PriceSmart, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended February 28, 2017; comparative periods ended February 29, 2016. Amounts below are in U.S. dollars, generally millions unless stated otherwise. PriceSmart operated 39 membership warehouse clubs across 13 countries and territories.
Financial performance and position
- Second quarter: Total revenue was $793.3 million, up 2.0% year over year; warehouse sales were $772.3 million, up 1.8%. Operating income was $39.4 million, up 0.7%; net income was $27.2 million, up 4.9%; diluted EPS was $0.90 versus $0.85.
- First six months: Total revenue was $1,532.9 million, up 2.9%; warehouse sales were $1,488.4 million, up 2.7%. Operating income was $77.8 million, up 1.8%; net income was $52.1 million, up 5.0%; diluted EPS was $1.72 versus $1.63.
- Margins: Warehouse gross margin was 14.6% in the quarter, up 40 basis points, and 14.8% for six months, up 43 basis points. Management attributed improvement chiefly to Colombia, including fewer markdowns. Operating income as a percentage of warehouse sales was 5.1% for the quarter and 5.2% for six months, versus 5.2% and 5.3%, respectively, a year earlier.
- Cash flow: Six-month operating cash flow was $64.4 million, down from $69.6 million. Cash used in investing was $87.1 million, mainly reflecting property and equipment additions of $87.0 million. Financing provided $6.3 million. Cash and equivalents fell $17.5 million to $182.0 million; operating cash flow less property and equipment additions was approximately negative $22.6 million.
- Liquidity and debt: Current assets were $507.1 million and current liabilities $366.2 million (current ratio approximately 1.38). Cash was $182.0 million, including $155.5 million held by foreign subsidiaries; restricted cash totaled $3.5 million. Short- and long-term debt totaled approximately $123.1 million, compared with $104.6 million at August 31, 2016; cash exceeded debt by about $58.9 million. Available short-term credit facilities were $62.4 million. The company reported compliance with applicable debt covenants.
- Shareholder distributions: A $0.70-per-share dividend was declared, payable in two $0.35 installments; $10.6 million was paid during the six months.
Changes and operating trends
- Colombia was the strongest growth market: second-quarter warehouse sales rose 38.4% and six-month sales rose 30.5%, supported by the Chia club opened in September 2016 and a more stable peso. The company also reported improving comparable sales in Colombia.
- Caribbean warehouse sales declined 4.6% in the quarter and 3.5% for six months, with Trinidad a significant contributor. Central American sales declined 0.2% in the quarter but increased 1.5% for six months. Comparable warehouse sales grew 2.1% for the quarter and 1.1% for six months.
- Membership income increased 4.9% in the quarter and 3.5% for six months. Total membership accounts rose 3.4% year over year; the reported 12-month renewal rate improved to 83% from 80% at August 31, 2016.
- Warehouse operating expenses rose 4.7% in the quarter and 6.1% for six months, faster than warehouse sales. General and administrative expenses increased 12.5% and 10.6%, respectively, reflecting buying-department staffing, deferred compensation, IT costs and, for the six-month period, executive relocation costs.
Outlook, risks and notable items
- Outlook and investment: No earnings guidance is provided. Management planned one new club in Santa Ana, Costa Rica, for fall 2017 and estimated approximately $70 million of additional fiscal 2017 capital expenditures. It expected to transfer most Miami distribution-center activity to its newly acquired facility by the end of fiscal Q3. The $46 million acquisition was financed in part by a $35.7 million, 10-year loan; a related swap fixes the rate at 3.65% from March 1, 2017.
- Trinidad foreign-exchange and liquidity exposure: Limited access to U.S. dollars led the company to reduce imported shipments, adversely affecting sales, particularly in December. Management said currency sourcing had recently improved but the problem remained. Trinidad had approximately $16.0 million of U.S.-dollar liabilities exposed to potential local-currency devaluation; a hypothetical 20% devaluation would produce an estimated $3.2 million expense impact. Further shipment limits and product shortages remained possible.
- Tax recoverability and disputes: VAT receivables were $35.8 million, including $8.7 million in three countries with refund-process disputes; income tax receivables were $16.8 million. No allowance was recorded, as management expected recovery. A subsidiary also disputed tax assessments of $2.5 million and $5.1 million and recorded no provision. These judgments create potential recovery and tax-liability risk.
- Other commitments and contingencies: Future minimum operating lease commitments were $142.0 million, up from $120.9 million at August 31, 2016, principally following an extension of the Guatemala Pradera lease through 2043. Construction service commitments were $8.2 million. The company said pending legal matters were not expected to materially affect its financial position, results or liquidity; Part II reported no legal proceedings.
- Currency and seasonality: Currency translation and transaction movements affect reported results; six-month currency transaction loss was minimal at $0.013 million, compared with a $0.796 million loss a year earlier. Management cautioned that quarterly results vary with currency, economic and political conditions, holidays, weather and shipment timing. It identified sluggish conditions in some markets, including Trinidad.
Most important facts for investors to verify
- Whether Trinidad’s access to tradable currency improves, and whether its $16.0 million exposure or merchandise shipments change materially.
- Recovery timing and collectability of VAT and income tax receivables, including disputed balances for which no allowance was recorded.
- Whether sales and comparable-sales growth persist in Colombia and recover in the Caribbean and Costa Rica, alongside expense growth.
- Actual capital spending, Miami facility transition costs or lease exit charges, and progress toward the planned Costa Rica opening.
- Debt, cash availability by jurisdiction, covenant compliance and the effect of foreign-exchange movements on liquidity and earnings.