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Value Line recently initiated coverage of little-known wholesale club chain PriceSmart (PSMT). The reason why most U.S. consumers are unfamiliar with the brand is because its warehouses are exclusive to Central America and the Caribbean. 

PriceSmart is the third venture of Sol Price, the retailing titan who pioneered the concept of paying a membership fee to buy everyday products at discount prices.

Mr. Price entered the retailing business in 1954 when he opened the first FedMart using $50,000 in startup capital and a warehouse he inherited from a family member. The three initial product categories sold by FedMart were jewelry, furniture, and liquor, and its only clients were government employees. Despite the odd combination of goods, the business was quite successful and went on to spawn such innovative offerings as gasoline sold at wholesale prices, in-store pharmacies, and optical centers.

Sol and his son, Robert Price, sold FedMart in 1975 and started Price Club the following year. Although the two chains shared similar concepts, Price Club is commonly regarded as the first true warehouse store because its merchandise catered to restaurants, newspaper stands, candy shops, and any other small businesses that couldn’t afford the kind of volume that warrants wholesale prices.   

Price Club enjoyed a dominant position for over 15 years and inspired a host of imitators, such as Costco Wholesale (COST), BJ’s Wholesale (BJ) and Wal-Mart (WMT) owned Sam’s Club.  Eventually, the latter overtook the originator in terms of market share, which motivated the Prices to merge their chain with third place Costco in 1993. The combined entity, dubbed PriceCostco, had a footprint twice the size of both individual chains and was headed by Robert Price.

Unfortunately, the new arrangement was shortlived since PriceCostco’s dual headquarters structure proved inefficient and ended up failing. This led to a breakup of the company, with Costco management gaining total control of PriceCostco and Robert Price taking some real estate assets and the rights to operate membership club stores in certain international markets.

The assets gained from the transaction formed the foundation for what is now PriceSmart. The chain’s primary objective is to operate U.S. style warehouse clubs in growing, middle-class Central American and Caribbean markets that face little competition from Wal-Mart and other big-box discounters.

The chain started out well by expanding rapidly and surpassing sales targets.  However, it eventually began to suffer from the mismanagement of Gilbert Partida, a lawyer with no retail experience whom the Prices chose to lead the company.

Mr. Partida’s missteps were plentiful and damaging. Shortly after attempting to solicit a new equity offering, he sold a third of his stake in the company, which rattled investor confidence. Then he rolled out telephone cards with razor thin margins, and opened three stores in Wal-Mart dominated Mexico that proved unsuccessful.

In 2003, Mr. Partida abruptly resigned amidst heavy losses and a plummeting share price. Robert Price took over PriceSmart and attempted to correct his mistakes by closing four stores and exiting the telephone card business. It proved difficult to rectify investor sentiment though as the company was forced to restate its SEC filings for 2002 and 2003 due to revenue recognition errors.

PriceSmart eventually shuttered its Mexican locations and halted expansion efforts for several years, choosing instead to focus on improving sales and profitability at current warehouses.

The strategy has been paying off as sales have improved steadily after reaching a low point in the November 2004 quarter. The larger purchasing quantities that result from higher volumes have given PriceSmart greater bargaining power with suppliers. This trend should continue since management has resumed evaluating sites for additional warehouse locations and still has ample room for traffic gains in existing markets. In late 2009, it acquired land in the Dominican Republic for a new club to be opened in 2010. Additionally the company is looking to launch multiple clubs in Columbia.

Click here to see Value Line's full page report, earnings estimates, Timeliness Rank, and Historical data on PriceSmart.