QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2023
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to
COMMISSION FILE NUMBER 000-22793
PriceSmart, Inc.
(Exact name of registrant as specified in its charter)
Delaware
33-0628530
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
9740 Scranton Road, San Diego, CA
92121
(Address of principal executive offices)
(Zip Code)
(858) 404-8800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.0001 par value
PSMT
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.
Yesx
No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yesx
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller Reporting Company
o
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o
No
x
The registrant had 31,049,026 shares of its common stock, par value $0.0001 per share, outstanding at June 30, 2023.
PriceSmart, Inc.’s (“PriceSmart,” “we” or the “Company”) unaudited consolidated balance sheet as of May 31, 2023 and the consolidated balance sheet as of August 31, 2022, the unaudited consolidated statements of income for the three and nine months ended May 31, 2023 and 2022, the unaudited consolidated statements of comprehensive income for the three and nine months ended May 31, 2023 and 2022, the unaudited consolidated statements of equity for the three and nine months ended May 31, 2023 and 2022, and the unaudited consolidated statements of cash flows for the nine months ended May 31, 2023 and 2022 are included herein. Also included herein are the notes to the unaudited consolidated financial statements.
Receivables, net of allowance for doubtful accounts of $57 as of May 31, 2023 and $103 as of August 31, 2022, respectively
15,031
13,391
Merchandise inventories
442,580
464,411
Prepaid expenses and other current assets (includes $0 and $2,761 as of May 31, 2023 and August 31, 2022, respectively, for the fair value of derivative instruments)
51,317
43,894
Total current assets
847,190
773,579
Long-term restricted cash
10,739
10,650
Property and equipment, net
816,973
757,241
Operating lease right-of-use assets, net
106,411
111,810
Goodwill
43,152
43,303
Deferred tax assets
28,278
28,355
Other non-current assets (includes $10,759 and $11,884 as of May 31, 2023 and August 31, 2022, respectively, for the fair value of derivative instruments)
70,132
72,928
Investment in unconsolidated affiliates
10,471
10,534
Total Assets
$
1,933,346
$
1,808,400
LIABILITIES AND EQUITY
Current Liabilities:
Short-term borrowings
$
10,414
$
10,608
Accounts payable
417,210
408,407
Accrued salaries and benefits
44,551
44,097
Deferred income
32,507
29,228
Income taxes payable
7,365
7,243
Other accrued expenses and other current liabilities (includes $1,240 and $82 as of May 31, 2023 and August 31, 2022, respectively, for the fair value of derivative instruments)
34,106
38,667
Operating lease liabilities, current portion
6,929
7,491
Dividends payable
14,426
—
Long-term debt, current portion
19,757
33,715
Total current liabilities
587,265
579,456
Deferred tax liability
1,967
2,165
Long-term income taxes payable, net of current portion
4,833
5,215
Long-term operating lease liabilities
114,377
118,496
Long-term debt, net of current portion
124,631
103,556
Other long-term liabilities (includes $1,164 and $0 for the fair value of derivative instruments and $9,416 and $8,440 for post-employment plans as of May 31, 2023 and August 31, 2022, respectively)
Common stock $0.0001 par value, 45,000,000 shares authorized; 31,934,824 and 31,697,590 shares issued and 31,064,154 and 30,904,826 shares outstanding (net of treasury shares) as of May 31, 2023 and August 31, 2022, respectively
3
3
Additional paid-in capital
494,382
481,406
Accumulated other comprehensive loss
(169,603)
(195,586)
Retained earnings
802,002
736,894
Less: treasury stock at cost, 870,670 shares as of May 31, 2023 and 792,764 shares as of August 31, 2022
Less: net income attributable to non controlling interest
—
—
—
(19)
Net income attributable to PriceSmart, Inc.
$
29,572
$
19,258
$
93,824
$
81,230
Other Comprehensive Income, net of tax:
Foreign currency translation adjustments (1)
15,285
(9,401)
26,599
(15,119)
Defined benefit pension plan:
Net gain/(loss) arising during period
(22)
5
(81)
42
Amortization of prior service cost and actuarial gains included in net periodic pensions cost
37
34
111
98
Total defined benefit pension plan
15
39
30
140
Derivative instruments:(2)
Unrealized gains/(losses) on change in derivative obligations
3,060
272
2,525
(147)
Unrealized gains/(losses) on change in fair value of interest rate swaps
(4,271)
355
(5,904)
4,486
Amounts reclassified from accumulated other comprehensive income to other expense, net for settlement of derivatives
11
—
2,733
—
Total derivative instruments
(1,200)
627
(646)
4,339
Other comprehensive income (loss)
14,100
(8,735)
25,983
(10,640)
Comprehensive income
43,672
10,523
119,807
70,590
Less: comprehensive income attributable to noncontrolling interest
—
—
—
3
Comprehensive income attributable to PriceSmart, Inc.
$
43,672
$
10,523
$
119,807
$
70,587
(1)Translation adjustments arising in translating the financial statements of a foreign entity have no effect on the income taxes of that foreign entity. They may, however, affect: (a) the amount, measured in the parent entity's reporting currency, of withholding taxes assessed on dividends paid to the parent entity and (b) the amount of taxes assessed on the parent entity by the government of its country. The Company has determined that the reinvestment of earnings of its foreign subsidiaries are indefinite because of the long-term nature of the Company's foreign investment plans. Therefore, deferred taxes are not provided for on translation adjustments related to non-remitted earnings of the Company's foreign subsidiaries.
(2)See Note 8 - Derivative Instruments and Hedging Activities.
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
53,264
50,258
Allowance for doubtful accounts
(46)
10
Loss on sale of property and equipment
295
881
Deferred income taxes
(723)
(3,241)
Equity in losses of unconsolidated affiliates
63
6
Stock-based compensation
13,522
12,678
Change in operating assets and liabilities:
Receivables, prepaid expenses and other current assets, non-current assets, accrued salaries and benefits, deferred membership income and other accruals
(5,229)
(16,133)
Merchandise inventories
21,831
(71,257)
Accounts payable
7,880
9,860
Net cash provided by operating activities
184,681
64,311
Investing Activities:
Proceeds from the disposal of Aeropost, net of divested cash
—
4,959
Additions to property and equipment
(96,557)
(98,562)
Purchases of short-term investments
(123,317)
(22,442)
Proceeds from settlements of short-term investments
21,842
53,058
Proceeds from settlements of long-term investments
—
1,486
Proceeds from disposal of property and equipment
218
97
Net cash used in investing activities
(197,814)
(61,404)
Financing Activities:
Proceeds from long-term bank borrowings
38,712
30,633
Repayment of long-term bank borrowings
(31,407)
(17,804)
Proceeds from short-term bank borrowings
3,156
22,313
Repayment of short-term bank borrowings
(3,229)
(6,505)
Cash dividend payments
(14,290)
(13,275)
Purchase of treasury stock
(5,993)
(3,997)
Net cash provided by (used in) financing activities
(13,051)
11,365
Effect of exchange rate changes on cash and cash equivalents and restricted cash
11,183
(7,034)
Net increase (decrease) in cash, cash equivalents
(15,001)
7,238
Cash, cash equivalents and restricted cash at beginning of period
251,373
215,479
Cash, cash equivalents and restricted cash at end of period
$
236,372
$
222,717
Supplemental disclosure of noncash investing activities:
NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION
PriceSmart, Inc.’s (“PriceSmart,” the “Company,”, "we" or "our") business consists primarily of international membership shopping and services offered both online and at warehouse clubs similar to, but typically smaller in size than, warehouse clubs in the United States. As of May 31, 2023, the Company had 51 warehouse clubs in operation in 12 countries and one U.S. territory (nine in Colombia; eight in Costa Rica; seven in Panama; five in the Dominican Republic and Guatemala; four in Trinidad; three each in El Salvador and Honduras; two Nicaragua and Jamaica; and one each in Aruba, Barbados and the United States Virgin Islands), of which the Company owns 100% of the corresponding legal entities (see Note 2 - Summary of Significant Accounting Policies). In addition, the Company plans to open a warehouse club in Medellín, Colombia in August 2023, a club in Escuintla, Guatemala in the fall of 2023 and a warehouse club in Santa Ana, El Salvador in early 2024. Once these three new clubs are open, the Company will operate 54 warehouse clubs. Our operating segments are the United States, Central America, the Caribbean and Colombia.
PriceSmart continues to invest in technology and talent to support the following three major drivers of growth:
1.Invest in Remodeling Current PriceSmart Clubs, Adding New PriceSmart Locations and Opening More Distribution Centers;
2.Increase Membership Value; and
3.Drive Incremental Sales via PriceSmart.com and Enhanced Online, Digital and Technological Capabilities.
Basis of Presentation – The interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).
These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2022 (the “2022 Form 10-K”). The interim consolidated financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries. Intercompany transactions between the Company and its subsidiaries have been eliminated in consolidation.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation – The interim consolidated financial statements of the Company included herein include the assets, liabilities and results of operations of the Company’s wholly owned subsidiaries, subsidiaries in which it has a controlling interest, and the Company’s joint ventures for which the Company has determined that it is the primary beneficiary. The Company’s net income excludes income attributable to non-controlling interests. The Company reports non-controlling interests in consolidated entities as a component of equity separate from the Company’s equity. The interim consolidated financial statements also include the Company's investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method. All significant inter-company accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC and reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows for the periods presented. The results for interim periods are not necessarily indicative of the results for the year.
The Company determines whether any of the joint ventures in which it has made investments is a Variable Interest Entity (“VIE”) at the start of each new venture and if a reconsideration event has occurred. At this time, the Company also considers whether it must consolidate a VIE and/or disclose information about its involvement in a VIE. A reporting entity must consolidate a VIE if that reporting entity has a variable interest (or combination of variable interests) and is determined to be the primary beneficiary. If the Company determines that it is not the primary beneficiary of the VIE, then the Company records its investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method. Due to the nature of the joint ventures that the Company participates in and the continued commitments for additional financing, the Company determined these joint ventures are VIEs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
In the case of the Company's ownership interest in real estate development joint ventures, both parties to each joint venture share all rights, obligations and the power to direct the activities of the VIE that most significantly impact the VIE's economic performance. As a result, the Company has determined that it is not the primary beneficiary of the VIEs and, therefore, has accounted for these entities under the equity method. Under the equity method, the Company's investments in unconsolidated affiliates are initially recorded as an investment in the stock of an investee at cost and are adjusted for the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee after the date of the initial investment.The Company's ownership interest in real estate development joint ventures the Company has recorded under the equity method as of May 31, 2023 are listed below:
Real Estate Development Joint Ventures
Countries
Ownership
Basis of Presentation
GolfPark Plaza, S.A.
Panama
50.0
%
Equity(1)
Price Plaza Alajuela PPA, S.A.
Costa Rica
50.0
%
Equity(1)
(1)Joint venture interests are recorded as investment in unconsolidated affiliates on the consolidated balance sheets.
Use of Estimates– The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and assumptions take into account historical and forward-looking factors that the Company believes are reasonable. Actual results could differ from those estimates and assumptions.
Cash and Cash Equivalents – The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase and proceeds due from credit and debit card transactions in the process of settlement. The Company invests in certain debt securities, primarily U.S. treasury bills, as part of our cash management policy. Purchases of debt securities are classified as trading, held-to-maturity, or available-for-sale at the time of purchase based on the individual security. All of our debt securities are currently classified as held-to-maturity and are reported at amortized cost. The Company has the ability and intent to hold these investments until maturity. All of these investments are currently included in Cash and cash equivalents on the consolidated balance sheets. In addition, the Company invests some of our cash in money market funds which are considered equity securities and are held at fair value in Cash and cash equivalents on the consolidated balance sheets.
Restricted Cash – The following table summarizes the restricted cash reported by the Company (in thousands):
May 31, 2023
August 31, 2022
Short-term restricted cash
$
2,965
$
3,013
Long-term restricted cash
10,739
10,650
Total restricted cash(1)
$
13,704
$
13,663
(1)Restricted cash consists of cash deposits held within banking institutions in compliance with federal regulatory requirements in Costa Rica and Panama. In addition, the Company is required to maintain a certificate of deposit and/or security deposits of Trinidad dollars, as measured in U.S. dollars, of approximately $7.8 million with a few of its lenders as compensating balances for several U.S. dollar and euro denominated loans payable over several years. The certificates of deposit will be reduced annually commensurate with the loan balances.
Short-Term Investments – The Company considers as short-term investments, certificates of deposit and similar time-based deposits with financial institutions with maturities over three months and up to one year.
Long-Term Investments – The Company considers as long-term investments, certificates of deposit and similar time-based deposits with financial institutions with maturities over one year.
Goodwill – Goodwill totaled $43.2 million as of May 31, 2023 and $43.3 million as of August 31, 2022. The Company reviews reported goodwill at the reporting unit level for impairment. The Company tests goodwill for impairment at least annually or when events or changes in circumstances indicate that it is more likely than not that the asset is impaired.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
Receivables –Receivables consist primarily of credit card receivables and receivables from vendors and are stated net of allowances for credit losses. The determination of the allowance for credit losses is based on the Company’s assessment of collectability along with the consideration of current and expected market conditions that could impact collectability.
