PriceSmart, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended November 30, 2015; unaudited. Unless noted, dollar amounts are U.S. dollars. Financial statement amounts below are in millions.
Business context
PriceSmart operates membership warehouse clubs across Central America, the Caribbean and Colombia. It had 38 clubs in 13 countries and territories at quarter-end, up from 36 a year earlier, including a new club opened in Managua, Nicaragua, in November 2015. The company was constructing a club in Chía, Colombia, expected to open in fall 2016.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 | Change / context |
|---|---|---|---|
| Total revenue | $711.9 | $656.0 | Up 8.5% |
| Net warehouse club sales | $690.8 | $636.4 | Up 8.6% |
| Membership income | $11.5 | $10.1 | Up 13.4% |
| Operating income | $37.3 | $36.3 | Up 2.8% |
| Net income | $23.7 | $20.6 | Up 14.6% |
| Diluted EPS | $0.78 | $0.68 | Up $0.10 |
| Operating cash flow | $1.9 | $(13.9) | Improved, but remained modest |
| Capital expenditures | $17.7 | $26.3 | Lower year over year |
- Warehouse gross profit increased 3.3% to $100.6 million, while warehouse gross margin fell 73 basis points to 14.6%. Management attributed pressure to Colombia pricing actions and lower margins across other markets.
- Comparable warehouse sales grew 1.7%; excluding Colombia, comparable sales increased 5.0%. Sales growth reflected an 11.8% increase in transactions, partly offset by a 2.9% decline in average ticket.
- Operating income was 5.4% of warehouse sales, compared with 5.7% a year earlier. SG&A rose, including higher general and administrative costs, while lower pre-opening expense helped offset cost pressures.
- Cash and cash equivalents were $140.0 million at November 30, down from $157.1 million at August 31, 2015. Current assets were $507.3 million and current liabilities $361.9 million.
- Long-term debt, including current maturities, was $94.4 million; short-term borrowings were $1.9 million. The company reported $55.6 million of available short-term credit facilities and compliance with its disclosed debt covenants.
- Operating cash flow improved year over year as inventory investment was lower than in the prior-year quarter; inventory nevertheless increased $55.4 million during the quarter. Investing cash outflow was $17.7 million and financing cash outflow was $0.6 million.
Material changes and management commentary
- Colombia remained a key headwind: the peso’s year-over-year devaluation reduced U.S.-dollar reported sales and made imported goods more expensive locally. Colombia sales rose 3.0% in U.S. dollars but 49.2% in local currency; management said it was accepting lower margins to support long-term market growth.
- Central America sales grew 10.5% and Caribbean sales 6.7%. Management cited strong Panama performance and improving conditions in Costa Rica.
- The twelve-month membership renewal rate declined to 82% from 86% at fiscal year-end, primarily reflecting first-year renewals for the recently opened Colombia clubs. Excluding Colombia, the rate was 87%, unchanged.
- Net currency transaction loss narrowed to $0.2 million from $2.6 million in the prior-year quarter. Foreign-currency translation reduced other comprehensive income by $0.5 million.
- Q1 included final insurance settlement proceeds of approximately $3.1 million related to the June 2015 Guatemala club fire. The company recorded a $0.165 million cost-of-goods-sold credit, an $0.085 million asset-disposal gain and approximately $0.202 million of other income related to the settlement.
Outlook, risks and contingencies
- Management expected approximately $13.6 million of fiscal 2016 construction spending for a previously announced club and approximately $50.0 million of other capital expenditures. Future spending depends on land purchases and construction plans.
- The company anticipated ongoing semiannual dividends, subject to board approval; no dividend was declared in this quarter.
- Management highlighted foreign-exchange volatility, especially in Colombia, competition, consumer demand, import and supply-chain costs, labor, cybersecurity, systems, and political and economic conditions as risks. Results may vary by quarter and are not necessarily indicative of full-year performance.
- Tax matters include disputed VAT refund procedures in two countries and a minimum income tax regime challenged in court. The filing reports $6.9 million of VAT receivables in the countries with disputed refund processes. The company also disclosed provisional tax assessments of $2.6 million and $5.2 million at a subsidiary, for which it recorded no provision because it expects to prevail.
- Non-income-tax contingency accruals were $4.3 million. Management said pending legal matters were not expected to materially affect financial position, results or liquidity; the filing’s legal proceedings item reported none.
- The company had $142.7 million of future minimum operating lease commitments for open locations and $13.6 million of construction-service commitments not yet rendered. It reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Colombia’s currency, imported-goods pricing and membership renewals improve, and how these factors affect comparable sales and margins.
- Whether operating cash generation can support inventory needs, planned capital spending, debt service and potential dividends.
- Recoverability and timing of disputed VAT and income-tax receivables, and outcomes of the tax assessments and court challenges.
- Execution, cost and expected returns for the Chía club and other expansion and capital projects.
- The filing’s tax-rate disclosures differ slightly: the financial statements show an effective rate of 33.8%, while MD&A reports 34.0%; verify the precise reported measure when comparing periods.