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PSMT > SEC Filings for PSMT > Form 10-Q on 10-Jul-2013All Recent SEC Filings

Show all filings for PRICESMART INC

Form 10-Q for PRICESMART INC


10-Jul-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This quarterly report on Form 10-Q contains forward-looking statements concerning the Company's anticipated future revenues and earnings, adequacy of future cash flow and related matters. These forward-looking statements include, but are not limited to, statements containing the words "expect," "believe," "will," "may," "should," "project," "estimate," "anticipated," "scheduled," and like expressions, and the negative thereof. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the following risks: the Company's financial performance is dependent on international operations which exposes the Company to various risks; any failure by the Company to manage its widely dispersed operations could adversely affect its business; the Company faces significant competition; future sales growth could be dependent upon the Company acquiring suitable sites for additional warehouse clubs; the Company faces difficulties in the shipment of, and risks inherent in the acquisition and importation of, merchandise to its warehouse clubs; the Company is exposed to weather and other natural disaster risks; general economic conditions could adversely impact the Company's business in various respects; the Company is subject to changes in relationships and agreements with third parties with which the Company does business; a few of the Company's stockholders own nearly 29.7% of the Company's voting stock, which may make it difficult to complete some corporate transactions without their support and may impede a change in control; the loss of key personnel could harm the Company's business; the Company is subject to volatility in foreign currency exchange rates; the Company faces the risk of exposure to product liability claims, a product recall and adverse publicity; a determination that the Company's long-lived or intangible assets have been impaired could adversely affect the Company's future results of operations and financial position; although the Company takes steps to continuously review, enhance, and implement improvements to its internal controls, there may be material weaknesses or significant deficiencies that the Company has not yet identified; as well as the other risks detailed in the Company's U.S. Securities and Exchange Commission ("SEC") reports, including the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2012 filed on October 30, 2012 pursuant to the Securities Exchange Act of 1934. See "Part II - Item 1A - Risk Factors."

The following discussion and analysis compares the results of operations for the three and nine month period ended May 31, 2013 and 2012 and should be read in conjunction with the consolidated financial statements and the accompanying notes included therein.

PriceSmart's business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States. The Company's ownership in all operating subsidiaries as of May 31, 2013 is 100%, and they are presented on a consolidated basis. The number of warehouse clubs in operation as of May 31, 2013 and 2012 for each country or territory are as follows:

                           Number of             Number of        Anticipated warehouse
                        Warehouse Clubs       Warehouse Clubs         club openings
                      in Operation as of    in Operation as of              in
Country/Territory        May 31, 2013          May 31, 2012          Fiscal year 2014
Colombia                               3                     1                        -
Panama                                 4                     4                        -
Costa Rica                             5                     5                        1
Dominican Republic                     3                     3                        -
Guatemala                              3                     3                        -
El Salvador                            2                     2                        -
Honduras                               2                     2                        1
Trinidad                               4                     4                        -
Aruba                                  1                     1                        -
Barbados                               1                     1                        -
U.S. Virgin Islands                    1                     1                        -
Jamaica                                1                     1                        -
Nicaragua                              1                     1                        -
Totals                                31                    29                        2


During fiscal 2013, the Company opened its second and third clubs in Colombia. These clubs are in south and north Cali and opened in October 2012 and May 2013, respectively. Additionally, in February 2013, the Company acquired property located in La Union, Cartago, Costa Rica, upon which it anticipates opening its sixth membership warehouse club in Costa Rica in the fall of 2013. Finally, in February 2013, the Company acquired land in Tegucigalpa, Honduras upon which it anticipates opening its third warehouse club in Honduras in the spring of 2014.

The Company's warehouse clubs are located in Latin America and the Caribbean, and its corporate, U.S. buying operations and distribution centers are primarily located in the United States. The Company's reportable segments are based on management's organization of these locations into operating segments by general geographic location. The Company's operating segments are the United States, Latin America and the Caribbean.

