PriceSmart, Inc. — FY2011 Form 10-K
Business context and reporting period. PriceSmart operates membership warehouse clubs across Latin America and the Caribbean. This annual report covers the fiscal year ended August 31, 2011; selected fourth-quarter results are also summarized below. At year-end, it operated 29 clubs in 12 countries and one U.S. territory, up from 27 clubs a year earlier. All amounts below are U.S. dollars.
Key financial results
| Metric | FY2011 | FY2010 |
|---|---|---|
| Total revenue | $1,714.2 million | $1,395.9 million |
| Net warehouse club sales | $1,675.2 million, +22.7% | $1,365.8 million, +11.6% |
| Warehouse gross profit / margin | $252.9 million / 15.1% | $209.4 million / 15.3% |
| Operating income / margin on warehouse sales | $90.9 million / 5.4% | $74.9 million / 5.5% |
| Net income attributable to PriceSmart | $61.8 million | $49.3 million |
| Diluted earnings per share | $2.07 | $1.65 |
| Cash from operations | $75.6 million | $83.0 million |
| Cash and cash equivalents at year-end | $76.8 million | $73.3 million |
| Total long-term borrowings, including current portion | $68.2 million | $60.7 million |
FY2011 investing cash outflow was $39.4 million and financing cash outflow was $30.6 million. Current assets were $292.8 million and current liabilities $218.2 million. The company also reported $23.9 million of restricted cash, primarily related to loan collateral. Contractual obligations totaled $163.0 million, including $81.0 million of scheduled debt and interest payments and $77.9 million of operating leases.
Membership income rose 15.6% to $22.8 million; membership accounts increased 16.1% to approximately 832,500, and the renewal rate improved to 88% from 86%.
Material changes versus the prior comparable period
- FY2011 comparable club sales increased 18.1%; total warehouse sales rose 22.7%, driven mainly by transaction growth and additional club capacity. The company opened clubs in Santo Domingo and Barranquilla during the fiscal year.
- Operating income increased 21.3% and net income attributable to PriceSmart increased 25.4%. Warehouse gross margin declined 24 basis points to 15.1%, consistent with management’s stated strategy of lowering prices to support sales and member value.
- Operating cash flow decreased to $75.6 million from $83.0 million, primarily reflecting a larger increase in inventory, including inventory for new clubs.
- Long-term debt increased by approximately $7.5 million. Cash increased modestly, while restricted cash rose to $23.9 million from $6.9 million.
Fourth quarter: net warehouse sales increased 22.1%, with comparable sales up 19.3% for the reported 13-week comparison. Net income was $12.6 million, or $0.42 per diluted share, versus $13.2 million, or $0.44, a year earlier. Gross profit was $64.6 million, or 14.8% of sales, compared with $55.5 million, or 15.6%.
Outlook, risks and unusual items
- Management gave no specific target for new club openings. It expected to invest approximately $4.4 million in FY2012 club expansions, reconfigurations and upgrades. A south Cali land acquisition and a club opening in late calendar 2012 were anticipated, subject to conditions; the north Cali site remained uncertain.
- Management highlighted foreign-exchange exposure: approximately 79% of FY2011 warehouse sales were denominated in foreign currencies, while about 49% of sales consisted of imported merchandise. Currency movements, political and economic conditions, competition, commodity and fuel costs, shipping disruptions, weather and natural disasters, and availability of suitable expansion sites could affect results.
- FY2011 included corrections of prior-period errors: a $2.3 million increase to depreciation expense and a $3.1 million reduction in income-tax expense. Management said the cumulative correction increased FY2011 net income by approximately $0.8 million and was not material to individual prior periods. The fourth-quarter discussion separately describes a $2.5 million depreciation charge; investors should reconcile the quarterly and annual disclosures.
- Management identified two material weaknesses in financial reporting controls: foreign-currency translation of fixed assets and depreciation, and review of deferred-tax-asset reconciliations. It planned remediation by the end of FY2012’s first quarter. Management and Ernst & Young concluded internal control over financial reporting was ineffective; the auditor nevertheless issued an unqualified opinion on the financial statements and an adverse opinion on internal control.
- The company reported $13.5 million of gross unrecognized tax benefits, partly offset by tax benefits and timing adjustments, and $2.8 million accrued for non-income-tax contingencies. Ordinary-course litigation was not expected by management to have a material adverse effect. An indemnity relating to a Costa Rica property could require purchase of land estimated at $4.1 million if development restrictions apply; no liability was recorded at year-end.
- Future semiannual dividends were anticipated but remain subject to Board approval. FY2011 dividends paid were $17.9 million, or $0.60 per share.
Investor verification priorities
- Check whether the two reported control weaknesses were remediated on schedule and whether subsequent filings or audits identify further issues.
- Reconcile the $2.3 million annual depreciation correction with the fourth-quarter disclosure of $2.5 million, and assess the impact of the $3.1 million tax benefit on earnings comparability.
- Review sales and comparable-sales trends by market, including the impact of currency changes, new clubs and inventory investment on cash conversion and margins.
- Examine debt maturities, loan covenants and the substantial restricted-cash collateral, as well as the company’s planned expansion spending and Cali land conditions.
- Monitor tax exposures, the Costa Rica land indemnity and joint-venture commitments, and whether dividends remain consistent with capital needs.