PriceSmart, Inc. — Q2 FY2013 Form 10-Q
Reporting period: Fiscal quarter and six months ended February 28, 2013; comparisons are to the periods ended February 29, 2012. Amounts are in U.S. dollars. PriceSmart operated 30 warehouse clubs across 12 countries and one U.S. territory.
Financial performance and position
| Metric | Q2 FY2013 | Six months FY2013 |
|---|---|---|
| Total revenue | $607.4 million, up 10.8% | $1,142.7 million, up 11.4% |
| Net warehouse club sales | $591.9 million, up 10.1%; comparable sales up 9.3% | $1,115.5 million, up 10.9% |
| Membership income | $8.3 million, up 30.2% | $16.0 million, up 25.7% |
| Operating income | $36.5 million, up 20.2%; 6.2% of warehouse sales | $66.2 million, up 21.3%; 5.9% of warehouse sales |
| Net income | $24.9 million, up 23.1%; diluted EPS $0.82 vs. $0.67 | $44.9 million, up 31.2%; diluted EPS $1.48 vs. $1.14 |
| Warehouse sales gross margin | 14.7%, unchanged | 14.9% vs. 14.7% |
For the six months, net cash from operating activities was $61.1 million, versus $47.2 million; capital expenditures were $38.7 million, versus $21.8 million. Investing activities used $39.2 million, and financing activities used $9.2 million. Cash and cash equivalents increased $10.0 million to $101.2 million; the period included a $2.8 million adverse exchange-rate effect on cash.
At February 28, 2013, current assets were $367.6 million and current liabilities $267.1 million (current ratio approximately 1.38). Restricted cash totaled $38.9 million, much of it held as collateral or for regulatory requirements. Long-term debt, including its current portion, was $79.2 million; unused short-term credit facilities were $35.2 million. Total assets were $792.7 million and equity $443.2 million.
Changes and management commentary
- Quarterly sales growth reflected strong December holiday sales, 6.1% more transactions and 3.8% higher average tickets. One additional club was operating year over year, following the October 2012 opening in Cali, Colombia.
- Membership accounts rose 12.5% to 1.03 million; management attributed higher membership income partly to the fee increase effective June 2012. Renewal rates were 85%, compared with 88% a year earlier.
- Operating leverage improved: Q2 warehouse operating expenses fell 37 basis points as a share of warehouse sales. Six-month gross margin improved about 20 basis points, which management attributed to lower import costs, vendor income, reduced shrink and fewer markdowns.
- Q2 currency transactions produced a $263,000 loss, compared with a $898,000 gain in the prior-year quarter. The six-month effective tax rate declined to 29.9% from 34.2%, reflecting tax-rate and jurisdictional mix changes and reversals of certain tax accruals.
- Vendor demonstration reimbursements were reclassified from other income to lower cost of sales and related operating costs. The comparative presentation changed, but operating income and net income were unaffected.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance was provided. Management anticipated the next club openings in north Cali, Colombia, in May 2013; Costa Rica in fall 2013; and Honduras in spring 2014. The company continued to seek additional sites and expected to continue semiannual dividends, subject to board approval and capital needs.
- Management cited moderate economic growth in major markets, but noted that tax increases and weaker activity in some smaller markets were challenging sales. Risks include foreign-currency volatility, import costs, competition, economic and political conditions, natural disasters, site availability and execution of international operations. About 79% of warehouse sales were denominated in foreign currencies and about 52% consisted of imported products.
- Recorded non-income-tax contingencies were $2.7 million. PriceSmart disclosed an indemnity related to Costa Rica property that could require purchase of land estimated at $4.1 million; no liability was recorded. Future contribution commitments to two commercial-center joint ventures totaled $3.1 million.
- Management reported no material litigation expected to adversely affect the company, no impairment charges in FY2013 to date, and no material change in previously disclosed risk factors. Disclosure controls were judged effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether comparable-sales momentum and membership growth persist, and how the lower renewal rate develops.
- Whether planned club openings occur on schedule and generate returns that justify higher capital spending.
- Exposure to foreign exchange, imported-product costs, and changes in economic conditions across operating markets.
- Debt maturities, collateral and covenant requirements, and the availability of cash restricted for loans or regulatory purposes.
- Potential outcomes and cash requirements for tax contingencies, the Costa Rica land indemnity, and joint-venture commitments.