PriceSmart, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended May 31, 2017, compared with the corresponding 2016 periods. Financial amounts below are in millions of U.S. dollars unless stated otherwise. PriceSmart operated 39 membership warehouse clubs in 12 countries and one U.S. territory.
Financial performance
| Metric | Three months ended May 31, 2017 | Nine months ended May 31, 2017 | Comparable 2016 |
|---|---|---|---|
| Total revenue | $730.3; +3.7% | $2,263.1; +3.1% | $704.3; $2,194.1 |
| Net warehouse club sales | $710.7; +3.8% | $2,199.1; +3.0% | $684.5; $2,134.4 |
| Operating income | $27.6; +0.5% | $105.4; +1.4% | $27.5; $103.9 |
| Net income | $18.8; +11.9% | $70.9; +6.7% | $16.8; $66.5 |
| Diluted earnings per share | $0.62 | $2.34 | $0.55; $2.19 |
| Warehouse gross margin | 14.0%, up 0.23 percentage point | 14.5%, up 0.36 percentage point | 13.7%; 14.2% |
Third-quarter comparable warehouse sales grew 2.2%; the 39-week comparable-sales increase was 1.4%. Membership income rose 4.9% in the quarter and 4.0% year to date, to $12.0 million and $35.6 million, respectively. The reported twelve-month membership renewal rate improved to 84% from 80% at August 31, 2016; excluding Colombia it was 87%.
Operating income grew more slowly than revenue. Warehouse operating expense increased to 9.5% of warehouse sales in the quarter from 9.2%, and to 9.1% for nine months from 8.8%. The effective tax rate declined to 31.0% from 35.2% for the quarter and from 33.4% for nine months.
Cash flow, balance sheet and debt
- Cash and cash equivalents were $192.1 million at May 31, down from $199.5 million at August 31, 2016; $154.1 million was held by foreign subsidiaries. Current assets were $500.7 million and current liabilities $333.3 million (current ratio approximately 1.50).
- Nine-month operating cash flow was $86.3 million, down from $112.2 million. Investing cash outflow was $99.5 million, including $99.5 million in property and equipment additions. Financing provided $8.2 million. Cash flow from operations less property and equipment additions was approximately negative $13.3 million.
- Total debt was $124.7 million, versus $88.1 million at August 31, 2016. It included $20.4 million current and $104.3 million long-term debt. Short-term borrowings were zero, with $68.8 million of short-term facilities available. The company reported compliance with its debt covenants.
- Capital spending included the $46 million purchase of a Miami-area distribution center, club construction and expansion. Management expected approximately $28 million of additional capital expenditures for the remainder of fiscal 2017, apart from existing construction commitments.
Changes, outlook and notable items
- Colombia was the principal sales growth contributor: third-quarter warehouse sales increased 27.2%, reflecting the new Chia club, improved exchange rates and local sourcing. Central America grew 1.8%; Costa Rica sales declined 3.4%. Caribbean sales increased 0.6% in the quarter, while nine-month Caribbean sales declined 2.2%.
- Management expected to open a new club in Santa Ana, Costa Rica, in fall 2017 and a Santo Domingo, Dominican Republic, club in spring 2018. The June 2017 Dominican Republic land purchase was a subsequent event. The company continued to explore other sites; no broader financial guidance was provided.
- Third-quarter other income included a $1.1 million currency gain, versus a $0.2 million loss a year earlier. Foreign currency translation produced a $4.7 million loss in other comprehensive income for the nine-month period.
- A $751,000 charge was recorded for costs associated with exiting the former leased Miami distribution center; the remaining recorded exit obligation was approximately $282,000. The company reported $136.4 million of future minimum operating lease commitments, including the effect of a Guatemala lease extension.
- Trinidad continued to face U.S.-dollar shortages, constraining currency conversion and potentially requiring renewed limits on imported shipments. The company reported approximately $3.0 million of net U.S.-dollar liabilities exposed to Trinidad-dollar devaluation; a hypothetical 20% devaluation would have an estimated $0.6 million expense effect. Management said improved access to tradeable currencies had supported a more normalized import flow in the quarter, but the risk remained.
- Tax recovery is a material uncertainty: VAT receivables totaled $30.5 million and income-tax receivables $16.0 million. The company is pursuing clarification or recovery in disputed jurisdictions and has not recorded allowances. It also disclosed unprovided tax assessments of $2.6 million and $5.2 million, which management expects to defeat, and $3.9 million of income-tax receivables and $2.0 million of deferred tax assets tied to a challenged minimum-tax regime.
- Management stated that pending legal matters were not expected to materially adversely affect financial position, results or liquidity, and reported no material changes in risk factors from the prior annual report. Forward-looking results remain exposed to foreign exchange, competition, consumer spending, import and logistics conditions, tax disputes, and execution of new-club plans.
Important facts for investors to verify
- Whether operating cash flow can recover as capital spending remains high, and the timing and returns from the Miami distribution center and club investments.
- Progress in Trinidad’s currency availability, related shipment levels, and potential foreign-exchange losses.
- Recoverability and timing of tax receivables, disputed VAT claims, and the unprovided tax assessments.
- Whether Colombia’s sales and margin improvement is sustainable and whether Costa Rica and Caribbean market weakness persists.
- Opening schedules and capital requirements for the planned Costa Rica and Dominican Republic clubs, alongside lease and construction commitments.