PriceSmart, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended May 31, 2023; amounts below are in U.S. dollars. PriceSmart operates membership warehouse clubs across Central America, the Caribbean and Colombia. It had 51 clubs in 12 countries and the U.S. Virgin Islands at quarter-end, compared with 50 a year earlier.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Total revenue | $1,096.7 million | $1,030.8 million | $3,293.6 million | $3,044.7 million |
| Net merchandise sales | $1,070.3 million | $999.0 million | $3,211.7 million | $2,955.0 million |
| Operating income | $43.1 million | $33.8 million | $152.4 million | $128.1 million |
| Net income attributable to PriceSmart | $29.6 million | $19.3 million | $93.8 million | $81.2 million |
| Diluted earnings per share | $0.94 | $0.62 | $3.01 | $2.63 |
| Merchandise gross margin | 15.3% | 14.2% | 15.8% | 15.3% |
| Operating margin | 3.9% | 3.3% | 4.6% | 4.2% |
Q3 revenue rose 6.4%, merchandise sales 7.1%, and operating income 27.5% year over year. Nine-month revenue increased 8.2% and merchandise sales 8.7%. Comparable merchandise sales grew 5.8% for the quarter and 6.5% for the nine-month period; on a constant-currency basis, comparable growth was 4.3% and 6.7%, respectively. Q3 sales growth reflected 2.8% more transactions and a 4.2% higher average ticket.
Membership income increased 8.4% to $16.7 million in Q3 and 7.7% to $48.8 million for nine months. Membership accounts rose 2.2% year over year to approximately 1.79 million, while the trailing 12-month renewal rate declined to 87.1% from 88.9%.
Q3 adjusted net income was $31.9 million, or $1.02 per diluted share, and adjusted EBITDA was $63.2 million, versus $19.3 million and $51.3 million, respectively, a year earlier. Nine-month adjusted net income was $103.3 million and adjusted EBITDA was $215.6 million, compared with $79.8 million and $178.3 million. These are non-GAAP measures; the company excludes specified unusual items, including the CEO separation charge and VAT write-off.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $184.7 million, versus $64.3 million in the prior-year period. Management attributed the improvement primarily to working-capital movements, including inventory and accounts payable, and higher net income.
- Investing cash outflow was $197.8 million, including $96.6 million of property and equipment additions and net investment purchases. Financing cash outflow was $13.1 million. Cash, cash equivalents and restricted cash decreased $15.0 million to $236.4 million, excluding $112.6 million of short-term investments.
- At May 31, cash and cash equivalents were $222.7 million and short-term investments were $112.6 million. Current assets were $847.2 million and current liabilities $587.3 million.
- Short-term borrowings were $10.4 million; long-term debt totaled $144.4 million, including $19.8 million due within 12 months. Total borrowings were approximately $154.8 million. The company reported compliance with applicable debt covenants and $155.5 million available under its short-term credit facilities.
- Stockholders’ equity was $1,089.7 million. Nine-month capital expenditures were $96.6 million; contractual construction obligations for services not yet rendered were $9.1 million.
Material changes and management commentary
- Gross margin improved year over year, partly because the prior-year quarter included markdowns of slow-moving and out-of-season inventory. Management said Q3 margin moderated from the first two quarters as it removed the COVID premium, reduced the Trinidad foreign-exchange premium and cut selected imported-product prices in Colombia and other markets to support member value.
- Colombia reported merchandise-sales declines of 15.7% in Q3 and 11.6% for nine months in reported dollars, primarily reflecting peso devaluation. Nine-month constant-currency sales in Colombia increased 6.6%. Central America and the Caribbean posted positive reported sales growth.
- Other expense was $1.5 million in Q3, versus $4.7 million a year earlier, helped by higher interest income from increased investments at higher yields. For nine months, other expense rose to $11.8 million from $1.8 million, primarily due to foreign-currency losses. Net interest expense also increased for the nine-month period as borrowing costs and debt balances rose.
- Cash taxes and VAT refunds are subject to complex processes that may take months or years. The company wrote off $2.3 million of VAT receivables in Q3 following unfavorable court rulings; it reported $37.9 million of VAT receivables and $37.8 million of income-tax receivables at May 31, with no allowance against the remaining balances.
- PriceSmart recorded $7.7 million of CEO departure-related costs in the first half of FY2023. Founder and Chairman Robert E. Price became interim CEO and receives no compensation for that role. Management estimated approximately $2.5 million of quarterly SG&A savings during his interim tenure, before related executive compensation increases; it estimated the fair value of his services at about $5.1 million annually.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management estimated a forward annual effective tax rate of approximately 32% to 33% and expected ongoing semiannual dividends, subject to Board approval and capital needs.
- Planned openings were a Medellín, Colombia club in August 2023, an Escuintla, Guatemala club in fall 2023, and a Santa Ana, El Salvador club in early 2024. If completed, these would bring the total to 54 clubs. The company also cited club remodels, distribution-center investment, membership value and online/digital capabilities as growth priorities.
- Foreign-exchange volatility, inflation, political and economic instability, supply-chain disruption and limited U.S.-dollar availability remain risks. Honduras began restricting U.S.-dollar allocations; approximately $15.9 million of the subsidiary’s lempira-denominated cash was not readily convertible at May 31. Trinidad continues to face currency-conversion constraints.
- Import clearance delays in Nicaragua in late May and June 2023 temporarily prevented merchandise imports for several weeks. Management said imports had returned to a more normal cadence but warned that uncertainty could reduce Q4 sales; imports represented approximately 53% of sales in that market for the first nine months.
- Click USA and Aeropost asserted claims related to alleged cyberattacks and a separate employment-classification matter following PriceSmart’s Aeropost sale. The company said settlement was probable and offered to release an approximately $750,000 receivable in exchange for releases. The agreement caps liability for the representation-and-warranty claims at $4.0 million; the claimants estimated losses of $2.9 million for the cyber-related claims and approximately $300,000 for the separate claim.
- Management identified CEO transition execution as a risk. It stated that ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes could affect a particular period.
Investor facts to verify
- Whether Colombia’s currency depreciation, pricing actions and membership-account declines continue to pressure reported results and margins.
- Whether the company recovers the substantial VAT and income-tax receivables, particularly after the unfavorable VAT rulings and $2.3 million write-off.
- Whether Honduras and Trinidad currency-conversion constraints, and Nicaragua import delays, affect cash availability, costs or sales.
- Progress, timing and funding for the three planned club openings, remodels and other capital investments, alongside debt maturities and dividend commitments.
- Resolution and final cost of the Aeropost-related claims, and the financial and operational impact of the ongoing CEO transition.