PriceSmart, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended November 30, 2020. Comparisons are with the three months ended November 30, 2019 unless otherwise noted. Amounts below are in U.S. dollars.
Business context
PriceSmart operates membership warehouse clubs in Central America, the Caribbean and Colombia, alongside its Aeropost package-forwarding and marketplace business. It had 46 clubs in operation at quarter-end; a 47th club opened in Bogotá on December 4, 2020. Click & Go curbside pickup and delivery was available in all 13 markets.
Financial and operating results
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Total revenue | $877.4 million | $811.9 million |
| Net merchandise sales | $838.4 million | $778.7 million |
| Operating income | $44.5 million | $30.7 million |
| Net income attributable to PriceSmart | $27.7 million | $19.7 million |
| Diluted earnings per share | $0.90 | $0.64 |
| Operating cash flow | $(17.8) million | $16.1 million |
- Revenue rose 8.1%; merchandise sales increased 7.7%. Sales growth reflected a 15.9% increase in average ticket, partly offset by a 7.1% decline in transactions.
- Comparable merchandise sales increased 3.6% across 43 qualifying clubs. Foreign currency movements reduced reported merchandise sales growth by about 3.5 percentage points, or $27.4 million.
- Merchandise gross margin improved to 16.1% from 14.9%; total revenue margin was 18.0% versus 16.9%. Operating margin increased to 5.1% from 3.8%. Management cited pricing actions, merchandising and inventory management, including fewer markdowns.
- SG&A was $113.0 million, or 12.9% of revenue, versus $106.3 million, or 13.1%. Net interest expense increased to $2.0 million from $0.9 million, primarily due to borrowing balances and hedging costs.
- The effective tax rate was 32.9%, compared with 32.2%. Membership income declined 3.3% to $13.3 million; member accounts were down 3.8%, and the trailing 12-month renewal rate fell to 81.9% from 86.1%.
- Operating cash flow turned negative, mainly as inventory rose $63.7 million and accounts payable rose only $6.5 million; management attributed the inventory build to two additional clubs and holiday-season stocking, and lower payables partly to the end of temporary vendor-term extensions. Investing cash outflow was $50.3 million, including investment purchases and capital spending; financing cash outflow was $22.2 million.
- At November 30, cash and cash equivalents were $208.0 million, restricted cash $4.4 million, and short-term investments $74.0 million. Short-term borrowings were $47.3 million and long-term debt, including current maturities, was $127.9 million. Operating lease liabilities totaled about $133.0 million. The company reported compliance with debt covenants.
Changes, outlook and material risks
- COVID-19 restrictions and health concerns continued to affect club traffic, operations and consumer behavior. Click & Go contributed approximately 3.1% of quarterly merchandise sales. Management said the pandemic’s duration and economic effects remain uncertain; it provided no overall earnings or revenue guidance.
- Trinidad faced a worsening shortage of U.S. dollars and other tradeable currencies. Its local-currency cash and investments equated to approximately $100.5 million. Management said reduced U.S. shipments would leave the club with a narrower-than-usual assortment and could reduce Q2 FY2021 sales by an estimated $14–18 million. A hypothetical 20% Trinidad-dollar devaluation could reduce the U.S.-dollar value of those balances by about $20.1 million and produce an estimated $2.9 million loss on a separate net U.S.-dollar liability position.
- Barbados also faced U.S.-dollar liquidity constraints; approximately $12.8 million in local-currency cash was not readily convertible for general company use. Foreign exchange exposure, local economic conditions and government restrictions remain material risks.
- Hurricanes Eta and Iota caused significant infrastructure damage in parts of Central America, especially Honduras. Clubs were operating normally at filing, but management warned combined storm and pandemic effects could hurt future results.
- Management planned new clubs in Guatemala City, expected in Q1 FY2022, and Portmore, Jamaica, expected in Q3 FY2022. It anticipated some sales transfers from nearby clubs as well as potential incremental membership and sales.
- VAT and income-tax receivables totaled approximately $64.4 million, with no recovery allowance recorded. Management believes recovery is more likely than not, but refund processes can take months or years; one country’s $8.4 million VAT balance lacked a clearly defined refund process.
- A securities class action alleging federal securities-law violations remained pending, with the court considering the company’s motion to dismiss. The company said it would defend the claims and did not expect ordinary-course legal matters to materially affect its financial position, results or liquidity.
Important facts for investors to verify
- Whether Trinidad’s currency-conversion constraints ease, and the actual effect of reduced shipments on Q2 sales, margins and inventory.
- Whether negative operating cash flow reverses as seasonal inventory is sold and vendor-payment patterns normalize.
- Progress in membership-account recovery and renewal rates, including online sign-ups and renewals.
- Realized currency impacts, including any devaluation or further liquidity constraints in Trinidad and Barbados.
- Recoverability and timing of tax refunds, and any changes to the company’s assumptions or allowances.
- Construction spending, opening timelines and sales transfers associated with the Bogotá, Guatemala City and Portmore clubs.