PRICESMART INC annual report, FY2012

PriceSmart, Inc. — FY2012 Form 10-K

Reporting period: Fiscal year ended August 31, 2012. The filing also reports fourth-quarter results; fiscal Q4 ended August 31, 2012. PriceSmart operates membership warehouse clubs across Latin America and the Caribbean, with 29 clubs in 12 countries and one U.S. territory at year-end.

Financial performance and position

MetricFY2012FY2011
Total revenue$2.051 billion$1.714 billion
Net warehouse club sales$2.000 billion$1.675 billion
Operating income$107.9 million$88.6 million
Net income attributable to PriceSmart$67.6 million$61.8 million
Diluted earnings per share$2.24$2.07
Warehouse gross margin14.8%15.0%
Effective tax rate34.1%30.7%
Operating cash flow$89.9 million$75.6 million
Cash and cash equivalents at year-end$91.2 million$76.8 million
Long-term debt, including current portion$78.7 million$68.2 million

Annual sales increased 19.4%; transaction growth was 17.7% and average transaction value grew 1.4%. Comparable club sales rose 14.5% for the 52-week comparison. Operating margin was approximately 5.3% of total revenue; warehouse gross margin declined 14 basis points as price reductions and initial import costs for the Barranquilla club weighed on the rate. Net income increased 9.5%, slower than operating income growth, partly reflecting higher taxes and a shift from a prior-year foreign-exchange gain to a FY2012 loss.

FY2012 investing cash outflow was $52.6 million, including $52.7 million in property and equipment additions. Financing cash outflow was $25.1 million, including $18.1 million of dividends. Current assets were $336.6 million and current liabilities $234.7 million; the balance sheet also included $37.7 million of restricted cash. Debt covenants were reported in compliance, and $36.2 million of short-term credit facilities were available, excluding letters of credit.

Fourth quarter: Net warehouse sales grew 14.4% year over year and comparable sales rose 10.1%. Membership income increased 21.6% to $7.3 million; operating income was $27.9 million, up $10.2 million; net income was $17.7 million, or $0.58 per diluted share, versus $12.7 million, or $0.42, a year earlier.

Material changes versus the prior period

  • FY2012 revenue, warehouse sales, operating income and net income all increased year over year. Sales growth slowed through the year: quarterly year-over-year growth was 24%, 22%, 17% and 14%; comparable sales growth was 19%, 17%, 13% and 10%.
  • Latin America sales rose 24.1% to $1.316 billion, aided by the Barranquilla club; Caribbean sales rose 11.2% to $683.7 million.
  • Membership accounts increased 16% to 965,601; annual renewal was 88%. Membership fees were raised by about $5 in most markets effective June 1, 2012.
  • Foreign-exchange transactions produced a $525,000 loss, compared with a $3.1 million gain in FY2011. The Colombian peso’s first-quarter decline contributed to losses.
  • Debt increased by about $10.4 million to $78.7 million, principally reflecting expansion borrowing. Capital spending and land acquisitions also increased.
  • FY2011 included a $2.3 million depreciation correction and a $3.1 million tax benefit from correcting a deferred-tax reconciliation error. Management said prior-period errors were not material to individual periods and did not require restatement. FY2012 included an $8.9 million charge to other comprehensive loss related to subsidiary mergers and currency-translation corrections.

Outlook, risks and other notable matters

  • Management anticipated two FY2013 club openings: a second Cali, Colombia location targeted for spring 2013 and a sixth Costa Rica location targeted for fall 2013. A south Cali club opened October 19, 2012, after year-end.
  • The company invested approximately $21.6 million in existing-club expansions and improvements during FY2012 and continued developing distribution capacity in Costa Rica and Panama. No numerical revenue or earnings guidance is provided in the filing text.
  • Key risks include foreign-exchange volatility, political and economic instability, competition and possible entry by warehouse-club rivals, import and shipping disruptions, weather and natural disasters, and dependence on suitable sites and effective management of dispersed operations. About 79% of warehouse sales were denominated in foreign currencies; about 50.2% of sales related to imported products.
  • Other exposures include product liability and recalls, potential asset impairments, tax audits and uncertain tax positions, and environmental indemnities relating to former properties. Management said ordinary-course legal claims were not expected to have a material adverse effect. No FY2012 goodwill or long-lived-asset impairment was recorded.
  • Two material weaknesses in FY2011 controls—foreign-currency translation of fixed assets/depreciation and deferred-tax reconciliations—were reported as remediated by August 31, 2012. Management and Ernst & Young concluded internal control over financial reporting was effective; the auditor issued an unqualified opinion on the financial statements.
  • Potentially notable contingent commitment: PriceSmart had agreed to purchase land at fair market value, estimated at approximately $4.1 million, if a neighboring owner could not develop its land due to water-retention improvements. No liability was recorded at year-end.

Important facts for investors to verify

  • Whether the deceleration in quarterly comparable sales continued after FY2012, and whether new club openings deliver planned sales and returns.
  • The effect of currency movements on translated revenue, import affordability, financing costs and reported earnings.
  • Whether gross-margin pressure, debt growth and capital spending remain consistent with the company’s expansion and cash-generation plans.
  • The terms and timing of debt maturities, collateralized cash, covenant requirements and planned joint-venture contributions.
  • Developments in tax audits, deferred-tax asset realization, the Alajuela land indemnity and other environmental obligations.