PriceSmart, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended February 28, 2015; amounts below are in U.S. dollars. Financial statement amounts are shown in millions unless otherwise noted. PriceSmart operated 36 membership warehouse clubs across 13 countries and territories, up from 32 clubs a year earlier.
Financial performance
- Second-quarter revenue: $750.3 million, up 11.3% year over year. Net warehouse club sales were $732.1 million, up 11.4%; comparable sales increased 1.4%. Membership income rose 14.9% to $10.9 million.
- Six-month revenue: $1,406.3 million, up 9.9%; net warehouse club sales increased 9.8% to $1,368.5 million.
- Profit: Q2 operating income was $41.7 million versus $39.4 million; net income was $24.8 million versus $28.3 million, and diluted EPS was $0.82 versus $0.93. For six months, operating income was $78.0 million versus $71.7 million; net income was $45.5 million versus $49.7 million, and diluted EPS was $1.50 versus $1.64.
- Margins: Q2 warehouse gross margin was 14.5%, essentially unchanged; operating income was 5.7% of warehouse sales versus 6.0% a year earlier. Six-month warehouse gross margin improved to 14.9% from 14.5%; operating income was 5.7% of warehouse sales versus 5.8%.
- Cash flow: Six-month operating cash flow was $11.9 million, down from $35.7 million. Merchandise inventory increased $54.9 million, a significant use of cash. Investing used $43.8 million, including $42.2 million of property and equipment additions; financing provided $14.2 million. Cash and equivalents declined $17.9 million to $119.2 million.
- Liquidity and debt: Current assets were $443.0 million and current liabilities $331.1 million (current ratio approximately 1.34). Long-term debt, including current maturities, was $105.1 million; short-term borrowings were $4.5 million. The company reported $54.5 million of available short-term facilities and compliance with applicable debt covenants. Restricted cash totaled $26.9 million.
- Capital returns: A $0.70 per-share dividend was declared, split into two $0.35 payments. The board retains discretion over future dividends.
Changes versus the prior period
- Revenue and operating income grew, but net income and EPS declined. Q2 results included a $1.7 million net currency loss, compared with a $0.7 million gain; six-month currency loss was $4.3 million versus a $1.0 million gain.
- Colombia was the principal pressure point: the peso depreciated approximately 29% against the U.S. dollar during the six-month period. Management attributed about $0.16 per share of Q2 year-over-year net-income decline to Colombia; growth elsewhere contributed about $0.05 per share.
- Q2 Colombian warehouse margins fell 258 basis points year over year as the company reduced margins to limit price increases on imported goods. Across the company, Q2 warehouse gross margin was down 2 basis points; six-month margin benefited from lower distribution costs, reduced shrink, vendor rebates and demonstrations.
- Interest expense rose as borrowing and hedging activity increased to fund construction and expansion. The effective tax rate rose to 35.3% for Q2 from 28.2%, and to 36.1% for six months from 30.2%, including the effect of Colombian losses for which no tax benefit was recognized.
- The company opened three clubs in Colombia in October and November 2014, bringing its Colombian total to six. It also added Colombia as a separate reporting segment; prior-period segment disclosures were retrospectively recast.
Outlook, risks and unusual items
- Management scheduled the fifth Panama club, in La Chorrera, to open in summer 2015 and said it continues to explore additional sites, particularly in Colombia. It provided no specific consolidated revenue or earnings guidance.
- Management described market conditions as challenging in some countries, citing weaker economies, crime and violence, lower oil prices and currency movements. It expects Colombia’s peso-related pressure to be less acute after intercompany U.S.-dollar liabilities were reduced to a more normal level, but said future currency effects cannot be forecast reliably.
- Management said it is willing to accept lower Colombian merchandise margins to support member value and its long-term position. It reported strong Colombian membership sign-ups and growth in local-currency sales and transactions.
- Tax matters warrant attention. VAT receivables in two countries were $6.3 million and subject to disputes over refund procedures. A subsidiary received provisional tax assessments of $2.6 million for withholding taxes and $5.2 million for related deductibility issues; the company expects to prevail and recorded no provision. The company also disclosed a new minimum income tax regime it has appealed.
- Six-month other comprehensive loss was $19.1 million, primarily reflecting $22.6 million of foreign-currency translation losses, partly offset by derivative gains. These translation adjustments do not affect net income unless the underlying investment is sold or liquidated.
- After quarter-end, the Honduras subsidiary repaid approximately $8.2 million on a loan and entered into an $8.5 million five-year Citibank facility, with a related currency and interest-rate swap. Management reported no material change in risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether Colombian currency movements, import costs and margin reductions continue to weigh on reported sales, earnings and cash flow.
- Whether the company converts its strong reported sales growth and membership-account growth into improved net income and operating cash flow.
- Inventory levels, working-capital requirements, capital spending and borrowing needs as the Panama club project advances.
- Recoverability and timing of disputed VAT and income-tax receivables, and the outcomes of the disclosed tax assessments and appeals.
- Debt maturities, covenant headroom, collateral and the effectiveness and costs of currency and interest-rate hedges.