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PriceSmart Announces a $75 Million Share Repurchase – Buyback Wednesdays

  • July 19, 2023

Key Insights:

  • PriceSmart, Inc. (PSMT), “Latin America’s Costco”, is the largest operator of membership warehouse clubs in Central America, the Caribbean, and Colombia serving over 3 million cardholders.
  • The Company currently operates 51 warehouse clubs in 12 countries and one U.S. territory.
  • Currency fluctuations in Colombia will likely translate to margin compression in the second half of the fiscal year.
  • Combined with a low degree of debt, PriceSmart has the necessary potential to engage in its expansion efforts.

PriceSmart

Investing is filled with regrets. There are missed opportunities where you pass on a great investment, selling prematurely  just before a company you own goes on a massive run, not selling a losing investment soon enough and the cardinal sin of averaging down on losers.

Costco (COST) for me belongs in the missed opportunities bucket. When the stock was trading at $50 several years ago, I analyzed the company, wrote an article comparing both Costco and Safeway and then failed to buy Costco. A few months later, Buffett and Munger picked up Costco for Berkshire Hathaway (the price was around $80 if I remember correctly) and yet I failed to get over my anchor bias and buy the stock.

It certainly felt strange when I watched a video of Charlie Munger last year talk about how Costco was still an excellent company to own if you had a long enough time horizon of 30, 40 or 50 years. The stock was trading around $500 at that time.

This article is however not about Costco but about another company that is very similar to Costco, operates in Latin America and the Caribbean, trades at half of Costco’s valuation and has similar characteristics in terms of growth and margins. It also has a market cap that is less than 1% of Costco’s market cap.

PriceSmart offers top-quality merchandise at affordable prices to its warehouse members. This similarity between the two companies is not a coincidence. In 1993 Costco merged with another company operating a chain of warehouse stores called Price Club. The Price Club was founded in 1976 by Sol and Richard Price. Costco renamed itself to Price/Costco but the merger was short lived. The following year, the company unwound the merger by spinning off Price Enterprises with Robert Price as the Chairman and CEO of Price Enterprises. PriceSmart, a wholly owned subsidiary of Price Enterprises, opened its first company owned store in Panama in 1996. The next year, the company separated from Price Enterprises and went public on the Nasdaq.

In addition to its retail offerings, PriceSmart also provides a range of services, including optical, pharmacy  and tire center services, among others. Furthermore, the company has adapted to the changing consumer landscape by introducing an e-commerce platform called Click & Go.

The Central American region serves as its largest market, contributing approximately 60% of net sales. The Colombian market represents its largest storefront presence, despite accounting for only 12% of total net sales.

PriceSmart-Distribution Network

Source: PriceSmart.com

Share Repurchase:

The PriceSmart Board approved a share repurchase plan on July 10, 2023, allowing for the repurchase of the company’s common stock valued at up to $75 million. This amount represents approximately 3.14% of the company’s market capitalization at the time of the announcement. Management anticipates that the repurchase program will commence in the latter part of the company’s fiscal fourth quarter.

Expressing a positive outlook regarding the buyback announcement, Robert Price, the Interim Chief Executive Officer of PriceSmart, commented:

“We believe that the decision to repurchase stock is in the best interest of our shareholders. We also want to assure our investors that our company’s balance sheet and cash flow support both the stock repurchase and our plans to continue to grow PriceSmart.”

Dividends:

Regarding dividends, the company has shown limited changes over the years. From FY 2016 through FY 2021, the annualized dividend per share remained steady at $0.7, without any noticeable growth. However, in FY 2022, there was a sudden and significant increase of 22.86% to $0.86. The company once again increased its annualized dividend in FY 2023 to $0.92 per share. The company pays dividends twice a year. The forward dividend yield is 1.18% and with a payout ratio of 24%, there is still a lot of room for the dividend to grow in the future.

Pricesmart Leadership Transition:

PriceSmart recently underwent a few significant C-Suite changes.

