PriceSmart, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended November 30, 2016; unaudited. Comparisons are with the three months ended November 30, 2015 unless stated otherwise. PriceSmart operated 39 membership warehouse clubs in 13 countries and territories, including a new club opened in Chía, Colombia, in September 2016. Amounts below are U.S. dollars.
Key financial results
| Metric | Q1 FY2017 | Prior period | Change |
|---|---|---|---|
| Total revenue | $739.6 million | $711.9 million | +3.9% |
| Net warehouse club sales | $716.1 million | $690.8 million | +3.7% |
| Membership income | $11.7 million | $11.5 million | +2.1% |
| Operating income | $38.4 million | $37.3 million | +2.9% |
| Net income | $24.9 million | $23.7 million | +5.1% |
| Diluted earnings per share | $0.82 | $0.78 | +5.1% |
| Operating cash flow | $2.1 million | $1.9 million | Cash flow statement values |
- Margins: Warehouse gross profit increased 6.9% to $107.6 million; gross margin expanded 45 basis points to 15.0%. Operating margin was approximately 5.2% of warehouse sales, essentially unchanged. The effective tax rate declined to 31.5% from 33.8%.
- Cash flow and investment: Operating cash flow of $2.1 million was outweighed by $17.4 million of investing outflows, including $17.0 million of property and equipment additions. Cash declined $24.1 million to $175.4 million. Comprehensive income was $14.5 million, including a $10.9 million foreign-currency translation loss.
- Liquidity and debt: Current assets were $534.9 million and current liabilities $376.4 million (current ratio approximately 1.42). Cash and cash equivalents were $175.4 million, of which $165.8 million was held by foreign subsidiaries. Short-term borrowings were $12.2 million and long-term debt, including its current portion, was $84.5 million. The company reported compliance with debt covenants.
- Other balance-sheet items: Total assets were $1.118 billion and equity $655.0 million at November 30, 2016. VAT receivables totaled $35.0 million; income-tax receivables totaled $18.3 million.
Material changes and operating trends
- Colombia net warehouse sales rose 22.8%, helped by the new Chía club and improved trading conditions; transactions increased 11.3% and average ticket 10.3%. Central American sales rose 3.5%, while Caribbean sales fell 2.3%, including a 5% decline in Trinidad.
- Comparable warehouse sales were flat. Management said weakness in the Caribbean, principally Trinidad, offset growth in Central America and Colombia; sales shifting to new clubs also weighed on comparable results.
- Warehouse operations expense increased to 9.1% of warehouse sales from 8.8%. General and administrative expense rose 8.7%, reflecting buying-department spending, deferred compensation and an executive relocation. The prior-year quarter included a $202,000 insurance recovery related to the Guatemala warehouse fire.
- Foreign-exchange transaction losses increased to $928,000 from $244,000. Foreign-currency translation reduced other comprehensive income by $10.9 million in the quarter.
Outlook, risks and unusual items
- Management expected approximately $95.4 million of additional capital expenditures for the remainder of FY2017, mainly for replacements, improvements, expansions and land acquisitions. No new warehouse-club openings were planned for FY2017.
- The company expected completion of its approximately $46 million Medley, Florida distribution-center acquisition in the first half of calendar 2017. It expected a $33 million, 10-year Union Bank loan to fund part of the purchase, with a related interest-rate hedge fixing the rate at 3.60%.
- Trinidad faced limited access to U.S. dollars. PriceSmart reduced shipments from Miami to align with the subsidiary’s ability to pay in hard currency; management anticipated further reductions and estimated potential sales impact of $8–$10 million in the second and third fiscal quarters. Trinidad had $31.2 million in net U.S.-dollar-denominated liabilities exposed to currency devaluation; a hypothetical 20% Trinidad-dollar devaluation could result in approximately $6.2 million of other expense.
- Tax recoverability is a significant uncertainty: the company was pursuing VAT-refund disputes in three countries and had not recorded allowances against the disclosed tax receivables. It also disclosed contested assessments of $2.5 million for withholding taxes and $5.2 million related to service-charge deductions, for which it expected to prevail and recorded no provision.
- Future minimum operating lease commitments were $140.8 million, up from $120.9 million at August 31, 2016, primarily due to extending the Guatemala Pradera lease through November 2043. The company reported no material change in risk factors and no material subsequent event requiring disclosure.
Most important facts for investors to verify
- Cash-flow comparison: The consolidated cash-flow statement reports prior-year operating cash flow of $1.9 million, while the MD&A cash-flow summary reports $3.9 million. The filing text does not reconcile this discrepancy.
- Trinidad exposure: Monitor access to hard currency, shipment constraints, potential $8–$10 million sales impact, and the $31.2 million exposed liability balance.
- Tax assets and disputes: Confirm the timing and recoverability of VAT and income-tax receivables and the outcomes of the contested assessments and appeals.
- Capital commitments and financing: Track the remaining FY2017 capital-spending plan, Medley project completion and expected loan funding, as well as lease obligations.
- Underlying sales momentum: Assess flat comparable sales against reported growth, which included the new Colombia club, and watch performance in Trinidad and Colombia.