Markus Hansen says PriceSmart's valuation, now in the low 20s on forward numbers, can reach the mid-20s and still be fairly valued.
PriceSmart forecasts about $5.5bn of revenue and $350m of EBITDA, with close to 40% of EBITDA coming from upfront membership fees.
Hansen says PriceSmart's Colombia business could support about 25 stores and that controlling logistics is a key moat as the company builds its own distribution centres.
PriceSmart Brings the Costco Club Model to Central America
PriceSmart applies the Sol Price warehouse club model to the middle class of Central America, the Caribbean and Colombia. Upfront membership fees fund low prices and recurring profit, while owned real estate and controlled logistics protect the model. New stores and private label extend the growth, though the stock has already rerated.
Takeaways
Membership fees drive profit and loyalty. Close to 40% of EBITDA comes from fees paid upfront. Tiers have risen from $30 and $60 to $45 and $90. Renewal runs 90 to 91%, and Platinum holders are just under 20% of members, up from 12%.
The customer is Latin America's rising middle class. PriceSmart targets roughly the top 10 to 15% of the population, many with US exposure through study, work or travel. About 2.5m core paying members live in markets with around 70m people.
Owned real estate and logistics form the moat. The company owns land where it can and builds its own distribution centre once a market reaches four or five stores. Heavy shipping volumes bring good pricing, and owning sites adds layout flexibility but makes the business more asset heavy.
New stores give a long growth runway. PriceSmart has about 61 stores and adds three to four a year, usually profitable within two to three years. Colombia, 10 years in with 11 stores, could support about 25. Chile has been studied for about five years.
Private label is the next margin lever. Private label is 19% of sales, against about 33% at Costco and just above 30% at Sam's Club. It typically sells at a 25 to 30% discount to brands. A private label chicken offer is in development, and tyres and auto services are possible.
Financials are strong with minimal debt. Hansen forecasts about $5.5bn of revenue, $350m of EBITDA and $250m of EBIT, with cash conversion near 90%. Earnings should grow about 11 to 12%. Debt is minimal and the dividend yield is about 1%.
The stock has rerated but has limits. The shares moved from the teens to the low 20s on forward numbers. Hansen sees the mid-20s as fair value, not a Costco-type multiple soon. Control of 25 to 30% of the company limits the float.
From Fed Mart to PriceSmart
Fed Mart, a 1950s warehouse retailer, charged a two-dollar annual subscription aimed at federal employees.
Sol Price left in 1975 and started Price Club with his son.
Price Club went public in 1980. Sam Walton's attempt to buy it failed, which Hansen says led him to start Sam's Club.
Price Club merged with Costco, and Costco's Central American stores were spun into Price Enterprises, which the Price family took private.
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On this episode 2
Show 1
PriceSmart was founded in 1996 with its first store in Panama.