PriceSmart, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended November 30, 2011; comparison is with the three months ended November 30, 2010. Amounts below are in U.S. dollars. The filing is unaudited.
Business context
PriceSmart operates membership warehouse clubs across Latin America and the Caribbean. At quarter-end, it had 29 clubs in 12 countries and one U.S. territory, including a new club in Barranquilla, Colombia. It opened a club in Santo Domingo in November 2010.
Financial performance and liquidity
- Revenue: $478.7 million, up 24.0%. Net warehouse club sales were $468.3 million, up 24.1%; comparable sales grew 18.8% for the 13 weeks ended December 5, 2011. Membership income rose 16.7% to $6.3 million; membership accounts increased 17.9%, and renewal rates were 89%.
- Margins and operating profit: Warehouse gross profit was $67.8 million, with gross margin of 14.5%, down 1.19 percentage points. Operating income increased 9.3% to $24.3 million; operating margin was 5.2% of warehouse sales.
- Net income and EPS: Net income was $14.0 million versus $14.9 million, and diluted EPS was $0.47 versus $0.50. The effective tax rate increased to 36.2% from 31.6%, principally because no tax benefit was recognized on Colombia losses.
- Cash flow: Operating cash flow was negative $12.4 million, compared with negative $5.9 million. The principal cash use was a $42.4 million increase in inventory. Capital expenditures were $8.3 million. Cash and cash equivalents declined $18.5 million during the quarter to $58.3 million.
- Liquidity and debt: Current assets were $320.8 million and current liabilities $232.0 million. Cash included $29.9 million of restricted cash. Long-term debt, including its current portion, was $70.8 million; short-term borrowings were $5.8 million. The filing reports $22.0 million of available short-term credit facilities. The company was in compliance with its disclosed debt covenants.
- Balance sheet: Total assets were $688.0 million and equity was $382.4 million at November 30, 2011.
Material changes and unusual items
- Warehouse sales growth reflected 18.8% comparable-sales growth, transaction growth of 21.0%, and additional sales from newer clubs. Management said sales increased across markets and major merchandise categories.
- Gross margin declined mainly because of ongoing price reductions; initial merchandise-import costs for Barranquilla reduced warehouse margin by 14 basis points. SG&A declined by 0.62 percentage points as a share of sales, reflecting expense growth below sales growth.
- Foreign-exchange results shifted from a $0.4 million gain to a $1.2 million loss. The Colombian peso depreciated 9.3% against the U.S. dollar during the quarter; management attributed about $1.5 million of currency losses to Colombia. Currency effects reduced year-over-year earnings by approximately $1.6 million, or $0.05 per share.
- Net income in the new Colombian subsidiary was affected by start-up and import costs, infrastructure expenses, and currency losses; management estimated the total consolidated earnings impact at approximately $2.8 million, or $0.09 per diluted share.
- The company recorded an $8.9 million increase in accumulated other comprehensive loss and a corresponding reduction in property and equipment related to a subsidiary merger and correction of prior translation errors. Management concluded the corrections were not material to individual prior periods and did not require restatement.
- Disclosure controls were ineffective at quarter-end because two previously identified material weaknesses remained: review of foreign-currency translation of fixed assets and depreciation, and reconciliation of deferred tax assets for loss carryforwards. Remediation was ongoing.
Outlook, risks, and contingencies
- The filing gives no specific sales or earnings guidance or target for new club openings. Management expects to continue evaluating expansion opportunities and estimated approximately $4.4 million of fiscal 2012 spending on club expansions, reconfigurations, and upgrades.
- PriceSmart acquired land in south Cali, Colombia, on December 14, 2011 and anticipated opening a club there in late calendar 2012. A north Cali site remained subject to conditions. A subsequent Guatemala loan agreement provided for the equivalent of $8.9 million over ten years, at a rate fixed at 8% for the first three years.
- Management cited risks from foreign-currency movements, economic conditions, commodity and oil prices, competition, international operations, and import and shipment costs. Results may also vary seasonally and are not necessarily indicative of full-year performance.
- Recorded non-income-tax contingencies were $2.6 million. The company had an unrecorded indemnification obligation relating to Alajuela, Costa Rica, that could require it to buy land estimated at $4.1 million under specified circumstances. It also disclosed $3.7 million of future additional-contribution commitments to two joint ventures, with maximum exposure of $11.2 million.
- Management said ordinary-course legal matters were not expected to have a material adverse effect; the legal-proceedings section reports none. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether comparable-sales growth and membership trends continue, and how price reductions affect gross margin.
- Whether inventory growth and negative operating cash flow are seasonal or persist, and the resulting need for external financing.
- The continuing impact of currency volatility, particularly in Colombia, and the effectiveness of the company’s hedges.
- Progress on remediation of the two material weaknesses and the reliability of fixed-asset translation and deferred-tax reporting.
- Potential cash commitments or liabilities involving Alajuela, joint ventures, tax matters, and the planned Colombia expansion.