PriceSmart, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended February 29, 2012, compared with the corresponding 2011 periods. All amounts are U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
PriceSmart operates membership warehouse clubs in Latin America and the Caribbean. At quarter-end it had 29 clubs in 12 countries and one U.S. territory, one more than a year earlier, following the opening of its Barranquilla, Colombia club. The company reported strong transaction-led sales growth and continued investing in new locations and club capacity.
Key financial results
| Metric | Three months | Six months |
|---|---|---|
| Total revenue | $549.8 million, up 22.3% | $1,028.5 million, up 23.1% |
| Net warehouse club sales | $537.8 million, up 22.2% | $1,006.1 million, up 23.1% |
| Comparable club sales | Up 16.7% | Up 17.7% |
| Operating income | $30.3 million, up 13.5% | $54.6 million, up 11.6% |
| Net income | $20.2 million, versus $17.9 million | $34.2 million, versus $32.8 million |
| Diluted earnings per share | $0.67, versus $0.60 | $1.14, versus $1.11 |
Quarterly membership income rose 14.7% to $6.4 million; membership accounts increased 18.5% year over year to 916,787, and the renewal rate was 89%. Quarterly warehouse gross margin declined to 14.6% from 14.8%; for the half-year it was 14.5% versus 15.2%. Management attributed most of the reduction to its pricing strategy, with initial Colombia import costs also weighing on the six-month result. Operating income as a percentage of warehouse sales fell to 5.6% from 6.1% for the quarter and to 5.4% from 6.0% for the half-year.
Cash, liquidity, and debt
- Six-month operating cash flow was $47.6 million, including $47.2 million from continuing operations, compared with $37.7 million in total operating cash flow a year earlier.
- Investing activities used $21.7 million, principally for property and equipment; financing activities used $12.8 million, including $9.1 million of dividends.
- Cash and cash equivalents were $90.8 million at February 29, 2012, up from $76.8 million at August 31, 2011. Restricted cash totaled approximately $38.0 million, much of it tied to loan arrangements.
- Long-term debt, including its current portion, was $83.7 million, up from $68.2 million at fiscal year-end; short-term borrowings were $0.1 million. The company reported compliance with applicable debt covenants. A substantial portion of Colombia borrowing was secured by restricted deposits.
- Current assets were $313.1 million and current liabilities were $227.8 million. Long-term restricted cash is not freely available for general liquidity needs.
Material changes, outlook, and risks
- Growth reflected higher transactions, a 2.5% increase in average transaction value for the quarter, and the additional Barranquilla club. Comparable sales exclude newer clubs until they meet the company’s tenure criterion.
- Management described plans for three fiscal 2013 openings: south Cali, Colombia, anticipated in October 2012; north Cali, Colombia, anticipated in spring 2013; and La Union, Costa Rica, anticipated in summer 2013. These are plans, not guaranteed dates. The company also expected about $7.1 million in fiscal 2012 club expansions, reconfigurations, and upgrades. No quantified earnings or revenue guidance was provided.
- After quarter-end, PriceSmart increased a Union Bank credit line from $15 million to $25 million and acquired north Cali land for a planned club.
- Foreign exchange remains a significant exposure: about 79% of net warehouse sales were denominated in foreign currencies and about 51% of sales consisted of imported products. A Colombian peso decline in the first quarter contributed to a $1.5 million currency loss; the second-quarter currency gain left a $286,000 net currency loss for the half-year. Currency translation and corrections also reduced other comprehensive income.
- In the first quarter, the company recorded an $8.9 million charge to accumulated other comprehensive loss related to a subsidiary merger and corrections of prior-period property translation errors. Management concluded the errors were not material to individual periods and did not restate prior financial statements.
- Disclosure controls were deemed ineffective at period-end because two previously identified material weaknesses remained under remediation: foreign-currency translation controls for fixed assets and depreciation, and review of deferred tax assets related to loss carryforwards.
- Tax authorities may challenge positions; recorded non-income-tax contingencies were $3.1 million. At Alajuela, Costa Rica, an indemnity could require a fair-market-value purchase of adjacent land, estimated at about $4.1 million, if its owner cannot develop the land because of required drainage canals. No liability was recorded; additional drainage work and permits may be needed for further adjacent development.
- Management cited risks from competition, economic and commodity-price conditions, foreign exchange, international operations, and potential control deficiencies. It stated that ordinary-course legal proceedings were not expected to have a material adverse effect; no material change in disclosed risk factors was reported.
Important facts for investors to verify
- Whether comparable-sales growth and membership trends continue, and how new clubs affect sales, expenses, and margins.
- Whether planned Colombia and Costa Rica openings proceed on schedule and within expected capital requirements.
- How currency movements, hedging, and restricted deposits affect reported earnings, cash availability, and debt exposure.
- Progress in remediating the two material weaknesses, especially given the disclosed translation errors and tax-accounting review weakness.
- Potential changes in tax contingencies and the Alajuela land indemnity exposure, as well as the company’s ability to meet debt obligations and fund expansion and dividends.