PriceSmart, Inc. — Q3 FY2019 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2019; comparisons are with the corresponding 2018 periods. Financial amounts below are in U.S. dollars. Unless otherwise stated, figures are in millions.
Business context and reporting period
PriceSmart operated 42 membership warehouse clubs across 12 countries and one U.S. territory at quarter-end, compared with 41 a year earlier. It also operated the Aeropost marketplace and casillero business and was investing in e-commerce and other omni-channel capabilities. A new, smaller-format Dominican Republic club opened in June 2019, after the reporting date. Clubs under construction in Guatemala and Panama were expected to open in fall 2019; the company said these openings would bring its total to 45.
Financial performance and liquidity
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Total revenue | $788.6 | $782.2 | $2,422.6 | $2,388.8 |
| Net merchandise sales | $755.0 | $750.5 | $2,322.7 | $2,312.4 |
| Operating income | $22.0 | $28.4 | $83.2 | $98.9 |
| Net income attributable to PriceSmart | $14.1 | $18.7 | $52.5 | $55.3 |
| Diluted earnings per share | $0.46 | $0.61 | $1.73 | $1.82 |
| Merchandise gross margin | 13.9% | 14.6% | 14.0% | 14.5% |
| Operating margin | 2.8% | 3.6% | 3.4% | 4.1% |
Quarterly revenue rose 0.8%, while operating income and attributable net income fell approximately 23% and 25%, respectively. Comparable merchandise sales declined 0.8% for the 13-week period and 1.3% for the 39-week period. Management estimated currency devaluations reduced comparable sales by $27.5 million (3.8%) and $76.1 million (3.4%), respectively. Transaction growth was offset by lower average ticket; management cited competitive pressure, economic weakness, and instability in certain markets.
For the nine months, cash from operations was $113.0, investing cash outflow was $71.0, and financing cash outflow was $21.5. Additions to property and equipment were $86.4; operating cash flow less these additions was approximately $26.5. Cash, cash equivalents, and restricted cash totaled $114.0 at May 31, versus $96.9 at August 31, 2018; short-term investments were $17.0, down from $32.3. The filing attributes higher operating cash flow in part to payable timing, lower inventory cash use, and higher stock-based compensation.
At May 31, current assets were $500.5 and current liabilities were $390.3. Cash and cash equivalents were $106.4; merchandise inventories were $326.7. Total debt was approximately $95.1, comprising $2.2 short-term borrowings and $93.0 long-term debt, of which $23.5 was current. The company reported covenant compliance. Long-term debt declined from $102.6 at August 31, 2018.
Material changes and unusual items
- Merchandise gross margin declined 70 basis points in the quarter and 50 basis points year to date, which management largely attributed to pricing actions to support sales. SG&A rose to 13.3% of revenue in the quarter from 12.9%, and to 12.7% year to date from 11.9%.
- Aeropost-related operations and omni-channel investment reduced attributable net income by $2.9 in the quarter and $11.0 year to date, or $0.09 and $0.36 per share, respectively. The business reported a $2.9 net loss for the nine-month period.
- Other revenue increased substantially year to date, partly because adoption of ASC 606 changed the presentation of co-branded card interest-generating portfolio income, and partly because of vendor reimbursements. The filing cautions that this presentation change reduces comparability with prior periods.
- Foreign currency transaction results were a $0.2 gain in the quarter and a $1.9 loss year to date. Other comprehensive loss was $20.0 year to date, mainly due to $18.0 of foreign currency translation losses and $2.1 of derivative losses.
- The company recorded a one-time $3.8 CEO separation charge in Q1 FY2019 ($3.6 after tax), including accelerated equity-award and other separation costs.
- ASC 606 adoption was not material. The company expected ASC 842 lease adoption on September 1, 2019 to materially increase reported assets and liabilities, but did not expect a material effect on net income or cash flows.
Outlook, risks, and contingencies
The filing provides no quantified full-year revenue or earnings guidance. Management described continued investment in new clubs, distribution, technology, and omni-channel capabilities and anticipated further club openings, subject to development progress. It anticipated ongoing semiannual dividends, but future declarations and amounts remain at the board’s discretion.
Key disclosed risks include currency volatility and restricted access to U.S. dollars in Trinidad, political and social disruption in Nicaragua and Honduras, challenging economic conditions and competition in several markets, and the execution costs and integration risks of the Aeropost initiative. The Trinidad subsidiary had a net U.S.-dollar-denominated asset position of approximately $37.3 at May 31; management said it might limit shipments if it cannot exchange local currency for tradeable currencies.
Tax recovery is a notable uncertainty: the company reported $25.1 of VAT receivables and $28.4 of income-tax receivables, with no allowance recorded. Certain refunds and tax positions are disputed or subject to unclear processes; management believes recovery is more likely than not. A securities class action filed May 22, 2019 alleges violations related to prior filings. The company intends to defend the claims; it had not accrued a liability and said a loss range could not be reasonably estimated. Management stated ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether merchandise margins and comparable sales stabilize, especially after currency effects and pricing actions.
- Whether Aeropost and omni-channel investments generate sufficient sales, efficiencies, and eventual profitability to offset current losses and costs.
- Recovery timing and collectability of material VAT and income-tax receivables, including disputed balances and advances paid under tax assessments.
- Foreign-exchange exposure and access to tradeable currencies in Trinidad, and the effects of currency movements on sales, earnings, and equity.
- Execution, timing, and capital requirements for announced warehouse openings, and the balance-sheet impact of ASC 842 adoption.
- Developments in the securities class action and any material change in the company’s estimated exposure.