PriceSmart, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended August 31, 2017. The filing also reports fourth-quarter results; its comparable-sales periods use a 13-week calendar that ended September 3, 2017. Amounts below are U.S. dollars.
Business context
PriceSmart operates membership warehouse clubs across Latin America and the Caribbean, with U.S. buying, corporate and distribution operations. It had 39 clubs in 13 countries and territories at year-end, including a new club in Chía, Colombia. The company opened in Santa Ana, Costa Rica, on October 5, 2017, and expected to open a fourth Dominican Republic club in spring 2018.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $2,996.6 million | $2,905.2 million |
| Net warehouse club sales | $2,910.1 million | $2,820.7 million |
| Operating income | $136.2 million | $136.7 million |
| Net income | $90.7 million | $88.7 million |
| Diluted EPS | $2.98 | $2.92 |
| Operating cash flow | $122.9 million | $141.5 million |
- Revenue rose 3.1%; warehouse sales increased 3.2%, with comparable sales up 1.5%. Transactions grew 2.8% and average ticket 1.0%.
- Warehouse gross margin improved to 14.5% from 14.3%; total gross margin was 15.9% of revenue, up from 15.7%. SG&A increased to 11.4% of revenue from 11.0%, weighing on operating margin, which declined to 4.5% from 4.7%.
- Net income increased about 2.3%, while operating income was nearly flat. The effective tax rate declined to 31.7% from 32.6%.
- Fourth-quarter warehouse sales increased 3.6% year over year and comparable sales rose 1.9%. Membership income was $12.2 million, up 5.3%. Operating income was $30.8 million, down $2.0 million; net income was $19.8 million, or $0.64 per diluted share, versus $22.3 million, or $0.74, a year earlier. The quarter’s effective tax rate rose to 33.9% from 30.4%.
Cash, debt and liquidity
- Cash and cash equivalents were $162.4 million at year-end, down from $199.5 million; including restricted cash, the cash-flow statement reports $165.7 million versus $202.7 million.
- Operating cash flow was $122.9 million; investing cash outflow was $135.2 million, largely reflecting property, club and distribution-center investment. Capital expenditures were $135.3 million. Cash flow after property additions was approximately negative $12.4 million.
- Long-term debt, including its current portion, was $106.3 million, up from $88.1 million; there were no short-term borrowings outstanding. Of $69.0 million in short-term facilities, $68.0 million was available, excluding letters of credit. The company reported compliance with applicable debt covenants.
- Current assets were $510.4 million and current liabilities were $363.4 million. Total assets were $1.18 billion and stockholders’ equity was $708.8 million.
- The company paid $21.3 million in dividends, or $0.70 per share. Management anticipated continuing semiannual dividends, subject to Board approval and capital needs.
Material changes and management commentary
- Colombia returned to segment operating profitability as the peso stabilized and sales and margins improved. Colombia warehouse sales grew 27.2%, including the contribution of the Chía opening; comparable sales increased 10.2%.
- Central America sales grew 1.7%; Caribbean sales declined 1.6%, mainly reflecting weakness in Trinidad. Costa Rica sales were also weak.
- Trinidad’s shortage of U.S. dollars led the company to limit U.S. merchandise shipments for part of the first half, hurting sales. Shipments normalized later in the year, but management warned the currency-availability issue could recur in FY2018.
- Investment increased: the company acquired a Miami-area distribution center for about $46 million, funded partly with a $35.7 million loan, and continued club construction and expansion. Long-term debt also included a new $12 million Trinidad loan.
Outlook, risks and contingencies
- Management forecast FY2018 capital expenditures of $120–$140 million. It planned $3–$5 million of additional technology-related spending for ERP evaluation and a team developing an online business targeted for launch in summer 2018; the spending was expected to be expensed and affect near-term earnings.
- Key risks include foreign exchange movements and currency-conversion restrictions, economic and political conditions, competition, import and supply-chain disruption, cost inflation, new-club execution and possible cannibalization, and e-commerce investment and execution. About 77% of warehouse sales were in non-U.S.-dollar functional-currency markets; about 52% of sales were products purchased in U.S. dollars.
- Hurricanes Irma and Maria disrupted the U.S. Virgin Islands club: it closed for nine days and then operated with limited hours for 16 days; damaged roads continued to constrain access.
- Tax recovery remains uncertain in certain markets. The company disclosed a $1.2 million VAT receivable where refund procedures were disputed, and a $4.3 million income-tax receivable plus $2.0 million in deferred tax assets in a country with a minimum tax based on sales. It recorded no allowance, citing its expectation of recovery. A subsidiary also received tax assessments of $2.6 million and $5.3 million; the company expected to prevail and recorded no provision, but had paid the amounts in advance while appealing.
- The company reported no material off-balance-sheet arrangements and stated that ordinary-course legal proceedings were not expected to have a material adverse effect. Management and the auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Whether Trinidad can obtain enough tradable currency to sustain normal imported-goods shipments and sales.
- Whether Colombia’s sales and margin recovery, and Caribbean and Central America performance, continue in FY2018.
- Execution, timing and returns on the announced club openings, $120–$140 million capital plan, ERP work and e-commerce launch.
- Recoverability and timing of disputed VAT and income-tax receivables, and outcomes of the tax assessments and appeals.
- Cash generation relative to investment, dividend payments and rising debt; confirm liquidity facilities and covenant compliance in subsequent filings.