PRICESMART INC quarterly report, Q1 FY2023

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PriceSmart, Inc. — Q1 FY2023 10-Q Summary

Reporting period: Three months ended November 30, 2022; comparable period is the three months ended November 30, 2021. Amounts below are in U.S. dollars. PriceSmart operates membership warehouse clubs across Central America, the Caribbean, and Colombia, plus U.S. operations. It had 50 clubs in 12 countries and the U.S. Virgin Islands at quarter-end.

Financial performance and position

  • Revenue: Total revenue was $1,054.8 million, up 8.1%. Net merchandise sales were $1,025.5 million, up 8.6%; membership income was $15.9 million, up 7.5%.
  • Comparable sales: Comparable merchandise sales rose 5.0% for the 13 weeks ended December 4, 2022, versus the comparable prior-year weeks. Currency movements reduced comparable sales by 2.1%.
  • Margins and operating profit: Merchandise gross margin was 16.2%, up 0.2 percentage points. Operating income increased 20.7% to $55.5 million; operating margin rose to 5.3% from 4.7%. SG&A was $130.2 million, or 12.3% of revenue, down from 12.7%.
  • Net income and EPS: Net income attributable to PriceSmart was $32.9 million, up from $30.5 million. Diluted EPS was $1.05 versus $0.98.
  • Other income and taxes: Other expense, net, was $6.2 million, compared with other income of $0.3 million a year earlier; the current-period expense was primarily currency-related. The effective tax rate was 33.3%, compared with 34.1%.
  • Cash flow: Operating cash flow was $30.5 million, versus cash used of $13.3 million. Investing activities used $21.5 million, including $23.9 million of cash additions to property and equipment. Financing provided $14.7 million. Cash, cash equivalents, and restricted cash increased to $281.7 million from $251.4 million at August 31, 2022.
  • Liquidity and debt: Cash and cash equivalents were $267.9 million, short-term investments $8.9 million, and current assets $853.3 million versus current liabilities of $611.6 million. Short-term borrowings were $11.1 million and long-term debt was $151.8 million, up from $137.3 million at August 31. The company reported compliance with debt covenants and $155.0 million available under short-term credit facilities.
  • Equity: Stockholders’ equity was $1,026.4 million, compared with $991.1 million at fiscal year-end.

Material changes and operating trends

  • Central America merchandise sales increased 10.1% and Caribbean sales increased 12.9%; Colombia sales declined 8.3%. The Colombian peso’s devaluation reduced reported merchandise sales by $23.6 million in that segment. Currency movements reduced consolidated merchandise sales by $21.2 million, or 2.3%.
  • Sales growth reflected a 3.0% increase in transactions and a 5.5% increase in average ticket. The company operated one more club than in the prior-year quarter, following the opening of a second Jamaica club.
  • Membership accounts increased 3.9% to approximately 1.76 million, while the trailing 12-month renewal rate fell to 87.9% from 89.0%. Platinum accounts represented 7.9% of membership accounts, up from 6.5%.
  • Merchandise gross margin improvement was attributed principally to gains across sales categories, especially food service and bakery, and more favorable freight costs. The company said shipping transit times and freight rates generally improved versus the prior quarter.
  • Operating cash flow improved substantially year over year, partly because inventory growth was lower than in the prior-year period and working-capital changes were more favorable.

Outlook, risks, contingencies, and unusual items

  • Expansion: The company expected to open a club in San Miguel, El Salvador, in spring 2023 and one in Medellín, Colombia, in summer 2023. These openings would bring the total to 52 clubs. No specific financial guidance was provided.
  • CEO transition: Sherry Bahrambeygui was announced to be stepping down effective February 3, 2023; founder and Chairman Robert Price was to become interim CEO. The company expected a one-time pre-tax separation charge of approximately $7.7 million in Q2 FY2023, including approximately $4.2 million of non-cash equity-award costs, with an estimated after-tax EPS impact of about $0.23. Management also expected SG&A to rise in Q2 due to severance costs.
  • Foreign exchange and funding risks: Management cited inflation, currency volatility, supply-chain pressures, and the risk that local-currency devaluations could increase import costs, reduce demand, and pressure margins. The Colombian peso had depreciated approximately 20% against the U.S. dollar year over year. U.S.-dollar illiquidity in Trinidad and Barbados could hinder conversion of local-currency receipts and settlement of U.S.-dollar liabilities.
  • Tax recoveries: The company reported $38.0 million of VAT receivables and $34.2 million of income-tax receivables. Some refunds may take months or years; no allowance was recorded, based on management’s expectation of recovery, but the company cautioned that recovery is not assured.
  • Legal claim: The purchaser of Aeropost alleged breaches relating to cybersecurity and IT-system representations and separately alleged employee misclassification. The purchaser estimated the cybersecurity-related losses at $2.9 million and the separate claim at approximately $0.3 million; contractual liability for the referenced representations and warranties is capped at $4.0 million. PriceSmart intends to defend the claims and recorded no accrual because it concluded loss was not probable and reasonably estimable.
  • Other commitments: Non-cancelable construction obligations were approximately $15.8 million; three land purchase agreements could require approximately $9.7 million if completed. The company’s maximum disclosed exposure to its real-estate joint ventures was $11.4 million, including committed future investments.
  • Capital returns: No dividend was declared in the quarter. The company said it anticipated ongoing semiannual dividends, subject to Board discretion and financial performance and capital needs. Share repurchases during the quarter were for employee tax withholding on vested awards, not under a public repurchase program.
  • Seasonality: Management cautioned that holiday patterns, economic and political events, weather, shipment timing, product mix, and currency effects can make quarterly results non-indicative of full-year performance.

Important facts for investors to verify

  1. Whether the scheduled El Salvador and Colombia club openings proceed on time and within expected costs.
  2. The impact of Colombia’s currency depreciation, inflation, and import-cost decisions on sales volume and margins, and whether Trinidad and Barbados currency-conversion constraints worsen.
  3. The actual Q2 CEO-transition charge and its effect on reported earnings and expenses.
  4. Progress and recoverability of VAT and income-tax receivables, and any developments in the Aeropost-related claims.
  5. Whether membership renewal rates stabilize and comparable-sales growth persists; note that comparable sales use 13-week periods ending December 4, 2022 and November 28, 2021, rather than the financial-statement quarter-end dates.
  6. Debt growth, cash generation, capital spending, and the Board’s future dividend decisions.