PriceSmart, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, three months ended November 30, 2017. Unaudited results are compared with the three months ended November 30, 2016. PriceSmart operates membership warehouse clubs across Latin America and the Caribbean; it had 40 clubs in 12 countries and one U.S. territory at quarter-end. Amounts below are U.S. dollars.
Financial performance
| Metric | Q1 FY2018 | Prior comparable period | Change |
|---|---|---|---|
| Total revenue | $767.1 million | $739.6 million | +3.7% |
| Warehouse club sales | $745.4 million | $716.1 million | +4.1% |
| Membership income | $12.4 million | $11.7 million | +5.7% |
| Operating income | $33.2 million | $38.4 million | Down $5.2 million |
| Net income | $22.5 million | $24.9 million | Down $2.4 million |
| Diluted earnings per share | $0.74 | $0.82 | Down $0.08 |
| Operating margin | 4.3% | 5.2% | Down 0.9 percentage points |
| Warehouse gross margin | 14.5% | 15.0% | Down 0.5 percentage points |
Comparable warehouse sales increased 2.2%. Sales growth reflected 4.6% more transactions, partly offset by a 0.5% decrease in average ticket. Segment warehouse sales rose 3.1% in Central America, 3.7% in the Caribbean and 10.1% in Colombia. The new Santa Ana, Costa Rica club opened in October.
Operating income fell as merchandise margins narrowed and expenses increased, including costs for the new club, corporate and technology spending, hurricane-related support, and Miami distribution-center exit and labeling costs. Colombia operating income improved by $1.2 million; operating income declined in the other reported operating segments.
Cash flow, balance sheet and debt
- Operating cash flow: Used $10.2 million, compared with $2.1 million provided in the prior-year quarter. Inventory growth used $61.5 million of cash, partly offset by a $21.4 million increase in accounts payable.
- Investing cash flow: Used $19.7 million, primarily for property and equipment additions. Financing cash flow: Used $5.3 million. Cash, cash equivalents and restricted cash declined $33.2 million to $132.5 million; unrestricted cash and equivalents were $129.2 million at November 30.
- Liquidity: Current assets were $544.7 million and current liabilities $393.1 million, giving working capital of approximately $151.7 million. The company reported $66.0 million of available short-term credit facilities and was in compliance with its financial covenants.
- Debt: Long-term debt was $98.6 million, including $18.3 million current; short-term borrowings were $2.5 million. Total reported borrowings were approximately $101.1 million, versus $106.3 million of long-term debt and no short-term borrowings at August 31, 2017.
- Capital investment: Management expected fiscal 2018 capital expenditures of $125 million to $140 million. The filing reports $23.5 million of segment capital expenditures, net, for the quarter.
Outlook, commentary and material risks
- Management expected to open a fourth Dominican Republic club in spring 2018. It also planned to begin operating a new Costa Rica distribution center in fiscal Q4 2018 and had occupied a new Panama distribution center in September 2017.
- The company designated an additional $3 million to $5 million of fiscal 2018 technology spending to evaluate an ERP system and develop an online business targeted for summer 2018. Most of this spending was expected to be expensed; $735,000 had been spent in Q1.
- Management anticipated continued semiannual dividends, subject to board approval and capital needs. No dividend was declared in the quarter.
- Trinidad’s limited availability of U.S. dollars remained a significant operating and currency risk. The subsidiary had $12.1 million of net U.S.-dollar-denominated liabilities at quarter-end, compared with $4.0 million of net assets at August 31. Management said it could limit U.S. merchandise shipments if access to tradable currencies remained inadequate.
- Hurricanes Irma and Maria disrupted the U.S. Virgin Islands business in September; operations returned to normal in October and November. Political unrest in Honduras, economic weakness in Trinidad and other markets, foreign-exchange volatility, import and supply risks, competition, and technology and cybersecurity risks were also discussed.
- Tax receivables included $33.0 million of VAT receivables and $20.4 million of income-tax receivables. Recovery can take months or years; the company reported disputes and said it had not recorded allowances against these receivables. It also disclosed tax assessments of $2.7 million and $5.5 million in one jurisdiction, which it contests and for which it had made advance payments, without recording a provision.
- U.S. tax legislation enacted in December 2017 was expected to cause a one-time noncash expense in fiscal Q2 from remeasuring certain deferred tax assets and a tax expense related to accumulated foreign profits. The amounts were not yet clear in the filing; management expected a favorable ongoing effective-tax-rate effect, partly offset by excess foreign tax credits.
- Management said pending legal proceedings were not expected to have a material adverse effect; Part II reports no legal proceedings. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether sales growth and improved comparable sales persist, and whether merchandise margins recover from the year-over-year decline.
- Whether higher operating costs, including technology investment and new-club expenses, continue to pressure operating profit and earnings.
- Progress in resolving Trinidad’s U.S.-dollar liquidity constraints and the resulting exposure to currency devaluation or shipment limits.
- Recoverability and timing of disputed VAT and income-tax receivables, and outcomes of the tax assessments and appeals.
- The quantified fiscal 2018 capital spending, U.S. tax-law impacts, and launch timing and investment needs for the planned online business.
- Cash generation after seasonal inventory build, while funding planned construction, expansions and dividends.