PriceSmart, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2015; unaudited. Comparisons are with the corresponding 2014 periods. PriceSmart operated 36 membership warehouse clubs across 13 countries and territories, up from 33 a year earlier.
Financial performance
| Metric | Three months ended May 31 | Nine months ended May 31 |
|---|---|---|
| Total revenue | $697.1 million, up 13.3% | $2,103.4 million, up 11.0% |
| Net warehouse club sales | $675.3 million, up 13.0%; comparable sales up 4.1% | $2,043.8 million, up 10.8%; comparable sales up 2.5% |
| Membership income | $11.2 million, up 17.1% | $32.2 million, up 13.8% |
| Operating income | $33.5 million, up 7.4% | $111.5 million, up 8.3% |
| Net income | $21.2 million, down 0.6%; diluted EPS $0.70, unchanged | $66.7 million, down 6.1%; diluted EPS $2.20, versus $2.34 |
| Warehouse gross margin | 14.3%, down 0.47 percentage points | 14.7%, up 0.09 percentage points |
| Operating income as a share of warehouse sales | 5.0%, versus 5.2% | 5.5%, versus 5.6% |
- Cash flow: Nine-month operating cash flow was $65.7 million, down from $76.2 million. Investing used $63.4 million, including $63.0 million of property and equipment additions. Financing provided $6.8 million; cash increased $8.5 million to $145.6 million.
- Liquidity and debt: At May 31, cash and cash equivalents were $145.6 million, current assets $474.9 million, and current liabilities $354.8 million. Restricted cash totaled $25.7 million. Long-term debt, including current maturities, was $101.8 million, versus $91.4 million at August 31, 2014. The company reported $58.9 million of available short-term credit facilities and compliance with debt covenants.
- Capital returns: The company declared a $0.70-per-share fiscal 2015 dividend, payable in two $0.35 installments. It stated that it anticipated continuing semiannual dividends, subject to board approval and capital needs.
Material changes and management commentary
- Growth reflected four club openings over the prior year, including three in Colombia and one in Honduras. Colombia generated a large share of sales growth, but reported results were pressured by peso depreciation and lower margins on imported products.
- The Colombian peso depreciated about 31% against the U.S. dollar from the start of fiscal 2015 through May 31. Nine-month currency losses were $4.6 million, compared with a $1.5 million gain in the prior-year period; foreign-currency translation losses in other comprehensive income were $24.2 million.
- Management said Colombia’s currency impact on consolidated net income was approximately $0.07 per share in the quarter, offsetting a similar year-over-year improvement elsewhere in the business. It said Colombian intercompany dollar liabilities had returned to a more normal level, which it expected would reduce future exposure, though exchange-rate outcomes remain uncertain.
- Q3 warehouse gross margin declined mainly because PriceSmart reduced Colombian merchandise margins to limit the effect of higher import costs on members. Management indicated it was prepared to accept lower Colombian margins to support its longer-term position.
- As of May 31, management anticipated two club openings within 12 months: Panama and Nicaragua. The Panama Costa Verde club opened in June 2015; the second Nicaragua club was scheduled for late 2015. The company continued to explore additional sites, including Colombia.
Risks, contingencies, and unusual items
- Guatemala fire after quarter-end: A fire closed the Pradera club for 16 days; it reopened June 20, 2015. The company estimated $3.0–$3.3 million of inventory, equipment, repair, and related expenses for the following quarter. Insurance applied, but reimbursement was under review and not yet recognized as probable.
- Tax matters: The filing describes disputed VAT receivables of $6.3 million in two countries and provisional tax assessments totaling $7.7 million related to withholding and deductibility. The company expected to prevail and had not recorded a provision for the assessments. It also had $4.2 million of prior tax payments in appealed cases recorded as non-current assets, with refund timing uncertain.
- Other commitments: Non-cancelable operating lease commitments for open locations totaled $149.1 million. Construction services of approximately $14.4 million remained contractually committed but not yet performed. A $8.6 million liability for land purchased in Chia, Colombia was paid June 2; permits for a potential club there were not yet secured.
- Management cited international operating, competition, currency, tax, supply-chain, systems, natural-disaster, and compliance risks. It reported no material change in risk factors from its 2014 Form 10-K, no material off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether comparable sales and membership growth persist as new clubs mature, particularly in Colombia.
- How Colombian peso movements, import pricing, and margin reductions affect reported sales, profitability, and cash flows.
- The actual costs and insurance recoveries associated with the Guatemala fire.
- Progress and timing for the Nicaragua opening, and permitting and development prospects for the Chia site.
- Outcomes and recoverability of disputed VAT and income-tax balances, including the unprovided $7.7 million assessments.
- Debt maturities, covenant compliance, and funding needs alongside planned capital spending and dividends.