PriceSmart, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended November 30, 2014; comparative period is the three months ended November 30, 2013. Amounts below are U.S. dollars.
Business context
PriceSmart operates membership warehouse clubs across Latin America and the Caribbean. It had 36 clubs in 13 countries and territories at quarter-end, versus 32 a year earlier. Three new clubs opened in Colombia during the quarter; the company expected one additional opening in Panama in summer 2015.
Financial performance and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Total revenue | $656.0 million | $605.6 million | +8.3% |
| Net warehouse club sales | $636.4 million | $589.7 million | +7.9% |
| Comparable warehouse sales | +2.0% | ||
| Membership income | $10.1 million | $9.3 million | +9.1% |
| Operating income | $36.3 million | $32.4 million | +12.1% |
| Net income | $20.6 million | $21.4 million | −3.7% |
| Diluted EPS | $0.68 | $0.71 | Lower |
| Operating cash flow | $(13.9) million | $(37.6) million | Improved |
Warehouse gross profit was $97.4 million, with gross margin of 15.3%, up from 14.5%; management attributed the improvement to lower distribution costs and shrink, vendor rebates, and more product demonstrations. Operating margin was 5.7%, compared with 5.5%. Higher operating income was offset below the operating line by foreign-exchange losses, higher interest and a higher effective tax rate (37.0%, versus 32.6%).
Cash and cash equivalents were $119.2 million at November 30, down from $137.1 million at August 31; restricted cash totaled $31.4 million. Current assets were $485.8 million and current liabilities $379.6 million. Investing activities used $29.5 million, primarily for club construction and equipment. Operating cash use reflected a $97.0 million inventory increase, partly offset by higher accounts payable.
Long-term debt, including current maturities, was $96.3 million, and short-term borrowings were $17.1 million; total debt was therefore $113.4 million. Short-term facilities had $43.4 million available. The company reported a first-quarter covenant breach under a Honduras loan, received a lender waiver and covenant amendment, and stated it was compliant, amended or covered by waiver at quarter-end.
Changes, outlook and material risks
- Net warehouse sales rose 7.9%, driven by 5.3% transaction growth, 2.5% average-ticket growth and new clubs. Membership accounts increased 15.2% year over year; the renewal rate was 84%.
- Three Colombia openings contributed to $3.1 million of pre-opening expense. General and administrative expense rose 19.4%, mainly from spending on IT, e-commerce and U.S. buying operations.
- Other expense included a $2.6 million net currency loss, versus a $0.3 million gain a year earlier; management linked most of the loss to the Colombian peso’s sharp decline and U.S.-dollar liabilities associated with new-club openings. Foreign-currency translation also reduced other comprehensive income by $11.7 million.
- Management described mixed economic conditions: weaker currencies, unemployment and other local pressures affected several markets, while some markets remained strong. It warned that currency weakness can raise the local cost of U.S.-sourced goods and reduce demand and reported sales. No numerical earnings or sales guidance was provided.
- Tax recovery is a significant uncertainty: VAT receivables totaled $22.7 million, including $6.6 million in two countries with disputed refund processes. The company also disclosed provisional tax assessments of $2.5 million and $5.2 million at a subsidiary; it expects to prevail and recorded no provision. A new minimum-tax regime in another market may require tax payments exceeding tax based on income.
- Other risks include international operating and competitive pressures, further currency volatility, execution and funding of club expansion, and tax and legal contingencies. Management said pending legal matters were not expected to materially harm financial position, results or liquidity. Disclosure controls were assessed as effective; the filing reported no material change in internal control over financial reporting.
Key facts investors should verify
- Whether sales and comparable-sales trends continue after new-club openings and local currency movements.
- Progress on Colombian operations, the planned Panama opening, and related capital spending and borrowing.
- Cash conversion and inventory growth, including the extent to which accounts payable funded working capital.
- Resolution and recoverability of disputed VAT balances and the provisional tax assessments, plus the effects of the new minimum-tax rules.
- Ongoing covenant compliance and the terms, maturities and currency exposure of debt and hedges.