PriceSmart, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended February 28, 2018. The company operates membership warehouse clubs across Central America, the Caribbean, and Colombia; it had 40 clubs in 13 countries and territories at period-end. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended Feb. 28, 2018 | Three months ended Feb. 28, 2017 | Six months ended Feb. 28, 2018 | Six months ended Feb. 28, 2017 |
|---|---|---|---|---|
| Total revenue | $839.6 | $793.3 | $1,606.6 | $1,532.9 |
| Net warehouse club sales | $816.6 | $772.3 | $1,562.0 | $1,488.4 |
| Membership income | $12.7 | $11.8 | $25.1 | $23.5 |
| Operating income | $37.3 | $39.4 | $70.4 | $77.8 |
| Net income | $14.1 | $27.2 | $36.6 | $52.1 |
| Diluted earnings per share | $0.47 | $0.90 | $1.21 | $1.72 |
| Net warehouse sales gross margin | 14.4% | 14.6% | 14.4% | 14.8% |
- Sales trends: Net warehouse sales grew 5.7% in the quarter and 4.9% year to date. Comparable sales increased 4.1% and 3.2%, respectively. Membership income rose 7.4% for the quarter and 6.5% year to date; member accounts increased 2.9% year over year to approximately 1.56 million. The 12-month renewal rate was 85% overall and 87% excluding Colombia.
- Margins and expenses: Total gross margin was 15.7% of revenue in the quarter and 15.8% year to date, versus 15.8% and 16.1% in the prior-year periods. SG&A was $94.3 million in the quarter and $183.2 million year to date, or 11.2% and 11.4% of revenue, respectively.
- Cash flow: Six-month operating cash flow was $59.1 million, investing cash outflow was $46.2 million, and financing cash outflow was $21.9 million. Cash, cash equivalents, and restricted cash declined $10.1 million to $155.6 million, including $152.1 million of unrestricted cash and cash equivalents on the balance sheet. Capital expenditures were $46.2 million.
- Liquidity and debt: Current assets were $505.6 million and current liabilities were $356.6 million. Long-term debt was $96.7 million, of which $14.2 million was current. The company reported $68.5 million of available short-term credit facilities and compliance with applicable debt covenants.
- Dividends: The company declared a $0.70-per-share dividend for fiscal 2018, paid half in February and scheduled the second half for August. Future dividends remain subject to Board approval.
Material changes versus the prior comparable period
- Revenue and comparable sales increased, but operating income fell $2.1 million in the quarter and $7.4 million for the six months. Lower merchandise margins and higher operating expenses offset sales growth.
- Net income declined substantially, primarily reflecting a $13.4 million one-time U.S. transition tax on previously unremitted foreign earnings. The company also recorded an approximately $0.8 million non-cash tax charge from remeasuring deferred tax balances. The reported effective tax rates were 61.6% for the quarter and 47.3% year to date, versus 30.6% and 31.0% in the prior-year periods.
- Quarterly operating results included a $1.9 million impairment charge for internally developed e-commerce software and $525,000 of Aeropost acquisition-related costs. Management described approximately $2.6 million of total costs associated with ending development of the internal online platform and shifting to Aeropost’s technology.
- Capital spending was lower than in the prior-year half-year period, when the company acquired its Miami distribution center. Six-month investing outflow decreased by approximately $41.0 million year over year.
Outlook, commentary, risks, and contingencies
- Expansion and spending: Management expected the fourth Dominican Republic club, under construction in Santo Domingo, to open in May 2018. It planned fiscal 2018 capital expenditures of $125 million to $135 million. A leased Costa Rica distribution center was expected to begin operations in fall 2018. The filing provides no earnings or revenue guidance.
- Digital strategy: On March 15, 2018, after quarter-end, PriceSmart acquired Aeropost, a cross-border logistics and e-commerce provider, for $30.0 million. Management intends to use its technology and delivery capabilities to expand online shopping options; integration and execution remain risks.
- Foreign exchange and market risks: Approximately 78% of first-half warehouse sales were in currencies other than the U.S. dollar. Trinidad continued to face U.S.-dollar illiquidity; its subsidiary had approximately $10.1 million of net U.S.-dollar-denominated liabilities at February 28, 2018, compared with a $4.0 million net asset position at August 31, 2017. The company said it might limit U.S. shipments to Trinidad based on its ability to obtain tradable currency. Management also cited difficult conditions in Trinidad, Panama, and Barbados, and political unrest in Honduras; U.S. Virgin Islands operations had rebounded following hurricanes.
- Taxes and recoverability: The company had $29.4 million of VAT receivables and $19.4 million of income-tax receivables, with no allowances recorded. Refund timing can extend from months to years. Some receivables and deferred tax assets relate to disputed tax rules or refund claims. A subsidiary is appealing assessments of $2.7 million and $5.5 million; the company expects to prevail and has not provided for them, but paid the assessed amounts in advance pending appeal.
- Other commitments and risks: Future minimum operating lease commitments totaled $169.2 million. The company reported maximum exposure of $11.7 million related to its two real-estate joint ventures. It identified risks including currency volatility, tax and regulatory changes, competition (including online retailers), supply-chain disruption, cybersecurity and systems implementation, and availability of suitable sites. Management said pending legal matters were not expected to have a material adverse effect; Part II reported no legal proceedings.
Important facts for investors to verify
- How much of the year-over-year earnings decline is attributable to the one-time transition tax and how tax estimates may change as regulations and interpretations develop.
- The status, timing, and recoverability of tax receivables, disputed assessments, and advance tax payments, particularly where no allowance has been recorded.
- Whether Trinidad’s currency constraints persist, affect imported merchandise shipments, or increase foreign-exchange losses.
- Whether sales growth can be sustained while warehouse gross margins are declining and SG&A is rising as a share of revenue.
- Progress and costs associated with Aeropost integration, the online strategy, planned club and distribution-center openings, and the $125 million to $135 million capital-spending plan.