PriceSmart, Inc. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended November 30, 2023; unaudited, compared with the three months ended November 30, 2022. PriceSmart operates membership warehouse clubs across Central America, the Caribbean and Colombia, plus U.S. operations. It had 53 clubs at quarter-end, versus 50 a year earlier.
Financial performance and position
| Metric | Q1 FY2024 | Prior comparable period | Change |
|---|---|---|---|
| Total revenue | $1,166.5 million | $1,054.8 million | +10.6% |
| Net merchandise sales | $1,135.0 million | $1,025.5 million | +10.7%; +6.8% constant currency |
| Operating income | $58.2 million | $55.5 million | +4.8% |
| Net income | $38.0 million | $32.9 million | +15.6% |
| Diluted EPS | $1.24 | $1.05 | +18.1% |
| Adjusted EBITDA | $77.8 million | $75.2 million | +3.4% |
| Operating cash flow | $41.1 million | $30.5 million | +$10.6 million |
Merchandise gross margin was 16.1%, down 0.1 percentage point; total revenue margin was 17.5%, also down 0.1 point. Operating margin declined to 5.0% from 5.3%. Net margin was approximately 3.3%, versus 3.1%. Comparable merchandise sales rose 8.0% for the 13 weeks ended December 3, 2023, or 4.3% excluding currency effects.
Cash, liquidity and debt: At November 30, cash and cash equivalents were $174.5 million, short-term investments $88.0 million, and restricted cash $12.4 million. Current assets were $880.8 million and current liabilities $705.2 million. Gross borrowings were approximately $144.2 million, comprising $9.2 million of short-term borrowings and $135.0 million of long-term debt. The company reported compliance with debt covenants. Cash, cash equivalents and restricted cash declined $65.3 million during the quarter, to $186.9 million.
Investing cash outflow was $30.1 million, including $33.3 million in property and equipment additions. Financing cash outflow was $74.5 million, largely reflecting share repurchases. No dividend was declared in the quarter.
Material changes and management commentary
- Sales growth reflected an 8.2% increase in transactions and a 2.3% increase in average ticket, as well as three more clubs than a year earlier. Currency movements added about $40.0 million, or 3.9 percentage points, to reported merchandise sales growth.
- Membership income increased 11.7% to $17.7 million; member accounts grew 3.8% to 1.82 million. The trailing 12-month renewal rate was 87.4%, compared with 87.9% a year earlier.
- SG&A increased 12.1% to $146.0 million and rose to 12.5% of revenue from 12.3%, primarily due to higher compensation, professional fees and depreciation. Management said the interim CEO declined compensation, which it expects to reduce costs by about $2.5 million per quarter during his term, partly offset by other executive salary increases.
- Total other expense improved to $2.1 million from $6.2 million, helped by $1.7 million more interest income and lower foreign-currency losses. The effective tax rate declined to 32.3% from 33.3%.
- The company completed its $75 million share repurchase authorization in Q1, buying approximately 1.007 million shares under the program. It said it had no current plan for another repurchase program.
Outlook, risks and contingencies
- No specific full-year financial guidance is provided in the filing. PriceSmart planned to open a club in Santa Ana, El Salvador, in February 2024, which would bring its total to 54. It is also investing in club remodels and expansions, distribution capacity, membership value, and online and technology capabilities. The company raised Platinum membership fees by $5 in most markets and expects staggered increases in most remaining countries during FY2024.
- Management cited currency volatility, inflation and potential margin pressure, political disruption, import and supply-chain delays, and natural disasters as business risks. U.S.-dollar availability remains constrained in Trinidad and Honduras; approximately $29.0 million of Trinidad-dollar cash and investments and $22.8 million of Honduran-lempira cash and short-term investments were not readily convertible for general company use.
- PriceSmart reported $40.5 million of VAT receivables and $42.1 million of income-tax receivables, with no allowance recorded. The company believes recovery is more likely than not, but refund processes can take months or years and recovery is not assured. It previously recorded a $7.2 million charge in FY2023’s fourth quarter to settle an alternative-minimum-tax dispute in one country.
- Planned capital commitments include an expected approximately $33 million purchase of its Via Brasil, Panama, club building in Q2 FY2024; the purchase is expected to eliminate about $12.1 million of lease liability and $1.4 million of annual lease payments. A future Miraflores, Guatemala, relocation is expected to require about $12.1 million to outfit the club after the lessor delivers the building, anticipated in the first half of calendar 2025.
- The company said ordinary-course legal proceedings are not expected to materially affect its financial position, results or liquidity. It reported no material changes to risk factors and no material change in internal control over financial reporting; disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- How much of reported sales growth and comparable-sales growth is sustainable after separating currency effects, new-club contributions and transfers of sales to newer locations.
- Whether merchandise margins and operating leverage improve, given lower gross-margin percentages and SG&A growing faster than revenue.
- The timing and recoverability of tax receivables, and developments in the AMT dispute and related tax exposures.
- Whether U.S.-dollar conversion restrictions in Trinidad and Honduras ease, and the effect of trapped local-currency balances on liquidity and foreign-exchange risk.
- Capital spending, debt maturities and cash requirements for the Via Brasil purchase, planned club openings, remodels and the Miraflores project.
- The reported results alongside non-GAAP measures: adjusted EBITDA and adjusted net income are company-defined measures and should not be viewed as substitutes for GAAP results.