PriceSmart, Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended November 30, 2013; comparative period is the three months ended November 30, 2012. Financial statements are unaudited. Unless otherwise stated, dollar amounts below are in millions.
Business context
PriceSmart operates membership warehouse clubs in Latin America and the Caribbean, with U.S. buying, distribution and corporate operations. It had 32 clubs in 12 countries and one U.S. territory at quarter-end, versus 30 a year earlier. A new Costa Rica club opened in October 2013.
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Total revenue | $605.6 | $535.3 | +13.1% |
| Net warehouse club sales | $589.7 | $523.6 | +12.6% |
| Membership income | $9.3 | $7.7 | +20.8% |
| Operating income | $32.4 | $29.7 | +8.9% |
| Net income | $21.4 | $20.0 | +7.1% |
| Diluted EPS | $0.71 | $0.66 | +$0.05 |
| Net cash from operating activities | $(37.6) | $7.9 | $(45.6) |
| Capital expenditures | $18.3 | $14.7 | +$3.6 |
Margins and drivers: Warehouse gross profit was $85.4 million, with a 14.5% margin versus 15.0% a year earlier; management attributed the 54-basis-point decline to price reductions intended to deliver member value. Operating income was 5.5% of warehouse sales versus 5.7%. Comparable warehouse sales rose 7.9% for the 13 weeks ended December 1, 2013, and member accounts increased 12.1% to 1.12 million. Renewal rate was 85% for the 12 months ended November 30, 2013.
Cash and debt: Cash and cash equivalents were $77.2 million at November 30, down from $121.9 million at August 31. Current assets were $420.4 million and current liabilities $318.9 million (working capital of approximately $101.5 million; current ratio approximately 1.32). These totals include restricted cash of $29.9 million. Long-term debt, including its current portion, was $63.3 million, versus $73.0 million at August 31; short-term borrowings were $13.0 million, versus none. Operating cash use largely reflected an $81.3 million inventory build, partly offset by increased accounts payable. Investing cash use was $18.3 million; financing provided $10.8 million.
Other balance-sheet items: Total assets were $880.6 million and equity was $505.1 million at November 30. Total liabilities were $375.5 million. Net income included a $0.3 million foreign-currency transaction gain, compared with a $0.001 million loss in the prior-year quarter. The effective tax rate was 32.6% versus 30.5%.
Material changes versus prior year
- Sales growth reflected 11.7% more transactions and 0.8% growth in average ticket; management cited new clubs in Colombia and Costa Rica as contributors.
- Membership income benefited from account growth, the earlier increase in membership fees and the Platinum membership program in Costa Rica.
- Operating expenses grew, but general and administrative expense increased only 0.2%; warehouse-club operating expense remained 8.8% of warehouse sales.
- Operating cash flow shifted from positive $7.9 million to negative $37.6 million, primarily because inventory use of cash more than doubled year over year.
- Management reclassified prior-year asset-disposal activity from other income/expense to operating expenses; the reclassification did not affect net income.
- No dividend was declared in Q1 FY2014; a $0.60-per-share dividend had been declared in the comparable prior-year quarter. The company said it anticipated ongoing semi-annual dividends, subject to Board approval.
Outlook, risks and unusual items
- Management anticipated one additional club opening in fiscal 2014: the third Honduras club, planned for spring 2014. A January 2014 land acquisition in Pereira, Colombia, was for a club then planned to open in November 2014.
- The company continued to explore additional sites, particularly in Colombia, while noting that suitable land at feasible prices can be difficult to secure. Management said Latin American sales growth was expected to outpace Caribbean growth, in part because the next planned opening was in Honduras.
- Management cited foreign-currency volatility, import costs, changing economic conditions, stronger retail competition, political events and risks to new-club execution. Approximately 53% of warehouse sales involved products purchased in U.S. dollars and imported, while approximately 79% of sales were in foreign currencies.
- Operating cash flow is seasonally affected by inventory needs ahead of holiday sales; management cautioned that quarterly results are not necessarily indicative of full-year results.
- VAT receivables totaled $24.0 million ($7.3 million current and $16.7 million non-current). In one country, $4.6 million was subject to a dispute over refund procedures; the company had recorded no allowance and said it expected to prevail. Separately, it had remitted $2.7 million in an appealed income-tax case, recorded as a non-current asset, and expected a refund if successful.
- Potential future contributions to two real-estate joint ventures totaled $3.1 million; the company’s stated maximum exposure to those ventures was $11.2 million. Non-cancelable operating lease commitments for open locations totaled $62.8 million, and construction services obligations not yet rendered were approximately $4.0 million.
- The Barbados subsidiary had failed a fiscal-year 2013 covenant test; the bank provided a written waiver, and the company was working to amend the covenants. The filing states it was in compliance or had a waiver as of November 30, 2013. No material changes to previously disclosed risk factors were reported.
- The company reported no material impact from adopting the accounting updates described in the filing. Disclosure controls were assessed as effective at a reasonable-assurance level.
Key facts for investors to verify
- Whether sales, comparable sales and membership growth continued, and whether the lower warehouse gross margin persisted.
- Whether the large seasonal inventory investment converted to sales and operating cash flow in subsequent quarters.
- Progress, cost and timing of the planned Honduras and Pereira clubs, and the funding required for further expansion.
- Recovery timing and outcome of the disputed VAT receivable and appealed income-tax payment.
- Debt covenant compliance, restricted-cash availability, and the Board’s decisions on future dividends.