PriceSmart, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2021; comparisons are with the periods ended February 29, 2020. Amounts are in U.S. dollars unless noted. PriceSmart operated 47 membership warehouse clubs in 12 countries and one U.S. territory, and offered Click & Go curbside pickup and delivery in all 13 markets.
Financial performance
| Metric | Q2 FY2021 | Six months FY2021 |
|---|---|---|
| Total revenue | $937.6 million, up 3.4% | $1,815.0 million, up 5.6% |
| Net merchandise sales | $898.4 million, up 3.1% | $1,736.8 million, up 5.2% |
| Operating income | $45.0 million, up 15.9%; 4.8% of revenue | $89.5 million, up 28.7%; 4.9% of revenue |
| Net income attributable to PriceSmart | $28.2 million vs. $25.6 million | $56.0 million vs. $45.3 million |
| Diluted EPS | $0.92 vs. $0.85 | $1.82 vs. $1.49 |
| Operating cash flow | Not separately presented in the filing summary of cash flows | $29.7 million vs. $89.1 million |
Q2 merchandise gross margin rose to 16.0% from 14.7%; six-month margin was 16.0% vs. 14.8%. Management attributed the improvement to pricing actions, including to offset currency and COVID-related costs, and fewer markdowns. SG&A increased to 13.0% of revenue in Q2 from 12.3%, reflecting higher club operating costs and investments in technology and talent. The effective tax rate was 33.9% for Q2 and 33.4% for the six-month period, compared with 33.1% and 32.7%.
Liquidity, debt and cash flow
At February 28, 2021, cash and cash equivalents were $180.2 million, restricted cash $7.6 million, and short-term investments $81.4 million. Cash, cash equivalents and restricted cash declined to $187.8 million from $303.8 million at August 31, 2020. Six-month investing cash use was $82.3 million, including $47.2 million of property and equipment additions; financing cash use was $60.8 million. Lower operating cash flow chiefly reflected increased inventory and reduced accounts payable, including the expiration of temporary extended vendor terms.
Short-term borrowings were $23.1 million and long-term debt was $126.6 million, for total borrowings of approximately $149.6 million, down from approximately $197.2 million at August 31, 2020. Short-term facilities had $107.7 million available; the weighted-average rate on facilities used was 2.2%. The company reported compliance with its debt covenants. These figures exclude operating lease liabilities.
Changes versus the prior period
- Comparable merchandise sales increased 1.1% for Q2 and 2.3% for the six-month period, but foreign exchange reduced comparable sales by 3.0% and 3.2%, respectively.
- Higher average ticket—up 13.8% in Q2 and 14.8% year to date—more than offset lower transactions, down 9.4% and 8.3%, respectively.
- Membership income fell 2.1% in Q2 and 2.7% year to date. Member accounts were down 3.6% year over year, and the trailing 12-month renewal rate declined to 81.5% from 86.2%.
- Other revenue increased 25.5% in Q2 and 29.0% year to date, mainly from higher package volumes in marketplace and casillero operations.
Outlook, risks and notable items
- No specific earnings or revenue guidance was provided. PriceSmart expected to open clubs in Guatemala City and Bucaramanga in the first quarter of fiscal 2022, and in Portmore, Jamaica, in the third quarter of fiscal 2022.
- COVID-19 restrictions, changing consumer demand, supply-chain disruption, and employment and economic uncertainty continued to affect operations. Click & Go contributed approximately 3.1% of Q2 net merchandise sales.
- U.S.-dollar illiquidity in Trinidad constrained imports and contributed to a 10.7% decline in comparable sales there in Q2. Trinidad held about $96.7 million in local-currency cash and investments; management illustrated that a hypothetical 20% devaluation could reduce their U.S.-dollar value by about $19.3 million. Barbados also faced dollar-conversion constraints, with approximately $14.0 million in local-currency cash not readily convertible for general company use.
- Tax refund recoveries remain uncertain. The company reported $29.5 million of VAT receivables and $28.5 million of income-tax receivables; it had recorded no recovery allowances and cautioned that collection was not assured.
- Construction service commitments were approximately $19.1 million, and a land-purchase option could require about $7.6 million. The company continued to anticipate semiannual dividends, subject to board approval and business conditions.
- A securities class action was dismissed in Q2 FY2021, and the plaintiff’s appeal period expired. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Key facts for investors to verify
- Whether the improved gross margin and operating income are sustainable as currency costs, COVID-related expenses, and SG&A pressures evolve.
- Progress in restoring reliable access to U.S. dollars in Trinidad and converting accumulated local-currency balances; monitor Barbados liquidity as well.
- Recovery timing and collectability of VAT and income-tax receivables, particularly balances subject to unclear refund processes or tax disputes.
- Membership account trends and renewal rates, and whether online sign-ups and renewals offset reduced in-club traffic.
- Operating cash flow, inventory and accounts-payable movements, capital spending, and funding for planned club openings.