Tax Receivables –The Company pays Value Added Tax (“VAT”) or similar taxes, income taxes, and other taxes within the normal course of business in most of the countries in which it operates related to the procurement of merchandise and/or services the Company acquires and/or on sales and taxable income. VAT is a form of indirect tax applied to the value added at each stage of production (primary, manufacturing, wholesale and retail). This tax is similar to, but operates somewhat differently than, sales tax paid in the United States. The Company generally collects VAT from its Members upon sale of goods and services and pays VAT to its vendors upon purchase of goods and services. Periodically, the Company submits VAT reports to governmental agencies and reconciles the VAT paid and VAT received. The net overpaid VAT may be refunded or applied to subsequent returns, and the net underpaid VAT must be remitted to the government. With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due, this creates an income tax receivable. In most countries where the Company operates, the governments have implemented additional collection procedures, such as requiring credit card processors to remit a portion of sales processed via credit and debit cards directly to the government as advance payments of VAT and/or income tax. This collection mechanism generally leaves the Company with net VAT and/or income tax receivables, forcing the Company to process significant refund claims on a recurring basis. These refund or offset processes can take anywhere from several months to several years to complete.
In two countries where the Company operates, minimum income tax rules require the Company to pay taxes based on the percentage of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those it would expect to pay based on taxable income. The Company had income tax receivables of $11.3 million and $11.0 million and deferred tax assets of $3.6 million and $3.5 million as of May 31, 2023 and August 31, 2022, respectively, in these countries. While the rules related to refunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests.
In one of the countries with a significant VAT receivable balance, the Company received unfavorable rulings at the supreme court level of that country denying a portion of the Company’s appeals for refund of over-withholdings of VAT. After evaluating the merits of the Company’s arguments, the court’s decision, and probability that the other related refund appeals would receive the same judgment, the Company concluded that a total of $2.3 million of related VAT receivables would not be recoverable and this amount was written-off in the third quarter of fiscal year 2023. These charges were recorded in the Warehouse club and other expenses line item under the Selling, general and administrative caption within the consolidated statements of income.
The Company's various outstanding VAT receivables and/or income tax receivables are based on cases or appeals with their own set of facts and circumstances. The Company consults and evaluates with legal and tax advisors regularly to understand the strength of its legal arguments and probability of successful outcomes in addition to its own experience handling complex tax issues. Based on those evaluations, the Company has not placed any type of allowance on the recoverability of the remaining tax receivables or deferred tax assets, because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests.
The Company’s policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:
•Short-term VAT and Income tax receivables, recorded as Prepaid expenses and other current assets: This classification is used for any countries where the Company’s subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. The Company also classifies as short-term any approved refunds or credit notes to the extent that the Company expects to receive the refund or use the credit notes within one year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
•Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where the Company’s subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when the Company does not expect to eventually prevail in its recovery. The Company does not currently have any allowances provided against VAT and income tax receivables.
The following table summarizes the VAT receivables reported by the Company (in thousands):
May 31, 2023
August 31, 2022
Prepaid expenses and other current assets
$
4,274
$
3,890
Other non-current assets
33,613
32,460
Total amount of VAT receivables reported
$
37,887
$
36,350
The following table summarizes the Income tax receivables reported by the Company (in thousands):
May 31, 2023
August 31, 2022
Prepaid expenses and other current assets
$
17,809
$
12,077
Other non-current assets
19,942
19,985
Total amount of income tax receivables reported
$
37,751
$
32,062
Lease Accounting – The Company’s leases are operating leases for warehouse clubs and non-warehouse club facilities such as corporate headquarters, regional offices, and regional distribution centers. The Company determines if an arrangement is a lease and classifies it as either a finance or operating lease at lease inception. Operating leases are included in Operating lease right-of-use assets, net; Operating lease liabilities, current portion; and Long-term operating lease liabilities on the consolidated balance sheets. The Company does not have finance leases.
Operating lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. The Company’s leases generally do not have a readily determinable implicit rate; therefore, the Company uses a collateralized incremental borrowing rate at the commencement date in determining the present value of future payments. The incremental borrowing rate is based on a yield curve derived from publicly traded bond offerings for companies with credit characteristics that approximate the Company's market risk profile.
In addition, we adjust the incremental borrowing rate for jurisdictional risk derived from quoted interest rates from financial institutions to reflect the cost of borrowing in the Company’s local markets. The Company’s lease terms may include options to purchase, extend or terminate the lease, which are recognized when it is reasonably certain that the Company will exercise that option. The Company does not combine lease and non-lease components.
The Company measures Right-of-use (“ROU”) assets based on the corresponding lease liabilities, adjusted for any initial direct costs and prepaid lease payments made to the lessor before or at the commencement date (net of lease incentives). The lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are not included in the calculation of the ROU asset and the related lease liability and are recognized as incurred. The Company’s variable lease payments generally relate to amounts the Company pays for additional contingent rent based on a contractually stipulated percentage of sales.
Merchandise Inventories – Merchandise inventories, which include merchandise for resale, are valued at the lower of cost (average cost) or net realizable value. The Company provides for estimated inventory losses and obsolescence based on a percentage of sales. The provision is adjusted every reporting period to reflect the trend of actual physical inventory and cycle count results. In addition, the Company may be required to take markdowns below the carrying cost of certain inventory to expedite the sale of such merchandise.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
Stock Based Compensation– The Company utilizes three types of equity awards: restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”). Compensation related to RSAs, RSUs and PSUs is based on the fair market value at the time of grant. The Company recognizes the compensation cost related to RSAs and RSUs over the requisite service period as determined by the grant, amortized ratably or on a straight-line basis over the life of the grant. The Company also recognizes compensation cost for PSUs over the performance period of each tranche, adjusting this cost based on the Company’s estimate of the probability that performance metrics will be achieved. If the Company determines that an award is unlikely to vest, any previously recorded expense is then reversed.
The Company accounts for actual forfeitures as they occur. The Company records the tax savings resulting from tax deductions in excess of expense for stock-based compensation and the tax deficiency resulting from stock-based compensation in excess of the related tax deduction as income tax expense or benefit. In addition, the Company reflects the tax savings (deficiency) resulting from the taxation of stock-based compensation as an operating cash flow in its consolidated statement of cash flows.
RSAs are outstanding shares of common stock and have the same cash dividend and voting rights as other shares of common stock. Shares of common stock subject to RSUs are not issued nor outstanding until vested, and RSUs do not have the same dividend and voting rights as common stock. However, all outstanding RSUs have accompanying dividend equivalents, requiring payment to the employees and directors with unvested RSUs of amounts equal to the dividend they would have received had the shares of common stock underlying the RSUs been actually issued and outstanding. Payments of dividend equivalents to employees are recorded as compensation expense.
PSUs, similar to RSUs, are awarded with dividend equivalents, provided that such amounts become payable only if the performance metric is achieved. At the time the Compensation Committee confirms the performance metric has been achieved, the accrued dividend equivalents are paid on the PSUs.
Treasury Stock – Shares of common stock repurchased by the Company are recorded at cost as treasury stock and result in the reduction of stockholders’ equity in the Company’s consolidated balance sheets. The Company may reissue these treasury shares as part of its stock-based compensation programs. When treasury shares are reissued, the Company uses the first in/first out (“FIFO”) cost method for determining cost of the reissued shares. If the issuance price is higher than the cost, the excess of the issuance price over the cost is credited to additional paid-in capital (“APIC”). If the issuance price is lower than the cost, the difference is first charged against any credit balance in APIC from treasury stock and the balance is charged to retained earnings. During the nine months ended May 31, 2023, the Company reissued approximately 7,000 treasury shares.
Fair Value Measurements – The Company measures the fair value for all financial and non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring or non-recurring basis. The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.
The Company has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring and revaluing fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company was not required to revalue any assets or liabilities utilizing Level 1 or Level 3 inputs at the balance sheet dates. The Company's Level 2 assets and liabilities revalued at the balance sheet dates, on a recurring basis, consisted of cash flow hedges (interest rate swaps and cross-currency interest rate swaps) and forward foreign exchange contracts. In addition, the Company utilizes Level 2 inputs in determining the fair value of long-term debt.
Non-financial assets and liabilities are revalued and recognized at fair value subsequent to initial recognition when there is evidence of impairment. For the periods reported, no impairment of such non-financial assets was recorded.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
The Company’s current and long-term financial assets and liabilities have fair values that approximate their carrying values. The Company’s long-term financial liabilities consist of long-term debt, which is recorded on the balance sheet at issuance price and adjusted for any applicable unamortized discounts or premiums and debt issuance costs. There have been no significant changes in fair market value of the Company’s current and long-term financial assets and liabilities, and there have been no material changes to the valuation techniques utilized in the fair value measurement of assets and liabilities disclosed in the Company’s 2022 Annual Report on Form 10-K.
Derivatives Instruments and Hedging Activities – The Company uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to changes in interest and currency exchange rates. In using derivative financial instruments for the purpose of hedging the Company’s exposure to interest and currency exchange rate risks, the contractual terms of a hedged instrument closely mirror those of the hedged item and are intended to provide a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria (effective hedge) are recorded using hedge accounting. If a derivative financial instrument is an effective hedge, changes in the fair value of the instrument will be reported in accumulated other comprehensive loss until the hedged item completes its contractual term. Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. The Company did not change valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s consolidated balance sheets from previous practice during the reporting period. The Company seeks to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which the Company has an established banking relationship. There can be no assurance, however, that this practice effectively mitigates counterparty risk.
Cash Flow Instruments. The Company is a party to receive floating interest rate, pay fixed-rate interest rate swaps to hedge the interest rate risk of certain U.S. dollar denominated debt within its international subsidiaries. The swaps are designated as cash flow hedges of interest expense risk. These instruments are considered effective hedges and are recorded using hedge accounting. The Company is also a party to receive variable interest rate, pay fixed interest rate cross-currency interest rate swaps to hedge the interest rate and currency exposure associated with the expected payments of principal and interest of U.S. denominated debt within its international subsidiaries whose functional currency is other than the U.S. dollar. The swaps are designated as cash flow hedges of the currency risk and interest-rate risk related to payments on the U.S. denominated debt. These instruments are also considered to be effective hedges and are recorded using hedge accounting. Under cash flow hedging, the entire gain or loss of the derivative, calculated as the net present value of the future cash flows, is reported on the consolidated balance sheets in accumulated other comprehensive loss. Amounts recorded in accumulated other comprehensive loss are released to earnings in the same period that the hedged transaction impacts consolidated earnings. Refer to “Note 8 - Derivative Instruments and Hedging Activities” for information on the fair value of interest rate swaps and cross-currency interest rate swaps as of May 31, 2023 and August 31, 2022.
Fair Value Instruments. The Company is exposed to foreign currency exchange rate fluctuations in the normal course of business. This includes exposure to foreign currency exchange rate fluctuations on U.S. dollar denominated liabilities within the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts that are intended to offset changes in cash flows attributable to currency exchange movements. The contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar.
Currently, these contracts are treated for accounting purposes as fair value instruments and do not qualify for derivative hedge accounting, and as such the Company does not apply derivative hedge accounting to record these transactions. As a result, these contracts are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. The Company seeks to mitigate foreign currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features and are limited to less than one year in duration.
Revenue Recognition – The accounting policies and other disclosures such as the disclosure of disaggregated revenues are described in “Note 3 – Revenue Recognition.”
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
Gain Contingencies and Recoveries – A gain contingency is an existing condition, situation, or set of circumstances involving uncertainty as to a possible gain that will ultimately be resolved when one or more future events occur or fail to occur. During the ordinary course of our business, gain contingencies arise when we have the opportunity to recover costs or damages we incur from insurance carriers or other third parties. Anticipated proceeds in excess of the amount of loss recognized are considered contingent gains. Anticipated proceeds in excess of a loss recognized in the financial statements are not recognized until all contingencies related to the collectability, timing and amount are realizable.
Cost of Goods Sold – The Company includes the cost of merchandise and food service and bakery raw materials in cost of goods sold - net merchandise sales. The Company also includes in cost of goods sold - net merchandise sales the external and internal distribution and handling costs for supplying merchandise, raw materials and supplies to the warehouse clubs, and, when applicable, costs of shipping to Members. External costs include inbound freight, duties, drayage, fees, insurance, and non-recoverable value-added tax related to inventory shrink, spoilage and damage. Internal costs include payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense and building and equipment depreciation at the Company's distribution facilities and payroll and other direct costs for in-club demonstrations.
For export sales, the Company includes the cost of merchandise and external and internal distribution and handling costs for supplying merchandise in cost of goods sold - exports.
Until the disposal of Aeropost in the first quarter of fiscal year 2022, the Company included the costs for the marketplace and casillero operations of external and internal shipping, handling and other direct costs incurred to provide delivery, insurance and customs processing services in cost of goods sold - non-merchandise.
