PriceSmart, Inc. — FY2016 Form 10-K
Business and reporting period. PriceSmart operates membership warehouse clubs across Latin America and the Caribbean. This 10-K covers the fiscal year ended August 31, 2016; the filing also highlights fourth-quarter results, including comparable sales for the 14 weeks ended September 4, 2016. The company operated 38 clubs at fiscal year-end, compared with 37 a year earlier. Amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total revenue | $2,905.2 million | $2,802.6 million | +3.7% |
| Net warehouse club sales | $2,820.7 million | $2,721.1 million | +3.7% |
| Operating income | $136.7 million | $146.4 million | -6.6% |
| Net income | $88.7 million | $89.1 million | -0.5% |
| Diluted EPS | $2.92 | $2.95 | -1.0% |
| Warehouse gross margin | 14.3% | 14.7% | -40 basis points |
| Operating cash flow | $139.9 million | $110.5 million | +$29.4 million |
| Cash capital additions to property and equipment | $77.7 million | $89.2 million | -$11.5 million |
- Cash and cash equivalents were $199.5 million; current assets were $512.6 million and current liabilities were $367.9 million. The resulting current ratio was approximately 1.39.
- Long-term debt, including its current portion, was $88.1 million; short-term borrowings were $16.5 million. Cash exceeded these borrowings by approximately $94.3 million, excluding restricted cash.
- Cash increased $42.5 million during the year. Net cash used in investing activities was $78.2 million; financing activities used $16.5 million.
- The annual dividend was $0.70 per share, unchanged from FY2015.
Material changes and fourth-quarter results
- FY2016 comparable warehouse sales declined 0.8%; excluding Colombia, comparable sales increased 1.7%. Net warehouse sales growth reflected a 6.2% increase in transactions and a 2.4% decrease in average sale.
- Colombia net warehouse sales fell 15.8% in U.S. dollars, although local-currency sales grew 6.0%. Currency translation and price pressure on imported goods weighed on results. Colombia’s operating loss widened to approximately $5.0 million from $1.5 million.
- Central America sales rose 8.2%, supported in part by new clubs in Panama and Nicaragua; Caribbean sales rose 2.3%. Consolidated operating income declined as weaker margins and higher expenses offset sales growth.
- Fourth-quarter net warehouse sales increased 1.3%, while comparable sales declined 1.2%. Membership income increased 0.7% to $11.6 million. Operating income was $32.8 million, down $2.1 million year over year; net income was $22.3 million, or $0.74 diluted EPS, versus $22.4 million, or $0.75.
- Membership income for the year increased 4.8% to $45.8 million, but the overall renewal rate fell to 80% from 86%, primarily reflecting weaker renewals among new Colombian members. Excluding Colombia, renewal was 87%.
- The effective tax rate declined to 32.6% from 34.8%, partly because of an intercompany transaction involving the Colombian subsidiary. Currency transaction losses improved to $0.9 million from $4.4 million; foreign-currency translation remained a significant factor in comprehensive income.
Outlook, risks, and other notable items
- Trinidad currency constraints: Limited access to U.S. dollars restricts the subsidiary’s ability to pay for imports. The company anticipated reducing U.S. shipments by about 20% over three months, potentially lowering second-quarter FY2017 sales by an estimated $8–$10 million. It reported $18.9 million of net U.S.-dollar liabilities exposed to Trinidad-dollar devaluation; a hypothetical 20% devaluation would have an estimated $3.8 million effect on other expense.
- Investment plans: The Chia, Colombia club opened in September 2016. The company expected approximately $130 million of FY2017 capital spending for equipment replacement and building or leasehold improvements, in addition to approximately $1.5 million of warehouse-club construction commitments. A Medley, Florida distribution center purchase was contracted for approximately $46 million, with completion expected in the first half of calendar 2017.
- Colombia strategy: Management described long-term growth there as a priority and said it was prepared to accept lower merchandise margins to build market position. Actions include seeking local suppliers and supply-chain savings. Online sales remain a small share of total sales, but the company intends to expand multichannel offerings.
- Key risks: Foreign-exchange volatility and currency convertibility, political and economic conditions, import and supply-chain disruption, competition, cost inflation, site availability, natural disasters, cybersecurity and tax uncertainty could materially affect results.
- Tax and legal exposures: The company reported $34.1 million in VAT receivables and $16.8 million in income-tax receivables. Refund and tax-rule disputes remain pending in several markets; management had not recorded allowances on certain disputed receivables based on its expectation of recovery. A subsidiary also faced provisional tax assessments totaling $7.6 million, for which the company expected to prevail and recorded no provision. Ordinary-course legal proceedings were not expected to have a material adverse effect.
- Management and Ernst & Young concluded that internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether Trinidad’s access to tradable currency improves and whether the planned shipment cuts produce the estimated sales impact.
- Whether Colombian local-currency sales and membership renewals continue to improve, and whether lower pricing stabilizes margins and operating performance.
- How the 80% company-wide renewal rate develops, particularly in Colombia, and what it implies for recurring membership income.
- Whether the $46 million distribution-center purchase and FY2017 capital-spending plans proceed on schedule and within budget.
- Recoverability and timing of VAT and income-tax receivables, and the outcomes of the disclosed tax disputes.
- The annual filing provides full-year financial statements; it does not provide a separate, comprehensive fourth-quarter cash-flow or liquidity breakdown.