Please ensure Javascript is enabled for purposes of website accessibility

PriceSmart Inc.'s Struggles Extend Beyond the Colombian Market

By Demitri Kalogeropoulos – Jul 8, 2016 at 11:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The retailer this week posted slowing growth and a sharp drop in profits.

Image source: PriceSmart.

Subscription warehouse club PriceSmart (PSMT) posted quarterly earnings results on Thursday, July 7, that were marked by a sharp drop in profits and weak sales growth. Currency issues continued to plague its Colombian stores, but customer traffic was soft even after accounting for that unusual situation.

Here's how the headline results stacked up against the prior-year period:

Metric 

Q3 2016 Actuals

Q3 2015 Actuals

Growth (YOY)

Revenue

$685 million

$675 million

1%

Net income

$17 million

$21 million

(21%)

Earnings per share

$0.55

$0.70

(21%)

Data source: PriceSmart's financial filing.

What happened this quarter?

PriceSmart's two new warehouses helped push revenue slightly higher, but sales at existing locations declined. Meanwhile, pricing pressure sent profitability lower, leading to a significant decline in net income.

Highlights of the quarter include:

  • The comparable-store sales growth trend worsened, declining to a negative 0.9% rate over the past three quarters from a negative 0.5% pace through Q1 and Q2.
  • Membership income rose by less than 3% to $11.5 million.
  • Store opening expenses declined sharply as no new warehouses were prepped for launch.
  • Operating margin fell to 4% from 5%, which translated into $26 million of operating income compared to $34 million a year ago.

What management had to say

Weakness in the Colombian market played a key role in the lower comps results, according to executives. "Comparable warehouse sales were negatively impacted by the devaluation of the Colombian peso from the year ago period," management explained in a press release. Excluding those six locations from the calculation yields a 2.2% comps gain over the last three quarters rather than the 1% reported decrease. Still, PriceSmart was growing at a 3% pace through the first two quarters of the year, and so the weak selling environment extends beyond just Colombia.

The struggles in that economy were also a big reason why operating margin declined. Three months ago, CEO Jose Luis Laparte told investors that PriceSmart had "taken margin reductions in that market in an effort to solidify our position for the future." It's likely that more price cuts this quarter continued that weakening profitability trend.

Looking forward

Laparte and his executive team aim to get comps growth to breakeven in Colombia, and still see it as an important market to the company's future. However, these earnings results demonstrate that the economic situation there is likely to keep pressuring sales growth, profits, and membership fee income in the meantime.

In fact, the sluggish business environment has continued into PriceSmart's fiscal fourth quarter. Comps declined by 2% during the month of June, the retailer said.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends PriceSmart. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

PriceSmart Stock Quote
PriceSmart
PSMT

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.