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PriceSmart Talks Economic Challenges and Rebound Plans

Demitrios Kalogeropoulos, The Motley Fool

Investors haven't found much to celebrate about PriceSmart's (NASDAQ: PSMT) last few earnings reports. Instead, sluggish sales growth and questions about its e-commerce strategy contributed to the stock's 24% drop in the last three years compared to a 40% spike in the broader market.

The international warehouse chain has a fresh chance to win over skeptics on Wall Street with the appointment of its new CEO, Sherry Bahrambeygui, who has just finished a strategic review of the retailer's assets and shortcomings. Bahrambeygui and her team are aiming to return the company to steady sales growth in the coming quarters while cutting costs. They detailed those rebound plans, and their reasons for optimism in the business, in a conference call with analysts.

Let's look at a few highlights from that discussion.

A customer browses the aisles at a warehouse store.

Image source: Getty Images.

Major economic headwinds

[Foreign currency exchange] fluctuations and the number of markets in which we've been experiencing external forces, whether economic or geopolitical, is probably more prominent than I can recall in recent quarters, and it definitely is having an impact on our overall performance. -- Bahrambeygui

With its store footprint spread out over volatile markets in the Caribbean and Central America, PriceSmart's earnings results are routinely impacted by exchange rate shifts and economic slowdowns. Yet executives said worsening selling environments in places like Costa Rica, Panama, and Guatemala -- combined with unfavorable currency moves -- made these headwinds even more pronounced lately.

The 1% comparable-store sales decline in the second quarter would have been an almost 4% increase except for exchange rate moves, executives explained. Economic slumps in Central America dragged down otherwise strong results from the Caribbean, too.

Rebound plans

Just as important as getting back to basics, is that we recognize we need to increase our capabilities with technology that's available today, so that we can better know our members, and we can deliver greater value to them today and in the future. -- Bahrambeygui

PriceSmart's rebound strategy has three pillars today, including a focus on nailing fundamentals like merchandising and supply-chain management. Executives call these, collectively, their "back to basics" initiatives, and they should feed directly into higher comps over time.

The company is also shifting its store growth plans by both speeding the launch of new locations and trying out smaller formats. This initiative plays right into the warehouse specialist's third focus, e-commerce, which aims to supplement reduced inventory through a robust online selling and fulfillment network.

The business fundamentals are strong

The core principles and discipline of the business are just as relevant today as they were 40 years ago. The best way to execute on that discipline however has evolved. -- Bahrambeygui

Executives argued that the challenges PriceSmart faces today, which have held sales and profits back in recent years, are fixable through these initiatives. As support for that claim, they pointed to the chain's strong membership trends. Its base of subscribers is up over 3% so far this year, and existing members are renewing at an 85% rate. The rollout of the recent Platinum plan is going well so far, too, and has plenty of room to grow from its current 2.5% portion of the broader shopper base.

In any case, PriceSmart's recovery path will likely require investors' patience since it will take time for these shifts to begin affecting the business. Until then, sales and profits are likely to continue being pulled and pushed by economic conditions and currency exchange shifts in a few of the retailer's Latin American markets.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.