Vendor consideration consists primarily of volume rebates, time-limited product promotions, cooperative marketing efforts, digital advertising, slotting fees, demonstration reimbursements and prompt payment discounts. Volume rebates and time-limited promotions are recognized on a systematic and rational allocation of the cash consideration as the Company progresses toward earning the rebate, provided the amounts to be earned are probable and reasonably estimable. Cooperative marketing efforts and digital advertising are related to consideration received by the Company from vendors for non-distinct online advertising services on the Company’s website and social media platforms. Slotting fees are related to consideration received by the Company from vendors for preferential "end cap" placement of the vendor's products within the warehouse club. Demonstration reimbursements are related to consideration received by the Company from vendors for the in-club promotion of the vendors' products. The Company records the reduction in cost of goods sold on a transactional basis for these programs. On a quarterly basis, the Company calculates the amount of rebates recorded in cost of goods sold that relates to inventory on hand and this amount is reclassified as a reduction to inventory, if significant. Prompt payment discounts are taken in substantially all cases and therefore are applied directly to reduce the acquisition cost of the related inventory, with the resulting effect recorded to cost of goods sold when the inventory is sold.
Selling, General and Administrative – Selling, general and administrative costs consist primarily of expenses associated with operating warehouse clubs and freight forwarding operations. These costs include payroll and related costs, including separation costs associated with the Chief Executive Officer departure, utilities, consumable supplies, repair and maintenance, rent expense, building and equipment depreciation, bank, credit card processing fees, and amortization of intangibles. Also included in selling, general and administrative expenses are the payroll and related costs for the Company’s U.S. and regional management and purchasing centers.
In December 2022, the Company announced that Sherry Bahrambeygui would resign as Chief Executive Officer effective February 3, 2023. In connection with her departure, the Company recognized a one-time separation charge of approximately $7.7 million ($7.2 million net of tax) in the second quarter of fiscal year 2023. This amount consists of approximately $4.2 million of non-cash charges related to the acceleration of certain equity awards and approximately $3.5 million for other separation costs. Given that Ms. Bahrambeygui had substantially rendered the required services per her separation agreement, the Company recorded these charges in the second quarter of fiscal year 2023. These charges were recorded in the Separation costs associated with Chief Executive Officer departure line item under the Selling, general and administrative caption within the Consolidated Statements of Income and are recorded in the Company’s United States segment. The Company substantially fulfilled all payment obligations by the end of the second quarter of fiscal year 2023; however, some vesting of PSUs will occur in the first quarter of fiscal year 2024.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
Pre-Opening Costs – The Company expenses pre-opening costs (the costs of start-up activities, including organization costs and rent) for new warehouse clubs as incurred.
Loss Contingencies and Litigation – The Company records and reserves for loss contingencies if (a) information available prior to issuance of the consolidated financial statements indicates that it is probable that an asset had been impaired, or a liability had been incurred at the date of the consolidated financial statements and (b) the amount of loss can be reasonably estimated. If one or both criteria for accrual are not met, but there is at least a reasonable possibility that a material loss will occur, the Company does not record and reserve for a loss contingency but describes the contingency within a note and provides detail, when possible, of the estimated potential loss or range of loss. If an estimate cannot be made, a statement to that effect is made.
Related Party Transactions –On February 3, 2023, Robert E. Price, a Company founder and Chairman of the Board, became Interim Chief Executive Officer. Mr. Price has elected not to receive compensation for his role as Interim Chief Executive Officer. Therefore, the financial statements do not include compensation charges for his services. We have estimated the fair value of these services, based on a number of factors, to be approximately $5.1 million on an annual basis. We acknowledge that this may not be representative of what ultimately could be the cost to the Company when a replacement Chief Executive Officer is hired.
Foreign Currency Translation – The assets and liabilities of the Company’s foreign operations are translated to U.S. dollars when the functional currency in the Company’s international subsidiaries is the local currency and not U.S. dollars. Assets and liabilities of these foreign subsidiaries are translated to U.S. dollars at the exchange rate on the balance sheet date, and revenue, costs and expenses are translated at average rates of exchange in effect during the period. The corresponding translation gains and losses are recorded as a component of accumulated other comprehensive income or loss. These adjustments will affect net income upon the sale or liquidation of the underlying investment.
The following table discloses the net effect of translation into the reporting currency on other comprehensive loss for these local currency denominated accounts for the three and nine months ended May 31, 2023 and 2022 (in thousands):
Three Months Ended
Nine Months Ended
May 31, 2023
May 31, 2022
May 31, 2023
May 31, 2022
Effect on other comprehensive income (loss) due to foreign currency translation
$
15,285
$
(9,401)
$
26,599
$
(15,119)
Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses), including transactions recorded involving these monetary assets and liabilities, are recorded as Other income (expense) in the consolidated statements of income (in thousands):
Three Months Ended
Nine Months Ended
May 31, 2023
May 31, 2022
May 31, 2023
May 31, 2022
Currency loss
$
(2,095)
$
(2,504)
$
(12,153)
$
(6,142)
Recent Accounting Pronouncements Adopted
There were no new accounting standards that had a material impact on the Company’s consolidated financial statements during the nine-month period ended May 31, 2023, and there were no other new accounting standards or pronouncements that were issued but not yet effective as of May 31, 2023 that the Company expects to have a material impact on its consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
NOTE 3 – REVENUE RECOGNITION
Performance Obligations
The Company identifies each distinct performance obligation to transfer goods (or bundle of goods) or services. The Company recognizes revenue when (or as) it satisfies a performance obligation by transferring control of the goods or services to the customer.
Net Merchandise Sales. The Company recognizes net merchandise sales revenue, net of sales taxes, on transactions where the Company has determined that it is the principal in the sale of merchandise. These transactions may include shipping commitments and/or shipping revenue if the transaction involves delivery to the customer.
Non-merchandise Sales. Until the disposal of Aeropost in the first quarter of fiscal year 2022, the Company recognized non-merchandise revenue, net of sales taxes, on transactions where the Company had determined that it was the agent in the transaction. These transactions primarily consisted of contracts the Company entered into with its customers to provide delivery, insurance and customs processing services for products its customers purchased online in the United States either directly from other vendors utilizing the vendor’s website or through the Company’s marketplace site. Revenue was recognized when the Company’s performance obligations were completed (that is when delivery of the items have been made to the destination point) and was recorded in “non-merchandise revenue” on the consolidated statements of income. Prepayment for orders for which the Company had not fulfilled its performance obligation were recorded as deferred income. Additionally, the Company recorded revenue at the net amounts retained, i.e., the amount paid by the customer less amounts remitted to the respective merchandise vendors, as the Company was acting as an agent and was not the principal in the sale of those goods being purchased from the vendors by the Company’s customers.
Membership Fee Revenue. Membership income represents annual membership fees paid by the Company’s warehouse club Members, which are recognized ratably over the 12-month term of the membership. Our membership policy allows Members to cancel their membership in the first 60 days and receive a full refund. After the 60-day period, membership refunds are prorated over the remaining term of the membership. The Company has significant experience with membership refund patterns and expects membership refunds will not be material. Therefore, no refund reserve was required for the periods presented. Membership fee revenue is included in membership income in the Company's consolidated statements of income. The deferred membership fee is included in deferred income in the Company's consolidated balance sheets.
Platinum Points Reward Programs. The Company currently offers Platinum Memberships in all of its markets. The annual fee for a Platinum Membership is approximately $75. The Platinum Membership provides Members with a 2% rebate on most items, up to an annual maximum of $500. The rebate is issued annually to Platinum Members on March 1 and expires August 31. Platinum Members can apply this rebate to future purchases at the warehouse club during the redemption period. The Company records this 2% rebate as a reduction of revenue at the time of the sales transaction. Accordingly, the Company has reduced warehouse sales and has accrued a liability within other accrued expenses and other current liabilities, platinum rewards. The Company has determined that breakage revenue is 5% of the awards issued; therefore, it records 95% of the Platinum Membership liability at the time of sale. Annually, the Company reviews for expired unused rebates outstanding, and the expired unused rebates are recognized as “Other revenue and income” on the consolidated statements of income.
Co-branded Credit Card Points Reward Programs. Most of the Company’s subsidiaries have points reward programs related to co-branded credit cards. These points reward programs provide incremental points that can be used at a future time to acquire merchandise within the Company’s warehouse clubs. This results in two performance obligations, the first performance obligation being the initial sale of the merchandise or services purchased with the co-branded credit card and the second performance obligation being the future use of the points rewards to purchase merchandise or services. As a result, upon the initial sale, the Company allocates the transaction price to each performance obligation with the amount allocated to the future use points rewards recorded as a contract liability within other accrued expenses and other current liabilities on the consolidated balance sheet. The portion of the selling price allocated to the reward points is recognized as Net merchandise sales when the points are used or when the points expire. The Company reviews on an annual basis expired points rewards outstanding, and the expired rewards are recognized as Net merchandise sales on the consolidated statements of income within markets where the co-branded credit card agreement allows for such treatment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
Gift Cards. Members’ purchases of gift cards to be utilized at the Company's warehouse clubs are not recognized as sales until the card is redeemed and the customer purchases merchandise using the gift card. The outstanding gift cards are reflected as other accrued expenses and other current liabilities in the consolidated balance sheets. These gift cards generally have a one-year stated expiration date from the date of issuance and are generally redeemed prior to expiration. However, the absence of a large volume of transactions for gift cards impairs the Company's ability to make a reasonable estimate of the redemption levels for gift cards; therefore, the Company assumes a 100% redemption rate prior to expiration of the gift cards. The Company periodically reviews unredeemed outstanding gift cards, and the gift cards that have expired are recognized as “Other revenue and income” on the consolidated statements of income.
Co-branded Credit Card Revenue Sharing Agreements. As part of the co-branded credit card agreements that the Company has entered into with financial institutions within its markets, the Company often enters into revenue sharing agreements. As part of these agreements, in some countries, the Company receives a portion of the interest income generated from the average outstanding balances on the co-branded credit cards from these financial institutions (“interest generating portfolio” or “IGP”). The Company recognizes its portion of interest received as revenue during the period it is earned. The Company has determined that this revenue should be recognized as “Other revenue and income” on the consolidated statements of income.
Contract Performance Liabilities
Contract performance liabilities as a result of transactions with customers primarily consist of deferred membership income, other deferred income, deferred gift card revenue, Platinum points programs, and liabilities related to co-branded credit card points rewards programs which are included in deferred income and other accrued expenses and other current liabilities in the Company’s consolidated balance sheets. The following table provides these contract balances from transactions with customers as of the dates listed (in thousands):
Contract Liabilities
May 31, 2023
August 31, 2022
Deferred membership income
$
31,155
$
28,000
Other contract performance liabilities
$
10,013
$
10,473
Disaggregated Revenues
In the following table, net merchandise sales are disaggregated by merchandise category (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
NOTE 4 – EARNINGS PER SHARE
The Company presents basic net income per share using the two-class method. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders and that determines basic net income per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings that would have been available to common stockholders. A participating security is defined as a security that may participate in undistributed earnings with common stock. The Company’s capital structure includes securities that participate with common stock on a one-for-one basis for distribution of dividends. These are the restricted stock awards and restricted stock units issued pursuant to the 2013 Equity Incentive Award Plan. The Company does not include performance stock units as participating securities until the performance criteria are satisfied. The Company determines the diluted net income per share by using the more dilutive of the two class-method or the treasury stock method and by including the basic weighted average of outstanding performance stock units for which performance criteria have not been met in the calculation of diluted net income per share under the two-class method and including all potential common shares assumed issued in the calculation of diluted net income per share under the treasury stock method.
The following table sets forth the computation of net income per share for the three and nine-months ended May 31, 2023 and 2022 (in thousands, except per share amounts):
Three Months Ended
Nine Months Ended
May 31, 2023
May 31, 2022
May 31, 2023
May 31, 2022
Net income attributable to PriceSmart, Inc.