General Economic Factors

The economies in the major PriceSmart markets continue to experience moderate year-over-year growth. Specific events in some of the smaller countries in which the Company has warehouse clubs, such as increases in value-added taxes, reduced economic activity and other factors are contributing to a more challenging retail environment in those markets, adversely impacting sales growth.

The Company does not currently face direct competition from U.S. branded membership warehouse club operators. However, it does face competition from various retail formats such as hypermarkets, supermarkets, cash and carry, home improvement centers, electronic retailers and specialty stores, including those within Central America that are owned and operated by a large U.S. based retailer. The Company has competed effectively in these markets in the past and expects to continue to do so in the future due to the unique nature of the membership warehouse club format. The Company has noted that certain retailers are making investments in upgrading their stores and adding new locations within the Company's markets resulting in increased competition. For example, Cost-U-Less, a cash and carry, low price operator with whom the Company competes in St. Thomas recently opened a location in Barbados. Further, it is possible that U.S. warehouse club operators may decide to enter the Company's markets and compete more directly with PriceSmart in a similar warehouse club format.

Many PriceSmart markets are susceptible to foreign currency exchange rate volatility. Approximately 52% of the Company's net warehouse sales are comprised of products purchased in U.S. dollars and imported into the markets where PriceSmart warehouse clubs are located, but approximately 79% of the Company's net warehouse sales are in foreign currencies. Currency exchange rate changes either increase or decrease the cost to the Company's subsidiaries of imported products purchased in U.S. dollars and priced in local currency. Although the Company adjusts prices on U.S. dollar goods on a periodic basis to maintain its target margins after taking into account changes in exchange rates, price changes can impact the demand for those products in the market.

Currency exchange rates also affect the reported sales of the consolidated company when local currency-denominated sales are translated to U.S. dollars. In addition, the Company revalues all U.S. dollar-denominated monetary assets and liabilities within those markets that do not use the U.S. dollar as their functional currency. These monetary assets and liabilities include, but are not limited to, excess cash permanently reinvested offshore, U.S. dollar-denominated long-term debt used to finance land acquisition and the construction of warehouse clubs, and U.S. dollar-denominated accounts payable related to the purchase of merchandise.

In addition to adjusting prices, the Company seeks to manage its foreign exchange risk by (1) obtaining local currency loans from banks within certain markets where it is economical to do so and where management believes the risk of devaluation and the level of U.S. dollar denominated liabilities warrants this action; (2) reducing the time between the acquisition of product in U.S. dollars and the settlement of that purchase in local currency; and (3) by entering into cross-currency interest rate swaps and forward currency derivatives. The Company has local currency-denominated long-term loans in Honduras and Guatemala; has cross-currency interest rate swaps and forward currency derivatives in Colombia and has forward currency derivatives in Costa Rica. Turbulence in the currency markets can have a significant impact on the value of the foreign currencies within the countries in which the Company operates. For example, in the first quarter of fiscal year 2012, concerns related to European sovereign debt contributed to the Colombian peso devaluation of 9.3% against the U.S. dollar, resulting in the Company's Colombian subsidiary recording approximately $1.5 million in currency losses upon the translation of U.S. dollar denominated liabilities. Future volatility and uncertainties regarding the currencies in the Company's countries could have a material impact on the Company's operations in future periods. However, there is no way to accurately forecast how currencies may trade in the future and, as a result, the Company cannot accurately project the impact of the change in rates on the Company's future demand for imported products, reported sales, or financial results.


Business Strategy

The Company's business strategy is to offer for sale to businesses and families a limited number of stock keeping units (SKU's) covering a wide range of products at the lowest possible prices. The Company charges an annual membership fee to its customers. These fees combined with warehouse and distribution operating efficiencies and volume purchasing enable PriceSmart to operate its business on lower merchandise margins than conventional retail stores. The combination of annual membership fees, operating efficiencies and low margins enable PriceSmart to offer its members high quality merchandise at very competitive prices which, in turn, enhances the value of the PriceSmart membership.

