PriceSmart, Inc. — Form 10-Q summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2018; comparisons are with the corresponding 2017 periods. The filing was signed July 5, 2018. Amounts below are U.S. dollars; financial-statement amounts are generally in millions unless noted.
Business context
PriceSmart operates membership warehouse clubs across Latin America and the Caribbean. At quarter-end it had 41 clubs in 13 countries and territories, up from 39 a year earlier. It opened clubs in Santa Ana, Costa Rica, in October 2017 and Santo Domingo, Dominican Republic, in May 2018. In March 2018, it acquired Aeropost, a cross-border logistics and e-commerce business operating in 38 countries.
Financial results and liquidity
| Metric | Three months ended May 31 | Nine months ended May 31 |
|---|---|---|
| Total revenue | $782.2 million, up 7.1% | $2,388.8 million, up 5.6% |
| Net merchandise sales | $750.5 million, up 5.6% | $2,312.4 million, up 5.2% |
| Comparable merchandise sales | Up 2.7% | Up 3.0% |
| Merchandise gross margin | 14.6%, up 0.6 percentage points | 14.5%, essentially unchanged |
| Operating income | $28.4 million, versus $27.6 million | $98.9 million, down from $105.4 million |
| Net income attributable to PriceSmart | $18.7 million; diluted EPS $0.61 | $55.3 million; diluted EPS $1.82 |
| Operating cash flow | Not separately reported for the quarter | $90.8 million, versus $86.9 million |
Quarterly selling, general and administrative expenses rose to $101.1 million from $85.0 million, increasing to 12.9% of revenue from 11.6%. Nine-month SG&A was $284.3 million, or 11.9% of revenue, versus $253.9 million, or 11.2%.
For the nine months, investing activities used $98.3 million, including $74.8 million of property and equipment additions and $23.9 million for Aeropost, net of acquired cash. Financing activities used $12.4 million. Cash, cash equivalents and restricted cash declined $20.9 million to $144.8 million; cash and cash equivalents alone were $141.2 million at May 31.
Current assets were $509.7 million and current liabilities $376.0 million, including $14.6 million of current long-term debt. Long-term debt was $91.2 million; short-term borrowings were $0.3 million. Available short-term credit facilities were $69.8 million, and the company reported compliance with its debt covenants. Total long-term debt was $105.9 million, compared with $106.3 million at August 31, 2017.
Material changes and unusual items
- Nine-month net income fell to $55.3 million from $70.9 million, with the $13.4 million U.S. tax-reform transition tax a major factor. The nine-month effective tax rate increased to 42.5% from 31.0%; the third-quarter rate was 30.3%.
- Quarterly net income was nearly flat year over year despite higher revenue. Merchandise margin improved, but higher operating costs and a $0.6 million currency transaction loss (versus a $1.1 million gain in the prior-year quarter) weighed on results.
- Aeropost contributed $7.8 million of revenue and a $2.3 million net loss from acquisition through May 31. The acquisition added $16.1 million of intangible assets and $16.0 million of goodwill on a preliminary basis; purchase-price allocation remained subject to refinement. The filing also reports $3.1 million of acquired income-tax contingencies.
- The company recorded a $1.9 million impairment for internally developed e-commerce software after acquiring Aeropost’s platform, as well as Aeropost-related integration and deal costs. Management said integration was expected to be sufficiently complete by the end of fiscal Q2 2019.
- Nine-month capital spending and working-capital movements included a $15.3 million inventory cash outflow. Dividends declared were $0.70 per share for fiscal 2018, with the second $0.35 payment scheduled for August 31, 2018, subject to Board discretion.
Outlook, commentary and risks
No specific earnings or revenue guidance is provided. Management expected two additional small-format clubs in Santiago, Panama, and Santo Domingo, Dominican Republic, to open in spring 2019, and continued to assess other sites. A new Costa Rica distribution center was expected to begin operating in fall 2018. Management anticipates ongoing semi-annual dividends, but future declarations and amounts remain at the Board’s discretion.
Management cited currency volatility, economic and political conditions, foreign-exchange convertibility, taxes and recovery of government tax receivables, competition, supply-chain disruptions, security, and execution of the Aeropost integration and new ERP system as risks. Trinidad’s shortage of U.S. dollars and other tradeable currencies persisted; the subsidiary had a $6.3 million net U.S.-dollar liability exposure at May 31, and PriceSmart said it might limit shipments to match its ability to obtain foreign currency. Political unrest in Nicaragua led to reduced club hours and closures during strikes. Panama, Barbados and Trinidad were also described as challenging markets.
Tax and other contingencies include disputed assessments and refund claims. The company had $27.0 million of VAT receivables and $21.6 million of income-tax receivables; it had not recorded allowances and said it believed recovery was more likely than not. Management stated that pending legal proceedings were not expected to materially adversely affect financial position, results or liquidity, while noting outcomes and timing remain uncertain. In June 2018, after quarter-end, the company extended a Honduras lease, adding approximately $31.6 million to future minimum lease commitments.
Investor verification priorities
- Assess underlying comparable sales and margins by market, distinguishing currency effects, new-club transfers and the Aeropost contribution.
- Track whether Aeropost integration, e-commerce benefits and the preliminary goodwill and intangible-asset valuations develop as expected.
- Review the recoverability and timing of VAT and income-tax receivables, disputed tax assessments, and the final cost and payment schedule of the U.S. transition tax.
- Monitor Trinidad currency availability and exposure, Nicaragua operating conditions, and any resulting shipment or sales restrictions.
- Evaluate planned club and distribution-center investment, cash generation, debt maturities and covenant headroom, as well as the added Honduras lease commitments.