PriceSmart, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2019. Unaudited results; amounts below are in U.S. dollars. PriceSmart operated 41 membership warehouse clubs across 12 countries and one U.S. territory.
Financial performance and liquidity
| Metric | Three months | Six months |
|---|---|---|
| Total revenue | $854.4 million, up 1.8% | $1,634.1 million, up 1.7% |
| Net merchandise sales | $820.3 million, up 0.5% | $1,567.7 million, up 0.4% |
| Comparable merchandise sales | Down 0.9% | Down 1.4% |
| Operating income | $36.5 million, versus $37.3 million | $61.2 million, versus $70.4 million |
| Net income attributable to PriceSmart | $23.8 million; diluted EPS $0.79 | $38.4 million; diluted EPS $1.27 |
- Warehouse merchandise gross margin was 14.0% for the quarter and 14.1% for the six-month period, down 40 and 30 basis points, respectively, year over year. Management attributed the decline largely to pricing actions to support sales. Total gross margin as a percentage of revenue rose 40 basis points in both periods, helped by marketplace/casillero revenue mix and revenue classification changes.
- Operating cash flow was $76.3 million, compared with $59.1 million; investing cash outflow was $53.8 million and financing cash outflow was $19.8 million. Capital additions to property and equipment were $62.7 million. Cash, cash equivalents and restricted cash totaled $98.1 million at period-end; short-term investments were an additional $23.5 million.
- Current assets were $499.5 million and current liabilities $392.6 million. Long-term debt totaled $96.0 million, of which $26.2 million was current. The company reported compliance with applicable debt covenants and $68.6 million of available short-term credit facilities.
- Dividends declared were $0.70 per share, split into two $0.35 payments. The filing says future dividends remain subject to Board approval.
Material changes versus prior period
- Quarterly attributable net income rose from $14.1 million to $23.8 million; six-month net income rose from $36.6 million to $38.4 million. Comparisons benefit from the prior-year $13.4 million U.S. tax-reform transition tax, which did not recur. Effective tax rates were 32.9% versus 61.6% for the quarter and 33.3% versus 47.3% for six months.
- Despite modest sales growth, operating income fell about 2% for the quarter and 13% for six months. Higher operating and administrative expenses included investment in omni-channel capabilities, Aeropost operations, and a $3.8 million CEO separation charge in the first quarter.
- Aeropost-related activities, including marketplace/casillero results and omni-channel investment, reduced attributable net income by $4.2 million for the quarter and $8.1 million for six months. Aeropost generated $19.1 million of six-month revenue and an $8.1 million net loss.
- Foreign-currency transaction losses were $0.4 million for the quarter and $2.1 million for six months, versus gains in the prior-year periods. Currency translation reduced six-month other comprehensive income by $8.3 million.
- Other revenue increased substantially, partly from $19.0 million of Aeropost non-merchandise revenue over six months and a $2.2 million reimbursement of prior underpayments on co-branded credit-card income. Adoption of ASC 606 also changed presentation of this card income from a reduction of operating expenses to other revenue, limiting year-over-year comparability.
Outlook, risks and unusual items
- No quantified full-year earnings or sales guidance is provided. Management expected two small-format clubs in Panama and the Dominican Republic to open in spring and summer 2019, and standard-format clubs in Guatemala and Panama in fall 2019. The company expected to launch an e-commerce platform in the Dominican Republic alongside its new club.
- Management cited economic weakness, currency devaluation, competition in Panama and political instability in Nicaragua as factors affecting comparable sales. It also noted continuing U.S.-dollar liquidity constraints in Trinidad, which could require limiting shipments; the subsidiary had a net U.S.-dollar asset position of approximately $20.7 million.
- Tax recovery remains an area to monitor: reported VAT receivables were $26.0 million and income-tax receivables $24.9 million. The company has not recorded allowances on these balances, including disputed amounts, based on its expectation of recovery. It also disclosed disputed tax assessments totaling $8.0 million; $2.5 million had been paid in advance while under appeal.
- Other commitments include $189.8 million of future minimum operating lease payments, $18.8 million of construction obligations not yet performed, and potential $52.1 million cash use if land purchase options are exercised. The company expected lease accounting adoption in September 2019 to materially increase reported assets and liabilities, but not materially change net income or cash flows.
- The filing identifies risks from foreign exchange, political and macroeconomic conditions, tax and regulatory changes, supply-chain disruption, competition, cybersecurity, and execution/integration of Aeropost. Management said disclosure controls were effective and the previously identified weakness in classification of cash equivalents and short-term investments had been remediated by February 28, 2019.
Important facts for investors to verify
- Whether comparable-sales trends and merchandise margins stabilize, particularly in Central America, and how currency movements affect reported sales and earnings.
- Whether Aeropost and omni-channel investments produce the expected growth and efficiencies, and the pace at which associated losses and costs change.
- Recoverability and timing of disputed VAT and income-tax receivables, and outcomes of the disclosed tax assessments and appeals.
- Progress, opening dates, capital requirements and returns for the four planned clubs, alongside lease and construction commitments.
- Effects of Trinidad’s currency liquidity constraints and other political, economic and regulatory developments in operating markets.
- Impact of the forthcoming lease-accounting adoption and continued compliance with debt covenants.