When investors think about Membership-based shopping warehouse club concepts, they typically think of the larger players in the market such as Costco Wholesale (COST), BJ's Wholesale Club Holdings (BJ), and Sam's Club, the latter being a subsidiary of Walmart (WMT). But this does not mean that these are the only players for investors to consider. One alternative, a company that is fairly small by comparison, is a firm called PriceSmart (NASDAQ:PSMT). In recent years, the business has exhibited attractive growth on its top line and cash flows have been looking generally positive. Add on to this the fact that shares of the business look attractively priced at this point in time, and it should make for an interesting opportunity for long-term investors who are focused on the value approach but who also want to achieve some growth over time.
Today, PriceSmart operates 49 warehouse clubs spread throughout Central America, the Caribbean, and Colombia. Its largest presence is in Costa Rica and Colombia, each holding 8 of its warehouses. Through these locations, which are member-based only, the company sells a mixture of brand name and private label consumer products, essential goods, and direct from farm-fresh produce. They also sell other products such as prepared foods and fresh baked goods. Their locations also tend to offer various departments such as an optical center, a pharmacy, an audiology department, and tired apartments. On average, these stores are between 40,000 and 60,000 square feet, and they tend to be located in major cities where demand for their products would be greatest. This is not to say that the company doesn't have some locations that have a smaller footprint. They do have some stores ranging from 30,000 square feet to 40,000 square feet. But those are largely focused on less populated areas.
According to management, the largest category of merchandise sales for the business in its 2021 fiscal year was what it calls foods and sundries. This category largely focuses on grocery products, cleaning supplies, health and beauty products, canned food products, and more. It made up about 50% of the company's net merchandise sales during the year. Fresh foods ranging from produce to meat comprised 29% of sales, while hard lines, which focus on electronics, appliances, and other related products, made up 12% of net merchandise sales. The company also sells apparel, furniture products, and other related items that, combined, made up 5% of sales. And it also has its 'Other Business' category. Their focus is on providing food services, offering optical, tire center, and other related services. That made up 4% of revenue in 2021.
Over the past few years, the financial performance achieved by PriceSmart has been great. Revenue expanded from just under $3 billion in 2017 to $3.62 billion in 2021. In the first quarter of the company's 2022 fiscal year, sales came in at $975.4 million. That represents an increase of 11.2% over the $877.4 million the company generated one year earlier. This most recent increase in revenue came as a result of two key things. The biggest was an increase in warehouse count from 46 locations in the first quarter of 2021 to 49 today. The second was an increase in membership count to 1.69 million. That is about 7% higher than the 1.58 million members the company had one year earlier.
From a profitability perspective, the general trend for the company has been positive. After seeing profits drop from $90.7 million in 2017 to $74.3 million in 2018, it eventually climbed higher, hitting $98 million in 2021. Other profitability metrics have also been positive. Although lumpy, operating cash flow expanded from $129 million in 2017 to $259.3 million in 2020. Then, in 2021, this metric declined to $127.2 million. The adjusted figure for this actually has risen almost every year, climbing from $145.8 million in 2017 to $150.4 million in 2020. Then, in 2021, it came in at $178.7 million. And EBITDA, over the same window of time, followed a similar path, ultimately rising from $194.2 million in 2017 to $243.3 million in 2021.
Early data for the 2022 fiscal year also looks promising. Net income of $30.5 million in the first quarter of 2022 was slightly higher than the $27.7 million reported one year earlier. Operating cash flow of negative $13.3 million is better than the negative $17.8 million seen one year earlier. The adjusted equivalent of this managed to rise from $48.3 million to $51.8 million. And finally, we have EBITDA. Based on the data provided, this increased from $64.8 million in the first three months of 2021 to $67.6 million the same time this year.
Using the 2021 figures, shares of the business don't look all that pricey. On a price-to-earnings basis, the company is trading at a multiple of 22.2. But on a price to operating cash flow basis, the multiple drops to 12.2. Another way to look at the company is through the lens of the EV to EBITDA multiple. This gives us a reading of 10.4. To put all of this in perspective, I also decided to compare the company to three similar firms, admittedly firms that are much larger than it. On a price-to-earnings basis, these companies ranged from a low of 21.8 to a high of 48.5. Only one of the three companies was cheaper than PriceSmart. Using the price to operating cash flow approach, the range was 11.4 to 23.9. Also, in this case, only one of the three companies was cheaper than our prospect. And using the EV to EBITDA approach, the range was 12.2 to 24.8. In this scenario, PriceSmart was the cheapest of the group.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|BJ's Wholesale Club Holdings||21.8||11.4||12.2|
Based on all the data provided, I do believe that PriceSmart makes for an interesting opportunity for investors who don't mind a company with foreign operations. Although on a price-to-earnings basis, shares look a bit lofty on an absolute basis, I would say that, on the whole, shares are quite affordable at this point in time. Add in the prospect of future growth, and I must say that the company certainly looks like a compelling opportunity for long-term investors at this time.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.