PriceSmart Down to Strong Sell on Soft Q3 and Weak Comps

Zacks

On Aug 12, we downgraded PriceSmart, Inc. (PSMT) to a Zacks Rank #5 (Strong Sell).Estimates of this retail warehouse stores operator have been declining ever since the company reported dismal third-quarter fiscal 2014 and weak June comps results last month.

Moreover, the company’s July comps released on Aug 11 were not so impressive either.

PriceSmart is involved in the operation of membership shopping warehouses in international markets. It has stores in 12 countries in Latin America and the Caribbean. However, its corporate, U.S. buying operations and distribution centers are primarily located in the United States. It had 33 warehouse clubs in operation at the end of Jul 2014.

Shares of PriceSmart slumped 20% year-to-date as the company failed to impress with any of the three quarterly results reported so far.

Poor Earnings Results

While the company missed the Zacks Consensus Estimate for revenues in the third quarter of fiscal 2014, it barely managed to meet the Estimate for earnings. Comps were quite weak during the quarter.

Adjusted earnings of 70 cents per share in the third quarter (ended May 31, 2014) were in line with the Zacks Consensus Estimate. Earnings grew 14.8% from the prior-year quarter as slightly better margins made up for the top-line weakness. Foreign exchange transaction gains and higher gains from the sale of assets aided earnings in the quarter.

The company reported total revenue of $615.0 million in the quarter, up 7.6% from the prior-year quarter. Revenues, however, missed the Zacks Consensus Estimate of $626 million by almost 2%.

Warehouse gross profit margin increased 34 basis points (bps) to 14.8% in the quarter due to higher merchandise margins. Operating income was $31.2 million, up 9.5% year over year. Operating margin increased 9 bps due to higher warehouse margins.

The Zacks Consensus Estimate for earnings declined almost 2% for fiscal 2014 and 5% for fiscal 2015 over the last 30 days after the company announced the disappointing earnings result.

Comps have been Weak

Comps grew 2.9% in the quarter, significantly slower than 6.7% and 7.9% in the first two quarters of the fiscal year. Also, PriceSmart’s June comps growth of 1%, released concurrent with the third-quarter results, were the slowest this year.

Further, on Aug 11, PriceSmart reported that July comps (for the four weeks ended Jul 27) increased 1.8%. Though better than June, July comps were weaker than 2.3% and 4.6% reported in May and April, respectively.

In fact, PriceSmart’s comps have been soft in all the months so far this year — 1.8% in July, 1.0% in June, 2.3% in May, 4.6% in April, 1.9% in March, 5.3% in February and 8.4% in January. The company’s comps have been declining since Oct 2013 — from high teen/low double-digit comps in 2012 and high single-digit in 2013 — due to weak purchasing power of consumers and slower economic and retail activity in the countries where PriceSmart operates.

Other Stocks to Consider

Better-ranked stocks in the retail sector are Burlington Stores, Inc. (BURL), The Men's Wearhouse, Inc. (MW) and Citi Trends, Inc. (CTRN). All the three stocks sport a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on CTRN
Read the Full Research Report on MW
Read the Full Research Report on PSMT
Read the Full Research Report on BURL


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