PriceSmart, Inc. — Form 10-Q summary
Reporting period: Second quarter and six months ended February 29, 2016; comparative periods ended February 28, 2015. Amounts below are U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
PriceSmart operated 38 membership warehouse clubs in 12 countries and one U.S. territory. It opened a club in Managua, Nicaragua, in November 2015 and was building a club in Chía, Colombia, expected to open in September 2016. The business relies on membership income, high-volume sales and a substantial share of merchandise sourced internationally.
Financial results and liquidity
| Metric | Three months | Six months |
|---|---|---|
| Total revenue | $777.9; prior year $750.3 | $1,489.9; prior year $1,406.3 |
| Net warehouse club sales | $759.0; up 3.7% | $1,449.8; up 5.9% |
| Operating income | $39.1; prior year $41.7 | $76.4; prior year $78.0 |
| Net income | $25.9; prior year $24.8 | $49.6; prior year $45.5 |
| Diluted earnings per share | $0.85; prior year $0.82 | $1.63; prior year $1.50 |
| Warehouse gross margin | 14.2%; prior year 14.5% | 14.4%; prior year 14.9% |
- For the six months, operating cash flow was $69.6, investing cash outflow $32.2 and financing cash outflow $17.9. Cash increased $15.9 to $173.0.
- At February 29, cash and cash equivalents were $173.0; current assets were $464.8 and current liabilities $330.4. Short-term borrowings were zero.
- Long-term debt, including its current portion, was $91.1, compared with $90.5 at August 31, 2015. The company reported $67.4 of available short-term credit facilities and compliance with applicable debt covenants.
- Six-month capital expenditures were $32.2. The company paid $10.6 in dividends; the declared dividend was $0.70 per share, with the second $0.35 installment payable August 31, 2016.
Changes versus the prior year
- Sales growth reflected new clubs and growth in Central America and the Caribbean, but Colombia’s sales translated into U.S. dollars fell 32.1% for the quarter and 18.0% for the six months. In local currency, Colombia sales declined 6.5% for the quarter but rose 14.1% for the six months.
- Comparable club sales are reported inconsistently in the filing: the highlights state a 1.7% quarterly decline, while the detailed discussion states a 0.9% decline. The detailed discussion reports six-month comparable sales growth of 0.3%. Excluding Colombia, comparable sales rose 2.7% for the quarter and 3.8% for the six months.
- Operating income fell despite revenue growth, as Colombia’s operating loss and higher selling, general and administrative expenses outweighed incremental margins elsewhere. General and administrative expense rose 14.6% for the quarter and 15.2% for the six months.
- Currency transaction losses narrowed to $0.6 for the quarter and $0.8 for the six months, versus losses of $1.7 and $4.3 in the comparable periods. Foreign currency translation losses in other comprehensive income were $10.4 for the quarter and $10.9 for the six months.
- Operating cash flow improved from $11.9 to $69.6 for the six months, mainly reflecting a much smaller inventory build than in the prior-year period.
- The 12-month membership renewal rate fell to 81% from 86% at fiscal year-end, primarily due to lower renewals among first-year Colombia members; excluding Colombia, it was 88%.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management expects the Chía club to open in September 2016 and plans approximately $35.0 of other capital expenditures in the second half of fiscal 2016, in addition to approximately $8.9 of committed construction services.
- After quarter-end, PriceSmart agreed to acquire a build-to-suit Miami-area distribution center for approximately $46.0, with completion expected in the first half of calendar 2017; management expects long-term financing secured by the property.
- Management identified the Colombian peso’s sharp devaluation as a material headwind: it reduces reported sales and raises local-currency prices of imported goods. The company is reducing margins and costs and increasing local sourcing to support its position in Colombia.
- Other disclosed risks include foreign-exchange volatility, competition, economic and political conditions, import and supply-chain exposure, cost inflation, cybersecurity and operational-system risks, and tax disputes. Management noted Trinidad’s dependence on oil and gas exports as a potential source of slower growth.
- Tax matters include $6.6 of disputed VAT receivables in two countries and a $1.8 income-tax receivable associated with challenged minimum-tax rules. The company also disclosed provisional assessments totaling $7.7 for withholding and service-charge deductibility in one jurisdiction, which it expects to contest successfully and for which it recorded no provision. Accrued non-income-tax contingencies were $4.2.
- A Guatemala club fire insurance claim was settled in the first quarter of fiscal 2016, resulting in approximately $0.2 of other income. The filing reports no material legal proceedings, no material change in risk factors, and effective disclosure controls.
Important facts for investors to verify
- Resolve the filing’s conflicting quarterly comparable-sales figures (down 1.7% versus down 0.9%) and confirm the applicable calculation basis.
- Track Colombia’s local-currency sales, membership renewal trends, operating losses and the effect of further peso movements on reported results and margins.
- Assess recovery timing and collectability of disputed VAT and income-tax receivables, and monitor outcomes of the $7.7 in provisional tax assessments.
- Review the funding, financing terms and execution risks for the planned Chía club and the approximately $46.0 Miami distribution-center purchase.
- Monitor cash generation, debt maturities, credit-facility renewals, covenant compliance and the board’s decisions on future dividends.