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Milwaukee Private Wealth Management is an independent Investment Research & Advisory Services firm. We provide high net worth individuals, families, and institutional investors with services focused on the firm's value oriented investment principals. The firm concentrates on fundamental... More
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  • PriceSmart: Emerging Markets Warehouse Clubs 2 comments
    Mar 24, 2010 10:14 AM | about stocks: PSMT, WMT, COST, BJ
    PriceSmart is a membership warehouse shopping club company whose business is located in the Caribbean and Central America. Although the company is based in San Diego, this is an emerging market story. 
    PSMT recently reported their February store sales. Net sales increased 11.6% to $100.4MM from February 2009. On a same store basis, net sales increased 7.1%. Even more interesting, growth seems to be ramping back up at PSMT’s locations, with the last three months growing at 8.0%, 9.2%, and 11.6% on a year over year basis. Through the first six months of fiscal year 2010, net sales are up 6.5% to $667.5MM. 

    As the company continues to drive sales, investors will recognize the scalability of their business model. Historically, PSMT has been focused on reducing costs and in turn passing the incremental savings onto consumers in the form of lower prices. While aiming to decrease costs, and thus pricing for consumers, they have held their gross margins constant at 17-18% for the past three years. The growth in the top line has helped to expand operating margins and fuel EPS growth. The company understands that SG&A expenses “rise relatively slowly in relation to sales increases” and Warehouse Club Operations expenses have declined nearly 400bps as a percentage of revenue over the last five years. PSMT needs to continue to drive revenue growth, ideally through organic same-store membership growth. PSMT has successfully grown their membership per store from 18,000 in August 2006 to over 25,000 in November 2009 (latest data available).

    PSMT is also growing its store count. They plan on adding a 27th store this year in Trinidad and cite in their 10-K that they are, “closely examining Columbia as a potential new market for multiple PriceSmart warehouse clubs.” Columbia is the logical first step for the company to enter the South American marketplace. Columbia has a population in excess of 45 million, whereas the rest of the markets in which PSMT warehouses are located have a combined population of just over 55 million. Columbia represents a tremendous growth opportunity for PSMT.

    Disclosure: Long
    Stocks: PSMT, WMT, COST, BJ
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Comments (2)
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  • Pakiya
    , contributor
    Comments (22) | Send Message
    Interesting idea. Costco has 10% gross margins, how can this company do better than Costco? PriceSmart is reporting 20%+ margins. PriceSmart ships the products from the San Diego or Florida location, seems like their costs would have an impact on lowering their margins.


    Also, why isn't Costco entering the markets that PriceSmart is entering?
    13 Jul 2010, 01:22 PM Reply Like
  • Milwaukee Private Wealth Ma...
    , contributor
    Comments (23) | Send Message
    Author’s reply » PriceSmart has current gross margins of 18.3% which is consistent with their historic gross margin ratio. Part of their business strategy is to pass on savings to customers. Rather than expand margins as they realize increased buying power, they opt to hold gross margins steady thus providing competitive pricing to customers.


    PriceSmart includes transportation/shipping expense in cost of goods sold which is reflected in gross margin. Remember, shipping is the least expensive form of commercial transportation. Thus to move merchandise from Miami to Panama City via ship may actually be less expensive per freight mile than moving merchandise from Omaha to Salt Lake City via truck.


    Every retail company faces unique economic circumstances. Costco works on a different model than PriceSmart. Further, Costco is a domestic company whereas PriceSmart operates internationally, having presence in countries such as Costa Rica, Panama and Nicaragua, and recently announced their intention to expand into Colombia.


    Although PriceSmart operates in markets where WalMart affiliates operate, the competitive dynamics in these countries are different than in the United States where Costco may have a Sam’s Club, BJ’s Wholesale Club and other competitors within close proximity.


    Milwaukee Private Wealth Management can only speculate that Costco may one day want to expand internationally, and consequently look at PriceSmart as a vehicle in which to enter foreign markets. Keep in mind that the Price family, who founded PriceSmart, also founded PriceCo in the United States which was a predecessor company to Costco.


    Milwaukee Private Wealth Management is a Registered Investment Advisor with the SEC employing a value oriented discipline when managing client portfolios. You are welcome to contact us to discuss PriceSmart or retain our management services.
    15 Jul 2010, 11:17 AM Reply Like
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