Current and Future Management Actions

Generally, the Company's earnings and cash flow from operations improve as sales increase. Higher sales provide greater purchasing power and often result in lower product prices from the Company's suppliers. As the Company's and individual PriceSmart locations' sales volumes increase, operating efficiencies are often realized through the leveraging of fixed costs and by the introduction of more efficient operating processes. Further, increased sales permit the Company to leverage its selling, general and administrative expenses. Sales growth in our existing locations (comparable warehouse club sales) creates the highest degree of cost leverage due to the operating efficiencies within our warehouse club format. Therefore, the Company prioritizes initiatives that it expects will have the greatest impact on increasing sales. Looking forward to the next several quarters, the following items are likely to have an impact on the Company's business and the results of operations.

The Company seeks to increase sales by attracting new members and growing sales with existing members in its warehouse clubs and by adding new PriceSmart warehouse clubs. During fiscal 2013, the Company opened its second and third clubs in Colombia. These clubs are in south and north Cali and opened in October 2012 and May 2013, respectively. Additionally, in February 2013, the Company acquired property located in La Union, Cartago, Costa Rica, upon which it anticipates opening its sixth membership warehouse club in Costa Rica in the fall of 2013. Finally, in February 2013, the Company acquired land in Tegucigalpa, Honduras upon which it anticipates opening its third warehouse club in Honduras in the spring of 2014. The Company continues to explore other potential sites for future warehouse clubs in its markets.

Effective June 1, 2012, the Company raised the annual membership fee by approximately $5.00 in most markets. The annual fee for a Diamond membership in these markets is now approximately $35.00 (entitling members to two cards). A membership fee helps PriceSmart offer high quality merchandise at low prices providing value to its members. In November, the Company introduced Platinum Membership in Costa Rica for $75 with a corresponding 2% rebate that can be applied against future purchases up to an annual maximum of $500.

The Company believes that its logistics and distribution operations are an important part of what allows PriceSmart to deliver high quality merchandise at low prices to our members. The Company continues to explore areas to improve efficiency, lower costs and ensure a good flow of merchandise to our warehouse clubs. The Company is adding regional distribution centers in some of its larger markets (currently Costa Rica and Panama) to improve merchandise flow and lower costs, the benefit of which can be passed on to our members in the form of lower merchandise prices.

Although the Company has leased sites in the past and will likely do so again in the future, generally the Company seeks to enhance its long-term business performance by buying rather than leasing real estate. Real estate ownership provides a number of advantages as compared to leasing, including lower operating expenses, flexibility to expand or otherwise enhance PriceSmart buildings, long-term control over the use of the property and the residual value that the real estate may have in future years. In the course of acquiring sites, the Company sometimes has to purchase more land than is actually needed for the warehouse club operation. As an example, when the Company acquired the Alajuela site in Costa Rica, it purchased land for the PriceSmart warehouse club and entered into a joint venture with the seller on the balance of the property. PriceSmart entered into a similar real estate transaction with respect to its Brisas site in Panama City. To the extent that the Company acquires property in excess of what is needed for a particular warehouse club, the Company generally plans to either sell or develop the excess property. The excess land at Alajuela and Brisas is being held for development by the joint ventures, which commenced in fiscal year 2011. A similar development strategy is being employed for the Company's excess land at the new San Fernando, Trinidad and Arroyo Hondo, Dominican Republic locations where the properties are fully owned by PriceSmart. The profitable sale or development of real estate is highly dependent on real estate market conditions.


Financial highlights for the third quarter of fiscal year 2013 included:

Net warehouse club sales increased 12.3% over the comparable prior year period. The Company had two additional warehouse clubs in the quarter (both in Cali, Colombia) compared to the third quarter of fiscal 2012. Comparable warehouse club sales (that is, sales in the warehouse clubs that have been open for greater than 13 1/2 calendar months) for the 13 weeks ended June 2, 2013 grew 9.2%.

Membership income for the third quarter of fiscal year 2013 increased 26.4% to $8.8 million.

Warehouse sales gross profits (net warehouse club sales less associated cost of goods sold) in the quarter increased 8.2% over the prior year period and warehouse sales gross profits as a percent of net warehouse sales were 14.4%, a reduction of 55 basis points from the same period last year.

