I Failed You On This One

Summary

• Q3 earnings are out and the stock is taking it on the chin.
• We discuss the results relative to performance when we first got behind the name.
• It is not the first bad call, and it won't be the last.

PriceSmart (NASDAQ:NASDAQ:PSMT) has just reported earnings and is taking it on the chin this morning with the results it posted. This is a name that I have not touched upon since covering once back in summer of 2015 where I assigned a buy to it around the $90 mark. It has gone nowhere since then as shown in figure 2, and following today’s action, will be a clear-cut loser. Now briefly, the name caught my eye given the selling, but I am still willing to bet that this is a company most of you have probably never heard of. Essentially it owns and operates membership shopping warehouse clubs in Latin America and the Caribbean. To tell you the truth it operates much like a Costco or a Sam’s Club. With Amazon out there taking over the world it seems, even warehouse clubs have felt the pinch a bit. So, the question is how is PriceSmart performing?

Figure 2. 5 Year Stock History of PriceSmart

Source: Google Finance

Well over the last few quarters it has been hit or miss. Its third quarter saw decent sales and comps. I think the growth is steady, but not too strong. In other words, I don't think it is in hyper-growth mode. However, when I initiated a buy, the growth was much more pronounced. Now, in all honesty I tend to avoid these types of companies, so-called warehouse clubs. They are finicky and tough to predict. Sure money can be made in them, but a cursory historical glance of results versus estimates illustrates this point.

Turning to the present quarter, PriceSmart's net warehouse club sales increased 3.8% to $701.7 million from the $684.5 million in the third quarter of 2016. Total revenues for the third quarter were $730 million compared to $704 million in the comparable period of the prior year. How about total income per share? Operating income growth was satisfactory, but flat. The company recorded operating income during the quarter of $27.6 million compared to operating income of $27.5 million last year. However, net income showed some growth. Net income was $18.8 million, or $0.62 per share. This is up nicely from Q3 2016's numbers of $16.8 million or $0.55per share. This was primarily a result of better expense management and a new warehouse club. PriceSmart had 39 warehouse clubs in operation as of May 2017 compared to 38 warehouse clubs in operation as of May 2016.

When I initiated coverage, I felt revenues and earnings were on a path to accelerate. While I was correct that sales increased markedly, when I initiated coverage back in July 2015, its most recent quarter was Q3 2015. I in that quarter, net income was $21.2 million, or $0.70 per share. Here we are in 2017, and putting up earnings that are well below this number. That is not that path to a winning stock and almost fully explains why shares have been range bound for two years. I should also point out that the present quarter's earnings and revenues missed estimates. Sales were short by $4.2 million while earnings missed handily by $0.05. It is just not good enough.

All things considered, it is clear that the company is in no rush. When I first covered the name there were 37 warehouse clubs in operation at the end of June 2015. As you can see, only another net two stores have opened. While I like slow and steady growth, earnings have not followed suit thanks to strong competition, pricing concerns and expenses. While this was once a great growth story, it was a failed buy call. I own this one. It is not the first bad call, and it won't be the last. Do your due diligence and research at all times. Hopefully if you followed our advice you scaled into the stock, and collected the semi-annual dividend and are close to even on the name. There are better places to put our money to work.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.