PriceSmart, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended August 31, 2018. The filing also reports fourth-quarter results; this is an annual filing, not a standalone quarterly report. Amounts are in U.S. dollars unless noted.
Business context and period highlights
PriceSmart operates membership warehouse clubs in Central America, the Caribbean and Colombia, and acquired Aeropost in March 2018, adding cross-border logistics and e-commerce services. It ended the year with 41 clubs, compared with 39 a year earlier.
- FY2018 comparable merchandise sales increased 2.3%; net merchandise sales grew 4.9%, reflecting 4.6% transaction growth and 0.3% average-ticket growth.
- Sales growth varied by region: Central America 2.8%, Caribbean 6.2%, and Colombia 13.1%. Colombia’s performance benefited from currency stability and stronger transactions.
- Membership income grew 6.4% to $50.8 million. Member accounts increased 3.4% to about 1.59 million; renewal rates were 85%.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $3,166.7 million | $2,996.6 million |
| Operating income | $126.1 million; 4.0% of revenue | $136.2 million; 4.5% of revenue |
| Net income attributable to PriceSmart | $74.3 million | $90.7 million |
| Diluted EPS | $2.44 | $2.98 |
| Merchandise gross margin | 14.5% | 14.5% |
| Total gross margin | 16.1% of revenue | 15.9% of revenue |
| Operating cash flow | $119.5 million | About $123 million |
- Revenue rose 5.7%, while operating income fell about 7.5% and attributable net income fell about 18.1%. SG&A rose to $384.1 million, or 12.1% of revenue, from $340.6 million, or 11.4%.
- FY2018 investing cash outflow was $153.8 million, including $98.1 million of property and equipment additions, the Aeropost acquisition, and investment in time deposits. Financing cash outflow was $27.8 million. Cash, cash equivalents and restricted cash ended at $96.9 million.
- Balance-sheet cash and cash equivalents were $93.5 million, with $32.3 million of short-term investments and $3.5 million of restricted cash. Current assets were $487.9 million and current liabilities $349.4 million.
- Total debt was $102.6 million, including $14.9 million current and $87.7 million long-term; no short-term borrowings were outstanding. The company reported $68.4 million of available credit facilities and compliance with debt covenants.
- Operating lease commitments totaled $198.2 million. The company paid $21.2 million in dividends; the annual dividend was $0.70 per share.
Material changes, outlook and risks
- Aeropost: PriceSmart paid approximately $29.0 million in cash consideration. Aeropost contributed $16.9 million of revenue after acquisition but, together with acquisition-related items, reduced FY2018 net income by approximately $9.3 million. Management expects the business and its technology to support an omnichannel strategy.
- Costs and tax: Higher operating expenses, including Aeropost costs, contributed to lower operating income. U.S. tax reform resulted in a $12.5 million transition-tax charge and a $222,000 deferred-tax remeasurement charge; the effective tax rate was 39.3%, versus 31.7% in FY2017. Management expects the lower U.S. statutory rate to benefit future periods, but says foreign tax credits may limit the benefit.
- Plans: Two small-format clubs in Panama and the Dominican Republic were expected to open in spring 2019; a standard-format Guatemala club was expected in fall 2019. Management planned to test online sales in a few markets in late FY2019 and continue developing distribution capabilities. These are expectations, not guarantees.
- Key risks: About 77% of merchandise sales were in foreign currencies, and roughly 51% of sales came from goods sourced in U.S. dollars, exposing results and demand to exchange-rate movements. Trinidad’s U.S.-dollar illiquidity could constrain imports. Political unrest, economic weakness, natural disasters, import and supply-chain disruption, tax disputes and intensifying online and retail competition could affect results.
- Tax and other contingencies: The company had $25.1 million of VAT receivables and $24.5 million of income-tax receivables; some refunds or recoveries are disputed or take years. Management recorded no allowance against these balances. Ordinary-course legal matters were not expected to have a material adverse effect.
- Leadership and controls: CEO Jose Luis Laparte resigned effective November 16, 2018; Robert E. Price became Executive Chairman and Sherry S. Bahrambeygui Interim CEO while a permanent CEO search proceeded. The company restated FY2018 interim presentation of certain CDs from cash equivalents to short-term investments. It said the correction did not affect revenue, operating income, net income, operating cash flow or total assets. However, inadequate controls over this classification were a material weakness; management and EY reported ineffective internal control over financial reporting, and EY issued an adverse ICFR opinion. EY gave an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether operating income and earnings recover as Aeropost is integrated, and whether the anticipated omnichannel benefits materialize.
- Progress on the material-weakness remediation and whether subsequent filings report effective controls.
- Trinidad’s access to U.S. dollars, the impact on imported merchandise, and any resulting currency losses or shipment limits.
- Recoverability and timing of VAT and income-tax receivables, and outcomes of related court challenges and audits.
- Execution, timing and economics of planned club openings, distribution investments and online-sales tests.
- CEO succession, capital spending, lease obligations and the board’s future dividend decisions.