On February 3, 2023, PriceSmart’s Chief Executive Officer Ms. Sherry Bahrambeygui resigned from the post to pursue new professional and philanthropic interests.

As a result, Robert Price, the founder of the company and Chairman of the Board, assumed the role of Interim CEO. This is the second time in PriceSmart’s history Mr. Price has stepped in as interim CEO.

Additionally, John Hildebrandt, previously the Executive Vice President and Chief Operating Officer, has been promoted to the positions of President and Chief Operating Officer.

Currency Issues:

The devaluation of the Colombian peso has led to a decrease in comparable net merchandise sales in Colombia, resulting in a negative impact of approximately 190 basis points on the total consolidated net merchandise sales for the quarter. In the third quarter of fiscal year 2023, the Honduran Central Bank implemented restrictions on the availability and allocation of US dollars for conversion from Honduran lempiras to US dollars.

As of May 31, 2023, PriceSmart’s subsidiary in Honduras held approximately $15.9 million worth of cash and cash equivalents denominated in lempiras, which cannot be easily converted to US dollars for general company use. Resolving these currency-related issues promptly is crucial to avoid hindering the company’s growth.

Q3 FY2023 Highlights:

Although falling short of estimates, PriceSmart’s earnings for Q3 2023 demonstrated robust growth, with a notable 7.1% increase in net merchandise sales.

  • Compared to the previous year, membership accounts for PriceSmart experienced a 2.2% increase, reaching a total of 1.79 million accounts. Platinum Membership accounts now constitute 8.6% of the overall membership base, a rise from 7.1% in the previous year.
  • The company maintained a strong 12-month renewal rate of 87.1%, resulting in membership income of $16.7 million, reflecting an 8.4% increase compared to the same period last year.
  • Total gross profit saw an increase of approximately 15.1%, amounting to $21.5 million, when compared to the same quarter of the previous fiscal year.
  • Selling, general, and administrative (SG&A) expenses accounted for 12.9% of total revenues for the third quarter of fiscal year 2023, a slight increase from 12.4% in the third quarter of fiscal year 2022.
  • Operating income for the quarter exhibited a notable growth of 27.5% compared to the same period last year, reaching $43.1 million.
  • Net income amounted to $29.6 million or $0.94 per diluted share, compared to $19.3 million or $0.62 per diluted share in the corresponding prior year period.
  • Adjusted EBITDA for the first nine months of fiscal 2023 stood at $215.6 million, showing an increase from $178.3 million in the same period last year.
  • Freight rates continued to decrease, going from approximately $3,900 per container in the previous quarter to $2,900 during Q3 due to reduced transpacific demand in US imports. PriceSmart utilizes these reductions to dynamically adjust merchandise pricing for the benefit of its consumers.
  • In terms of merchandise categories, the foods category grew by approximately 9%, the non-foods category decreased by approximately 5% and other business categories grew by 7%, compared to the same period in the prior year.

PriceSmart-Q3 FY2023 results

Source: PriceSmart – Investor Presentation

The company concluded the quarter with cash and short-term investments totaling $335.3 million.

Growth:

Over the past five years, PriceSmart has experienced a compound annual revenue growth rate of 6.68%, resulting in a total revenue of $4.3 billion trailing twelve months. Furthermore, the company experienced an 8.5% growth in operating profit.  PriceSmart has been enhancing its gross margin over the years. Currently, the gross margin stands at 17.17%, reflecting an increase from 15.8% in 2018.

Strong Balance Sheet:

PriceSmart is currently in a strong financial position. Its current assets amount to $847.2 million, surpassing its current liabilities of $587.3 million by 44.25%. Moreover, the company is debt-free and possesses net cash of $189.7 million, excluding capital leases. Given this strong financial background, the share buyback program announced by the company is a logical decision.

