International warehouse club PriceSmart (PSMT 5.68%) has seen its fortunes improve recently as economic growth rates steadied in many of its core Latin American, Caribbean, and Central American markets. The retailer is also benefiting from a sharp rebound in the value of the local Colombian currency.
Heading into its fiscal third-quarter results, shareholders were looking for evidence that these positive trends are continuing to lift sales and profits higher. PriceSmart offered mixed results, with revenue rising even as earnings dipped.
Here's how the headline results stacked up against the prior-year period:
|
Metric |
Q3 2018 |
Q3 2017 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$782 million |
$730 million |
7% |
|
Net income |
$18.7 million |
$18.8 million |
(1%) |
|
Earnings per share |
$0.61 |
$0.62 |
(2%) |
Data source: PriceSmart's financial filing.
What happened this quarter?
PriceSmart's sales were pushed higher by the combination of an increasing store base and healthier sales at its existing warehouses. The Colombian segment continued to benefit from improving currency rates and nearly all of its other divisions enjoyed rising sales and higher membership income thanks to steady economic growth.
Image source: Getty Images.
Highlights of the period include:
- Comparable-store sales gains moderated, reaching 2.7%, compared to 4.1% in the fiscal second quarter.
- The Colombian market was the biggest contributor to growth, with 18% higher sales at existing locations. Comp sales slipped 1% in the Central American segment due to cannibalization from a newly opened warehouse.
- Membership fee income jumped 7%, led by a 20% surge in Colombia that was also tied to the rising value of the local currency.
- Gross margin improved to 16.6% of sales from 15.4% a year ago.
- Selling expenses worsened to 12.9% of sales from 11.6% thanks to extra costs associated with PriceSmart's e-commerce investments.
- The higher spending more than offset gross profit gains to push operating margin down slightly, to 3.6% of sales from 3.8%.
- Membership renewal rates held steady at 85%.
What management had to say
In PriceSmart's 10-Q report, executives explained that the sales and membership fee spikes in Colombia were due to a "much stronger local currency" in the country. As for the 1% decline in its Central American segment, that market was hurt by a new warehouse opening that siphoned off sales from a nearby location. Management explained:
This transfer of sales from existing warehouse clubs that are included in the calculation of comparable net merchandise sales to new warehouse clubs that are not included in the calculation can have an adverse impact on reported comparable net merchandise sales.
Looking forward
CEO Jose Laparte and his team are aiming to push membership income higher by introducing PriceSmart's platinum subscriber option to the Trinidad market this quarter. That offering has resonated with members in its Panama and Dominican Republic warehouses, so it should translate well into new markets.
As for the current quarter, it's possible that PriceSmart's accelerating sales growth streak may be coming to an end. While comps are up 3% through the last nine months and are running at about double the rate of the prior-year period, the retailer's comp sales growth slowed to below 1% for the month of June, as management revealed in a separate press release. Investors won't know until the next quarterly report whether that deceleration was a temporary blip, or part of a bigger challenge that threatens PriceSmart's growth rate.
