PriceSmart, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2016. Unaudited consolidated results; amounts below are U.S. dollars. PriceSmart operated 38 membership warehouse clubs in 13 countries and territories.
Financial performance and position
- Third quarter: Total revenue was $704.3 million, up 1.0% year over year. Net warehouse club sales were $684.5 million, up 1.4%; membership income was $11.5 million, up 2.6%. Operating income declined 18.0% to $27.5 million. Net income fell 20.6% to $16.8 million, or $0.55 per diluted share, from $21.2 million, or $0.70.
- Nine months: Total revenue was $2.194 billion, up 4.3%; net warehouse club sales rose 4.4% to $2.134 billion. Operating income declined 6.8% to $103.9 million. Net income was $66.5 million, or $2.19 per diluted share, approximately flat with $66.7 million, or $2.20, a year earlier.
- Margins and expenses: Warehouse gross margin was 13.7% in the quarter, down 54 basis points, and 14.2% for nine months, down 52 basis points. Management cited lower margins in Colombia from pricing actions and, elsewhere, more markdowns, reduced endcap activity and higher per-unit distribution costs. Quarterly SG&A increased, including general and administrative expense up 15.7% to $16.4 million.
- Cash flow: Nine-month operating cash flow was $112.2 million, versus $65.7 million in 2015; the improvement included a favorable inventory cash-flow swing. Investing used $51.9 million, primarily for property and equipment. Financing used $11.2 million. Cash increased $45.5 million to $202.6 million.
- Liquidity and debt: At May 31, cash and equivalents were $202.6 million; current assets were $480.9 million and current liabilities $348.9 million. Short-term borrowings were $10.1 million and long-term debt, including current portion, was $87.6 million. Short-term facilities had $45.6 million available; the weighted average rate on short-term borrowings was 6.7%. The company reported compliance with applicable debt covenants.
- Capital returns: The company declared a $0.70-per-share fiscal 2016 dividend, split into two $0.35 payments; the second was payable August 31, 2016. Future dividends remain at the board’s discretion.
Material changes versus the prior comparable period
- Comparable warehouse sales declined 2.8% for the quarter and 0.8% for the nine-month period. Excluding Colombia, comparable sales declined 0.4% in the quarter but increased 2.4% for nine months.
- Colombia was a key drag: quarterly warehouse sales translated into 21% fewer U.S. dollars year over year, while local-currency sales declined 3.8%. For nine months, U.S.-dollar sales in Colombia declined 18.9%, despite 7.7% local-currency growth.
- Central American sales benefited from new clubs in Panama and Nicaragua. Total clubs increased from 36 at the end of the prior-year third quarter to 38.
- Membership accounts were up 3.3% year over year, but the company-wide 12-month renewal rate declined to 80% from 86% at August 31, 2015, largely due to first-year member renewals in Colombia. Excluding Colombia, renewal was 87%.
- Currency transaction losses improved to $0.2 million for the quarter and $1.0 million for nine months, versus losses of $0.3 million and $4.6 million, respectively, in the prior-year periods. Nine-month foreign-currency translation adjustments remained a $4.4 million loss in other comprehensive income.
Outlook, commentary, risks and unusual items
- Management expected the Chia, Colombia warehouse club to open in September 2016. The company continued exploring additional sites; it provided no specific earnings or revenue guidance in the supplied filing text.
- Management said it was accepting lower merchandise margins in Colombia to support value and its longer-term position, including by reducing markups, lowering supply-chain costs and expanding local sourcing. It reported continued new-member sign-ups and improving renewal trends there, while noting renewals remained below other markets.
- Management warned of exposure to currency volatility, particularly the Colombian peso, which can reduce U.S.-dollar reported sales and raise local prices of U.S.-sourced goods. Other cited risks include weaker consumer spending, competition, import and logistics costs, labor and cybersecurity risks, and dependence on successful new-club openings.
- Tax recovery is a significant uncertainty: VAT receivables totaled $31.4 million, including $6.9 million in countries with contested or unclear refund processes; income-tax receivables totaled $13.6 million. The company had not recorded allowances for the disputed balances described and said it expected to prevail. A subsidiary also faced provisional tax assessments of $2.5 million and $5.2 million, for which no provision was recorded based on management’s assessment.
- Capital commitments included a planned Miami-area build-to-suit distribution center for approximately $46 million, expected to be completed in the first half of calendar 2017. Operating lease commitments totaled $115.5 million; construction-service commitments were approximately $5.2 million. Land purchase options could require approximately $16.9 million if exercised.
- The Guatemala Pradera club fire insurance claim was settled in fiscal 2016; the company recorded insurance-related credits and gains. The filing reported no material legal proceedings, no material change in risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether comparable sales and Colombia’s local-currency performance improve, and whether the Chia club opens on schedule.
- Whether membership renewal recovers from 80%, particularly in Colombia, and how new-member retention develops.
- Whether lower gross margins and higher operating and administrative costs continue to pressure operating income.
- The timing and recoverability of disputed VAT and income-tax receivables, and the outcomes of the tax assessments and court challenges.
- Funding and execution of the $46 million distribution-center purchase, other capital spending, debt maturities and the ability to sustain dividends.
- Currency movements and the effects of foreign cash balances: $165.7 million of the reported $202.6 million cash balance was held by foreign subsidiaries, with no current plan to repatriate that cash through subsidiary dividends.