Selling, general and administrative expenses (not including pre-opening expenses) decreased 47 basis points as a percentage of sales compared to the third quarter of last year.

Operating income for the third quarter of fiscal year 2013 was $28.7 million, an increase of $3.3 million over the third quarter of fiscal year 2012.

The Company had a $785,000 net loss from currency exchange transactions in the current quarter compared to a $449,000 net loss from currency exchange transactions in the same period last year.

Net income for the third quarter of fiscal year 2013 was $18.5 million, or $0.61 per diluted share, compared to $15.7 million, or $0.52 per diluted share, in the comparable prior year period.


Reclassifications to consolidated statement of income recorded during fiscal year 2013 for fiscal year 2012 - The Company receives cash consideration from its vendors for product demonstrations. Prior to fiscal year 2013, the Company recorded this consideration as other income. However, cash or equity consideration received from a vendor is presumed to be a reduction of cost of sales when it is recognized in the income statement. Additionally, reimbursements of costs incurred by the customer to sell the vendor's products are treated as a reduction of the related cost when recognized in the income statement. Therefore, the Company has recorded such consideration as a reduction to cost of sales and a reduction to related costs incurred to sell the vendor's products starting in fiscal year 2013. The Company has made reclassifications to the consolidated statement of income for fiscal year 2012 to conform to the presentation in fiscal year 2013. These reclassifications did not impact consolidated operating income or net income. The following table summarizes the impact of these reclassifications (in thousands):

                                                       Three Months Ended
                                                                                                            Total Fiscal
                          November 30, 2011     February 29, 2012     May 31, 2012      August 31, 2012       Year 2012
Revenues:
Net warehouse club
sales-as previously
reported                 $         468,329     $         537,816     $     494,898     $       499,003     $  2,000,046
Reclassifications                     (137 )                (197 )            (151 )              (197 )           (682 )
Net warehouse club
sales-as currently
reported                 $         468,192     $         537,619     $     494,747     $       498,806     $  1,999,364

Other income-as
previously reported      $           1,776     $           2,165     $       2,163     $         2,318     $      8,422
Reclassifications                   (1,097 )              (1,230 )          (1,294 )            (1,279 )         (4,900 )
Other income-as
currently reported       $             679     $             935     $         869     $         1,039     $      3,522

Cost of goods sold:
Net warehouse club-as
previously reported      $         400,481     $         459,313     $     421,512     $       422,825     $  1,704,131
Reclassifications                     (616 )                (805 )            (788 )              (590 )         (2,799 )
Net warehouse club-as
currently reported       $         399,865     $         458,508     $     420,724     $       422,235     $  1,701,332

Selling, general and
administrative:
Warehouse club
operations-as previously
reported                 $          42,509     $          46,384     $      46,197     $        47,311     $    182,401
Reclassifications                     (618 )                (622 )            (657 )              (886 )         (2,783 )
Warehouse club
operations-as currently
reported                 $          41,891     $          45,762     $      45,540     $        46,425     $    179,618

Net effect on operating
income                   $               -     $               -     $           -     $             -     $          -


COMPARISON OF THE THREE AND NINE MONTHS ENDED MAY 31, 2013 AND 2012

The Company's fiscal third quarter ended on May 31, 2013. Unless otherwise noted, all tables present U.S. dollar amounts in thousands. Certain percentages presented are calculated using actual results prior to rounding.

Net Warehouse Club Sales

                           Three Months Ended May 31,                    Nine Months Ended May 31,
                              2013                   2012                  2013                   2012
                       Amount        % Change       Amount          Amount       % Change        Amount
Net Warehouse club

sales $ 555,815 12.3 % $ 494,747 $ 1,671,269 11.4 % $ 1,500,558

Comparison of Three and Nine Months Ended May 31, 2013 and 2012

The Company recorded positive sales growth in nearly all countries. Colombia, in particular, experienced strong sales growth with the addition of two new warehouse clubs compared to the third quarter of fiscal year 2012. Total net warehouse sales growth of 12.3% during the three months ended May 31, 2013 resulted from an 8.8% growth in transactions and a 3.3% growth in average ticket. All merchandise categories experienced growth during the quarter, with hardline and softline merchandise growing a little faster than total sales at 16% and 15%, respectively. In addition, bakery continued to perform well, with growth in the period of 18%.

