PriceSmart, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended November 30, 2018; balance-sheet comparisons are to August 31, 2018. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
PriceSmart operates membership warehouse clubs in Latin America and the Caribbean. At quarter-end it had 41 clubs in 12 countries and one U.S. territory, versus 40 clubs a year earlier. It also operates Aeropost, acquired in March 2018, as part of its cross-border logistics and e-commerce expansion.
Financial results and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Total revenue | $779.6 million | $767.1 million | +1.6% |
| Net merchandise sales | $747.4 million | $745.4 million | +0.3% |
| Operating income | $24.7 million | $33.2 million | -25.6% |
| Net income attributable to PriceSmart | $14.6 million | $22.5 million | -35.0% |
| Diluted EPS | $0.48 | $0.74 | Down $0.26 |
| Operating cash flow | $25.7 million | $(10.2) million | Improved $35.9 million |
Merchandise gross margin fell to 14.2% from 14.5%; total gross margin as a percentage of revenue rose to 16.2% from 15.9%, mainly reflecting Aeropost non-merchandise revenue. Selling, general and administrative expense increased to $101.8 million from $88.9 million, or 13.1% of revenue versus 11.6%.
Investing cash outflow was $29.4 million, including $35.7 million of property and equipment additions; financing cash outflow was $3.5 million. Cash, cash equivalents and restricted cash ended at $88.4 million, versus $93.2 million a year earlier and $96.9 million at August 31, 2018. Short-term investments were $26.0 million. Operating cash flow benefited substantially from a $56.0 million increase in accounts payable; management attributed the year-over-year change in payables mainly to timing of holiday inventory purchases and payment due dates.
At November 30, current assets were $534.7 million and current liabilities were $410.6 million. Long-term debt, including its current portion, totaled $99.3 million; there were no short-term borrowings outstanding. The company reported $68.6 million of available short-term credit facilities and compliance with applicable debt covenants.
Material changes and operating trends
- Comparable merchandise sales declined 2.1%, compared with 2.2% growth a year earlier. Management cited currency devaluations, economic weakness and political instability; currency movements reduced reported merchandise sales by approximately $19.3 million, or 2.6%.
- Regional merchandise sales grew 4.8% in the Caribbean and 5.8% in Colombia, but declined 3.0% in Central America. Overall merchandise transactions increased 2.7%, while average ticket decreased 2.4%.
- Membership income rose 2.9% to $12.7 million; member accounts increased 3.4% to approximately 1.60 million. The reported 12-month renewal rate was 85%.
- Other revenue increased to $11.3 million from $1.1 million, including $9.1 million of Aeropost non-merchandise revenue. The adoption of ASC 606 also moved certain co-branded credit-card income from expense reduction to revenue; management said adoption had no material overall financial-statement impact.
- Other expense included a $1.8 million net currency loss, versus a $0.3 million gain a year earlier. Comprehensive income was $1.4 million, materially affected by a $13.4 million foreign-currency translation loss recorded in other comprehensive income.
Outlook, risks and unusual items
- Management expected two small-format clubs in Panama and the Dominican Republic to open in spring 2019, and two additional clubs in Guatemala and Panama to open in fall 2019. These were plans, not guaranteed outcomes; no numerical earnings or revenue guidance was provided.
- The company recorded approximately $3.8 million of CEO separation costs, including $2.9 million of non-cash equity-award charges, following the former CEO’s October 2018 departure. It also reported $3.9 million of Aeropost and omni-channel development costs, net of tax benefit. U.S. tax reform contributed a $1.7 million tax benefit.
- Management highlighted foreign-exchange volatility, weak or disrupted markets, political instability, competition, supply-chain and security risks, and uncertainty in developing the e-commerce business. Trinidad’s U.S.-dollar illiquidity was expected to continue and could require limits on shipments from the U.S.
- Tax recoveries remain a risk: VAT receivables totaled $26.2 million and income-tax receivables $24.0 million. The company had not recorded allowances for these balances. It also disclosed tax assessments under appeal, including $2.6 million and $5.3 million claims for which amounts had been advanced to the government but no provision recorded. Management expected to prevail.
- Operating lease commitments totaled $192.4 million. The company expected adoption of the new lease standard in fiscal 2020 to materially increase reported assets and liabilities, but did not expect a material effect on net income or cash flows.
- Management reported that internal control over financial reporting was not effective at quarter-end because a previously disclosed material weakness involving classification of certain financial instruments as cash equivalents or investments remained unremediated. Management expected remediation before fiscal year-end 2019.
- No dividends were declared in the quarter. The company said it anticipated continuing semiannual dividends, subject to Board approval and capital needs. Management stated pending legal matters were not expected to materially affect financial position, results or liquidity.
Important facts for investors to verify
- Whether comparable sales, merchandise margins and operating income recover, particularly in Central America, and how much currency movements continue to affect reported results.
- Whether Aeropost integration and omni-channel investment produce sustainable revenue and profits relative to their reported costs.
- The timing and performance of planned club openings and the associated capital spending.
- Recoverability and timing of disputed VAT and income-tax receivables, and outcomes of tax assessments and appeals.
- Progress in remediating the material weakness in financial reporting controls, and the effect of lease-standard adoption on the balance sheet.
- Cash conversion and working-capital trends, given the quarter’s operating cash flow benefit from higher accounts payable.