PriceSmart, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended August 31, 2019. The filing also reports fourth-quarter results. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
PriceSmart operates membership warehouse clubs across Central America, the Caribbean and Colombia, and runs a cross-border marketplace and shipping business through Aeropost. It had 43 clubs in operation at year-end, versus 41 a year earlier; a Panama City club opened in October 2019. The company’s strategy emphasizes club expansion, distribution efficiency, membership growth and investment in e-commerce and omnichannel capabilities.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $3,223.9 million | $3,166.7 million |
| Net merchandise sales | $3,091.6 million | $3,053.8 million |
| Operating income | $115.2 million (3.6% of revenue) | $126.1 million (4.0%) |
| Net income attributable to PriceSmart | $73.2 million; $2.40 diluted EPS | $74.3 million; $2.44 diluted EPS |
| Operating cash flow | $170.3 million | $119.5 million |
| Cash and cash equivalents | $102.7 million | $93.5 million |
| Short-term investments | $17.0 million | $32.3 million |
| Long-term debt, including current portion | $89.6 million | $102.6 million |
- Revenue grew 1.8%, while merchandise sales rose 1.2%. Currency movements reduced reported merchandise sales by an estimated $97.3 million, or 3.2%; comparable merchandise sales declined 0.6% (down 3.2% from currency effects).
- Merchandise gross profit was $443.0 million, with a 14.3% merchandise margin, down 0.2 percentage points. Total gross margin was 16.4% of revenue, up from 16.1%, helped by Aeropost and revenue presentation changes.
- SG&A rose to $413.1 million, or 12.8% of revenue, from $384.1 million, or 12.1%. Higher omnichannel and Aeropost costs, club operations and a $3.8 million former-CEO separation charge contributed. Aeropost-related activities reduced FY2019 net income by $14.5 million, or $0.47 per share.
- Operating cash flow increased by $50.9 million, largely reflecting a year-over-year $41.8 million change in accounts payable, including purchase timing and working-capital efficiencies. Investing cash outflow was $124.7 million; property and equipment additions were $140.1 million. Financing cash outflow was $32.0 million. Cash, cash equivalents and restricted cash ended the year at $106.2 million.
- Current assets were $491.9 million and current liabilities $407.5 million, a current ratio of approximately 1.21. Short-term borrowings were $7.5 million; $61.0 million of short-term credit facilities were available at year-end.
- Net interest expense was $3.9 million, down from $5.1 million. The effective tax rate was 33.8%, compared with 39.3%.
Fourth-quarter results and changes versus prior periods
For the quarter ended August 31, 2019, revenue was $801.3 million, up 3.0% from $777.9 million; net income attributable to PriceSmart was $20.7 million, or $0.67 diluted EPS, versus $19.0 million, or $0.62. Merchandise sales rose 3.7%, while comparable sales increased 1.5%; currency reduced comparable sales by 2.7%. Merchandise gross profit increased 7.1%, and its margin was 15.2%, up 0.5 percentage points. Operating income was $32.0 million, up $4.8 million.
For the full year, operating income and net income declined despite modest revenue growth. Central America merchandise sales fell 0.9%, affected by weak conditions, currency and political instability; Caribbean sales rose 6.2%, while Colombia sales were essentially flat in reported dollars. The prior-year comparison included only about five and a half months of Aeropost revenue, versus a full year in FY2019.
Outlook, risks and unusual items
- Expansion: Management planned six club openings across fiscal 2020 and 2021. The filing describes openings in Guatemala, Costa Rica, Colombia and Jamaica, in addition to the Panama club opened in October 2019. No specific revenue or earnings guidance is provided.
- Omnichannel investment: The company is developing online ordering, home delivery and club pickup, including services intended to support smaller-format clubs. Management cautions these investments may weigh on near-term profitability; Aeropost recorded a $14.5 million net loss including omnichannel investment costs.
- Foreign exchange and country exposure: About 77% of merchandise sales were in non-U.S. currencies, and about 52% of sales were products purchased in U.S. dollars. Devaluation, political unrest, economic weakness and import or supply-chain disruptions could pressure demand, costs and reported results. Trinidad’s U.S.-dollar liquidity constraints remained a risk.
- Tax recovery uncertainty: Year-end VAT receivables were $24.3 million and income-tax receivables $25.4 million. Recovery timing and legal or administrative outcomes are uncertain; the auditor identified tax receivables and contingencies as a critical audit matter. The company had not recorded allowances against these receivables.
- Legal matter: A securities class action filed in May 2019 alleges violations related to the 2017 Form 10-K and 2018 Forms 10-Q. A lead plaintiff was appointed in October; PriceSmart says it believes the claims are without merit and intends to defend them. The filing does not provide a clear estimated loss.
- Accounting and other items: Adoption of ASC 842 leases began September 1, 2019 and was expected to materially increase reported assets and liabilities, without a material effect on operating results or cash flows. The company also identified approximately $46.1 million of certain indefinite-lived intangibles whose fair value approximated carrying value. A $6.7 million valuation allowance was recorded against foreign tax credits. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions.
- The company paid a $0.70-per-share dividend in FY2019 and anticipated ongoing semiannual dividends, subject to Board approval and capital needs.
Most important facts for investors to verify
- Whether sales, comparable sales and margins improve as currency pressures and challenging conditions in Central America and Colombia evolve.
- Whether working-capital-driven cash flow growth is sustainable, and how planned club construction affects capital spending, liquidity and debt.
- Progress, cost and profitability of Aeropost and the omnichannel strategy, including whether the reported $14.5 million FY2019 earnings impact narrows.
- Recovery and timing of disputed or delayed tax receivables, and potential outcomes of tax matters and the securities class action.
- The timing and execution of planned club openings, and the balance-sheet effects of the new lease accounting standard.