PriceSmart, Inc. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended November 30, 2012; unaudited. Amounts below are in U.S. dollars. PriceSmart operated 30 membership warehouse clubs in 12 countries and one U.S. territory, compared with 29 clubs a year earlier.
Key financial results
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Total revenue | $535.3 million | $477.5 million | +12.1% |
| Net warehouse club sales | $523.6 million | $468.2 million | +11.8% |
| Operating income | $29.8 million | $24.3 million | +22.7% |
| Net income | $20.0 million | $14.0 million | +43.0% |
| Diluted earnings per share | $0.66 | $0.47 | Up $0.19 |
| Operating margin | 5.7% | 5.2% | Up 0.5 percentage point |
| Warehouse sales gross margin | 15.0% | 14.6% | Up 0.43 percentage point |
| Effective tax rate | 30.5% | 36.2% | Down 5.7 percentage points |
Membership income rose 21.2% to $7.7 million. Membership accounts increased 14.4% to 999,278; the 12-month renewal rate was 86%, versus 88%. Comparable warehouse club sales increased 8.3% for the 13 weeks ended December 2, 2012. Latin American warehouse sales grew 15.1%; Caribbean sales grew 5.8%.
Cash flow and liquidity: Operating cash flow was $7.9 million, versus cash used of $12.4 million in the prior-year quarter. Inventory growth used $38.9 million of cash, partly offset by a $27.6 million increase in accounts payable. Capital expenditures were $14.7 million, primarily for club construction and equipment. Cash and cash equivalents ended the quarter at $84.4 million, down from $91.2 million at August 31, 2012. Current assets were $372.2 million and current liabilities were $275.1 million. Restricted cash totaled $37.7 million and is not generally available for operating needs.
Debt: Long-term debt, including its current portion, was $81.0 million, up from $78.7 million at August 31. The company reported no short-term borrowings under its credit facilities and had $36.8 million of facility capacity available. It reported compliance with applicable financial covenants. Debt fair value was $82.2 million.
Material changes and business developments
- Sales growth reflected both the opening of the south Cali, Colombia club in October 2012 and growth at established clubs. Transactions increased 8.3% and average ticket increased 3.3%.
- Warehouse gross margin improved through vendor programs, lower shrink and fewer markdowns, as well as the absence of prior-year elevated import costs in Colombia. SG&A excluding pre-opening costs remained approximately 10.9% of sales; general and administrative expense increased 22.5%, mainly due to compensation and stock-based compensation.
- The company raised annual membership fees by approximately $5 in most markets effective June 2012. It introduced a $75 Platinum membership in Costa Rica in November, offering a 2% rebate on eligible purchases subject to an annual cap.
- The presentation of vendor consideration was changed in FY2013: certain vendor payments and reimbursements are now recorded as reductions to cost of sales or related costs rather than other income. Comparative FY2012 amounts were reclassified; operating income and net income were unchanged.
- Other comprehensive loss was $1.6 million, principally from foreign currency translation and swap valuation changes. Prior-year comprehensive income included $8.9 million of translation-related charges associated with a merger and correction of prior translation errors, making that comparison less representative.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance was provided. Management anticipated opening a north Cali, Colombia club in spring 2013 and a sixth Costa Rica club in fall 2013, and said it continued to evaluate additional sites. Management expects to continue semi-annual dividends, subject to Board approval and capital requirements.
- Management cited moderate year-over-year growth in major markets, but noted that higher value-added taxes, weaker activity and other local factors were challenging sales in some smaller markets. It also noted increasing competition and the possibility of entry by U.S. warehouse operators.
- Foreign exchange remains a key exposure: most warehouse sales are in foreign currencies, while a substantial share of merchandise is imported and purchased in U.S. dollars. Price changes, currency translation and remeasurement of dollar liabilities can affect demand and results. The company uses pricing actions, local-currency financing and derivatives to manage exposure, but these measures may not fully offset currency movements.
- Ordinary-course legal matters were not expected by management to have a material adverse effect; the filing reports no legal proceedings under Part II. Accrued non-income-tax contingencies were $3.2 million. A Costa Rica permitting-related indemnity could require purchase of adjacent land, estimated at approximately $4.1 million; no liability was recorded. The company also reported $3.1 million of future contribution commitments to its Panama and Costa Rica joint ventures.
- Results are subject to seasonality, economic and political conditions, weather, shipment timing, product mix, competition, and inventory markdown or impairment estimates. Management reported no long-lived asset impairment in the quarter. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether comparable sales, membership growth and the new Cali club’s contribution continue after the opening period; monitor the decline in membership renewal rate.
- Whether improved gross margins persist, particularly as vendor incentives, shrink and markdowns fluctuate.
- Whether operating cash generation covers inventory needs, expansion spending and dividends; distinguish restricted cash from available liquidity.
- Debt maturities, collateral and covenant headroom, including the timing and terms of new or subsequent borrowing and hedging arrangements.
- Potential effects of currency changes, tax assessments, the Costa Rica land indemnity and joint-venture funding commitments.
- The $0.60-per-share dividend declared in November was payable in two $0.30 installments; the first was paid December 21, 2012, and the second was scheduled for August 30, 2013.