PriceSmart, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended May 31, 2014; unaudited. Amounts below are in U.S. dollars. The company operates membership warehouse clubs across Latin America and the Caribbean, with 33 clubs in 12 countries and one U.S. territory at period-end.
Financial performance
| Metric | Three months ended May 31, 2014 | Year-over-year change | Nine months ended May 31, 2014 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $615.0 million | +7.6% | $1,895.0 million | +10.5% |
| Net warehouse club sales | $597.9 million | +7.6% | $1,844.7 million | +10.4% |
| Operating income | $31.2 million | +9.5% | $102.9 million | +8.8% |
| Net income | $21.3 million | +15.0% | $71.0 million | +12.0% |
| Diluted earnings per share | $0.70 | Up from $0.61 | $2.34 | Up from $2.09 |
- Third-quarter warehouse gross margin was 14.8%, up from 14.4%; management attributed the improvement to vendor fees and rebates and lower shrink and obsolescence. Nine-month warehouse gross margin was 14.6%, down from 14.7%.
- Comparable warehouse sales increased 2.9% for the 13-week period ended June 1, 2014. Transactions grew 7.3% and average ticket 0.2% in the reported quarter. Membership income rose 8.9% for the quarter; member accounts increased 10.0% and the renewal rate was 85.0%.
- Operating cash flow was $76.2 million for nine months, versus $66.9 million. Investing cash outflow was $84.3 million, chiefly reflecting expansion spending; financing cash inflow was $14.8 million. Cash increased $1.9 million to $123.8 million. Operating cash flow less property and equipment additions was negative $6.6 million.
- At May 31, cash and cash equivalents were $123.8 million, current assets $391.1 million and current liabilities $285.6 million (current ratio about 1.37). Restricted cash totaled $29.3 million and is not freely available for general use.
- Long-term debt, including current maturities, was $94.1 million, up from $73.0 million at August 31, 2013. Total equity was $523.9 million. The company reported $35.5 million of available short-term credit facilities and no short-term borrowings.
Material changes and business developments
- The company opened its sixth Costa Rica club in October 2013 and its third Honduras club in May 2014. It was constructing three Colombia clubs in Pereira, Medellin and Bogota, with openings planned before the end of calendar 2014.
- Capital expenditures were $82.8 million in the first nine months, up from $52.4 million. Management cited new-club construction, land purchases and fixtures and equipment.
- New borrowings included a $24.0 million draw on a Panama facility and a roughly $13.8 million Honduras loan. The company also repaid borrowings, including an $8.0 million Colombia loan tranche and $3.2 million due to MetroBank.
- The board declared a $0.70-per-share dividend, payable in two $0.35 installments; $10.6 million was payable at May 31. Management anticipates semiannual dividends, subject to board approval and capital needs.
- Foreign-currency translation and hedge valuation reduced nine-month comprehensive income: other comprehensive loss was $8.8 million, primarily from currency translation. Net income included currency gains of $0.5 million for the quarter and $1.5 million for nine months.
Outlook, risks and contingencies
- Management identified Costa Rica’s approximately 10% currency devaluation as a near-term headwind to reported sales, membership income and consumer purchasing power. Jamaica, Honduras and El Salvador also faced economic or retail weakness. Currency movements affect reported results and the cost and demand for imported merchandise.
- Approximately 79% of warehouse sales were in foreign currencies, while approximately 52% comprised products purchased in U.S. dollars and imported. The company uses pricing actions, local-currency borrowing and derivatives to manage exposures, but cannot reliably forecast future exchange rates.
- Expansion and liquidity demands include $25.4 million of contractual construction services not yet rendered, $138.0 million of future minimum operating lease commitments and land purchase options that could require about $31.0 million if exercised. Options are cancellable at the company’s discretion.
- A disputed VAT receivable in one country was $4.9 million; the company has not recorded an allowance and is pursuing recovery in court while the government audits the balance. Separately, $2.6 million paid in an appealed income-tax case was recorded as a non-current asset. Recorded non-income tax contingencies were $2.9 million.
- The Barbados subsidiary had previously failed an annual financial covenant test; the company obtained a waiver and was working to amend the loan covenants. At May 31, the company reported compliance with covenants or written waivers. Other material risks include competition, club execution, political and economic conditions, tax matters, foreign exchange, supply disruptions and natural disasters.
- Management reported no material changes in risk factors, no material impairment charges, no material subsequent events and no pending legal proceedings expected to materially affect the company. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
- The company reclassified prior-year asset disposal costs from other expense to operating expense to better reflect their nature; the reclassification did not affect net income. Management said adoption of the new revenue standard was not expected to have a material impact.
Important facts for investors to verify
- Progress, opening timing, startup costs and returns on the three planned Colombia clubs, and the extent to which new clubs divert sales from existing locations.
- Whether Costa Rica and other market currencies stabilize, and the effects of further devaluation on sales, margins, member demand and debt exposures.
- Recoverability and timing of the disputed $4.9 million VAT receivable and the $2.6 million income-tax payment recorded as an asset.
- Capital spending, operating cash flow, debt maturities and compliance with financial covenants as expansion continues.
- Performance of comparable sales, membership growth and renewal rates, including whether recent margin improvement persists.
- Board decisions on future dividends and the company’s ability to fund dividends alongside planned investment.