PriceSmart, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2013, ended May 31, 2013; compared with the corresponding 2012 periods. Unaudited consolidated results. Dollar amounts below are U.S. dollars.
Business context
PriceSmart operated 31 membership warehouse clubs in 12 countries and one U.S. territory, up from 29 clubs a year earlier. It opened its second and third clubs in Colombia during fiscal 2013. The business is concentrated in Latin America and the Caribbean, with sales exposed to local-currency movements and costs of imported merchandise.
Financial results and liquidity
- Third quarter: Total revenue was $571.7 million, up 13.1%; net warehouse club sales were $555.8 million, up 12.3%. Net income was $18.5 million, up 18.0%, or $0.61 per diluted share versus $0.52.
- First nine months: Total revenue was $1.714 billion, up 12.0%; net income was $63.4 million, up 27.1%, or $2.09 per diluted share versus $1.66. Operating income was $95.0 million, up 18.7%.
- Margins: Third-quarter warehouse gross margin was 14.4%, down 55 basis points; nine-month margin was 14.7%, down about 5 basis points. Third-quarter operating income was $28.7 million; operating margin was 5.2% of warehouse sales versus 5.1% a year earlier.
- Membership: Third-quarter membership income increased 26.4% to $8.8 million. Member accounts increased 11.8% to 1.061 million. The renewal rate was 84%, compared with 89% a year earlier; the filing says the prior-year rate benefited from early renewals ahead of the June 2012 fee increase.
- Cash flow and investment: Nine-month operating cash flow was $66.9 million, versus $76.0 million including discontinued operations in 2012. Capital expenditures were $49.2 million; investing cash use totaled $49.7 million. Inventory increased $19.9 million and was a significant operating-cash use. Cash and cash equivalents ended at $92.4 million, up $1.2 million from August 31, 2012.
- Debt and liquidity: Long-term debt, including current maturities, was $75.9 million, down from $78.7 million at August 31, 2012. Short-term borrowings were zero; $35.1 million of credit facilities remained available. Current assets were $350.2 million and current liabilities $251.0 million. Restricted cash totaled $39.0 million, much of it pledged or otherwise restricted.
- Dividends: The company declared $0.60 per share for fiscal 2013, payable in two $0.30 installments; the second installment was scheduled for August 30, 2013. Future dividends remain subject to board approval.
Material changes and management commentary
- Comparable warehouse sales grew 9.2% for the 13 weeks ended June 2, 2013. Third-quarter sales growth reflected 8.8% more transactions and a 3.3% higher average ticket. Latin America outpaced the Caribbean, with growth also supported by two additional Colombian clubs.
- Management attributed lower third-quarter gross margin primarily to broad price reductions intended to improve member value. Higher membership income and expense leverage more than offset the margin decline, supporting higher operating income.
- Export sales rose substantially but were tied to direct sales to one institutional customer in the Philippines; the company reported an approximately 5% gross margin on those sales, below warehouse-club margins.
- Net currency losses were $0.8 million in the quarter and $1.0 million for the nine months, versus losses of $0.4 million and $0.7 million, respectively, in the comparable periods.
- Management anticipated opening a sixth Costa Rica club in fall 2013 and a third Honduras club in spring 2014, and continued exploring additional sites. The filing provides no numerical earnings or revenue guidance and cautions that quarterly results are affected by seasonality, economic and political events, weather, product mix, and currency movements.
Risks, contingencies, and unusual items
- Foreign-exchange exposure is significant: approximately 79% of warehouse sales were in foreign currencies, while about 52% of sales comprised products purchased in U.S. dollars and imported. Management uses pricing changes, local-currency borrowing, swaps, and forward contracts; these measures may not eliminate the risk.
- A VAT receivable in a country with a disputed refund process was $4.2 million. The company had not recorded an allowance, stating it expected to prevail in its appeal. The filing text does not identify that country.
- The company had $2.9 million accrued for non-income-tax contingencies. It also disclosed an unrecorded indemnification obligation that could require purchasing land estimated at $4.1 million if a development restriction applies.
- PriceSmart’s estimated future additional contributions to its Panama and Costa Rica real-estate joint ventures totaled $3.1 million; its disclosed maximum exposure to loss in those ventures was $11.2 million.
- Vendor demonstration reimbursements were reclassified from other income to reductions of costs and related expenses. Prior-period reclassifications did not change operating income or net income. No long-lived-asset impairment was recorded in fiscal 2013.
- Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether planned Costa Rica and Honduras openings remain on schedule and what capital spending and funding they require.
- Whether sales growth and new membership income can offset continued price competition and pressure on warehouse gross margins; monitor renewal rates.
- How currency movements, imported-product costs, and the effectiveness and accounting treatment of hedges affect future earnings and cash flows.
- Progress and recoverability of the disputed $4.2 million VAT receivable, and developments affecting the land indemnity and joint-venture commitments.
- Whether operating cash generation keeps pace with inventory growth, capital expenditures, debt maturities, and dividends; distinguish unrestricted cash from restricted and collateral cash.