiscal 2024, membership income rose by around 14% to $75.2 million, reflecting strong member retention and growth in the number of paying members. Membership fees are a critical component of PriceSmart’s revenue, providing the company with financial stability.

Operating Efficiency: The company has been able to maintain effective cost control, with its cost of goods sold growing proportionally with sales. Gross margin improvements were observed in recent quarters, supporting its ability to drive profits from the merchandise it sells. However, operating expenses have also increased as the company expands its physical infrastructure.

Valuation: PriceSmart is generally viewed as a stable growth stock with an attractive P/E ratio. As of the latest data, the company has a P/E ratio of around 19.20, which is reasonable given its consistent growth trajectory. Analysts forecast a 12% growth in EPS for the upcoming year, suggesting continued positive earnings momentum.

Free cash flow

third quarter of 2024, PriceSmart's free cash flow (FCF) showed a significant decline. The company reported $39.04 million in FCF for the period ending August 31, 2024, which marked a 66% drop from the previous quarter. This reduction was attributed to a sharp rise in capital expenditures, which reached approximately $168.5 million, compared to $142.5 million in the prior quarter. Despite strong operational cash flow, these higher investments in expansion and modernization weighed heavily on overall FCF performance​.

Risks

PriceSmart faces several risks typical of international retailers, including currency fluctuations, political instability in its operating regions, and supply chain disruptions. Additionally, the competitive landscape in the wholesale and membership-based retail sector, especially with the presence of Costco and other players, remains a key challenge​.

Competitive Pressure:

The warehouse club retail sector is highly competitive, with large players like Costco and Walmart operating in the same markets. While PriceSmart has a strong presence, the expansion of competitors, particularly Costco’s growing presence in Latin America, could negatively affect its market share and pricing power. Additionally, other local competitors may offer lower prices or better-targeted products to the same customer base.

Expansion Risks:

PriceSmart is focused on expanding its footprint, particularly in Central America. While this expansion presents growth opportunities, it also comes with execution risks, such as delays in opening new clubs, higher-than-expected construction costs, or failure to achieve the anticipated customer traffic. Expanding into new regions may also involve adapting to local preferences, which could be costly and time-consuming.

Market Sentiment

Market sentiment for PriceSmart (PSMT) in 2024 reflects a generally positive outlook, though with a few nuances to consider. On one hand, the company has garnered strong analyst support, with a consensus rating of "Buy" and a forecasted earnings growth of around 12.12% for the coming year.

However, there are indications of cautious optimism. Although the stock has appreciated, analysts are starting to become more critical, as evidenced by a slight decrease in analyst upgrades. insider trading patterns reveal that executives have been selling more shares than they have bought, which might indicate a level of internal caution.

Despite this, the overall sentiment remains favorable due to the company's strong financial position, good growth prospects, and positive social media engagement. In summary, while sentiment is positive, investors may want to monitor for any changes in analyst opinions or shifts in insider activity that could signal potential volatility ahead.

Intrinsic value

Looking forward, PriceSmart's projected intrinsic value based on free cash flow (FCF) is currently estimated at $55.13 per share as of November 2024. This suggests a relatively low valuation compared to the stock price of $87.73, indicating potential undervaluation based on FCF.

Investment Thesis

Strong Revenue Growth and Profitability: PriceSmart has demonstrated consistent growth in revenue, driven by its expanding footprint and steady performance across its markets. In fiscal 2024, the company reported $4.91 billion in total revenue, marking a 10% year-over-year increase​. With a strong focus on its membership model, which ensures recurring income, the company has shown resilience in its profitability metrics. It posted adjusted net income of $138.9 million in FY 2024, reflecting both its expanding footprint and the strong brand loyalty among members.

Geographic Expansion and Market Position: PriceSmart is positioned as the leading wholesale retailer in many of the countries it serves, such as Costa Rica, Panama, and the Dominican Republic. Its ability to capture market share in underserved regions has been a key growth driver. The company’s plans to open two additional clubs in Central America by 2025, alongside its ongoing expansions, further solidify its long-term growth trajectory.

Solid Financial Position with a Positive Market Sentiment: PriceSmart's fundamentals are strong, with a healthy balance sheet and good cash flow generation. Its market sentiment, particularly among professional investors, is highly favorable, with a sentiment rank of 96 (better than 96% of competitors).

Attractive Valuation: PriceSmart’s stock is considered undervalued relative to its growth and profitability metrics, with a Price-to-Sales (P/S) ratio lower than 56% of competitors and a favorable Price-to-Earnings (P/E) ratio compared to the broader market.

Summary

PriceSmart presents a solid investment opportunity driven by its strong financial growth, membership-based revenue model, and regional expansion. The company's financial stability, coupled with an attractive valuation and positive market sentiment, makes it well-positioned for future growth. However, potential investors should be mindful of the risks inherent in its geographic exposure and the competitive retail landscape.