PriceSmart's Capital Returns: A Rising Tide of Profitability

PriceSmart, Inc. (NASDAQ: PSMT) has been making waves in the retail sector, and its return on capital (ROC) has been on an upward trajectory over the past five years. As an investor, you might be wondering what's driving this trend and how it compares to other retail giants. Let's dive in and explore the factors contributing to PriceSmart's improving ROC and how it stacks up against its competitors.

PriceSmart's ROC has been steadily increasing, from 12.5% in 2020 to 15.5% in 2024. This consistent growth indicates that the company is effectively utilizing its capital to generate higher returns. Several key factors contribute to this trend:

1. Expansion and New Club Openings: PriceSmart has been expanding its footprint by opening new warehouse clubs in strategic locations. In 2020, the company announced plans to build two new clubs in Guatemala and Jamaica, which are expected to open in the fall of 2021 and spring of 2022, respectively. These new clubs can drive incremental membership, net merchandise sales, and services, contributing to improved returns on capital.
2. Investment in E-commerce and Omni-channel Capabilities: PriceSmart has been investing in and integrating technology, talent, and cross-border logistics infrastructure to enhance the membership shopping experience and drive sales growth. The company acquired a company in March 2018 to expand its e-commerce platform and integrate it with its traditional business. This investment can lead to improved operational efficiency and increased returns on capital.
3. Growth in Comparable Net Merchandise Sales: PriceSmart has been experiencing growth in comparable net merchandise sales, which indicates that the company is effectively managing its existing clubs and driving sales growth without relying solely on new club openings. In the first quarter of fiscal 2025, comparable net merchandise sales increased by 5.7%. This growth contributes to improved returns on capital by increasing sales at existing clubs.
4. Improved Adjusted EBITDA: PriceSmart's adjusted EBITDA has been improving, suggesting that the company is becoming more operationally efficient. In the first quarter of fiscal 2025, adjusted EBITDA improved to $79.1 million from $77.8 million in the previous year. This improvement can lead to higher returns on capital as the company becomes more profitable.
5. Strong Financial Health: PriceSmart maintains a strong financial health, as indicated by its high financial health score of 6/6 on GuruFocus. The company's solid financial position allows it to invest in growth initiatives, such as new club openings and e-commerce expansion, which can contribute to improved returns on capital.

PriceSmart's improving returns on capital can be attributed to its strategic expansion, investment in technology, effective management of existing clubs, operational efficiency, and strong financial health. As an investor, you should be encouraged by these trends, as they indicate that PriceSmart is a well-positioned company with a strong track record of generating value for its shareholders.

In conclusion, PriceSmart's return on capital has been on a steady upward trajectory, driven by factors such as expansion, investment in technology, and operational efficiency. The company's strong financial health and improving adjusted EBITDA further support its position as a solid investment opportunity in the retail sector. As an investor, you should consider PriceSmart as a company with a proven track record of generating value for its shareholders and a promising future ahead.