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

Source: RetailSails.com    

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.

Of course, no investment is without its risks

Obviously, a company with this much success will face serious competition. Wal-Mart de Mexico (Pink Sheets: WMMVY.PK) tops the list of competitive threats. It could probably swallow PriceSmart whole if it wanted to.

Yet Costco and Wal-Mart have coexisted profitably for nearly three decades in the United States. Plus the Latin American market has plenty of room for more than one successful player.

Of course I also have to mention the risk of doing business in countries less stable politically and economically than the United States. PriceSmart buys inventory in U.S. dollars, but the overwhelming majority of its sales are in foreign currencies. Lately, strong Central American and Caribbean currencies have contributed to earnings, but that could easily reverse. If a local currency fails, I'd recommend selling your shares.

To sum it all up

PriceSmart isn't the cheapest stock on the market, but the membership warehouse model has proven to be valuable to customers and investors alike.

It's reasonable to expect the company's store count in Latin America to double within 10 years and for sales growth to shoot even higher, bringing increased operational efficiency. If it does, this stock will soar, and Sol Price's final contribution to retail could be his defining masterpiece.

So there you have it, my top pick for 2012 as The Motley Fool's Chief Investment Officer!

But let me be completely honest with you -- deciding on PriceSmart was not an easy decision.

That's because when I was reviewing all the stocks my fellow analysts recommended in our highly sought-after annual research report, Stocks 2012: The Investor's Guide to the Year Ahead, there were so many stocks I found attractive. 

Which is why I want you to get your hands on the FULL report, completely free.

Click below to find out how.