$
29,572
$
19,258
$
93,824
$
81,230
Less: Allocation of income to unvested stockholders
(456)
(312)
(1,098)
(869)
Net income attributable to PriceSmart, Inc. available for distribution
$
29,116
$
18,946
$
92,726
$
80,361
Basic weighted average shares outstanding
30,800
30,615
30,752
30,582
Add dilutive effect of performance stock units (two-class method)
29
14
18
6
Diluted average shares outstanding
30,829
30,629
30,770
30,588
Basic net income per share
$
0.95
$
0.62
$
3.02
$
2.63
Diluted net income per share
$
0.94
$
0.62
$
3.01
$
2.63
NOTE 5 – STOCKHOLDERS’ EQUITY
Dividends
The following table summarizes the dividends declared and paid during fiscal year 2023 and 2022 (amounts are per share):
First Payment
Second Payment
Declared
Amount
Record Date
Date Paid
Date Payable
Amount
Record Date
Date Paid
Date Payable
Amount
2/3/2023
$
0.92
2/16/2023
2/28/2023
N/A
$
0.46
8/15/2023
N/A
8/31/2023
$
0.46
2/3/2022
$
0.86
2/15/2022
2/28/2022
N/A
$
0.43
8/15/2022
8/31/2022
N/A
$
0.43
The Company anticipates the ongoing payment of semi-annual dividends in subsequent periods, although the actual declaration of future dividends, if any, the amount of such dividends, and the establishment of record and payment dates is subject to final determination by the Board of Directors at its discretion after its review of the Company’s financial performance and anticipated capital requirements, taking into account the uncertain macroeconomic conditions on our results of operations and cash flows.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
The following tables disclose the effects on accumulated other comprehensive loss of each component of other comprehensive income (loss), net of tax (in thousands):
Attributable to
PriceSmart
Noncontrolling
Interests
Total
Beginning balance, September 1, 2022
$
(195,586)
$
—
$
(195,586)
Foreign currency translation adjustments
26,599
—
26,599
Defined benefit pension plans (1)
30
—
30
Derivative instruments (2)
(646)
—
(646)
Ending balance, May 31, 2023
$
(169,603)
$
—
$
(169,603)
Attributable to PriceSmart
Noncontrolling Interests
Total
Beginning balance, September 1, 2021
$
(182,508)
$
251
$
(182,257)
Foreign currency translation adjustments
(15,119)
3
(15,116)
Defined benefit pension plans (1)
140
—
140
Derivative instruments (2)
4,339
—
4,339
Sale of Aeropost
—
(254)
(254)
Ending balance, May 31, 2022
$
(193,148)
$
—
$
(193,148)
Attributable to PriceSmart
Noncontrolling Interests
Total
Beginning balance, September 1, 2021
$
(182,508)
$
251
$
(182,257)
Foreign currency translation adjustments
(19,034)
3
(19,031)
Defined benefit pension plans (1)
(341)
—
(341)
Derivative instruments (2)
6,170
—
6,170
Amounts reclassified from accumulated other comprehensive loss
127
—
127
Sale of Aeropost
—
$
(254)
(254)
Ending balance, August 31, 2022
$
(195,586)
$
—
$
(195,586)
(1)Amounts reclassified from accumulated other comprehensive income (loss) related to the minimum pension liability are included in warehouse club and other operations in the Company's consolidated statements of income.
(2)Refer to Note 8 - Derivative Instruments and Hedging Activities.
Retained Earnings Not Available for Distribution
The following table summarizes retained earnings designated as legal reserves of various subsidiaries which cannot be distributed as dividends to PriceSmart, Inc. according to applicable statutory regulations (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
Repurchases of Common Stock
The Board of Directors authorized a program to repurchase up to $75 million of our common stock (the "Stock Buyback Program"). Under the Stock Buyback Program, shares of common stock may be repurchased from time to time on a discretionary basis through open market repurchases, privately negotiated transactions, block purchases, or other means, and will be structured to occur in compliance with applicable securities laws. In addition, open market repurchases of common stock could be made pursuant to trading plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which would permit common stock to be repurchased at a time that we might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The Stock Buyback Program does not obligate us to acquire any specific number of shares.
The timing and actual number of shares repurchased will depend on a variety of factors, including the common stock price, trading volume, market conditions, our cash flow and liquidity profile, the capital needs of the business, and other considerations. Repurchases are funded with existing cash on hand. The Stock Buyback Program has no expiration date and may be modified, suspended or terminated at any time by the Board of Directors at its discretion.
During the three and nine-months ended May 31, 2023, no repurchases were made under the Stock Buyback Program.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, the Company and its subsidiaries are subject to legal proceedings, claims and litigation arising in the ordinary course of business related to the Company’s operations and property ownership. The Company evaluates such matters on a case by case basis, and vigorously contests any such legal proceedings or claims which the Company believes are without merit. The Company believes that the final disposition of these matters will not have a material adverse effect on its financial position, results of operations or liquidity. It is possible, however, that the Company's results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to such matters.
The Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss and the accrued amount, if any, thereof, and adjusts the amount as appropriate. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. If it is at least a reasonable possibility that a material loss will occur, the Company will provide disclosure regarding the contingency.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
On August 5, 2022, PriceSmart received notice from Click USA Inc. and Aeropost, Inc. alleging that PriceSmart had breached certain provisions of a Stock Purchase Agreement between PriceSmart and Click USA, Inc. dated October 1, 2021, concerning the sale of Aeropost, Inc. to Click USA Inc. In this notice, Click USA Inc. and Aeropost, Inc. allege that PriceSmart made inaccurate or incomplete representations and warranties relating to Aeropost, Inc.’s cyber security and the condition of its IT systems in connection with the sale. Click USA Inc. and Aeropost, Inc. further asserted that, in or around April 2022, Aeropost, Inc. suffered cyberattacks, and they seek to hold PriceSmart liable for some amount of damages due to alleged losses directly relating to the cyberattacks as well as due to possible third-party claims as a result of the cyber-attacks. The notice suggested that aggregate losses attributable to these losses and future claims could exceed $3.0 million. On October 17, 2022, PriceSmart received a letter from Click USA Inc. supplementing its August 5, 2022 notice with additional information concerning Click USA Inc.’s direct losses and the existence or likelihood of third-party claims and potential related losses. Click USA Inc.’s letter estimates its total losses for direct and third-party claims at $2.9 million. Per the express terms of the agreement, the maximum amount of all losses for which PriceSmart may be liable for claims arising out of allegations concerning the above-referenced representations and warranties is $4.0 million. In its October 17, 2022 letter, Click USA Inc. notified PriceSmart of a separate and unrelated claim for breach of representations and warranties in the Stock Purchase Agreement relating to the alleged misclassification of an employee in Costa Rica. Click USA Inc. alleges that the amount of possible loss relating to this claim is approximately $300,000. PriceSmart intends to settle this litigation with Click USA Inc. and offered to release Aeropost, Inc. from an approximately $750,000 receivable owed to PriceSmart, Inc in exchange for release of the aforementioned claims. The Company has determined that settlement is probable as of May 31, 2023, and has written-off the receivable with the expense being recorded in the General and administrative line item in the Company's consolidated statements of income.
Income Taxes
For interim reporting, the Company uses an estimated annual effective tax rate (AETR) to calculate income tax expense. Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of the consolidated income tax expense. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating its ability to recover deferred tax assets in the jurisdictions from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating income (loss).
The Company is required to file federal and state tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with the interpretations the Company used to calculate its tax liability and therefore require the Company to pay additional taxes.
The Company accrues an amount for its estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. There were no material changes in the Company’s uncertain income tax positions during the nine months ended May 31, 2023.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
In evaluating the exposure associated with various non-income tax filing positions, the Company accrues for probable and estimable exposures for non-income tax related tax contingencies. As of May 31, 2023 and August 31, 2022, the Company has recorded within other accrued expenses and other current liabilities a total of $1.0 million and $1.1 million, respectively, for various non-income tax related tax contingencies.
While the Company believes the recorded liabilities are adequate, there are inherent limitations in projecting the outcome of litigation, in estimating probable additional income tax liability taking into account uncertain tax positions and in evaluating the probable additional tax associated with various non-income tax filing positions. As such, the Company is unable to make a reasonable estimate of the sensitivity to change of estimates affecting its recorded liabilities. As additional information becomes available, the Company assesses the potential liability and revises its estimates as appropriate.
In two countries where the Company operates, minimum income tax rules require the Company to pay taxes based on a percentage of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those it would expect to pay based on taxable income. The Company had income tax receivables of $11.3 million and $11.0 million, as of May 31, 2023 and August 31, 2022, respectively, and deferred tax assets of $3.6 million and $3.5 million as of May 31, 2023 and August 31, 2022, respectively, in these countries. While the rules related to refunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests.
Other Commitments
The Company is also committed to non-cancelable construction service obligations for various warehouse club developments and expansions. As of May 31, 2023 and August 31, 2022, the Company had approximately $9.1 million and $16.5 million, respectively, in contractual obligations for construction services not yet rendered.
From time to time, the Company has entered into general land purchase and land purchase option agreements. The Company’s land purchase agreements are typically subject to various conditions including, but not limited to, the ability to obtain necessary governmental permits or approvals. A deposit under an agreement is typically returned to the Company if all permits or approvals are not obtained. Generally, the Company has the right to cancel any of its agreements to purchase land without cause by forfeiture of some or all of the deposits it has made pursuant to the agreement. As of May 31, 2023, the Company had entered into three land purchase agreements that, if completed, would result in the use of approximately $9.2 million in cash.
The table below summarizes the Company’s interest in real estate joint ventures, commitments to additional future investments and the Company’s maximum exposure to loss as a result of its involvement in these joint venture as of May 31, 2023 (in thousands):
Entity
% Ownership
Initial Investment
Additional Investments
Net Income (Loss) Inception to Date
Company’s Variable Interest in Entity
Commitment
to Future
Additional
Investments(1)
Company's
Maximum
Exposure
to Loss in
Entity(2)
GolfPark Plaza, S.A.
50
%
$
4,616
$
2,402
$
(90)
$
6,928
$
99
$
7,027
Price Plaza Alajuela PPA, S.A.
50
%
2,193
1,236
114
3,543
785
4,328
Total
$
6,809
$
3,638
$
24
$
10,471
$
884
$
11,355
(1)The parties intend to seek alternate financing for the projects, which could reduce the amount of investments each party would be required to provide. The parties may mutually agree on changes to the projects, which could increase or decrease the amount of contributions each party is required to provide.
(2)The maximum exposure is determined by adding the Company’s variable interest in the entity and any explicit or implicit arrangements that could require the Company to provide additional financial support.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
NOTE 7 – DEBT
Short-term borrowings consist of unsecured lines of credit. The following table summarizes the balances of total facilities, facilities used and facilities available (in thousands):
Facilities Used
Total Amount
of Facilities
Short-term
Borrowings
Letters of
Credit
Facilities
Available
Weighted average
interest rate
May 31, 2023 - Committed
$
75,000
$
—
$
84
$
74,916
—
%
May 31, 2023 - Uncommitted
91,000
10,414
—
80,586
11.9
May 31, 2023 - Total
$
166,000
$
10,414
$
84
$
155,502
11.8
%
August 31, 2022 - Committed
$
75,000
—
73
$
74,927
—
%
August 31, 2022 - Uncommitted
91,000
10,608
—
80,392
5.3
August 31, 2022 - Total
$
166,000
$
10,608
$
73
$
155,319
5.3
%
As of May 31, 2023 and August 31, 2022, the Company was in compliance with all covenants or amended covenants for each of its short-term facility agreements. These facilities generally expire annually or bi-annually and are normally renewed. One of these facilities is a committed credit agreement with one bank for $75.0 million. In exchange for the bank’s commitment to fund any drawdowns the Company requests, the Company pays an annual commitment fee of 0.25%, payable quarterly, on any unused portion of this facility. Additionally, the Company has uncommitted facilities in most of the countries where it operates, with drawdown requests subject to approval by the individual banks each time a drawdown is requested.
The following table provides the changes in long-term debt for the nine months ended May 31, 2023:
(Amounts in thousands)
Current portion of long-term debt
Long-term debt (net of current portion)
Total
Balances as of August 31, 2022
$
33,715
$
103,556
$
137,271
(1)
Proceeds from long-term debt incurred during the period:
Guatemala subsidiary
—
12,454
12,454
Barbados subsidiary
—
7,460
7,460
Honduras subsidiary
1,001
12,797
13,798
Trinidad subsidiary
750
4,250
5,000
Total proceeds from long-term debt incurred during the period
1,751
36,961
38,712
Repayments of long-term debt:
(17,450)
(13,957)
(31,407)
Reclassifications of long-term debt due in the next 12 months
1,426
(1,426)
—
Translation adjustments on foreign currency debt of subsidiaries whose functional currency is not the U.S. dollar(2)
315
(503)
(188)
Balances as of May 31, 2023
$
19,757
$
124,631
$
144,388
(3)
(1)The carrying amount of non-cash assets assigned as collateral for these loans was $155.6 million. The carrying amount of cash assets assigned as collateral for these loans was $5.3 million.
(2)These foreign currency translation adjustments are recorded within Other comprehensive income (loss).
(3)The carrying amount of non-cash assets assigned as collateral for these loans was $160.9 million. The carrying amount of cash assets assigned as collateral for these loans was $3.9 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
As of May 31, 2023 and August 31, 2022, the Company had approximately $94.6 million and $110.7 million, respectively, of long-term loans held in the U.S. entity and in several foreign subsidiaries, which require these entities to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. The Company was in compliance with all covenants or amended covenants for both periods.
Annual maturities of long-term debt are as follows (in thousands):
Twelve Months Ended May 31,
Amount
2024
$
19,757
2025
37,049
2026
14,902
2027
39,160
2028
18,330
Thereafter
15,190
Total
$
144,388
NOTE 8 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to interest rate risk relating to its ongoing business operations. To manage interest rate exposure, the Company enters into hedge transactions (interest rate swaps) using derivative financial instruments. The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the LIBOR interest payments associated with variable-rate loans over the life of the loans. As changes in interest rates impact the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements.
