PriceSmart's Undervaluation and FX-Driven Upside: Asymmetric Potential in a Weakening-Dollar Regime

The investment landscape for multinational retailers has long been shaped by currency dynamics, and PriceSmart (PSMT) stands out as a compelling case study in this arena. With a P/E ratio of 26.48 and a P/B ratio of 3.15 in 2025-both near historical highs-the company appears to trade at a premium to its book value but at a discount relative to its earnings growth potential. This valuation divergence, coupled with its geographic exposure to emerging markets and significant foreign exchange (FX) sensitivity, positions PriceSmart as a candidate for asymmetric upside in a weakening-U.S.-dollar environment.

Geographic Expansion and Revenue Resilience

PriceSmart's Q4 2025 results underscore its operational strength. The company reported an 8.6% year-over-year revenue increase, driven by a 7.5% rise in comparable net merchandise sales. Regional breakdowns reveal a strikingly uneven but robust growth profile: Central America saw an 8.9% sales increase, the Caribbean posted a 6.3% gain, and Colombia surged by 18.2%. These figures highlight PriceSmart's ability to capitalize on regional demand, particularly in high-growth markets like Colombia, where its warehouse clubs are becoming critical revenue drivers.

The company's geographic diversification is further amplified by its expansion plans. With new locations slated in Jamaica and the Dominican Republic, PriceSmart is betting on its model's adaptability in markets where local purchasing power and membership growth now exceeding 2 million accounts suggest untapped potential.

FX Exposure: A Double-Edged Sword

PriceSmart's financial performance is inextricably tied to currency fluctuations. Approximately 80.1% of its 2025 net merchandise sales were transacted in non-U.S.-dollar currencies, with 49% of those sales involving U.S.-dollar-denominated purchases. This duality creates a unique risk-reward profile. When the dollar weakens, local-currency revenues translate to stronger U.S. dollar earnings, amplifying margins and membership income. Conversely, a stronger dollar erodes sales in regions where local currencies depreciate against the greenback.

The 2025 10-K filing quantifies this exposure. For instance, third-quarter net merchandise sales were reduced by $18.6 million (1.5%) due to FX headwinds, while the nine months ending May 31, 2025, saw a $38.0 million (1.0%) drag. These figures illustrate the magnitude of FX volatility but also hint at a structural opportunity: in a weakening-dollar regime, such negative impacts would reverse, directly boosting reported revenues and earnings.

Asymmetric Upside in a Dovish Scenario

The case for asymmetric upside hinges on macroeconomic trends. With global central banks increasingly adopting dovish policies and the U.S. dollar's dominance under pressure from inflation differentials and geopolitical shifts, a multi-year weakening trend is plausible. For PriceSmart, this scenario would translate to:
1. Revenue Boost: A 10% depreciation of the dollar against key currencies (e.g., the Colombian peso, Jamaican dollar) could add hundreds of millions in incremental revenue annually.
2. Margin Expansion: Lower import costs for U.S.-sourced goods (which constitute 49% of non-USD sales) would further pad gross margins.
3. Valuation Re-rating: A P/E ratio of 26.48, while elevated, could justify further expansion if earnings growth accelerates due to FX tailwinds.

However, this thesis is not without risks. PriceSmart's 10-K notes limited transparency on hedging strategies, leaving open questions about how it mitigates currency volatility. While the company's management discussion and analysis (MD&A) sections historically emphasize FX monitoring, the absence of concrete hedging details in 2025 filings suggests reliance on organic resilience rather than proactive risk management.

Conclusion: A High-Conviction Play

PriceSmart's valuation metrics, geographic diversification, and FX exposure create a compelling asymmetry. In a weakening-dollar environment, the company's earnings could surge beyond current expectations, potentially re-rating its P/E and P/B ratios upward. Conversely, a stronger dollar would pose challenges, though the company's expansion into high-growth markets and membership-driven recurring revenue provide a buffer. For investors seeking asymmetric upside with a structural catalyst, PriceSmart offers a unique opportunity-one where macroeconomic trends and operational execution align to create a compelling risk-reward profile.