PriceSmart, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended November 30, 2019; comparison is with the three months ended November 30, 2018. Amounts below are in U.S. dollars unless stated otherwise.
Business context
PriceSmart operates membership warehouse clubs in Central America, the Caribbean and Colombia, alongside its Aeropost marketplace and casillero business. It had 45 clubs in 12 countries and one U.S. territory at quarter-end, versus 41 a year earlier. Four additional clubs were planned to open in Costa Rica, Colombia and Jamaica during 2020.
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total revenue | $811.9 million | $779.6 million | +4.1% |
| Net merchandise sales | $778.7 million | $747.4 million | +4.2% |
| Operating income | $30.7 million | $24.7 million | +24.5% |
| Net income attributable to PriceSmart | $19.7 million | $14.6 million | +35.0% |
| Diluted EPS | $0.64 | $0.48 | +$0.16 |
| Operating cash flow | $16.1 million | $25.7 million | -$9.6 million |
- Merchandise gross margin was 14.9%, up 0.7 percentage points; gross margin as a percentage of total revenue was 16.9%, also up 0.7 points. Management attributed the improvement primarily to product margins, merchandising and inventory management.
- SG&A was $106.3 million, or 13.1% of revenue, versus $101.8 million and the same 13.1% ratio a year earlier. Higher club operating costs were partly offset by lower general and administrative costs.
- Net interest expense was $0.9 million, down from $1.0 million. The effective tax rate was 32.3%, versus 33.9%.
- Other comprehensive loss was $3.2 million, mainly from foreign-currency translation, compared with $13.2 million in the prior-year quarter.
Cash flow, debt and liquidity
- Cash and cash equivalents were $111.4 million at November 30, 2019; including restricted cash, the cash-flow statement reported $115.1 million. Short-term investments were $25.1 million.
- Operating activities provided $16.1 million. Investing activities used $45.7 million, including $37.6 million of property and equipment additions. Financing activities provided $37.3 million, including $25.0 million of long-term borrowings and net proceeds from short-term borrowing.
- Short-term borrowings were $23.0 million; long-term debt totaled $111.8 million, including $13.7 million current. Short-term credit facilities had $45.4 million available at quarter-end. The company reported compliance with applicable debt covenants.
- Following adoption of ASC 842, the balance sheet included $118.2 million of operating lease right-of-use assets and $130.0 million of operating lease liabilities. Adoption did not materially affect reported income or cash flows.
Material changes and management commentary
- Comparable merchandise sales increased 1.0%; reported merchandise sales growth included a 1.6% negative currency impact. Transactions rose 3.8% and average ticket increased 0.4%.
- Membership income rose 7.9% to $13.7 million; member accounts increased 2.9%, and the 12-month renewal rate was 86.1%, versus 85.0% a year earlier.
- Prior-year general and administrative expense included about $3.8 million of former CEO and President separation-related costs, which management said reduced prior-year EPS by $0.13. Current-quarter pre-opening expense was $953,000, versus $15,000, reflecting club openings and the development pipeline.
- Management reported slower economic conditions across most Central American markets and continued currency volatility. Colombia merchandise sales fell 5.0%, largely due to currency devaluation; Central America and the Caribbean grew 6.1% and 4.4%, respectively.
- Management cited continued U.S.-dollar illiquidity in Trinidad, which may constrain conversion of local-currency sales and shipments from the U.S. The Trinidad subsidiary held a net Trinidad-dollar asset position of about $21.9 million at quarter-end.
Outlook, risks and unusual items
- The company planned four club openings in 2020 and continued investing in technology and omnichannel capabilities. The filing provides no quantitative earnings or revenue guidance.
- Management anticipates continuing semiannual dividends, subject to board approval; no dividend was declared or paid in the quarter.
- Foreign exchange remains a material risk: approximately 77% of merchandise sales were in currencies other than the U.S. dollar, and 52% of those sales were for products purchased in U.S. dollars. A hypothetical 10% adverse currency movement was estimated to produce a $5.9 million net loss before tax on the specified balance-sheet exposures.
- VAT and income tax receivables totaled $57.8 million. The company reported no allowance, despite a $6.2 million VAT balance in one country without a clearly defined refund process and complex or unclear income-tax refund rules in two countries.
- A securities class action was consolidated on January 3, 2020; the company said it believes the claims are without merit and intends to defend itself. Management stated ordinary-course legal matters were not expected to have a material adverse effect.
- Q1 other expense included a $1.3 million unfavorable change in the fair value of written call options, partly offset by $705,000 of income from settlement of claims related to a prior business acquisition. The company also disclosed $15.1 million of unperformed construction obligations and $6.7 million of potential cash use if outstanding land purchase agreements were completed.
Important facts for investors to verify
- Whether comparable sales and merchandise margin improvements persist, particularly after currency effects and the contribution of recently opened clubs.
- Progress, costs and timing for the four planned club openings and related capital spending.
- Trinidad’s access to tradeable currencies and the company’s broader foreign-exchange exposure and hedge positions.
- Recoverability and timing of VAT and income-tax receivables, including balances subject to unclear refund processes.
- Debt, lease obligations, covenant compliance and cash-flow conversion as inventory and construction spending fluctuate.
- Developments in the securities class action and any material change in legal or tax contingencies.