Source: PriceSmart – Investor Presentation

PriceSmart vs Costco:

PriceSmart generates higher gross margin of 17.17% compared to Costco’s 12.28%. Additionally, PriceSmart boasts a higher free cash flow margin compared to Costco’s 1.41%  However, despite these advantages, Costco is positioned for stronger growth than PriceSmart.

This can be attributed to Costco’s advantageous position in operating within the United States, where consumers generally possess higher spending capacity. In contrast, PriceSmart’s key markets, such as Colombia, Panama, and Costa Rica, either have lower average incomes or, if affluent, have limited population sizes, such as Aruba. To address this situation, PriceSmart needs to explore opportunities to enter more lucrative markets.

Upcoming Projects:

  • PriceSmart is currently remodeling and expanding four of its high-volume clubs.
  • In addition, the company plans to open a warehouse club in Medellín, Colombia in August 2023, a club in Escuintla, Guatemala in the fall of 2023, and a warehouse club in Santa Ana, El Salvador in early 2024. Once these three new clubs are open, PriceSmart will operate 54 warehouse clubs. and is actively exploring additional locations as well.
  • The company expects to expand its suite of wellness services. There are currently 48 locations with optical centers and it expects to have 50 open by the end of the fiscal year.
  • It expects to open pharmacies in the remaining five clubs in Panama during fiscal year 2024.
  • Eight additional audiology centers are expected to open in fiscal 2024, totaling 32.
  • The company will continue to invest in the digital channel business to provide an enhanced omnichannel experience and additional value to its members.

Bottom Line:

Inflation, shrinkage in the non-food segment, political upheaval and foreign currency exchange fluctuations pose significant challenges for PriceSmart, and these headwinds are expected to persist in the foreseeable future. The decline in Colombia could indicate a weakening trend in consumer spending habits, which warrants close monitoring.

For PriceSmart to achieve remarkable growth, it needs to venture into larger and more affluent markets, as its current markets have low purchasing power and are exposed to risks such as political instability and currency fluctuations.

With over two decades of experience and a drive for expansion and innovation, PriceSmart is a company worth paying attention to. Notably, PriceSmart has outperformed the market, with the stock witnessing an increase of nearly 20% over the past year and 27.1% year-to-date.

Welcome to edition 68 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

There was a significant slowdown in buyback activity last week, as only three new buyback announcements were made, in contrast to the five announcements made in the previous week.

Top 3 Stock Buyback Announcements 

1. Novartis AG (NVS): $103.46

On July 18, 2023, the Board of Directors of this pharmaceutical company authorized a new $15 billion share repurchase program, equal to around 6.84% of its market cap at announcement.

Market Cap: $214.26BAvg. Daily Volume (30 days): 1,815,568Revenue (TTM): $52.22B
Net Income Margin (TTM): 13.45%ROE (TTM): 12.35% Net Debt: $17.02B
P/E: 30.41Forward P/E: 20.51EV/EBITDA (TTM): 12.49

2. PriceSmart, Inc. (PSMT): $78.44

On July 10, 2023, the Board of Directors of this owner of U.S. style membership shopping warehouse clubs approved a new $75 million share repurchase program, equal to around 3.14% of its market cap at announcement.

Market Cap: $2.41BAvg. Daily Volume (30 days): 154,713Revenue (TTM): $4.32B
Net Income Margin (TTM): 2.71%ROE (TTM): 11.38% Net Cash: $58.03M
P/E: 20.79Forward P/E: 20.23EV/EBITDA (TTM): 8.68

3. LiveOne, Inc. (LVO): $1.64

 On July 14, 2023, the Board of Directors of this digital media company authorized an additional $2.5 million share repurchase program, equal to around 1.57% of its market cap at announcement.

Market Cap: $144.17MAvg. Daily Volume (30 days): 283,382Revenue (TTM): $99.61M
Net Income Margin (TTM): -10.06%ROE (TTM): N/A Net Debt: $3.91M
P/E: N/AForward P/E: N/AEV/EBITDA (TTM): 23.68

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