PriceSmart, Inc. — Q2 FY2020 Form 10-Q
Business context and reporting period. The unaudited quarter ended February 29, 2020; comparisons are with the quarter ended February 28, 2019. PriceSmart operates membership warehouse clubs in Central America, the Caribbean and Colombia, alongside its Aeropost marketplace and casillero business. It had 45 clubs in 12 countries and one U.S. territory, up from 41 a year earlier. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Total revenue | $906.7 million | $854.4 million | $1,718.7 million | $1,634.1 million |
| Operating income | $38.8 million | $36.5 million | $69.5 million | $61.2 million |
| Net income attributable to PriceSmart | $25.6 million | $23.8 million | $45.3 million | $38.4 million |
| Diluted EPS | $0.85 | $0.79 | $1.49 | $1.27 |
| Operating cash flow | — | — | $89.1 million | $76.3 million |
- Quarterly net merchandise sales rose 6.3% to $871.7 million; comparable sales increased 0.4%. Six-month merchandise sales rose 5.3% to $1,650.5 million; comparable sales increased 0.7%.
- Merchandise gross margin improved 70 basis points to 14.7% in the quarter and 14.8% for the six months. Total gross margin was 16.6% and 16.7%, respectively. Operating margin was 4.3% in the quarter, unchanged year over year, and 4.0% for the six months versus 3.7%.
- SG&A rose to $111.8 million in the quarter and $218.0 million for the six months. As a share of revenue, it increased to 12.3% and 12.7%, respectively, primarily reflecting newer clubs and investment in personnel and technology.
- Six-month cash used in investing was $85.7 million, including $70.8 million of property and equipment additions. Cash, cash equivalents and restricted cash totaled $136.8 million at February 29; short-term investments were $30.4 million. Operating cash flow less property and equipment additions was approximately $18.2 million.
- Short- and long-term borrowings totaled approximately $133.7 million at February 29, compared with $97.1 million at August 31, 2019. The company reported $71.98 million available under short-term facilities and was in compliance with disclosed debt covenants. Operating lease liabilities were $135.4 million following adoption of the new lease standard.
- Working capital was approximately $103.7 million. The company declared a $0.70-per-share dividend, payable in two installments; future dividends remain subject to Board approval.
Material changes and management commentary
- Growth reflected higher transactions, four additional clubs, and stronger merchandise margins. Central America and the Caribbean grew in the quarter; Colombia’s six-month merchandise sales declined 2.3%, with currency devaluation a significant factor.
- Foreign exchange reduced reported merchandise sales by approximately $2.9 million in the quarter and $15.1 million for the six months. In contrast, currency transaction results included a $0.8 million gain in the quarter and a $0.9 million loss for the six months.
- Other revenue fell 13.6% in the quarter, mainly because the prior-year quarter included a $2.2 million payment related to co-branded credit-card income underpayments. Six-month SG&A comparisons also benefited from prior-year CEO separation costs and the expiry of Aeropost acquisition-related compensation amortization.
- PriceSmart adopted ASC 842 leases in September 2019. The transition added $120.6 million of right-of-use assets and $132.1 million of lease liabilities; prior periods were not restated.
- No quantified full-year guidance was provided. Management said it was reassessing liquidity and capital spending because of COVID-19, considering additional cost savings, and continuing technology and e-commerce investments.
Outlook, risks and contingencies
- COVID-19 developments after the February 29 quarter-end created substantial uncertainty. March 2020 sales increased 17.1% year over year to $306.1 million, partly reflecting consumer stock-up, but traffic later declined amid restrictions and concerns. The company said the pandemic’s ultimate effects on operations, liquidity and results could not be reasonably estimated.
- Management reported club access and operating-hour restrictions, temporary closures in some markets, supply-chain disruption risks, and potential shifts away from discretionary goods. It drew $63.2 million from credit lines after quarter-end, delayed strategic capital expenditures, postponed the Liberia, Costa Rica club opening, and temporarily halted or deferred construction plans in Bogotá, Bucaramanga and Jamaica.
- Currency volatility and limited U.S.-dollar availability in Trinidad remain risks; the subsidiary had a net Trinidad-dollar-denominated asset position of approximately $62.4 million. Tax-recovery exposure includes $26.7 million of VAT receivables and $26.2 million of income-tax receivables; no allowances were recorded against these balances.
- A securities class action against the company and certain current and former officers alleges federal securities-law violations. PriceSmart said it believes the claims are without merit and filed a motion to dismiss. The filing also describes ordinary-course legal matters and construction and joint-venture commitments.
- The company identified goodwill and other indefinite-lived intangible assets whose fair value approximated carrying value; deterioration could result in impairment. Other risks include foreign-exchange and interest-rate movements, economic and political conditions, supply disruption, and changing competition.
Important facts for investors to verify
- How subsequent COVID-19 restrictions, sales trends and supply conditions affected results after the filing date.
- Whether the $63.2 million post-quarter credit-line draw, delayed capital spending and postponed club openings materially changed liquidity or growth plans.
- The recoverability and timing of VAT and income-tax receivables, especially balances subject to unclear or complex refund processes.
- Debt covenant headroom, foreign-currency exposures, and the availability of cash held in foreign subsidiaries.
- Developments in the securities class action, potential legal exposure, and any change in management’s assessment of contingencies.