I am bullish on PriceSmart (NASDAQ: PSMT) due to its solid business model and promising growth potential. PriceSmart is a well-managed warehouse club retailer with stable margins and a growing customer base. The company operates 54 warehouse clubs in Central America, serving 1.9 million members who pay an annual fee for access to bulk groceries, household items, and pharmaceuticals.
PriceSmart has been able to maintain consistent margins even during challenging times like the COVID-19 pandemic. The company’s lean working capital and efficient inventory management have resulted in high-quality earnings, with operating cash flow averaging 185% of net income and free cash flow averaging 63% of net income from 2019 to 2024.
In addition, PriceSmart has seen positive trends in store and membership metrics. Average sales per store per day have increased, same-store sales have been consistently positive, and membership accounts have grown steadily. The company has also been successful in promoting upgrades to its ‘Platinum Membership,’ which has led to higher spending per member over time.
PriceSmart has been cautious in its expansion strategy, funding new stores internally with generated cash flows. New stores have shown a decent return on capital of around 11%, with the ability to fund at least 3-4 new stores annually. The macroeconomic environment in PriceSmart’s markets is favorable, with expected GDP growth rates supporting future store expansion and sales growth.
Despite its strong fundamentals and growth potential, PriceSmart currently trades at a discount compared to its peers in the wholesale club and grocery store industry. While there are risks associated with operating in emerging markets with volatile currencies and political environments, PriceSmart’s discounted valuation presents an opportunity for investors.
In conclusion, PriceSmart is a well-positioned company with solid growth prospects and a discounted valuation compared to its peers. I believe that the company’s stock is undervalued at its current price, making it an attractive investment opportunity for long-term investors.