PriceSmart, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended May 31, 2011, the third quarter and first nine months of fiscal 2011. PriceSmart operates membership warehouse clubs in Latin America and the Caribbean. It had 28 clubs in 11 countries and one U.S. territory, compared with 27 clubs a year earlier; it opened a Dominican Republic club in November 2010.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Three months ended May 31 | Nine months ended May 31 |
|---|---|---|
| Total revenue | $431.1, up 23.7% | $1,266.8, up 23.0% |
| Operating income | $22.4, up 24.0%; 5.3% of warehouse sales | $72.2, up 31.8%; 5.8% of warehouse sales |
| Net income attributable to PriceSmart | $16.3, versus $12.0 | $49.1, versus $36.1 |
| Diluted EPS | $0.55, versus $0.40 | $1.65, versus $1.21 |
| Warehouse gross margin | 15.0%, versus 15.5% | 15.2%, versus 15.3% |
- Warehouse sales grew 23.6% in the quarter and 22.8% year to date. Comparable sales increased 19.2% for the 13 weeks ended June 5 and 17.7% for the 39 weeks ended June 5. Growth reflected higher transaction counts, additional clubs, and favorable currency effects in some markets.
- Membership income rose 15.2% in the quarter and 15.8% year to date. Membership accounts grew 14.7% year over year to about 794,000; the renewal rate improved to 88% from 85%.
- For the nine months, operating cash flow was $38.8 million, down from $51.1 million; inventory growth used $36.5 million of cash. Investing activities used $27.4 million, while financing activities used $17.6 million. Cash and equivalents declined $7.5 million to $65.8 million.
- At May 31, cash was $65.8 million and restricted cash was $21.8 million. Short-term borrowings were $4.6 million; long-term debt was $67.8 million, for total borrowings of about $72.4 million. Approximately $23.0 million remained available under bank credit facilities. The company reported compliance with debt covenants.
- Total assets were $637.7 million and total equity was $368.2 million. The company declared a $0.60-per-share dividend; the second $0.30 installment, about $9.0 million in total, was payable August 31, 2011. Future dividends remain at the board’s discretion.
Material changes versus the prior comparable period
- Sales growth and cost leverage lifted operating income and earnings, while warehouse gross margin percentage narrowed by 55 basis points in the quarter, primarily due to price reductions. Year-to-date gross margin declined 6 basis points.
- Warehouse club operating expenses rose with club growth, payroll, utilities, depreciation, and card-processing costs. As a share of warehouse sales, warehouse operations expense improved slightly year over year, and general and administrative expense also declined as a percentage of sales.
- Interest expense increased as debt was added to finance land and club construction. Year-to-date other income included a $1.25 million gain on Panama property sales; Colombia currency gains were recorded in other income during its pre-opening phase.
- Long-term debt increased from $60.7 million at August 31, 2010 to $67.8 million. Cash flow was also affected by $14.9 million added to restricted cash, dividends, and treasury-stock purchases related to employee share vesting.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance was provided. Management expected the Barranquilla, Colombia club to open in early August 2011 and planned approximately $9.0 million of additional property and equipment spending in the remaining fiscal year. A proposed Cali land acquisition was subject to contingencies and planned for the first quarter of fiscal 2012.
- Management cited improving consumer spending in many markets but warned that higher oil and commodity prices could pressure operating costs and member purchasing power. Foreign-exchange volatility, economic weakness, competition, shipping and import risks, and weather or political disruptions also remain risks.
- PriceSmart had $3.7 million of committed future contributions to joint ventures. It had not accrued a liability for the Alajuela water-retention-basin matters, including an indemnity that could require purchase of adjacent land estimated at $4.1 million if its development is restricted. Non-income-tax contingencies accrued in other expenses were $2.3 million.
- The filing reported no legal proceedings in Part II and no material change in risk factors, except that the chairman and related holders owned approximately 33% of voting stock, down from 39% at the prior fiscal year-end. The Guam discontinued-operation lease was expected to end August 31, 2011.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether strong comparable-sales and membership growth persists, and how price reductions affect gross margin.
- Whether inventory growth converts to cash and whether operating cash flow recovers from the year-ago level.
- Debt maturities, restricted-cash requirements, available credit, and execution of the Colombia expansion and planned capital spending.
- Potential exposure from the Alajuela indemnity, joint-venture commitments, and tax contingencies.
- Foreign-currency movements, oil and commodity costs, and the effect of concentrated voting ownership.