PriceSmart, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended August 31, 2015. The filing also reports fourth-quarter results. PriceSmart operates membership warehouse clubs across Latin America and the Caribbean, with U.S. buying and distribution operations. It had 37 clubs in 12 countries and one U.S. territory at year-end, up from 33 a year earlier.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $2.803 billion | $2.518 billion |
| Net warehouse club sales | $2.721 billion; up 11.3% | $2.444 billion |
| Operating income | $146.4 million; up 7.1% | $136.7 million |
| Net income | $89.1 million | $92.9 million |
| Diluted EPS | $2.95 | $3.07 |
| Operating cash flow | $110.5 million | $137.3 million |
| Cash and cash equivalents at year-end | $157.1 million | $137.1 million |
| Long-term debt, including current portion | $90.5 million | $91.4 million |
- Warehouse gross profit was $400.1 million, with a 14.7% gross margin, approximately unchanged from FY 2014. Operating margin was 5.4%, down from 5.6%.
- Net cash used in investing activities was $89.1 million, including $89.2 million of additions to property and equipment. Financing activities provided $10.0 million. Cash flow from operations declined mainly as inventory investment rose by $40.8 million.
- At August 31, 2015, current assets were $464.4 million and current liabilities were $337.1 million. Short-term borrowings were $6.6 million; $50.4 million of short-term credit facilities remained available. The company reported compliance with applicable financial covenants.
- Membership income rose 14.7% to $43.7 million. Membership accounts increased 25.7% to about 1.49 million, and the renewal rate improved to 86% from 84%.
- Fourth-quarter net warehouse club sales grew 13.0%, comparable sales grew 3.4%, and net income was $22.4 million, or $0.75 per diluted share, versus $21.9 million, or $0.73 per share, a year earlier. Fourth-quarter warehouse gross margin was 14.8%, down 46 basis points.
Material changes versus the prior year
- Net income and diluted EPS fell despite higher sales and operating income. The company cited a $4.4 million net foreign-exchange loss for FY 2015, compared with a $984,000 gain in FY 2014, and a higher effective tax rate: 34.8% versus 30.8%.
- The Colombian peso weakened approximately 60.3% against the U.S. dollar during FY 2015. Management said the currency decline reduced reported sales and pressured margins; it also contributed to a substantial foreign-currency translation loss in other comprehensive income.
- Three Colombian clubs opened in October and November 2014, and a fifth Panama club opened in June 2015. These openings helped drive growth, while new-club costs and lower Colombian merchandise margins weighed on profitability.
- Operating cash flow decreased by $26.8 million year over year, while investing cash outflow decreased by $30.5 million as construction spending on the Colombia and Panama clubs moderated.
- The company created a separate Colombia operating segment during FY 2015 and retrospectively presented segment information on that basis.
Outlook, risks, and unusual items
- Expansion: Management expected to open a club in Managua, Nicaragua, in November 2015. It planned to begin construction of a seventh Colombian club in Chia in November 2015, with an anticipated opening in fall 2016. No quantified revenue or earnings guidance is provided.
- Capital spending: Management estimated approximately $12.3 million of FY 2016 construction commitments for a previously announced club and approximately $50 million of other capital expenditures for equipment and building improvements; future spending depends on land purchases and construction timing.
- Colombia: Management said it was prepared to accept lower merchandise margins and profits to build its position, while pursuing cost reductions, more local sourcing, and selective pricing changes. Further currency movements could materially affect results.
- Guatemala fire: A fire closed the Pradera club for nine days in June 2015. The company recorded a $2.8 million insurance receivable, received about $300,000 by year-end, and reported a remaining receivable of approximately $2.6 million. A $332,000 business-interruption claim had not been recognized as revenue.
- Tax matters: The filing discloses provisional tax assessments of $2.5 million and $5.2 million at a subsidiary, which management expected to defeat and for which it recorded no provision. It also reports $6.5 million of disputed VAT receivables in two countries and approximately $1.4 million of net income-tax liabilities associated with uncertain tax benefits.
- Other principal risks: International operations and currency exposure, competition, market saturation and site availability, import and supply-chain disruption, economic and political conditions, labor costs and work stoppages, cybersecurity and payment systems, tax disputes, and natural disasters. The company reported no legal proceedings expected to have a material adverse effect and no material off-balance-sheet arrangements.
- Management and Ernst & Young concluded that disclosure controls and internal control over financial reporting were effective as of August 31, 2015. Ernst & Young issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether Colombian sales, margins, and membership economics improve, and how additional peso volatility affects reported results and cash flows.
- Comparable-sales performance excluding the effects of new-club openings and sales transfers from existing clubs.
- Actual recovery and timing of insurance proceeds related to the Guatemala fire, including the unrecognized business-interruption claim.
- Recoverability and timing of disputed VAT and income-tax receivables, and outcomes of the provisional assessments and other tax appeals.
- Execution, costs, and opening schedules for Managua and Chia, along with the stated FY 2016 capital-spending plans and remaining debt obligations.