Wholesale retail clubs PriceSmart, Inc. (NASDAQ:PSMT), Costco Wholesale Corporation (NASDAQ:COST), and Sam’s Club parent Wal-Mart Stores, Inc. (NYSE:WMT) all outperformed the market over the past five years giving investors a total return of 202%, 79%, and 52% respectively (see chart below). Why did PriceSmart, Inc. (NASDAQ:PSMT) perform so well relative tothe other companies? The four reasons outlined below will tell you.
PSMT Total Return Price data by YCharts
Superior fundamentals
The table below illustrates a perfect example of the correlation between superior fundamentals and stock market returns. In the most recent quarter, PriceSmart won the contest on growth with revenue, operating income, and same store sales expanding 12%, 23%, and 10% respectively. On the other side of the spectrum, Sam’s Club grew revenue and same stores sales 3% and operating income declined 3.50%. Costco’s results fell in the middle.
| Metric | PriceSmart (mrq) | Costco (mrq) | Wal-Mart’s Sam’s Club (mrq) |
|---|---|---|---|
| Revenue growth | 12.11% | 8.29% | 3.43% |
| Operating income growth | 22.71% | 14.60% | -3.50% |
| Operating margin | 5.56% | 2.97% | 3.45% |
| Same store sales growth | *9.90% | 6.00% | 2.50% |
Compiled from SEC filings and investors relations websites
*17 Weeks
Robust Latin American growth
The main driver behind PriceSmart, Inc. (NASDAQ:PSMT)’s superior fundamentals stems from operating in a region of robust growth (see table below). Business friendly policies as well as close proximity to the Panama Canal fuel growth in Latin American countries such as Nicaragua, Honduras, and Panama. The local population absolutely loves PriceSmart. On the other hand, the weaker Caribbean markets translated into lower growth in that region for PriceSmart.
PriceSmart, Inc. (NASDAQ:PSMT) operates exclusively in Latin America and the Caribbean, making it a pure emerging market play translating into some political risk.
| Country | # of Stores | GDP* |
|---|---|---|
| Nicaragua | 1 | 3.70% |
| Jamaica | 1 | 0.90% |
| Aruba | 1 | 2.40% |
| USVI | 1 | 2.00% |
| Barbados | 1 | 0.70% |
| El Salvador | 2 | 1.50% |
| Honduras | 2 | 3.80% |
| Colombia | 2 | 4.30% |
| Guatemala | 3 | 3.10% |
| Dominican Republic | 3 | 4.00% |
| Panama | 4 | 8.50% |
| Trinidad | 4 | 0.70% |
| Costa Rica | 5 | 4.80% |
| United States | 0 | 2.20% |
| Total Stores | 30 |
Compiled from the
CIA World Factbook Website
Smaller size
Growth is easier to achieve for a smaller company (see table below). PriceSmart’s 30 stores represent a prime example of this mathematical fact. Costco certainly did better than Wal-Mart Stores, Inc. (NYSE:WMT) in the growth department, but not nearly as well as PriceSmart.
| Company | # of Stores (mrq) |
|---|---|
| Costco | 622 |
| Sam’s Club | 620 |
| BJ’s Wholesale Club | 190 |
| PriceSmart | 30 |
Compiled from SEC filings and Websites
Fragmented competition
According to the latest earnings call, PriceSmart doesn’t face much competition from American wholesale discount clubs; however, many Latin American retailers show signs of remodeling and upgrading in order to capture some of PriceSmart’s business. Costco operates as far south as Mexico and stops. Sam’s Club operates in Mexico and skips further south into Brazil.
Outlook
PriceSmart, Inc. (NASDAQ:PSMT) plans to expand its presence in Costa Rica. It is in the process of procuring permits for 6 more stores in the region. PriceSmart plans to open another store in Colombia by the end of 2013.
The Latin American economy shows no signs of easing up especially with an expansion project of the Panama Canal due for completion in 2014. This should also continue to fuel PriceSmart’s rally.
The price to earnings ratio of PriceSmart indicates the stock market’s full awareness of the company’s fundamental performance making this company a little more expensive (see table below).
| Company | P/E ratio |
|---|---|
| Wal-Mart Stores, Inc. (NYSE:WMT) | 15 |
| Costco | 23 |
| PriceSmart | 32 |
Source: Yahoo! Finance
Conclusion
This company largely operates in a vibrant economy fueled by an expanding infrastructure, specifically the Panama Canal, which will translate into superior growth for the company’s fundamentals and rewards for its shareholders. In addition, its small size and lack of major competition will also serve as a catalyst for future growth. PriceSmart represents a pure emerging markets play with some underlying political risk and market price risk as evidenced by the high P/E ratio. However, if the past five years serve as an indication, shareholders will be compensated for the extra risk. I made a five year outperform pick on the Motley Fool Caps game.
The article 4 Reasons Why This Retailer Will Outperform originally appeared on Fool.com and is written by William Bias.
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