Lately, investors in Latin American retailer PriceSmart
First, the good news.
By many operating metrics, PriceSmart's most recent quarter was excellent. Take a look at how the three months ending in November 2011 compare with the same time frame in 2010.
|
Metric |
2011 |
2010 |
Change |
|---|---|---|---|
| Revenue | $478.7 | $368.1 | 30% |
| Operating Income | $24.3 | $22.2 | 9% |
| Net Income | $14.0 | $14.9 | (6%) |
Source: SEC filings.
Throw in there the fact that the company's same-store sales increased a whopping 18.8%, and the picture almost looks perfect.
But then there's that pesky number that, for all intents and purposes, is the one that matters most: net income. To figure out why PriceSmart is taking in so much more money but keeping less of it, there are two areas that need to be investigated.
Explanation No. 1: driving traffic
The first explanation has to do with the sales strategy the company has recently put in place. Like Costco
The long-term goal is to drive traffic into stores, which, judging by same-store sales increases, seems to be working quite well. Both Costco and Wal-Mart
Regardless of the price of membership dues, PriceSmart is gaining an edge on the competition in Latin America, where there are no warehouse clubs to speak of. Wal-Mart de Mexico (OTC: WMMVY.PK) certainly could emerge as competition, as it has bought out several hypermarts and low-cost grocers but hasn't started clubs of its own yet. PriceSmart's moves now will help it build a moat making entry all the more difficult for competitors.
Explanation No. 2: setting up shop in Colombia
Right now, there are only three analysts closely following PriceSmart, and one only recently jumped on the bandwagon. When that's the case, it can be difficult to tell whether the "no stone goes unturned" due diligence is in place. PriceSmart's stock is up more than 200% over the past two years, and the recent 18% slide could largely be a result of something analysts missed -- specifically, the company's expenses related to opening up shop in Colombia. Its entry there could be a bellwether for future expansion into South America and its growing economies.
But starting up in Colombia won't come cheap. In the most recent earnings release, PriceSmart fell a full $0.11 short of analyst expectations. When we look at what PriceSmart had to say about this, its earnings release was pretty clear: "In total, the net loss in the Company's Colombian subsidiary affected the consolidated Company's net income by approximately $2.8 million, or $0.09 per diluted share in the quarter."
That alone represents the bulk of PriceSmart's "miss." Could it be that analysts simply weren't aware of the costs, or that they weren't tuned in to the company's decision to bring the price of goods down? There's really no way to know. The company doesn't hold quarterly conference calls, and the earnings release is the only real window into what's happening at the company, aside from its annual shareholder meeting.
What 2012 holds in store
Analyst expectations aside, I don't think the recent earnings misses are cause for too much alarm. The company clearly needs to make sure it keeps costs under control, but its history speaks to its disciplined strategy of growth.
With a strategy that should prove to be a great long-term move, expansion into South America, and same-store sales that are booming, my money is still on this international dividend stock.
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