It's not often you get a second chance at an incredible growth story. I believe that's part of why The Fresh Market
This sounds familiar ...
PriceSmart was founded by Sol Price, who also founded Price Club, which would later merge with Costco. Sam Walton himself, founder of Wal-Mart, once wrote that he had stolen "as many ideas from Sol Price as from anybody else in the business," even the "-mart" naming scheme.
Eventually, PriceSmart was spun off from Costco and developed into the company it is today -- the largest membership warehouse club in Latin America. However, with only a million members and 29 stores spread out over 12 countries, the bar isn't set particularly high. By comparison, Wal-Mart has 10,130 stores in 26 countries.
Not quite the same old story
Despite PriceSmart's pedigree, comparisons with its bigger rivals may be premature. PriceSmart opened its first club store 16 years ago and has averaged less than two store openings each year since. Sixteen years after Wal-Mart's debut, it had more than 200 stores and a rapidly expanding growth rate.
However, PriceSmart's slow growth in store count may not be a problem. Over the past five years, only six new stores have been opened, but same-store-sales growth has averaged about 15% per year, while membership accounts have grown 56%. Even sales per square foot have increased 52%, despite a slight expansion in average store size. However slow store openings may be, sales at existing stores are certainly making up for it.
Plus, it might not be long before PriceSmart accelerates its store openings. Currently, the majority of its stores are in very small Central American countries, some of them smaller in population than many cities in the U.S., which makes them too small to support more than one, maybe two stores. But a store opening in Colombia gives the company a country with a little breathing room, and access to the fast-growing economies of South America. The company is on track to add a second location there as well. In addition, while PriceSmart has no Mexican stores currently, a recent bribery scandal at Wal-Mart de Mexico (OTC: WMMVY.PK) may give the company the opening it needs.
A few concerns
PriceSmart isn't exactly a perfect investment. Because sales are growing so much faster than certain costs -- like selling, general, and administrative expenses or the cost of opening new stores -- free cash flow is exploding and operating margin is steadily increasing. But the company's margin is only a few points higher than Costco's, and almost a full percentage point lower than Wal-Mart's. It may yet overtake Wal-Mart, but at this point, it's not exactly blowing competitors out of the water. Then again, the low margins are the crux of the business model, allowing them to offer low prices to consumers.
It also isn't a cheap stock, either -- its P/E is nearly twice that of its competitors. You could argue that because the company is growing so fast, a high multiple is justified. If you look at trailing five-year average earnings growth, PriceSmart clocks in at 1.05, suggesting that it is just about fairly valued. Looking forward, though, a PEG of 2.2 seems expensive.
The Foolish bottom line
PriceSmart isn't the cheapest or the most efficient big-box retailer out there. But it is growing sales at a head-spinning pace while others are having trouble breaking even, and it may be poised to start growing even faster soon. While similar companies focus mainly on the highly developed, slow-growing North American markets, PriceSmart can re-create its founder's former successes in the emerging world and come out a global contender.
Add PriceSmart to My Watchlist to stay updated as it continues to grow its retail empire. PriceSmart isn't the only retailer growing, sales either. Check out The Motley Fool's free report on two companies changing the face of retail. One of them is PriceSmart originator Costco. Get your free copy now. Enjoy, and fool on!