In addition, the Company is exposed to foreign currency and interest rate cash flow exposure related to non-functional currency long-term debt of one of its wholly owned subsidiaries. To manage this foreign currency and interest rate cash flow exposure, the Company’s subsidiaries entered into cross-currency interest rate swaps that convert their U.S. dollar denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument. As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedges are intended to offset changes in cash flows attributable to interest rate and foreign exchange movements.
These derivative instruments (cash flow hedging instruments) are designated and qualify as cash flow hedges, with the entire gain or loss on the derivative reported as a component of other comprehensive loss. Amounts are deferred in other comprehensive loss and reclassified into earnings in the same income statement line item that is used to present the earnings effect of the hedged item when the hedged item affects earnings.
The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business, including foreign-currency exchange-rate fluctuations on U.S. dollar denominated liabilities within its international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts (NDFs) that are intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate foreign-currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
Cash Flow Hedges
As of May 31, 2023, all of the Company’s interest rate swap and cross-currency interest rate swap derivative financial instruments are designated and qualify as cash flow hedges. The Company formally documents the hedging relationships for its derivative instruments that qualify for hedge accounting.
The following table summarizes agreements for which the Company has recorded cash flow hedge accounting for the nine months ended May 31, 2023:
Entity
Date Entered into
Derivative Financial Counter- party
Derivative Financial Instruments
Initial US$ Notional Amount
US$
Loan
Held With
Floating Leg (swap counter-party)
Fixed Rate for PSMT Subsidiary
Settlement Dates
Effective Period of swap
Colombia subsidiary
12-Apr-23
Citibank, N.A. ("Citi")
Cross currency interest rate swap
$
10,000,000
PriceSmart, Inc.
4.00%
11.40
%
11th day of each July, October, January and April, beginning on July 11, 2023
April 12, 2023 - April 11, 2028
Colombia subsidiary
26-Sep-22
Citibank, N.A. ("Citi")
Cross currency interest rate swap
$
12,500,000
PriceSmart, Inc.
3.00%
10.35
%
24th day of each December, March, June and September beginning December 26, 2022
September 26, 2022 - September 24, 2024
Colombia subsidiary
3-May-22
Citibank, N.A. ("Citi")
Cross currency interest rate swap
$
10,000,000
PriceSmart, Inc.
3.00%
9.04
%
3rd day of each May, August, November and February, beginning on August 3, 2022
May 3, 2022 - May 3, 2027
Colombia subsidiary
17-Nov-21
Citibank, N.A. ("Citi")
Cross currency interest rate swap
$
10,000,000
PriceSmart, Inc.
3.00%
8.40
%
17th day of each February, May, August, and November, beginning on February 17, 2022
November 17, 2021 - November 18, 2024
Colombia subsidiary
3-Dec-19
Citibank, N.A. ("Citi")
Cross currency interest rate swap
$
7,875,000
Citibank, N.A.
Variable rate 3-month Libor plus 2.45%
7.87
%
3rd day of each December, March, June and September beginning March 3, 2020
December 3, 2019 - December 3, 2024
Colombia subsidiary
27-Nov-19
Citibank, N.A. ("Citi")
Cross currency interest rate swap
$
25,000,000
Citibank, N.A.
Variable rate 3-month Libor plus 2.45%
7.93
%
27th day of each November, February, May and August beginning February 27, 2020
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
For the three and nine months ended May 31, 2023 and May 31, 2022, the Company included the gain or loss on the hedged items (that is, variable-rate borrowings) in the same line item—interest expense—as the offsetting gain or loss on the related interest rate swaps as follows (in thousands):
Income Statement Classification
Interest
expense on
borrowings(1)
Cost of
swaps(2)
Total
Interest expense for the three months ended May 31, 2023
$
1,108
$
210
$
1,318
Interest expense for the three months ended May 31, 2022
$
618
$
871
$
1,489
Interest expense for the nine months ended, May 31, 2023
$
3,538
$
747
$
4,285
Interest expense for the nine months ended May 31, 2022
$
1,720
$
2,628
$
4,348
(1)This amount is representative of the interest expense recognized on the underlying hedged transactions.
(2)This amount is representative of the interest expense recognized on the interest rate swaps and cross-currency swaps designated as cash flow hedging instruments.
The total notional balance of the Company’s pay-fixed/receive-variable interest rate swaps and cross-currency interest rate swaps was as follows (in thousands):
Notional Amount as of
Floating Rate Payer (Swap Counterparty)
May 31, 2023
August 31, 2022
Union Bank
$
30,388
$
31,344
Citibank N.A.
66,431
66,353
Scotiabank
—
8,625
Total
$
96,819
$
106,322
Derivatives listed on the table below were designated as cash flow hedging instruments. The table summarizes the effect of the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting and its associated tax effect on accumulated other comprehensive (income)/loss (in thousands):
May 31, 2023
August 31, 2022
Derivatives designated as cash flow hedging instruments
Balance Sheet Classification
Fair Value
Net Tax Effect
Net OCI
Fair Value
Net Tax Effect
Net OCI
Cross-currency interest rate swaps
Other current assets
$
—
$
—
$
—
$
2,736
$
(348)
$
2,388
Cross-currency interest rate swaps
Other non-current assets
8,873
(3,105)
5,768
10,289
(4,559)
5,730
Cross-currency interest rate swaps
Other current liabilities
—
—
—
(82)
25
(57)
Cross-currency interest rate swaps
Other long-term liabilities
(1,164)
407
(757)
—
—
—
Interest rate swaps
Other non-current assets
1,886
(416)
1,470
1,596
(6)
1,590
Net fair value of derivatives designated as hedging instruments
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
Fair Value Instruments
From time to time the Company enters into non-deliverable forward foreign-exchange contracts. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting. The use of non-deliverable forward foreign-exchange contracts is intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar.
The following table summarizes the non-deliverable forward foreign exchange contracts that are open as of May 31, 2023:
Financial Derivative (Counterparty)
Subsidiary
Dates Entered into (Range)
Derivative Financial Instrument
Total Notional Amounts (in thousands)
Settlement Dates (Range)
Scotiabank Colpatria, S.A.
Colombia
11-Jan-2023 - 27-Mar-2023
Forward foreign exchange contracts (USD)
$
4,500
8-Sep-2023 - 21-Dec-2023
Citibank, N.A. ("Citi")
Colombia
18-Jan-2023 - 16-Mar-2023
Forward foreign exchange contracts (USD)
$
8,000
22-Jun-2023 - 16-Nov-2023
Forward derivative gains and (losses) on non-deliverable forward foreign-exchange contracts are included in Other income (expense), net in the consolidated statements of income in the period of change, but the amounts were immaterial for the three and nine month periods ended May 31, 2023 and May 31, 2022.
NOTE 9 – SEGMENTS
The Company and its subsidiaries are principally engaged in the international operation of membership shopping in 51 warehouse clubs located in 12 countries and one U.S. territory that are located in Central America, the Caribbean and Colombia. In addition, the Company operates distribution centers and corporate offices in the United States. The Company has aggregated its warehouse clubs, distribution centers and corporate offices into reportable segments. The Company’s reportable segments are based on management’s organization of these locations into operating segments by general geographic location, which are used by management in setting up management lines of responsibility, providing support services, and making operational decisions and assessments of financial performance. Segment amounts are presented after converting to U.S. dollars and consolidating eliminations. Certain revenues, operating costs and inter-company charges included in the United States segment are not allocated to the segments within this presentation, as it is impractical to do so, and they appear as reconciling items to reflect the amount eliminated on consolidation of intersegment transactions. From time to time, the Company revises the measurement of each segment's operating income and net income, including certain corporate overhead allocations, and other measures as determined by the information regularly reviewed by management. When the Company does so, the previous period amounts and balances are reclassified to conform to the current period's presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
NOTE 10 – SUBSEQUENT EVENTS
The Company has evaluated all events subsequent to the balance sheet date as of May 31, 2023 through the date of issuance of these consolidated financial statements and has determined that, except as set forth below, there are no subsequent events that require disclosure.
On May 30, 2023, the Company entered into a lease agreement for land and a building, which commenced on June 5, 2023 when the asset was made available to the Company. The purpose of the lease is the relocation of a distribution center in Panama. The lease agreement will result in the recognition of a lease liability and right-of-use asset of approximately $7.3 million.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements concerning PriceSmart, Inc.'s ("PriceSmart", the "Company", "we" or "our") anticipated future revenues and earnings, adequacy of future cash flows, omni-channel initiatives, proposed warehouse club openings, the Company's performance relative to competitors 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,” “intend,” and like expressions, and the negative thereof. These statements are only as of the date they are made, and we do not undertake to update these statements, except as required by law. These statements are subject to risks and uncertainties that could cause actual results to differ materially including, but not limited to, the risks detailed in under the heading "Part II. Item 1A. Risk Factors" in this Quarterly Report and under the heading “Part I. Item 1A. Risk Factors” and “Part I Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2022 filed with the United States Securities and Exchange Commission (“SEC”) on October 31, 2022. These risk factors may be updated from time to time in our other filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. Forward-looking statements speak only as of the date that they are made, and the Company does not undertake to update them, except as required by law. In addition, these risks are not the only risks that the Company faces. The Company could also be affected by additional factors that apply to all companies operating globally and in the U.S., as well as other risks that are not presently known to the Company or that the Company currently considers to be immaterial.
Overview
The mission of our business is to improve the lives of our employees and Members, provide socially responsible support to the communities in which we operate our business and deliver a fair financial return to our investors. PriceSmart is the only membership-based warehouse club business in the markets where we operate in Latin America and the Caribbean. Following in the tradition of Price Club® and Costco®, our goal is to offer high quality merchandise at the lowest possible prices by leveraging volume purchasing and eliminating inefficiencies from the distribution network.
PriceSmart opened its first location in Panama City, Panama in October of 1996. Today, our company operates 51 warehouse clubs in 12 countries, plus the U.S. Virgin Islands, with revenues in excess of $4.0 billion in fiscal year 2022.
Membership is a key characteristic of warehouse clubs. As of May 31, 2023, PriceSmart had almost 1.8 millionmembership accounts. Our Diamond Members generally pay an annual membership fee of approximately $35, and our Platinum Members generally pay $75 per year, in exchange for an annual 2% cash-back rebate. These membership fees are applied to lowering the price of the products we sell. We believe membership also provides a sense of identity and loyalty that, in turn, reduces the need for PriceSmart to spend money on advertising.
As is typical of all warehouse club businesses, PriceSmart stocks a limited number of stock keeping units (SKU’s). Our SKU count is less than 3,000 items, compared to a grocery store that might stock 30,000 SKU’s or a hypermarket that might stock over 100,000 SKU’s. We believe limiting the number of SKU’s contributes to efficiencies at all levels of our business, thereby supporting lower prices for our Members.
PriceSmart also offers an extensive selection of its own private label products under the brand “Member’s Selection®”. The Member’s Selection® brand provides our Members with high quality private label merchandise at prices lower than the comparable national brands. Similar to other warehouse clubs, PriceSmart has food courts at all locations with the traditional selection of hot dogs and pizza, along with other items. Unique to many of our PriceSmart clubs are our coffee bars selling coffee and coffee specialties, with coffee sourced from the coffee growing regions in our markets. PriceSmart also offers an extensive line of bakery products, which are produced by our bakeries.
Our warehouse clubs range in sales floor size from approximately 30,000 to 60,000 square feet. Our larger clubs are typically located in and around densely populated major cities that include a large penetration of consumers with significant disposable income. Our smaller clubs tend to be in areas with less population density, but where there are significant opportunities to serve the population and supply and support businesses. We also operate smaller format clubs in urban areas where it is difficult to secure sufficient real estate at a reasonable cost. However, for future clubs with a smaller physical footprint, beginning with our San Miguel, El Salvador club, we have redesigned the layout in order to accommodate a similar number of selling pallet positions as our larger clubs.
We strategically invest in technology to enhance Member experience and convenience. We believe technology allows us to access valuable data that supports our ability to increase efficiencies and gain important insights about our Members and their shopping preferences. We now provide digital membership and auto-renewal for the convenience of our Members. Additionally, technology is fundamental to providing a platform for our Members to shop online.
Our logistics and distribution infrastructure is key to maximizing efficiencies. We continually review and upgrade our logistics and distribution systems in an attempt to capture efficiencies as our business grows in sales volume, in geography and through activity generated by e-commerce. We utilize regional distribution centers in the U.S. and Costa Rica as well as several local distribution centers to distribute merchandise efficiently and to create flexibility to mitigate the risk of supply-chain disruption. We also seek to capture efficiencies by using specialized distribution centers for produce and centralized production for categories such as bakery and meat processing.
Purchasing land and constructing warehouse clubs is generally our largest ongoing capital investment. Securing land for warehouse club locations is challenging in several of our markets because suitable sites at economically feasible prices are difficult to find. We believe ownership of our real estate in many of our markets provides several advantages, including lower operating expenses, flexibility to expand or otherwise enhance our buildings, long-term control over the use of the property and potential increase of value in future years. Although we prefer to own real estate, we sometimes lease our real estate when leasing provides the best available opportunity.
