Club Expansion And Rising Costs Will Pressure Margins And Limit Long Term Upside

Catalysts

About PriceSmart

PriceSmart operates membership based warehouse clubs focused on value oriented retail across Latin America and the Caribbean.

What are the underlying business or industry changes driving this perspective?

• The aggressive club expansion pipeline into markets such as Chile, Jamaica and the Dominican Republic requires substantial capital and management attention. If local demand normalizes or remittance supported consumption weakens, new locations may underperform and dilute consolidated revenue growth and earnings.
• Ongoing investments in technology platforms including RELEX, ELERA and Workday, together with new distribution centers and corporate headquarters costs, risk structurally elevating SG&A if efficiency gains and scale benefits materialize slower than expected. This could put sustained pressure on operating margins.
• Heavy reliance on digital channel growth and higher value Platinum memberships to drive incremental spend may hit a ceiling in relatively small, lower income markets where online penetration and fee tolerance are limited. This may constrain future membership income and transaction driven revenue.
• Concentration in countries with volatile currencies, tight U.S. dollar liquidity and exposure to hurricanes increases the likelihood of supply chain disruptions, higher funding and hedging costs and inventory imbalances. These factors could erode gross margin stability and net income.
• The shift toward private label and health services for differentiation may invite competitive responses from regional and local retailers. This may compress pricing power and mix benefits over time and limit further improvement in gross margin and EBITDA.

Assumptions

This narrative explores a more pessimistic perspective on PriceSmart compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming PriceSmart's revenue will grow by 7.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.7% today to 3.3% in 3 years time.
• The bearish analysts expect earnings to reach $219.4 million (and earnings per share of $7.62) by about December 2028, up from $144.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, down from 27.2x today. This future PE is lower than the current PE for the US Consumer Retailing industry at 22.9x.
• The bearish analysts expect the number of shares outstanding to grow by 0.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is delivering broad based, high single digit top line growth across all regions, with total net merchandise sales up 7.7% for fiscal 2025 and comparable sales up 6.7%. If this performance is sustained through continued club openings and footprint optimization, it supports a durable revenue growth trajectory that may underpin a higher share price as scale increases earnings.
• Strategic investments in distribution centers, forecasting systems like RELEX and point of sale upgrades such as ELERA are explicitly aimed at lowering landed costs, improving inventory turns and increasing in stock availability. Over time, these initiatives could expand gross margins and operating leverage, driving earnings growth rather than the margin compression implied by a bearish view.
• Rapid expansion of higher fee Platinum memberships, strong renewal rates of 88.8% and a 14.9% increase in membership income indicate rising member loyalty and pricing power. These trends could create a steadily growing, high margin membership revenue base that supports net margin expansion and more resilient earnings.
• Digital channel sales are growing at over 20% year over year, with rising online engagement and higher average transaction values. This suggests that omnichannel initiatives may unlock incremental demand and basket size, increasing revenue density per club and supporting both revenue growth and EBITDA margin over the long term.
• Disciplined capital allocation, evidenced by rising operating cash flow of $261.3 million, moderated capital spending and access to long term bank borrowings, gives the company flexibility to fund growth initiatives while managing leverage. This may stabilize or enhance free cash flow generation and support valuation multiples and share price performance.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for PriceSmart is $100.0, which represents up to two standard deviations below the consensus price target of $120.0. This valuation is based on what can be assumed as the expectations of PriceSmart's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $135.0, and the most bearish reporting a price target of just $100.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $6.6 billion, earnings will come to $219.4 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $131.02, the analyst price target of $100.0 is 31.0% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.