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The Costco of Latin America

Although its headquarters are in San Diego, this company has no store presence within the United States. But it is the largest membership-based, warehouse-style retailer in Latin America.

However, largest is a relative term -- it currently operates just 29 stores in 12 countries and the U.S. Virgin Islands. So it's clear that PriceSmart [Nasdaq: PSMT] is still in the early chapters of its growth story.

The company has a legendary history

Its founder, Sol Price, is one of the most influential retailers of all time. Forbes magazine has even referred to him as a "demigod" of retailing.

He founded FedMart, a discount department store, eight years before Sam Walton founded Wal-Mart. He beat Walton to the punch again in 1976, starting Price Club seven years before Sam's Club first opened.

In his memoir, Sam Walton confessed that he had "stolen -- I actually prefer the word 'borrowed' -- as many ideas from Sol Price as from anybody else in the business."

Even Costco co-founder and CEO Jim Sinegal was once a checkout bagger for Sol and later an executive at Price Company.

In 1993, Price Club merged with Costco, becoming PriceCostco, a business that Sinegal ran with Sol's son Robert.

Soon afterward, Costco spun off another business, led by Robert Price, which retained rights to membership clubs in some international markets -- and thus the first PriceSmart warehouse club was born in Panama.

Since then, it's followed in the footsteps of its big brother, Costco, and Sam's Club

PriceSmart operates warehouse clubs similar to Costco and Sam's Club, but with a smaller footprint. (The stores range from 50,000 to 80,000 square feet, compared to nearly three times that size for the U.S. stores.)

The average membership fee of $29 promises high-quality merchandise and low prices for PriceSmart's 916,000 members and more than 1 million cardholders.

And it's clearly catching on. PriceSmart enjoys an 88% member renewal rate -- comparable to Costco's -- proof that customers see value in their memberships.

PriceSmart also benefits from an efficient distribution system. It ships its U.S. and internationally sourced goods directly to its warehouse clubs via container ships, allowing it to maximize freight volume while minimizing supply chain costs.

So what makes this company a strong buy right now?

As I mentioned above, the warehouse membership concept has proven extremely popular -- and successful -- in the United States. And I have every reason to suspect it will follow the same growth trajectory in Latin America.

PriceSmart recently entered South America through Colombia (the continent's third-largest economy), where the potential market is much larger than those in Panama or Costa Rica. Although management hasn't stated its store count goals, the company's footprint could easily double or more over the next 10 years.

So to put it simply: store growth, coupled with increased sales per store, make this an exciting investment today.

And if that's not enough, even though PriceSmart chooses to grow through retained earnings, it still offers a small, but quickly growing dividend (its yield is currently just shy of 1%).

It's also in great shape financially

Same-store sales growth is one of the most important metrics when evaluating retailers. It measures the sales growth at existing stores from one period to another, without the noise of new store openings.

PriceSmart's same-store sales growth has been spectacular, jumping 17% for 34 months. What's more, it posted 22% growth in its second fiscal quarter of 2012.

This has been having a positive effect on margins, too, because revenue is growing faster than selling, general, and administrative expenses. This is a good sign because it means that more of the growth falls to PriceSmart's bottom line.   

Sales per square foot is another metric, focusing on management's ability to merchandise and use a store's space effectively. This is particularly important when a company's stores are nearly 100,000 square feet large.

PriceSmart stacks up well against its closest U.S. relatives, as you can see in the table below. Although Costco is clearly more efficient, PriceSmart's same-store sales growth suggests that the company will reach $1,000 in sales per square foot very soon.

Sales per Square Foot 5-Year Average
PriceSmart $910 $759
Costco $1,052 $973
Wal-Mart $434 $436

As you might expect, operational performance like this is highly valued by investors, as is future growth.

The fact that PriceSmart, with only 29 warehouses, is able to approach -- and at times beat -- the operational efficiency of Costco and Wal-Mart indicates that the future could be very bright as the company achieves increased economies of scale.

PriceSmart already enjoys twice the operating margin of Costco and is 60 basis points away from matching Wal-Mart's.

Granted, trading at a multiple of 27 times forward earnings, PriceSmart's stock isn't cheap. But investors seeking international growth should nevertheless appreciate the potential upside for this proven retailer.

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