We do not currently face direct competition from U.S. membership warehouse club operators in our markets. However, we do face competition from various local and international retail formats such as hypermarkets, supermarkets, cash and carry outlets, hard discounters, home improvement centers, electronic retailers, specialty stores, convenience stores, traditional wholesale distribution and online sales.
The number of warehouse clubs for each country or territory were as follows:
Country/Territory
Number of Warehouse Clubs in Operation as of May 31, 2022
Number of Warehouse Clubs in Operation as of May 31, 2023
Anticipated Warehouse Club Openings in Calendar Year 2023
Anticipated Warehouse Club Openings in Calendar Year 2024
Colombia
9
9
1
—
Costa Rica
8
8
—
—
Panama
7
7
—
—
Dominican Republic
5
5
—
—
Guatemala
5
5
1
—
Trinidad
4
4
—
—
Honduras
3
3
—
—
El Salvador
2
3
—
1
Nicaragua
2
2
—
—
Jamaica
2
2
—
—
Aruba
1
1
—
—
Barbados
1
1
—
—
U.S. Virgin Islands
1
1
—
—
Totals
50
51
2
1
Our warehouse clubs, one regional distribution center and several smaller local distribution centers are located in Latin America and the Caribbean, and our corporate headquarters, U.S. buying operations and our larger regional distribution center are located primarily in the United States. Our operating segments are the United States, Central America, the Caribbean and Colombia.
We are proceeding with the construction of a warehouse club in the affluent El Poblado area of Medellín, Colombia. We expect to open this warehouse club, which will be our second club in Medellín and the Company’s tenth warehouse club in Colombia, in August 2023. In addition, we have recently leased land and have plans to open our sixth warehouse club in Guatemala, located in Escuintla, approximately 40 miles south of the nearest club in the capital of Guatemala City. The club will be built on a five-acre property and is anticipated to open in the fall of 2023. We have also purchased land and plan to open our fourth warehouse club in El Salvador, located in Santa Ana, approximately 40 miles west from the nearest club in the capital of San Salvador. The club will be built on a five-acre property and is anticipated to open in early 2024. Once these three new clubs are open, we will operate 54 warehouse clubs.
We also export products to a retailer in the Philippines and are exploring expansion of that business in other markets.
Factors Affecting Our Business
Overall economic trends, foreign currency exchange volatility, and other factors impacting the business
Our sales and profits vary from market to market depending on general economic factors, including GDP growth; consumer preferences; foreign currency exchange rates; political policies and social conditions; local demographic characteristics (such as population growth); the number of years we have operated in a particular market; and the level of retail and wholesale competition in that market. The economies of many of our markets are dependent on foreign trade, tourism, and foreign direct investments. Uncertain economic conditions and slowdown in global economic growth and investment may impact the economies in our markets, causing significant declines in GDP and employment and devaluations of local currencies against the U.S. dollar.
During the first nine months of fiscal year 2023, inflation in all of our markets and devaluations of local currencies, especially in Colombia, created significant headwinds. However, some markets, especially Costa Rica, benefited from currency appreciation which helped offset the currency devaluations we experienced in our other countries. Substantial product cost increases due to inflation or commodity price increases have and could continue to impact our financial results and could lead to reduced sales, fewer units sold, and/or margin pressure. Events directly or indirectly related to COVID-19 have resulted in market and supply-chain disruptions. These factors have increased the complexity of managing our inventory flow and business; however, during the first nine months of fiscal year 2023, we saw a general improvement in transit days and a reduction in freight rates of our shipping containers. We are working to hold down and/or mitigate the price increases passed on to our Members while maintaining the right inventory mix to grow sales. One key mitigating factor has been our expanded network of distribution centers, which has facilitated alternative shipping routes, increased throughput, and provided flexibility to mitigate our supply chain challenges and risks more effectively.
Currency fluctuation can be one of the largest variables affecting our overall sales and profit performance, as we have experienced in prior fiscal years, because many of our markets are susceptible to foreign currency exchange rate volatility. During the first nine months of fiscal year 2023 and 2022, approximately 78.8% and 78.0%, respectively, of our net merchandise sales were in currencies other than the U.S. dollar. Of those sales, 48.6% and 48.7% consisted of sales of products we purchased in U.S. dollars for each period, respectively.
A devaluation of local currency reduces the value of sales and membership income that is generated in that country when translated to U.S. dollars for our consolidated results. In addition, when local currency experiences devaluation, we may elect to increase the local currency price of imported merchandise to maintain our target margins, which could impact demand for the merchandise affected by the price increase. We may also modify the mix of imported versus local merchandise and/or the source of imported merchandise to mitigate the impact of currency fluctuations. Our Colombia market has experienced a foreign currency devaluation against the U.S. dollar of approximately 13% as of May 31, 2023 compared to May 31, 2022. Notwithstanding inflation and this currency devaluation in Colombia, during the third quarter of fiscal year 2023, we strategically decreased sales prices in select items across all of our imported merchandise categories in Colombia. While in the short term this action has adversely impacted our total gross margin percentage for our Colombia segment, and our Company overall, we see Colombia as a key market for growth, and we believe this strategy will enable us to provide value for the Member during a particularly difficult economic period of high inflation and significant currency devaluation. Information about the effect of local currency devaluations is discussed further in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Net Merchandise Sales and Comparable Sales.”
Our wallet-share capture of total retail and wholesale sales can vary from market to market due to competition and the availability of other shopping options for our Members. Demographic characteristics within each of our markets can affect both the overall level of sales and future sales growth opportunities. Certain island markets, such as Aruba, Barbados and the U.S. Virgin Islands, offer us limited upside for sales growth given their overall market size.
We continue to face the risk of political instability which may have significant effects on our business. For example, civil unrest in Colombia in response to tax reform and austerity measures paralyzed significant portions of the country’s infrastructure as roadblocks and riots disrupted normal economic activity during the third quarter of fiscal year 2021. Nicaragua and Honduras experienced anti-government protests in 2019; Costa Rica also had a general strike against tax reform measures that significantly impeded regular economic activity in 2018.
Our operations are subject to volatile weather conditions and natural disasters. In November 2020, Hurricanes Eta and Iota brought severe rainfall, winds, and flooding to a significant portion of Central America, especially Honduras, which caused significant damage to parts of that country’s infrastructure. Although our warehouse clubs were not significantly affected and we were able to manage our supply chain to keep our warehouse clubs stocked with merchandise, similar natural disasters could adversely impact our overall sales, costs and profit performance in the future.
Periodically, we experience a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This can and has impeded our ability to convert local currencies obtained through merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products and to otherwise redeploy these funds in our Company. This illiquidity also increases our foreign exchange exposure to any devaluation of the local currency relative to the U.S. dollar. For instance, during fiscal year 2021, we experienced significant limitations on our ability to convert Trinidad dollars to U.S. dollars or other tradable currencies. Our balance as of May 31, 2023 of Trinidad dollar denominated cash and cash equivalents and short and long-term investments measured in U.S. dollars was $13.5 million, a decrease of $87.0 million from the peak of $100.5 million as of November 30, 2020. However, as the Trinidad central bank strictly manages the exchange rate of the Trinidad dollar with the U.S. dollar and affects the level of U.S. Dollar liquidity in the market through its interventions, we are subject to continued challenges in converting our Trinidad dollars to U.S. dollars, as well as being exposed to the risk of a potential devaluation of the currency.
During the third quarter of fiscal year 2023, the Honduran Central Bank began limiting the availability and controlling the allocation of U.S. dollars for the conversion from Honduran lempiras to U.S. dollars. As of May 31, 2023, our Honduran subsidiary had approximately $15.9 million of cash and cash equivalents denominated in lempiras, which cannot be readily converted to U.S. dollars for general use within the Company.We are actively working with our banking partners and government authorities to address this situation.
We face difficulties in the shipment of, and the risks inherent in the importation of, merchandise to our warehouse clubs. One of those difficulties is possible governmental restrictions on the importation of merchandise. In late May 2023, certain disputes with Nicaraguan customs and tax authorities resulted in delays in the issuance of our importation clearance, and general delays in the customs inspection process. While this situation has occurred frequently in the last few years, we generally have been able to plan around these import blockages and resume within a manner of days. However, the most recent delay in obtaining importation clearance, resulted in us being unable to import merchandise into Nicaragua for several weeks in June. While at this time our tax clearances and imports seem to have returned to a more normal cadence, we continue to monitor this situation closely and are working with local officials to seek continuity of imports into Nicaragua. The duration and uncertainty surrounding this situation may result in a decline in merchandise sales in Nicaragua during our fiscal fourth quarter, as imports for the first nine months of fiscal year 2023 made up approximately 53% of our sales in that market.
Mission and Business Strategy
PriceSmart exists to improve the lives and businesses of our Members, our employees and our communities through the responsible delivery of the best quality goods and services at the lowest possible prices. Our mission is to serve as a model company, which operates profitably and provides a good return to our investors, by providing Members in emerging and developing markets with exciting, high-quality merchandise sourced from around the world and valuable services at compelling prices in safe U.S. style clubs and through PriceSmart.com. We prioritize the well-being and safety of our Members and employees. We provide good jobs, fair wages and benefits and opportunities for advancement. We strive to treat our suppliers right and empower them when we can. We conduct ourselves in a socially responsible manner as we endeavor to improve the quality of the lives of our Members and their businesses, while respecting the environment and the laws of all the countries in which we operate. We charge Members an annual membership fee that enables us to operate our business with lower margins than traditional retail stores. As we continue to invest in technological capabilities, we are increasing our tools to drive sales and operational efficiencies. We believe we are well positioned to blend the excitement and appeal of our brick-and-mortar business with the convenience and additional benefits of online shopping and services and, meanwhile, enhance Member experience and engagement.
As we look to the future, our Company is focused on three major drivers of growth:
•Invest in Remodeling Current PriceSmart Clubs, Adding New PriceSmart Locations and Opening More Distribution Centers
•Increase Membership Value
•Drive Incremental Sales via PriceSmart.com and Enhanced Online, Digital and Technological Capabilities
I.Invest in Remodeling Current PriceSmart Clubs, Adding New PriceSmart Locations and Opening More Distribution Centers. We believe that one of the quickest and most effective ways to increase sales and profitability is to increase the size of our warehouse clubs and the number of parking spaces at our high-volume locations. For instance, we are currently remodeling and expanding one of our clubs in San Salvador, El Salvador, our club in San Pedro Sula, Honduras, our club in Santiago, Dominican Republic and our club in Port of Spain, Trinidad and Tobago. We continue to pursue opportunities to add new warehouse clubs in our existing markets and to assess opportunities in new markets. In Medellin, Colombia, we are currently building our second warehouse club which we plan to open in August 2023. In the fall of 2023, we also intend to open our sixth warehouse club in Escuintla, Guatemala. Additionally, we have plans to open a new warehouse club in Santa Ana, El Salvador, in early 2024. Our distribution network currently consists of major distribution centers in Miami and Costa Rica, complemented by varying distribution activities in our other markets. Based on our experience with our Costa Rica distribution center, we believe that investing in similar distribution centers in other major markets will play a strategic role in a variety of ways. Distribution centers are also strategically important in providing the infrastructure to support PriceSmart.com online sales to both our business and our family Members. In addition to major distribution centers, PriceSmart has been investing in what we call Produce Distribution Centers, which enable us to purchase, process and package produce directly from farms both in our markets, as well as for imported produce.
II.Increase Membership Value. We are seeking to attract more Members and retain our current Members by expanding the benefits of being a Member of PriceSmart through sales, services, and convenience. As benefits grow and the value of being a PriceSmart Member increases, adjustments to the membership fee may be warranted. A larger membership base and higher membership fee contribute to the bottom line of the business and can be reinvested in providing better pricing to our Members. We focus on growth of our membership base, Member renewal rates and spend per Member as part of determining how Members see our value. By adding more benefits that Members can only obtain with us, we believe we can achieve growth in the number of Members, which drives Membership income and Merchandise sales. Recent examples of enhancements we have made to the value of membership include: additional services, such as the ability for all of our Members to transact on PriceSmart.com; pickup and delivery service in all of our clubs; and the implementation and expansion of our Well-being initiative, which offers Optical services with free eye exams for the Member and additional members of their families and deeply discounted eyeglass frames, Audiology services with free hearing exams and deeply discounted hearing aids, and, in some of our markets, Pharmacy, which provides a significant convenience to our Members. Another way we enhance Membership value is through our private label offering, “Member’s Selection®,” a brand that is available only to PriceSmart Members. We believe the "Member’s Selection®" brand carries goodwill and is recognized in our markets for value. Private label also provides us the opportunity to source quality items locally when appropriate. Select local sourcing has multiple benefits, including support of local communities in which we operate by enhancing business activity and creating direct and indirect jobs, mitigation of foreign currency exchange risk, and reduced supply chain exposure. These initiatives offer additional benefits and services for our Members, whether they choose to shop on-line, in-club, or both. During the first nine months of fiscal year 2023, our private label sales represented 26.0% of total merchandise sales, up from 24.2% for fiscal year 2022, and we plan to continue to invest in the development of additional private label products under the “Member’s Selection®” brand.