For the first three quarters of fiscal year 2013, net warehouse sales growth of 11.4% resulted from a 7.7% increase in transactions coupled with a 3.4% increase in average ticket.

Comparable Sales

The Company reports comparable warehouse club sales on a "same week" basis with 13 weeks in each quarter beginning on a Monday and ending on a Sunday. The periods are established at the beginning of the fiscal year to provide as close a match as possible to the calendar month and quarter that is used for financial reporting purposes. This approach equalizes the number of weekend days and weekdays in each period for improved sales comparison, as the Company experiences higher warehouse club sales on the weekends. Further, each of the warehouse clubs used in the calculations was open for at least 13 1/2 calendar months before its results for the current period were compared with its results for the prior period. For example, the sales related to the warehouse club opened in Cali, Colombia ("Canas Gordas") on October 19, 2012 will not be used in the calculation of comparable warehouse club sales until January 2014. In addition, sales related to the warehouse club opened in Cali, Colombia ("Menga") on May 3, 2013 will not be used in the calculation of comparable warehouse club sales until July 2014.

Comparable warehouse club sales, which are for warehouse clubs open at least 13 1/2 full months, increased 9.2% for the 13-week period ended June 2, 2013, compared to the same 13-week period last year.


Net Warehouse Club Sales by Segments

The following tables indicate the net warehouse club sales and the percentage
growth in net warehouse club sales during the three and nine months ended May
31, 2013 and 2012 in the segments in which the Company operates.

                                                     Three Months Ended May 31,
                                              2013                                               2012
                                                     Increase from
                    Amount        % of net sales      prior year        Change        Amount        % of net sales
Latin America    $   377,685             68.0 %     $      50,304         15.4 %   $   327,381             66.2 %
Caribbean            178,130             32.0 %            10,764          6.4 %       167,366             33.8 %
Net warehouse
club sales       $   555,815            100.0 %     $      61,068         12.3 %   $   494,747            100.0 %


                                                     Nine Months Ended May 31,
                                              2013                                               2012
                                                     Increase from
                    Amount        % of net sales      prior year        Change        Amount        % of net sales
Latin America    $ 1,127,369             67.5 %     $     142,595         14.5 %   $   984,774             65.6 %
Caribbean            543,900             32.5 %            28,116          5.5 %       515,784             34.4 %
Net warehouse
Club Sales       $ 1,671,269            100.0 %     $     170,711         11.4 %   $ 1,500,558            100.0 %

Comparison of Three and Nine Months Ended May 31, 2013 and 2012

For the three and nine months ended May 31, 2013 and 2012, the higher net
warehouse club sales growth in Latin America compared to the Caribbean reflects
improved economic conditions in those more diversified and larger markets, plus
the sales associated with the additional two warehouse club sales in Cali,
Colombia in the current periods compared to prior periods. We expect Latin
America sales growth to continue to outpace Caribbean sales growth as the next
two warehouse clubs we expect to open are located in Costa Rica and Honduras.

Export Sales
                                                  Three Months Ended May 31,
                                           2013                                              2012
                                                Increase from
                 Amount      % of net sales       prior year        Change        Amount        % of net sales
Export sales   $  6,224             1.1 %      $        3,456        124.9 %   $     2,768             0.6 %

                                                  Nine Months Ended May 31,
                                           2013                                              2012
                                                Increase from
                 Amount      % of net sales       prior year        Change        Amount        % of net sales
Export sales   $ 15,620             0.9 %      $        7,144         84.3 %   $     8,476             0.6 %

The increase in export sales was due to direct sales to a single institutional customer (retailer) in the Philippines for which the Company achieves a gross profit margin of approximately 5%, which is below the Company's warehouse club gross profit margin.


Membership Income
                                                     Three Months Ended May 31,
                                                      2013                              2012
                                                    Increase from
. . .
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