PriceSmart, Inc. — Form 10-Q Summary
Business context and period. Unaudited results cover the third quarter and first nine months of fiscal 2012, ended May 31, 2012, compared with the periods ended May 31, 2011. PriceSmart operated 29 membership warehouse clubs in 12 countries and one U.S. territory, one more club than a year earlier. Amounts below are U.S. dollars; financial statement amounts are rounded to millions.
Financial performance and position
- Revenue: Third-quarter revenue was $506.8 million, up 17.5%; net warehouse club sales were $494.9 million, up 17.4%. Nine-month revenue was $1,535.3 million, up 21.2%; warehouse sales were $1,501.0 million, up 21.1%.
- Sales drivers: Comparable warehouse sales rose 12.9% for the 13-week period and 16.1% for the 39-week period ended June 3, 2012. Third-quarter transactions increased 17.0%. Membership income rose 19.2% to $6.9 million; accounts increased 19.6% to 949,575 and renewal rates were 89%.
- Profit: Third-quarter operating income was $25.4 million, up 16.1%, while net income was $15.7 million versus $16.3 million. Diluted EPS was $0.52 versus $0.55. Nine-month operating income was $80.0 million, up 13.0%; net income was $49.9 million versus $49.1 million, and diluted EPS was $1.66 versus $1.65.
- Margins and expenses: Warehouse gross margin was 14.8% in the quarter, approximately flat year over year, and 14.6% for nine months versus 15.1%, a 45-basis-point decline. Nine-month operating income was 5.3% of warehouse sales versus 5.7%. SG&A and operating costs included a $777,000 charge for previously unbilled debit-card fees.
- Cash flow: Nine-month operating cash flow was $76.0 million versus $38.8 million. Capital expenditures were $35.8 million, compared with $34.8 million; financing used $12.7 million. Cash increased $28.1 million to $104.9 million. Inventory absorbed $3.0 million of cash, compared with $36.5 million in the prior-year period.
- Liquidity and debt: Current assets were $324.5 million and current liabilities $232.4 million at May 31. Restricted cash totaled $37.9 million, largely related to loan collateral. Short-term borrowings were $2.2 million; long-term debt, including current maturities, was $80.6 million versus $68.2 million at August 31, 2011. The company reported compliance with applicable debt covenants.
- Other: The board-declared dividend was $0.60 per share for the nine-month period; $9.1 million was payable at May 31. Total liabilities were $315.8 million and equity was $400.1 million.
Material changes and unusual items
- Sales growth reflected the additional Barranquilla, Colombia club, the Dominican Republic club operating for a longer comparable period, and growth at existing clubs. Nine-month growth was stronger in Latin America than the Caribbean.
- Nine-month warehouse gross margin declined due to price reductions and elevated initial merchandise import costs for the Barranquilla opening; management said those Colombian import costs had returned to a normal run rate by the third quarter.
- Third-quarter other expense included a $449,000 currency loss, compared with a $1.2 million currency gain a year earlier. The prior-year quarter also included a $1.2 million gain on a Panama property sale. Nine-month currency results were a $735,000 loss versus a $1.9 million gain.
- The company recorded a $9.2 million foreign-currency translation loss in other comprehensive income for the first nine months, primarily including a $5.6 million charge related to a subsidiary merger and a $3.3 million adjustment for prior-period translation errors. Management concluded the prior errors did not require restatement and were not material to individual periods.
- Effective June 1, 2012, annual membership fees increased by approximately $5 in most markets; Diamond membership fees became approximately $35.
Outlook, risks and contingencies
- Management anticipated three club openings in fiscal 2013: south Cali, Colombia, in October 2012; north Cali, Colombia, in spring 2013; and La Union, Costa Rica, in fall 2013. These are plans, not guaranteed outcomes. The company was also investing in club expansions and upgrades.
- Management’s strategy is to use sales growth and operating efficiencies to support low prices and membership growth. It did not provide quantified earnings or revenue guidance.
- Key exposures include foreign-exchange volatility, international operating and import risks, competition, economic conditions, weather and political events. About 79% of warehouse sales were in foreign currencies and about 49% comprised imported products. Management noted currency movements can affect local demand, reported sales, costs and debt-related results.
- Disclosure controls were deemed ineffective because two previously identified material weaknesses remained under remediation: controls over foreign-currency translation of fixed assets and depreciation, and reconciliation of deferred tax assets related to loss carryforwards. Management stated the financial statements fairly presented results in all material respects, but further remediation and testing were needed.
- Contingencies include routine legal and tax matters; management said ordinary-course legal matters were not expected to have a material adverse effect. The company had $2.8 million accrued for non-income-tax contingencies. A Costa Rica water-retention-basin matter included a potential land-purchase obligation estimated at $4.1 million if adjacent land could not be developed; no liability was recorded.
- Management cautioned that quarterly results may vary with seasonality, shipment timing, product mix, currency changes and local economic or political events. It stated that no material changes had occurred in the risk factors from its prior annual report.
Important facts for investors to verify
- Whether comparable-sales growth and membership-account gains persist, and how the June fee increase affects renewals and member demand.
- Whether gross margins stabilize after the temporary Colombia import-cost pressure and whether operating expenses leverage as sales grow.
- How foreign-exchange movements, including currency remeasurement and translation, affect earnings, cash flows and equity.
- Progress on the two material-weakness remediations and any further accounting or control adjustments.
- Actual timing, capital requirements and returns for planned club openings, alongside restricted-cash requirements and rising debt.
- Developments in the Costa Rica land indemnity and tax contingencies, and whether recorded reserves remain adequate.