III.Drive Incremental sales via PriceSmart.com and Enhanced Online, Digital and Technological Capabilities.We recognize the growing expectation of consumers in our markets for convenience. As a result, we continue to improve the functionality of PriceSmart.com and to expand our product offerings and related content available online. We also build and apply technology tools to continue to learn more about and strengthen our relationships with each of our Members. PriceSmart.com and these tools provide the opportunity for us to continually strengthen and expand the scope of our relationship with each Member and offer incremental products and services in the future. Our PriceSmart.com offering also provides data that informs us regarding the potential viability of new clubs in new areas and offers us options to serve and expand into new markets without the need for a traditional brick & mortar club location. We also invest in technology to capture operational efficiencies and enhance our decision-making for the increasingly dynamic environment we are in.
Financial highlights for the third quarter of fiscal year 2023 included:
•Total revenues increased 6.4% over the comparable prior year period.
•Net merchandise sales increased 7.1% over the comparable prior year period. We ended the quarter with 51 warehouse clubs compared to 50 warehouse clubs at the end of the third quarter of fiscal year 2022. Net merchandise sales - constant currency increased 5.6% over the comparable prior year period.
•Comparable net merchandise sales (that is, sales in the 49 warehouse clubs that have been open for greater than 13 ½ calendar months) for the 13 weeks ended June 4, 2023 increased 5.8%. Comparable net merchandise sales - constant currency for the 13 weeks ended June 4, 2023 increased 4.3%.
•Membership income for the third quarter of fiscal year 2023 increased 8.4% to $16.7 million over the comparable prior year period.
•Total gross margins (net merchandise sales less associated cost of goods sold) increased 15.1% over the prior-year period, and merchandise gross profits as a percent of net merchandise sales were 15.3%, an increase of 110 basis points or 1.1% from the same period in the prior year.
•Selling, general and administrative expenses increased 10.7% compared to the third quarter of fiscal year 2022, primarily due to unfavorable rulings on a portion of our VAT receivables and higher compensation, travel and professional fees.
•Operating income for the third quarter of fiscal year 2023 was $43.1 million, an increase of 27.5%, or $9.3 million, compared to the third quarter of fiscal year 2022.
•We recorded a $1.5 million net loss in total other expense, net in the third quarter of fiscal year 2023 compared to a $4.7 million net loss in total other expense, net in the same period last year primarily due to higher interest income of $2.7 million, comparatively, because of significantly more investments of surplus cash at higher yields.
•Our effective tax rate decreased in the third quarter of fiscal year 2023 to 28.9% from 33.7% in the third quarter of fiscal year 2022. The decrease in the effective tax rate is primarily related to expected cost savings for CEO compensation.
•Net income attributable to PriceSmart for the third quarter of fiscal year 2023 was $29.6 million, or $0.94 per diluted share, compared to $19.3 million, or $0.62 per diluted share, in the third quarter of fiscal year 2022.
•Adjusted net income attributable to PriceSmart for the third quarter of fiscal year 2023 was $31.9 million, or an adjusted $1.02 per diluted share, compared to adjusted net income of $19.3 million, or an adjusted $0.62 per diluted share, in the comparable prior year period.
•Adjusted EBITDA for the third quarter of fiscal year 2023 was $63.2 million compared to $51.3 million in the same period last year.
Financial highlights for the nine months ended May 31, 2023 included:
•Total revenues increased 8.2% over the comparable prior year period.
•Net merchandise sales increased 8.7% over the comparable prior year period. We ended the first nine months of fiscal year 2023 with 51 warehouse clubs compared to 50 warehouse clubs at the end of the third quarter of fiscal year 2022. Net merchandise sales - constant currency increased 9.0% over the comparable prior year period.
•Comparable net merchandise sales (that is, sales in the 49 warehouse clubs that have been open for greater than 13 ½ calendar months) for the 39 weeks ended June 4, 2023 increased 6.5%. Comparable net merchandise sales - constant currency for the 39 weeks ended June 4, 2023 increased 6.7%.
•Membership income increased 7.7% to $48.8 million.
•Total gross margins (net merchandise sales less associated cost of goods sold) increased 12.7% over the prior-year period, and merchandise gross profits as a percent of net merchandise sales were 15.8%, an increase of 50 basis points or 0.5% from the same period in the prior year.
•Selling, general and administrative expenses increased 9.3% compared to the nine months ended of fiscal year 2022, primarily due to $7.7 million of CEO departure-related costs we incurred in the current-year period.
•Operating income was $152.4 million, an increase of 19.0%, or $24.3 million, compared to the first nine months of fiscal year 2022.
•We recorded a $13.8 million net loss in total other expense, net in the first nine months of fiscal year 2023 compared to a $7.1 million net loss in total other expense, net in the same period last year primarily due to an increase of $10.0 million of foreign currency losses partially offset by an increase of $4.7 million in interest income comparatively.
•Our effective tax rate decreased for the first nine months of fiscal year 2023 to 32.2% from 32.8% in the first nine months of fiscal year 2022.
•Net income attributable to PriceSmart for the first nine months of fiscal year 2023 was $93.8 million, or $3.01 per diluted share, compared to $81.2 million, or $2.63 per diluted share, in the comparable prior year period.
•Adjusted net income attributable to PriceSmart for the first nine months of fiscal year 2023 was $103.3 million, or an adjusted $3.32 per diluted share, compared to adjusted net income of $79.8 million, or an adjusted $2.58 per diluted share, in the comparable prior year period.
•Adjusted EBITDA for the first nine months of fiscal year 2023 was $215.6 million compared to $178.3 million in the same period last year.
Non – GAAP (Generally Accepted Accounting Principles) Financial Measures
The accompanying Consolidated Financial Statements, including the related notes, are presented in accordance with U.S. GAAP (Generally Accepted Accounting Principles). In addition to relevant GAAP measures, we also provide non-GAAP measures including adjusted net income, adjusted net income per diluted share, adjusted EBITDA and net merchandise sales - constant currency because management believes these metrics are useful to investors and analysts by excluding items that we do not believe are indicative of our core operating performance. These measures are customary for our industry and commonly used by competitors. These non-GAAP financial measures should not be reviewed in isolation or considered as an alternative to any other performance measure derived in accordance with GAAP and may not be comparable to similarly titled measures used by other companies in our industry or across different industries.
Adjusted Net Income
The adjusted net income and adjusted net income per diluted share metrics are important measures used by management to compare the performance of core operating results between periods. We define adjusted net income as net income, as reported, adjusted for: separation costs associated with the departure of our former Chief Executive Officer, gain on the sale of our Aeropost subsidiary, the write-off of certain VAT receivables following unfavorable court rulings, and the tax impact of the foregoing adjustments on net income. We define adjusted net income per diluted share as adjusted net income divided by the weighted-average diluted shares outstanding.
We believe adjusted net income and adjusted net income per diluted share are useful metrics to investors and analysts because they present more accurate year-over-year comparisons for our net income and net income per diluted share because adjusted items are not the result of our normal operations.
Separation costs associated with Chief Executive Officer departure (1)
—
—
7,747
—
Gain on sale of Aeropost subsidiary (2)
—
—
—
(2,736)
VAT receivable write-off (3)
2,309
—
2,309
—
Tax impact of adjustments to net income (4)
—
—
(550)
1,280
Adjusted net income attributable to PriceSmart
$
31,881
$
19,258
$
103,330
$
79,774
Net income attributable to PriceSmart per diluted share
$
0.94
$
0.62
$
3.01
$
2.63
Separation costs associated with Chief Executive Officer departure
—
—
0.23
—
Gain on sale of Aeropost subsidiary
—
—
—
(0.05)
VAT receivable write-off
0.08
—
0.08
—
Adjusted net income attributable to PriceSmart per diluted share
$
1.02
$
0.62
$
3.32
$
2.58
(1) Reflects $7.7 million of separation costs associated with the departure of our former Chief Executive Officer in February 2023.
(2) Reflects a gain of $2.7 million associated with the sale of our Aeropost subsidiary on October 1, 2021.
(3) Reflects $2.3 million of VAT receivables deemed not recoverable and written-off in the third quarter of fiscal year 2023 following unfavorable court rulings.
(4) Reflects the tax effect of the above-mentioned adjustments.
Adjusted EBITDA
Adjusted EBITDA is defined as net income before interest expense, net, provision for income taxes and depreciation and amortization, adjusted for the impact of certain other items, including interest income; other income (expense), net; separation costs associated with Chief Executive Officer departure; and the write-off of certain VAT receivables following unfavorable court rulings. The following is a reconciliation of our Net income to Adjusted EBITDA for the periods presented:
Three Months Ended
Nine Months Ended
May 31, 2023
May 31, 2022
May 31, 2023
May 31, 2022
Net income attributable to PriceSmart as reported
$
29,572
$
19,258
$
93,824
$
81,230
Adjustments:
Interest expense
2,747
2,796
8,310
6,824
Provision for income taxes
12,019
9,776
44,647
39,729
Depreciation and amortization
17,821
17,557
53,264
50,258
Interest income
(3,161)
(473)
(6,260)
(1,540)
Other expense, net (1)
1,885
2,423
11,795
1,833
Separation costs associated with Chief Executive Officer departure (2)
—
—
7,747
—
VAT receivable write-off (3)
2,309
—
2,309
—
Adjusted EBITDA
$
63,192
$
51,337
$
215,636
$
178,334
(1) Primarily consists of foreign currency losses or gains due to the revaluation of monetary assets and liabilities (primarily U.S. dollars). This line item includes a gain of $2.7 million associated with the sale of our Aeropost subsidiary on October 1, 2021.
(2) Reflects $7.7 million of separation costs associated with the departure of our former Chief Executive Officer in February 2023. On a go-forward basis, our Interim Chief Executive Officer has declined to receive compensation for his services during his term; therefore, we expect selling, general and administrative expenses will be positively impacted by approximately $2.5 million of savings each quarter during his term, reduced by compensation increases for other executives related to the change in leadership.
(3) Reflects $2.3 million of VAT receivables deemed not recoverable and written-off in the third quarter of fiscal year 2023 following unfavorable court rulings.
Net Merchandise Sales - Constant Currency
As a multinational enterprise, we are exposed to changes in foreign currency exchange rates. The translation of the operations of our foreign-based entities from their local currencies into U.S. dollars is sensitive to changes in foreign currency exchange rates and can have a significant impact on our reported financial results. We believe that constant currency is a useful measure, indicating the actual growth of our operations. When we use the term "net merchandise sales - constant currency", it means that we have translated current year net merchandise sales at prior year monthly average exchanges rates. Net merchandise sales - constant currency results exclude the effects of foreign currency translation. Impact of foreign currency is the effect of currency fluctuations on our net merchandise sales. Refer to “Management’s Discussion & Analysis – Net Merchandise Sales” and Refer to “Management’s Discussion & Analysis – Comparable Net Merchandise Sales” for our quantitative analysis and discussion. Reconciliations between net merchandise sales - constant currency and comparable net merchandise sales - constant currency and the most directly comparable GAAP measure are included where applicable.
COMPARISON OF THE THREE AND NINE MONTHS ENDED MAY 31, 2023 AND 2022
The following discussion and analysis compares the results of operations for the three-month and nine-month periods ended on May 31, 2023 with the three-month and nine month-periods ended on May 31, 2022 and should be read in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this report. Unless otherwise noted, all tables on the following pages present U.S. dollar amounts in thousands. Certain percentages presented are calculated using actual results prior to rounding.
Net Merchandise Sales
The following tables indicate the net merchandise club sales in the segments in which we operate and the percentage growth in net merchandise sales by segment during the three and nine months ended May 31, 2023 and May 31, 2022:
Comparison of Three and Nine Months Ended May 31, 2023 and 2022
Overall, total net merchandise sales grew 7.1% for the third quarter and 8.7% for the nine-month period ended May 31, 2023. The third quarter increase resulted from a 2.8% increase in transactions and a 4.2% increase in average ticket. For the nine-month period, the increase resulted from a 3.2% increase in transactions and a 5.3% increase in average ticket. Transactions represent the total number of visits our Members make to our warehouse clubs and PriceSmart.com curbside pickup and delivery service transactions. Average ticket represents the amount our Members spend on each visit or PriceSmart.com order. We had 51 clubs in operation as of May 31, 2023 compared to 50 clubs as of May 31, 2022.
Net merchandise sales in our Central America segment increased 11.8% and 11.7% for the third quarter and nine-months ended May 31, 2023, respectively. These increases had a 690 basis point (6.9%) positive impact on total net merchandise sales growth for the third quarter and nine-months ended May 31, 2023. All markets within this segment had positive net merchandise sales growth for the three and nine-month periods ended May 31, 2023.
