Clorox' Strategy Shows PriceSmart is on the Right Track
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Clorox (NYSE: CLX) found out that being a big fish in a small pond can be better for a company's sales. Emily Glazer, at the Wall Street Journal, reported that Clorox achieved 5 to 7 percent sales gains for several cleaning products by focusing on South American nations where fewer competitors have set up shop. Clorox seems like it's reached some of the same conclusions that PriceSmart (NASDAQ: PSMT) has reached, as PriceSmart also selected markets where larger global retailers weren't expanding as rapidly. Although Clorox is a manufacturer and PriceSmart is a retailer, both companies have recognized the potential of Central America and smaller South American nations.
Clorox and PriceSmart's past growth strategies do differ in a few respects. PriceSmart set up most of its stores in Central America and hasn't entered the biggest South American markets so far, while Clorox already sells its bleach in the Chilean and Argentinian markets. Clorox makes most of its sales in the United States, and Clorox plans to sell even more cleaning products to United States shoppers. PriceSmart's store in the Virgin Islands is its only United States location, and PriceSmart's current expansion push involves South America.
The CIA World Factbook states that Brazil had a GDP of $2.282 trillion in 2011, explaining that Brazil's domestic economy has even surpassed Great Britain. Even though Brazil's market is the largest in the region, PriceSmart and Clorox have both focused on smaller countries, as both companies would have to compete with major United States based companies in Brazil. Wal-Mart, (NYSE: WMT) which competes with PriceSmart, has now expanded its footprint to 532 stores in Brazil, although many of these stores are smaller than its well known big boxes. Walmart has been adding new stores in Brazil rapidly through acquisitions, as global retailers that find competition in South America challenging exit the market. Proctor & Gamble, (NYSE: PG) which competes with Clorox, owns several brands including Gillette and Pantene that have captured large shares of the personal care market in Brazil.
Even though Clorox is much smaller than Proctor & Gamble, Clorox still plans to increase its presence in Central America by acquiring some bleach factories from its larger competitor, according to Michael Erman at Reuters. If Clorox bought Proctor & Gamble's bleach factories, Proctor & Gamble would have more money to expand its operations in Brazil and other South American countries, so Clorox thinks it can convince its larger competitor to sell. Clorox' plan suggests another way for PriceSmart to protect its market, as PriceSmart could offer to buy stores from Wal-Mart or any other global retailer that enters Central America.
PriceSmart's May press release shows that the discount retailer's growth trend has continued. PriceSmart's May sales were up 16 percent over last year and its 9 month trailing sales were up 21 percent. Although PriceSmart still trades at a premium, with a forward P/E of 22.45 and a PEG of 1.58, the recent sell-off has taken its stock back down to $64 a share, and it was trading above $80 at the beginning of May.
Clorox has recognized the potential of the Central American market, and the bleach maker looks like it's willing to back up this theory with its own cash by buying out Procter & Gamble locally. In the Wall Street Journal article, the Clorox CEO also mentioned that with rising sales and the relative lack of competition in the region, his company shouldn't have trouble maintaining its margins. These are good signs for Clorox investors, but Clorox also sells bleach in markets that aren't growing as rapidly. PriceSmart could show even stronger results because of these trends, as it's more of a pure play in the Central American market.
enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of The Clorox Company and The Procter & Gamble Company. Motley Fool newsletter services recommend PriceSmart and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.