PriceSmart, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended May 31, 2020; fiscal year ending August 31. Amounts below are U.S. dollars. The filing is unaudited.
Business context
PriceSmart operated 45 membership warehouse clubs in 12 countries and one U.S. territory at quarter-end, plus its Aeropost marketplace and casillero business. It opened a 46th club in Liberia, Costa Rica, on June 17, 2020, and expected to open a third club in Bogotá in fiscal Q2 2021. The company launched Click & Go curbside pickup during the quarter and had extended it to substantially all clubs by June.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $799.9M | $788.6M | $2,518.6M | $2,422.6M |
| Net merchandise sales | $768.4M | $755.0M | $2,418.8M | $2,322.7M |
| Operating income | $24.0M | $22.0M | $93.5M | $83.2M |
| Net income attributable to PriceSmart | $12.7M | $14.1M | $58.0M | $52.5M |
| Diluted EPS | $0.41 | $0.46 | $1.90 | $1.73 |
- Third-quarter revenue increased 1.4%, but comparable merchandise sales fell 3.6%. Average ticket rose 21.7% while transactions fell 16.4%, reflecting COVID-related restrictions and customer behavior.
- Q3 merchandise gross margin was 13.9%, unchanged year over year; nine-month margin was 14.5%, up 0.5 percentage point. Nine-month operating margin rose to 3.7% from 3.4%.
- Q3 interest expense was $2.6M versus $0.9M, and the effective tax rate rose to 38.0% from 34.7%; both weighed on quarterly earnings despite higher operating income.
- Nine-month operating cash flow was $174.1M, versus $113.0M. The increase primarily reflected working-capital improvement, including lower inventory. Investing cash outflow was $114.0M, including $89.7M of property and equipment additions. Financing provided $101.5M, mainly from borrowings.
- At May 31, cash and cash equivalents were $261.8M, short-term investments $40.0M, and restricted cash $4.2M. Short-term borrowings were $70.9M and long-term debt was $139.8M. Operating lease liabilities totaled $134.7M; lease adoption makes the balance sheet not directly comparable with August 2019.
- Current liabilities were $493.2M against current assets of $606.5M. The company declared a $0.70-per-share dividend, payable in two $0.35 installments; the second installment was payable August 31, 2020.
Material changes and management commentary
- COVID-19 restrictions—including club closures, reduced hours, capacity limits and limits on who could shop—reduced traffic and transactions. Product mix shifted toward essential goods, with intermittent supply-chain challenges.
- Reported Q3 merchandise sales increased 1.8%, but foreign exchange reduced sales by $19.3M, or 2.5%; comparable sales were down 3.6%. Colombia was particularly weak, with Q3 reported sales down 14.5% and comparable sales down 14.8%, amid peso devaluation and restrictions. Caribbean reported sales rose 9.6% and Central America rose 1.2%.
- Management temporarily paused many capital projects and discretionary spending, drew on credit facilities to preserve liquidity, negotiated extended vendor terms, and used tax deferrals where available. It resumed selected construction and said cash, operating cash flow and capital access were expected to cover anticipated needs, while continuing to reassess investment timing.
- Short-term borrowings increased to $70.9M from $7.5M at August 31, 2019; long-term debt rose to $139.8M from $89.6M, partly reflecting new subsidiary loans and COVID-related liquidity measures. The company reported compliance with debt covenants.
- Currency translation and derivative losses drove nine-month other comprehensive loss of $23.7M. The filing highlights Trinidad dollar illiquidity: $72.3M of Trinidad-dollar cash and investments (measured in U.S. dollars) were exposed to possible devaluation. A hypothetical 20% devaluation would reduce their U.S.-dollar value by about $14.5M, with an offsetting potential $2.2M gain on a separate U.S.-dollar net monetary asset position.
- Membership income rose 3.0% in Q3 and 6.8% year to date, but total member accounts fell 2.2% year over year and trailing renewal rates declined to 82.5% from 85.0%. Management attributed the renewal decline partly to reduced in-club traffic and restrictions.
Outlook, risks and contingencies
- The filing provides no quantified full-year earnings or revenue guidance. Management emphasized uncertainty over the pandemic’s duration, government restrictions, consumer demand, employment, currencies, supply chains and government fiscal measures.
- Other stated risks include competition, political instability, higher costs, technology and e-commerce execution, cybersecurity, product liability, and recovery of taxes owed by governments. Refund processes can take months or years; the company reported $26.0M of VAT receivables and $28.7M of income tax receivables, with no allowances recorded, based on management’s expectation of recovery.
- A securities class action against the company and certain current and former officers alleges federal securities-law violations. PriceSmart said it believes the claims lack merit and intends to defend the case; oral arguments on its motion to dismiss were scheduled for fiscal Q1 2021. Management stated ordinary-course legal matters were not expected to materially affect financial position, results or liquidity.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pandemic restrictions and transaction declines persist, and whether Click & Go and subsequent club openings support sales and membership renewals.
- Progress on debt repayment, available credit capacity, capital spending and cash needs; also note that much of the reported cash is held by foreign subsidiaries.
- Trinidad currency convertibility and devaluation exposure, and the effects of currency movements in Colombia and other markets.
- Recoverability and timing of VAT and income-tax refunds, particularly balances in jurisdictions with unclear or complex refund processes.
- Developments in the securities class action and any changes in disclosed contingencies or tax exposures.