PriceSmart, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended August 31, 2014. The filing also reports fourth-quarter results for the three months ended August 31, 2014. Unless noted, amounts are U.S. dollars.
Business context
PriceSmart operates membership warehouse clubs across Latin America and the Caribbean, with U.S.-based buying and distribution operations. It had 33 clubs in 12 countries and one U.S. territory at year-end, compared with 31 a year earlier. Membership fees, high-volume purchasing, and distribution efficiencies support its low-price model.
Financial performance and liquidity
| Metric | FY2014 | Prior comparable period |
|---|---|---|
| Total revenue | $2.518 billion | $2.300 billion |
| Net warehouse club sales | $2.444 billion; up 9.2% | $2.239 billion |
| Operating income | $136.7 million; 5.4% of revenue | $127.0 million; 5.5% of revenue |
| Net income | $92.9 million | $84.3 million |
| Diluted EPS | $3.07 | $2.78 |
| Net cash from operating activities | $137.3 million | $130.6 million |
- Warehouse gross profit was $360.4 million, with a 14.7% margin, down 7 basis points year over year. Selling, general and administrative expense excluding pre-opening and asset-disposal costs was approximately 10.7% of warehouse sales, essentially flat.
- Cash and cash equivalents were $137.1 million; restricted cash was an additional $29.4 million and is not all freely available. Current assets were $402.5 million and current liabilities $302.2 million.
- Long-term debt, including its current portion, increased to $91.4 million from $73.0 million. No short-term borrowings were outstanding against $61.9 million of facilities at year-end. The company reported compliance with applicable debt covenants.
- Investing activities used $119.6 million, principally for property, construction, and equipment. Property and equipment additions were $118.1 million. Dividends paid totaled $21.1 million, or $0.70 per share.
Fourth-quarter results and changes
- Net warehouse club sales increased 5.6% year over year; comparable sales rose 1.8% for the quarter. Full-year comparable sales increased 4.8%, while transactions grew 8.1% and average ticket grew 1.0%.
- Quarterly membership income increased 7.9% to $9.8 million. Warehouse gross margin was 15.2%, up 12 basis points year over year; management cited low shrink and markdown activity and supplier rebates.
- Quarterly operating income was $33.8 million, up $1.3 million. Net income was $21.9 million, or $0.73 per diluted share, versus $20.8 million, or $0.69, a year earlier.
- Quarterly currency transactions produced a $528,000 net loss, compared with a $97,000 gain in the prior-year quarter. For the full year, currency transactions produced a $984,000 gain versus a $954,000 loss.
- Full-year membership accounts grew 7.9% to 1,182,355; the renewal rate was 84%, versus 85% in FY2013. Management attributed membership-income growth to account growth and previously increased fees.
Outlook, risks, and unusual items
- Management anticipated four FY2015 openings: three in Colombia and one in Panama. The Bogota club opened October 29, 2014; the Pereira and Medellin clubs were planned for November 2014. The Panama club was scheduled for summer 2015. No specific revenue or earnings guidance is provided.
- Management expects growth to depend on comparable-sales execution, new clubs, and operating leverage, while noting that new clubs can divert sales from existing locations. Openings in Costa Rica and Honduras weighed on comparable sales during FY2014.
- Foreign-exchange exposure is significant: about 79% of FY2014 warehouse sales were denominated in foreign currencies, and approximately 52% comprised products purchased in U.S. dollars and imported. The Costa Rican colón devalued about 10% in February 2014; management said this hurt local purchasing power and sales.
- Management cited slower economic activity in Costa Rica, Jamaica, Honduras, and El Salvador; competitive pricing pressure in Barbados; and potential competition from retailers expanding in Central America. Other material risks include political and regulatory changes, import and shipping disruptions, natural disasters, and tax uncertainty.
- Tax matters include $4.1 million of accrued net liabilities for tax contingencies and approximately $4.2 million of tax prepayments under appeal. After year-end, a subsidiary received provisional assessments totaling $7.7 million; PriceSmart expected to prevail and recorded no provision. A disputed-country VAT receivable was $5.1 million, included within total VAT receivables of $20.7 million.
- PriceSmart reported effective disclosure controls and internal control over financial reporting; Ernst & Young issued unqualified opinions on the financial statements and internal controls. The company also disclosed an OFAC membership-screening matter: 77 Cuban-national members had their privileges suspended, and OFAC later licensed sales to eligible diplomats and dependents stationed outside Cuba.
Most important facts for investors to verify
- Whether new-club openings and comparable-sales trends translate into sustained growth without cannibalizing existing clubs.
- How foreign-exchange movements affect reported sales, purchasing power, margins, and the value of U.S.-dollar balances.
- Whether operating cash flow remains sufficient to fund expansion, dividends, and debt service as capital spending rises.
- The outcomes and timing of disputed tax assessments and VAT refunds, including the unprovided-for $7.7 million provisional assessments.
- Whether margin performance is sustainable: the full-year warehouse margin declined despite a stronger fourth quarter and supplier rebates that management said could be passed on to members.