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.
Family Dollar Stores, Inc. (NYSE:FDO) got a boost from the recent earnings report. However, continued pressure on the low-end consumer puts questions about how much upside is left for the stock. Analysts’ estimates for this fiscal year were lowered by 1% during the last three months, reflecting this trend. Family Dollar Stores has stated it is on track to open 500 new stores this year. It will be very interesting to see how those new stores perform after they have been opened for some time.
Bottom line
PriceSmart is relatively overvalued compared to other retailers. The company trades at a 27.9 forward P/E. The retail giant Wal-Mart trades at a 13.3 forward P/E, while Family Dollar Stores trades at a 16.8 forward P/E. The higher valuation must imply bigger growth perspectives, but I do not see this coming.
The rate of economic growth in Latin America and the Caribbean is not spectacular. Some regional currencies continue to depreciate. I would prefer retailers that have exposure to the U.S., where data shows incremental improvement in the state of the consumer. The rate of the improvement is not big, so I would not bet on explosive growth.
All in all, I do not see big upside in either of the above mentioned stocks. You can try Wal-Mart for its safe dividend, which currently yields 2.43%. PriceSmart, Inc. (NASDAQ:PSMT) looks fairly valued. Family Dollar Stores yields 1.52%, which is not enough to choose this stock for income.
The article Modest Prospects For This Discount Retailer originally appeared on Fool.com and is written by Vladimir Zernov.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends PriceSmart. Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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