PriceSmart, Inc. — Q2 FY2014 Form 10-Q
Reporting period: Three and six months ended February 28, 2014. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless otherwise noted.
Business context and reporting period
PriceSmart operates membership warehouse clubs across Latin America and the Caribbean. At quarter-end it had 32 clubs in 12 countries and one U.S. territory, up from 30 a year earlier. The company reported three- and six-month results compared with the same periods of fiscal 2013.
Financial performance and position
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Total revenue | $674.4m | $607.4m | $1,280.0m | $1,142.7m |
| Net warehouse club sales | $657.2m | $591.9m | $1,246.9m | $1,115.5m |
| Operating income | $39.4m | $36.4m | $71.7m | $66.1m |
| Net income | $28.3m | $24.9m | $49.7m | $44.9m |
| Diluted EPS | $0.93 | $0.82 | $1.64 | $1.48 |
| Net cash from operating activities | Not stated separately | Not stated separately | $35.7m | $61.1m |
| Capital expenditures | Not stated separately | Not stated separately | $58.1m | $38.7m |
- Q2 total revenue increased 11.0%; net income rose 13.6%. For the six-month period, total revenue increased about 12.0% and net income 10.7%.
- Warehouse gross margin was 14.5% in Q2, down 19 basis points year over year; for six months it was 14.5%, down 35 basis points. Operating income was 6.0% of warehouse sales in Q2 versus 6.2%, and 5.8% for six months versus 5.9%.
- Cash and cash equivalents were $75.3m at February 28, 2014, down from $121.9m at August 31, 2013. Restricted cash totaled $29.1m. Current assets were $348.6m and current liabilities $284.2m.
- Long-term debt, including current maturities, was $60.2m, down from $73.0m at August 31, 2013; $18.9m was due within the next 12 months. The company reported $35.9m of available short-term credit facilities and compliance with applicable covenants or written waivers at quarter-end.
- Cash from operations fell year over year as inventory and other operating assets absorbed cash and accounts-payable growth was much lower. Investing cash outflow increased with club construction, land purchases, and equipment spending.
- The company declared a $0.70-per-share dividend, split into two $0.35 payments; the first was paid in February and the second was scheduled for August, subject to the stated terms.
Material changes and management commentary
- Q2 warehouse sales grew 11.0%, with transactions up 10.2% and average ticket up 0.7%. Comparable warehouse sales rose 6.7% for the 13-week period ended March 2, 2014. Member accounts increased 11.4% to about 1.15 million; the reported renewal rate was 85%.
- Management attributed growth in part to new clubs in Colombia and Costa Rica. Latin American warehouse sales grew faster than Caribbean sales, with new locations contributing to the difference.
- Management said lower merchandise margins reflected efforts to offer members lower prices. New clubs also added operating costs; corporate and U.S. buying expenses rose with staffing needs, though remained flat as a share of warehouse sales in Q2.
- Q2 included a $0.7m currency transaction gain, versus a $0.3m loss a year earlier. Six-month other comprehensive loss was $11.4m, primarily from foreign-currency translation, and reduced reported equity but did not flow through current-period net income.
- Management planned four club openings within 12 months: one in Honduras and three in Colombia. Planned openings included Pereira, Medellin, and Bogota in Colombia, and a third Honduras club; timing was subject to execution. Management also noted suitable land is difficult to secure, particularly in Colombia.
- After quarter-end, the Panama subsidiary entered a $34.0m credit facility and drew $24.0m in April, partly to repay $4.0m of existing borrowings and support expansion. The Honduras subsidiary drew a roughly $13.8m loan in March, bearing a variable rate initially stated at 12.75% with a 12.5% floor.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management expects Latin American sales growth to outpace Caribbean growth as planned openings proceed and anticipates ongoing semiannual dividends, but future declarations remain at the board’s discretion.
- Foreign-exchange exposure is significant: about 79% of warehouse sales were in foreign currencies, while about 53% involved products purchased in U.S. dollars and imported. Management cited devaluations, including in Costa Rica and Colombia, as pressures on translated sales, import costs, and demand.
- A $4.7m VAT receivable in one country is subject to a government dispute and audit; the company recorded no allowance, said it expects to prevail, and noted that refunds can take months or years. The company also paid $2.7m in an appealed income-tax case, recorded as a non-current asset pending expected recovery.
- Other contingencies include $2.9m accrued for non-income-tax matters, $25.6m of construction-service commitments not yet performed, and $2.4m of potential future contributions to real-estate joint ventures. Management said it could not reasonably estimate sensitivity of certain recorded contingency liabilities.
- The company disclosed that 77 of approximately 2.2 million members were identified as Cuban nationals. It suspended their shopping privileges, reported the matter to OFAC, and requested a license to resume sales to Cuban diplomats. It was screening members against OFAC’s SDN list; preliminary review identified no SDNs.
- Management cited competition, economic and political conditions, weather and natural disasters, import and supply-chain risks, currency volatility, tax exposures, and successful execution of new-club openings as key business risks. No material change in reported risk factors was noted. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether planned Colombia and Honduras openings meet stated timelines, budgets, and expected returns.
- Whether operating cash flow recovers as inventory investment and new-club spending normalize, and how the company funds its capital program.
- Whether currency movements continue to pressure reported sales, margins, and accumulated other comprehensive loss, and how effective hedges prove to be.
- The status and recoverability of the disputed VAT receivable and appealed income-tax payment, along with any changes in tax reserves.
- The outcome of the OFAC license request and any further findings from the company’s sanctions-compliance review.
- Debt maturities, covenant compliance, and the terms and use of post-quarter-end Panama and Honduras borrowings.