PriceSmart, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended May 31, 2022. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
PriceSmart operates membership warehouse clubs in Central America, the Caribbean and Colombia, with U.S. operations supporting the business. It had 50 clubs in 12 countries and one U.S. territory at quarter-end, up from 47 a year earlier. Management cited growth priorities of opening clubs and distribution facilities, increasing membership value, and expanding digital and e-commerce capabilities. Planned openings in San Miguel, El Salvador and Medellín, Colombia were targeted for spring and summer 2023, respectively.
Financial results
| Metric | Three months ended May 31, 2022 | Three months ended May 31, 2021 | Nine months ended May 31, 2022 | Nine months ended May 31, 2021 |
|---|---|---|---|---|
| Total revenue | $1,030.8 | $895.3 | $3,044.7 | $2,710.3 |
| Operating income | $33.8 | $36.0 | $128.1 | $125.6 |
| Net income attributable to PriceSmart | $19.3 | $22.5 | $81.2 | $78.5 |
| Diluted earnings per share | $0.62 | $0.73 | $2.63 | $2.55 |
- Third-quarter net merchandise sales rose 16.5% to $999.0 million; comparable sales increased 12.8%. Nine-month merchandise sales rose 13.9% to $2,955.0 million; comparable sales increased 10.8%.
- Membership income increased 7.8% in the quarter to $15.4 million and 9.4% year to date to $45.3 million. Membership accounts grew 6.6% year over year; the trailing 12-month renewal rate was 88.9%.
- Merchandise gross margin was 14.2% in the quarter, down 170 basis points, and 15.3% for the nine months, down 70 basis points. Operating margin was 3.3% for the quarter versus 4.0% and 4.2% year to date versus 4.6%.
- Cash from operating activities was $64.3 million for the nine months, down from $80.0 million. Capital expenditures were $98.6 million, compared with $73.4 million; cash used in investing activities was $61.4 million.
- At May 31, cash and cash equivalents were $207.5 million, restricted cash was $15.2 million, and short-term investments were $19.8 million. Short-term borrowings were $15.3 million and total long-term debt was $142.5 million. The company reported compliance with its debt covenants.
- Total assets were $1,791.8 million and stockholders’ equity was $968.2 million. Inventory was $461.0 million, up from $389.7 million at August 31, 2021.
Material changes and unusual items
- Revenue growth was partly offset by foreign exchange: currency movements reduced merchandise sales by $19.1 million, or 2.3%, in the quarter and $53.8 million, or 2.1%, for the nine months.
- Operating income declined in the quarter despite sales growth, primarily reflecting lower merchandise margins. Management attributed elevated markdowns to seasonal and discretionary non-food inventory arriving late after supply-chain disruptions and sales below expectations in some categories. The company expected margin pressure to continue in fiscal Q4, but at a materially lower level than in Q3.
- The company sold Aeropost’s legacy marketplace and package-forwarding operations in October 2021, retaining selected technology and personnel. The nine-month results included a $2.7 million pretax disposal gain; the sale also reduced other revenue compared with the prior year.
- Interest expense rose to $6.8 million for the nine months from $5.9 million, primarily due to increased borrowing in Trinidad and lower capitalized interest.
- Other comprehensive loss was $10.6 million for the nine months, principally from foreign currency translation. Net currency transaction losses were $6.1 million for the period.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management described continuing investment in technology, talent, clubs and distribution infrastructure.
- Management cited supply-chain disruption, freight and fuel costs, inflation, changing consumer demand, currency volatility, COVID-related uncertainty, competition and political or economic conditions in operating markets as risks.
- Trinidad remains exposed to limited availability of U.S. dollars and potential currency devaluation. The company reported $28.8 million of Trinidad-dollar cash and investments, measured in U.S. dollars, and a separate net U.S.-dollar monetary asset position of approximately $70.5 million. Management illustrated that a hypothetical 20% Trinidad-dollar devaluation could reduce the translated value of the former by about $5.8 million while generating an estimated $14.1 million gain on revaluation of the latter; these are scenario estimates, not forecasts.
- VAT and income tax receivables require recovery from governments and may take months or years. The company recorded no recovery allowances on these balances, while acknowledging that full recovery is not assured. Ordinary-course legal proceedings were not expected by management to have a material adverse effect; no material subsequent events were reported.
- The company declared a $0.86-per-share dividend, split into two $0.43 payments; the second was payable August 31, 2022, subject to the stated dividend terms.
Important facts for investors to verify
- Whether inventory levels and non-food markdowns normalize as management anticipated, and how that affects gross margins in subsequent quarters.
- Whether sales and membership growth persist after accounting for new clubs, comparable-store trends and foreign exchange effects.
- Developments in Trinidad-dollar liquidity, currency conversion costs and any potential devaluation, alongside the company’s net currency exposures.
- Cash generation relative to capital spending, debt maturities, dividends and planned club and distribution investments.
- Timing and recoverability of tax receivables, and the assumptions supporting the absence of related allowances.