PriceSmart, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended February 29, 2024. All financial amounts below are U.S. dollars; figures are in millions unless stated otherwise. The interim financial statements are unaudited.
Business context
PriceSmart operates membership warehouse clubs across Central America, the Caribbean and Colombia. It had 54 clubs in 12 countries and the U.S. Virgin Islands at quarter-end, up from 50 a year earlier. The company also exports merchandise and operates online shopping, delivery and pickup services.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Total revenue | $1,292 | $1,142 | $2,458 | $2,197 |
| Net merchandise sales | $1,261 | $1,116 | $2,396 | $2,141 |
| Operating income | $63.6 | $53.8 | $121.8 | $109.3 |
| Net income | $39.3 | $31.3 | $77.3 | $64.3 |
| Diluted earnings per share | $1.31 | $1.02 | $2.54 | $2.07 |
| Adjusted EBITDA (non-GAAP) | $84.1 | $79.4 | $161.9 | $154.6 |
Margins and costs: Merchandise gross margin was 15.7% in Q2, down 0.3 percentage points year over year; the six-month margin was 15.9%, down 0.2 points. Total revenue margin was 17.1% in Q2 and 17.3% for six months, each down 0.2 points. SG&A was $157.5 million in Q2 and $303.5 million for six months; as a share of revenue it was 12.2% and 12.3%, respectively. Operating margin was 4.9% in both periods.
Sales trends: Q2 reported merchandise sales grew 13.0%; constant-currency growth was 9.0%, and comparable sales grew 8.8% (5.2% constant currency). For six months, reported merchandise sales grew 11.9%; constant-currency growth was 8.0%, and comparable sales grew 8.4% (4.7% constant currency). The leap-year day contributed to reported growth, including an estimated 1.1% lift to Q2 transactions. Colombia’s peso appreciation materially boosted reported sales.
Cash flow and investment: Six-month operating cash flow was $127.7 million, versus $116.7 million a year earlier. Investing cash outflow was $105.3 million, including $103.5 million in property and equipment additions. Financing cash outflow was $92.3 million, including $71.7 million of treasury-stock purchases and $17.8 million of dividends paid. Cash, cash equivalents and restricted cash fell by $69.6 million to $182.6 million; reported cash and cash equivalents alone were $170.6 million.
Liquidity and debt: The company had $93.6 million of short-term investments and $164.9 million available under short-term facilities, including $75 million committed capacity. It reported $6.1 million of short-term borrowings and $140.0 million of long-term debt, of which $37.6 million was classified as current. The company reported compliance with debt covenants. Liquidity is affected by restrictions on converting local currencies into U.S. dollars in Trinidad and Honduras.
Changes versus the prior comparable period
- Revenue, merchandise sales, operating income and net income increased. Q2 sales growth reflected higher transactions and average ticket, as well as four additional clubs versus the prior-year quarter.
- Membership income increased 14.6% in Q2 and 13.1% for six months, supported by membership-base growth and a $5 fee increase in most markets. Member accounts were up 5.0% year over year; the trailing renewal rate was 88.3%, compared with 88.0% a year earlier.
- Gross margin rates declined, which management attributed mainly to removal of a COVID-era merchandise pricing premium and lower liquidity premiums on products sold in Trinidad.
- Other expense was $7.0 million in Q2, compared with $5.3 million a year earlier, primarily reflecting greater foreign-currency losses. For six months, other expense improved to $9.2 million from $9.9 million, while interest income rose with higher investment balances and yields.
- The prior-year comparison included $7.7 million of CEO separation costs in Q2 and $2.1 million of Aeropost-related write-offs in the first half; neither recurred in FY2024. The lower effective tax rates—30.5% in Q2 and 31.4% for six months—were partly related to the non-recurrence of the separation costs.
Outlook, commentary, risks and unusual items
- Expansion and investment: Management’s stated growth priorities are remodeling and adding clubs and distribution capacity, increasing membership value, and developing online and digital capabilities. A new Cartago, Costa Rica club is expected to open in early 2025. The company also described ongoing club remodels, expansions and distribution-center investments. No formal earnings or revenue guidance is provided in the filing.
- Panama property purchase: In January 2024, PriceSmart bought its previously leased Via Brasil club building and land for $33.0 million. Management expects approximately $1.1 million in annual net-of-tax savings from reduced rent and depreciation effects, partly offset by depreciation on the building. A related $16.5 million loan has a 15-year term and variable-rate features.
- Management commentary: The Interim CEO declined compensation during his term; management expects approximately $2.5 million in quarterly savings versus prior CEO compensation, partly offset by salary increases for other executives.
- Foreign exchange and operating exposure: Currency movements affect reported sales, costs and earnings. Management reported U.S.-dollar conversion constraints in Trinidad and Honduras, political and access disruptions in Panama and Guatemala during 2023, and exposure to inflation, supply-chain costs, weather and local economic conditions.
- Tax uncertainty: The company has significant VAT and income-tax receivables and records no allowance against them, believing recovery is more likely than not. Refund processes can take months or years, and outcomes of tax disputes or audits could differ materially from estimates. It previously recorded a $7.2 million charge in FY2023 to settle a minimum-tax dispute in one country.
- Capital returns: The $75 million share-repurchase program was completed in the first quarter of FY2024; management said it had no current plan for another program. On April 3, 2024, the board declared a one-time $1.00-per-share special dividend, payable April 30 to holders of record April 19. Future dividends remain subject to board discretion and capital needs.
- The company reported no material change in risk factors from its FY2023 Form 10-K, no material off-balance-sheet arrangements, and no legal proceedings expected to materially affect its financial position, results or liquidity.
Important facts for investors to verify
- How much sales and comparable-sales growth persists after excluding currency appreciation, new clubs and the leap-year effect.
- Whether merchandise margins stabilize after the reported year-over-year declines, and how operating costs evolve as new clubs and facilities ramp up.
- How much of the $182.6 million cash-and-restricted-cash balance and $93.6 million of short-term investments is readily deployable, given local-currency conversion constraints.
- The collectability and timing of tax refunds, including the company’s unreserved VAT and income-tax receivables.
- Capital spending, debt service and liquidity following the special dividend, club expansion and Panama property purchase.
- Whether the expected Panama operating savings and Interim CEO compensation savings are realized.