PriceSmart, Inc. (PSMT): Modest Prospects For This Discount Retailer

Discount retailers have been performing mostly in-line with the general market this year. PriceSmart, Inc. (NASDAQ:PSMT), which is up 16% this year, is not an exception. The company has recently released its quarterly earnings. This gives us a chance to look more thoroughly at PriceSmart, Inc. (NASDAQ:PSMT)’s performance and evaluate whether it is a buy right now.

Currency issues and pricing strategy

PriceSmart, Inc. (NASDAQ:PSMT) has missed on both earnings and revenue. There are several reasons for that. The company has been more aggressive on pricing. Such moves typically have a negative impact in the short term. It takes some time for sales volumes to pick up and offset the price decline. As the retailer operates in Latin America and the Caribbean, it is exposed to currency fluctuations. The dollar appreciated to most currencies of the region, and this has negatively impacted both earnings and revenue.

As the company’s strategy is to keep prices as low as possible, dollar appreciation could be seen as a serious threat to the strategy. A lot of the assortment comes from U.S.; therefore, when the dollar rises, it becomes pricier. During the earnings call, an analyst put up the question of whether the company can keep the prices as low as they are if the currency environment does not change. The company has stated that the prices would ultimately have to rise.

PriceSmart, Inc. (NASDAQ:PSMT) implemented higher membership fees a year ago. Membership income rose 26.5% compared to the same quarter a year ago. This tactic proved to be successful, as the company has not seen customers fleeing because of this measure. The renewal rate has dropped to 84%, but it’s still a good number.

Competition and growth

On the competition side of the story, PriceSmart, Inc. (NASDAQ:PSMT)’s management has not confirmed that Wal-Mart Stores, Inc. (NYSE:WMT) is coming to Costa Rica with its Sam’s Club. Wal-Mart Stores, Inc. (NYSE:WMT) has recently had several problems with expansion. The District of Columbia passed a bill that requires large retailers like Wal-Mart to pay employees $12.50 per hour, compared to the minimum wage of $8.25. After this announcement, the company has stated that it will not open three stores planned in the Washington D.C. area. In India, Wal-Mart struggles to get things going. Wal-Mart Stores, Inc. (NYSE:WMT) is still unable to open a first store in the region, and current progress is slow.

Speaking about growth, PriceSmart, Inc. (NASDAQ:PSMT) plans to open two more stores in Columbia. Securing the land and getting all the necessary documentation is not so easy in the region, so one cannot expect the process to be fast as a lightning.

PriceSmart shares the same trend as other discount stores like Family Dollar Stores, Inc. (NYSE:FDO). Sales of low-margin consumables grow while sales of high-margin discretionary decline. Family Dollar Stores, Inc. (NYSE:FDO) has been a laggard this year. The stock is up just 9%. Most of this upside was achieved after the recent earnings report, which beat analysts’ estimates. Family Dollar Stores operates at 6.76% margin, while PriceSmart operates at 5.50% margin and Wal-Mart has a 5.93% operating margin.