PriceSmart, Inc. — FY2013 Form 10-K Summary
Reporting period: Fiscal year ended August 31, 2013. The filing also reports fourth-quarter results; it is an annual filing, not a standalone quarterly filing. Amounts are U.S. dollars unless stated otherwise.
Business context
PriceSmart operates membership warehouse clubs in Latin America and the Caribbean. At year-end it had 31 clubs in 12 countries and one U.S. territory, versus 29 clubs a year earlier. Two clubs opened in Cali, Colombia during FY2013. The sixth Costa Rica club opened October 18, 2013, after year-end; a third Honduras club was anticipated for spring 2014.
Financial and operating performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue | $2.300 billion | $2.045 billion |
| Net warehouse club sales | $2.239 billion; up 12.0% | $1.999 billion |
| Membership income | $33.8 million; up 25.5% | $27.0 million |
| Operating income | $127.9 million; up 18.5% | $107.9 million |
| Net income | $84.3 million | $67.6 million |
| Diluted earnings per share | $2.78 | $2.24 |
| Operating cash flow | $130.6 million | $89.5 million |
| Capital expenditures | $69.9 million | $52.7 million |
- Warehouse gross profit was $331.6 million; warehouse gross margin was 14.8%, down 10 basis points. Management attributed the margin decline principally to price reductions intended to provide member value.
- Operating income was 5.7% of warehouse sales, versus 5.4% in FY2012. SG&A, including pre-opening costs, improved as a share of sales.
- At August 31, cash and cash equivalents were $121.9 million, including $75.1 million held by foreign subsidiaries. Restricted cash totaled $40.8 million.
- Total long-term debt, including the current portion, was $73.0 million, down from $78.7 million. No short-term borrowings were outstanding; $35.3 million of short-term facilities remained available.
- Current assets were $375.6 million and current liabilities were $274.9 million. Accounts payable stood at $199.4 million.
- Net cash increased $30.6 million during the year. Financing used $21.8 million, including $18.1 million of dividends. The company paid $0.60 per share in dividends during FY2013.
Fourth-quarter results and changes
- Fourth-quarter net warehouse sales grew 13.9% year over year; comparable warehouse sales increased 9.3%. Two additional Colombia clubs contributed to the comparison.
- Fourth-quarter membership income rose 24.1% to $9.0 million. Operating income was $33.0 million, up $5.1 million; net income was $20.8 million, or $0.69 diluted EPS, versus $17.7 million, or $0.58, in the prior-year quarter.
- For FY2013, comparable sales grew 9.0%, total membership accounts rose 13.5% to 1,095,513, and the reported renewal rate was 85%, versus 88% in FY2012.
- Growth was led by Latin America: segment warehouse sales rose 15.1%, compared with 5.9% in the Caribbean. Transaction growth drove most of the company-wide sales increase.
- Vendor demonstration consideration was reclassified in FY2013 from other income to reductions of costs; prior periods were reclassified for comparability. The change did not affect operating income or net income.
Outlook, risks and contingencies
- Management planned to pursue comparable-sales growth, improve distribution efficiency and expand clubs. Two FY2014 openings were anticipated: Costa Rica and Honduras. The filing provides no quantified earnings or revenue guidance.
- Management cited moderate-to-strong growth in larger markets such as Panama, Costa Rica and Trinidad, while VAT increases, weaker activity and currency devaluations challenged some smaller markets.
- International exposure is substantial: approximately 79% of net warehouse sales were in foreign currencies, while about 52% consisted of U.S.-dollar-purchased imported products. FY2013 currency transaction losses were $954,000; foreign currency translation adjustments reduced comprehensive income by $10.4 million.
- In the fourth quarter, the Barbados subsidiary was found out of compliance with a loan covenant; the lender provided a written waiver for FY2013. The company stated it was compliant, had amended covenants, or had waivers for all applicable covenants at year-end.
- A disputed VAT receivable in one country was $4.3 million. The company was appealing the government’s position and recorded no allowance, expressing the expectation that it would prevail.
- Net liabilities for uncertain income tax benefits were approximately $1.3 million; accrued non-income-tax contingencies were $2.9 million. Ordinary-course legal claims were not expected by management to have a material adverse effect.
- Key risks include currency and political/economic volatility, competition, import and supply-chain disruption, natural disasters, expansion-site availability, consumer demand, product liability, tax matters, systems disruption and environmental remediation obligations.
- Management and the auditor concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether sales and membership growth, including the 85% renewal rate, persisted after FY2013 and supported returns on new club investments.
- How gross margins and operating leverage developed as the company maintained price reductions and expanded its store base.
- The status and recovery timing of the $4.3 million disputed VAT receivable, and any changes in tax exposures or valuation allowances.
- Whether the Barbados covenant issue was fully resolved and whether debt maturities, collateral and restricted cash affect available liquidity.
- Actual opening dates, costs and ramp-up performance for the Costa Rica and Honduras clubs, alongside currency effects on reported results and imported merchandise costs.