Net merchandise sales in our Caribbean segment increased 7.3% and 11.1%, respectively, for the third quarter and the nine-months ended May 31, 2023. The increase for the quarter had a 210 basis point (2.1%) positive impact on net merchandise sales growth and the increase for the nine-months had a 320 basis point (3.2%) positive impact on net merchandise sales growth. All of our markets in this segment had positive net merchandise sales growth. We opened our second warehouse club in Jamaica in April 2022.
Net merchandise sales in our Colombia segment decreased 15.7% and 11.6% for the third quarter and the nine-months ended May 31, 2023, respectively. This decrease had a 190 basis point (1.9%) and 140 basis point (1.4%) negative impact on total net merchandise sales growth. The primary driver of the decreased revenue for the quarter and nine months ended was due to the significant devaluation of the Colombian peso during the current fiscal year, which has negatively impacted reported sales in the third quarter of fiscal year 2023.
The following table indicates the impact that currency exchange rates had on our net merchandise sales in dollars and the percentage change from the three and nine-month period ended May 31, 2023. When we use the term "net merchandise sales - constant currency", it means that we have translated current year net merchandise sales at prior year monthly average exchanges rates. Net merchandise sales - constant currency results exclude the effects of foreign currency translation. Impact of foreign currency is the effect of currency fluctuations on our net merchandise sales.
Overall, the effects of currency fluctuations within our markets had approximately $14.9 million and $8.6 million, or 150 basis points (1.5%) of positive impact and 30 basis points (0.3%) of negative impact on net merchandise sales for the quarter and nine-months ended May 31, 2023, respectively.
Currency fluctuations had a $33.5 million and $47.4 million, or 570 basis points (5.7%) and 270 basis points (2.7%), positive impact on net merchandise sales in our Central America segment for the quarter and nine-months ended May 31, 2023. These currency fluctuations contributed approximately 340 basis points (3.4%) and 170 basis points (1.7%) of the positive impact on net merchandise sales for the quarter and nine-months ended May 31, 2023. The Costa Rica Colón appreciated significantly against the dollar as compared to the same three-month and nine-month period a year ago, and was a significant factor in the contribution to the favorable currency fluctuations in this segment.
Currency fluctuations had a $1.2 million and $8.8 million, or 40 basis point (0.4%) and 110 basis point (1.1%), positive impact on net merchandise sales in our Caribbean segment for the quarter and nine-months ended May 31, 2023. These currency fluctuations contributed approximately 10 basis points (0.1%) and 30 basis points (0.3%) of positive impact on total net merchandise sales, respectively. This positive impact was primarily driven by the appreciation of the Dominican Peso as compared to the same three-month and nine-month period a year ago.
Currency fluctuations had a $19.7 million and $64.8 million, or 1,630 basis point (16.3%) and 1,820 basis point (18.2%), negative impact on net merchandise sales in our Colombia segment for the quarter and nine-months ended May 31, 2023. These currency fluctuations contributed approximately 200 basis points (2.0%) and 230 basis points (2.3%) of the total negative impact on total net merchandise sales for the quarter and nine-months ended May 31, 2023.
Comparable Merchandise Sales
We report comparable net merchandise 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 of 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 we experience higher merchandise club sales on the weekends. Each of the warehouse clubs used in the calculations was open for at least 13 ½ calendar months before its results for the current period were compared with its results for the prior period. As a result, sales related to one of our warehouse clubs opened during fiscal year 2022 and one of our warehouse clubs opened during fiscal year 2023 will not be used in the calculation of comparable sales until the applicable warehouse club has been open for at least 13 ½ months. Therefore, comparable net merchandise sales includes 49 warehouse clubs for the thirteen and thirty-nine week periods ended June 4, 2023.
The following tables indicate the comparable net merchandise sales in the reportable segments in which we operate and the percentage changes in net merchandise sales by segment during the thirteen and thirty-nine week periods ended June 4, 2023 and May 29, 2022 compared to the prior year:
Thirteen Weeks Ended
June 4, 2023
May 29, 2022
% Increase/(Decrease) in Comparable Net Merchandise Sales
% Increase in Comparable Net Merchandise Sales
Central America
11.0
%
9.7
%
Caribbean
4.2
17.4
Colombia
(15.2)
18.1
Consolidated comparable net merchandise sales
5.8
%
12.8
%
Thirty-Nine Weeks Ended
June 4, 2023
May 29, 2022
% Increase/(Decrease) in Comparable Net Merchandise Sales
% Increase in Comparable Net Merchandise Sales
Central America
10.7
%
11.4
%
Caribbean
5.9
11.7
Colombia
(13.0)
5.5
Consolidated comparable net merchandise sales
6.5
%
10.8
%
Comparison of Thirteen and Thirty-Nine-Week Periods Ended June 4, 2023 and May 29, 2022
Comparable net merchandise sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the thirteen-week period ended June 4, 2023 increased 5.8%. Comparable net merchandise sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the thirty-nine week period ended June 4, 2023 increased 6.5%.
Comparable net merchandise sales in our Central America segment increased 11.0% and 10.7% for the thirteen-week and thirty-nine week periods ended June 4, 2023, respectively. All of our markets in Central America had positive comparable net merchandise sales growth for the thirteen-week and thirty-nine week periods ended June 4, 2023. The positive comparable net merchandise sales growth for our Central America segment contributed approximately 650 basis points (6.5%) and 640 basis points (6.4%) of positive impact in total comparable merchandise sales for the thirteen-week and thirty-nine week periods ended June 4, 2023, respectively.
Comparable net merchandise sales in our Caribbean segment increased 4.2% and 5.9% for the thirteen-week and thirty-nine week periods ended June 4, 2023. These increases contributed approximately 120 basis points (1.2%) and 170 basis points (1.7%) of positive impact on total comparable merchandise sales for the thirteen-week and thirty-nine week periods ended June 4, 2023, respectively.
Our Dominican Republic market continued its strong performance in the thirteen-week and thirty-nine week periods ended June 4, 2023, with 9.3% and 14.3% comparable net merchandise sales growth, respectively. This strong performance was offset by our Jamaica market, which decreased 3.8% for the thirty-nine week periods ended June 4, 2023, respectively, due to sales transfers from the existing club included in the comparable net merchandise sales calculation to the new club not included in the calculation.
Comparable net merchandise sales in our Colombia segment decreased 15.2% and 13.0% for the thirteen-week and thirty-nine week periods ended June 4, 2023, respectively. These decreases contributed approximately 190 basis points (1.9%) and 160 basis points (1.6%) of negative impact in total comparable merchandise sales for the thirteen-week and thirty-nine week periods ended June 4, 2023, respectively. The decrease in Colombia during the thirteen-week and thirty-nine week period was primarily due to the foreign currency devaluation.
When we use the term "comparable net merchandise sales - constant currency", it means that we have translated current year comparable net merchandise sales at prior year monthly average exchanges rates. Comparable net merchandise sales - constant currency results exclude the effects of foreign currency translation. Impact of foreign currency is the effect of currency fluctuations on our comparable net merchandise sales. The following tables illustrate the comparable net merchandise sales - constant currency percentage growth and the impact that changes in foreign currency exchange rates had on our comparable merchandise sales percentage growth for the thirteen-week and thirty-nine week periods ended June 4, 2023:
Thirteen Weeks Ended
June 4, 2023
Comparable Net Merchandise Sales Growth
Comparable Net Merchandise Sales - Constant Currency Growth
% Impact of Foreign Currency Exchange
Central America
11.0
%
5.3
%
5.7
%
Caribbean
4.2
3.8
0.4
Colombia
(15.2)
0.7
(15.9)
Consolidated comparable net merchandise sales
5.8
%
4.3
%
1.5
%
Thirty-Nine Weeks Ended
June 4, 2023
Comparable Net Merchandise Sales Growth
Comparable Net Merchandise Sales - Constant Currency Growth
% Impact of Foreign Currency Exchange
Central America
10.7
%
7.9
%
2.8
%
Caribbean
5.9
4.9
1.0
Colombia
(13.0)
4.9
(17.9)
Consolidated comparable net merchandise sales
6.5
%
6.7
%
(0.2)
%
Overall, the mix of currency fluctuations within our markets had a 150 basis point (1.5%) positive impact and 20 basis point (0.2%) negative impact on comparable net merchandise sales for the thirteen and thirty-nine week periods ended June 4, 2023.
Currency fluctuations within our Central America segment accounted for approximately 330 basis points (3.3%) and 150 basis points (1.5%) of positive impact on total comparable merchandise sales for the thirteen and thirty-nine week period, respectively. Our Costa Rica market was the main contributor as the market experienced currency appreciation when compared to the same periods last year.
Currency fluctuations within our Caribbean segment accounted for approximately 10 basis points (0.1%) and 30 basis points (0.3%) of positive impact on total comparable merchandise sales for the thirteen and thirty-nine week period, respectively. Our Dominican Republic, Jamaica, and Trinidad markets all experienced currency appreciation.
Currency fluctuations within our Colombia segment accounted for approximately 190 basis points (1.9%) and 200 basis points (2.0%) of negative impact on total comparable merchandise sales for the thirteen and thirty-nine week period, respectively. This reflects the devaluation of the Colombian peso when compared to the same periods a year ago.
Membership income is recognized ratably over the one-year life of the membership.
Three Months Ended
May 31, 2023
May 31, 2022
Amount
Increase/ (Decrease) from prior year
% Change
Membership
income % to
net merchandise
club sales
Amount
Membership income - Central America
$
10,126
$
1,056
11.6
%
1.5
%
$
9,070
Membership income - Caribbean
4,431
301
7.3
1.4
4,130
Membership income - Colombia
2,178
(62)
(2.8)
2.1
2,240
Membership income - Total
$
16,735
$
1,295
8.4
%
1.6
%
$
15,440
Nine Months Ended
May 31, 2023
May 31, 2022
Amount
Increase/ (Decrease) from prior year
% Change
Membership
income % to
net merchandise
club sales
Amount
Membership income - Central America
$
29,504
$
2,680
10.0
%
1.5
%
$
26,824
Membership income - Caribbean
13,184
1,087
9.0
1.4
12,097
Membership income - Colombia
6,118
(263)
(4.1)
1.9
6,381
Membership income - Total
$
48,806
$
3,504
7.7
%
1.5
%
$
45,302
Number of accounts - Central America
987,025
44,929
4.8
%
942,096
Number of accounts - Caribbean
462,634
12,540
2.8
450,094
Number of accounts - Colombia
336,171
(18,882)
(5.3)
355,053
Number of accounts - Total
1,785,830
38,587
2.2
%
1,747,243
Comparison of Three and Nine Months Ended May 31, 2023
The number of member accounts as of May 31, 2023 was 2.2% higher than the number of accounts as of May 31, 2022. Membership income increased 8.4% and 7.7% over the three and nine-month periods ended May 31, 2023, respectively, compared to the same prior-year periods.
Membership income increased in our Central America and Caribbean segments and decreased in our Colombia segment in the three and nine-month periods ended May 31, 2023. The consolidated increase in membership income is due to an increase in the membership base since the comparable prior year period. Since August 31, 2022, our Central America and Caribbean segments have increased their membership base and our Colombia segment has faced a decline in its membership base. Inflation and significant foreign currency devaluation have adversely impacted our Members in that market.
We offer the Platinum Membership program in all locations where PriceSmart operates. The annual fee for a Platinum Membership in most markets is approximately $75. The Platinum Membership program provides Members with a 2% rebate on most items, up to an annual maximum of $500. We record the 2% rebate as a reduction on net merchandise sales at the time of the sales transaction. Platinum Membership accounts are 8.6% of our total membership base as of May 31, 2023, an increase from 7.1% as of May 31, 2022. Platinum Members tend to have higher renewal rates than our Diamond Members.
Our trailing twelve-month renewal rate was 87.1% and 88.9% for the periods ended May 31, 2023 and May 31, 2022, respectively.
Other Revenue
Other revenue primarily consists of non-merchandise revenue from freight and handling fees generated from the marketplace and casillero operations we sold in October 2021, our interest-generating portfolio from our co-branded credit cards, and rental income from operating leases where the Company is the lessor.
Three Months Ended
May 31, 2023
May 31, 2022
Amount
Increase/ (Decrease) from prior year
% Change
Amount
Miscellaneous income
$
2,754
$
395
16.7
$
2,359
Rental income
555
(49)
(8.1)
604
Other revenue
$
3,309
$
346
11.7
%
$
2,963
Nine Months Ended
May 31, 2023
May 31, 2022
Amount
Increase/ (Decrease) from prior year
% Change
Amount
Non-merchandise revenue
$
—
$
(3,307)
(100.0)
%
$
3,307
Miscellaneous income
7,771
1,096
16.4
6,675
Rental income
1,660
(225)
(11.9)
1,885
Other revenue
$
9,431
$
(2,436)
(20.5)
%
$
11,867
Comparison of Three and Nine Months Ended May 31, 2023 and May 31, 2022
The primary driver of the decrease in other revenue for the nine-months ended May 31, 2023 was the sale of our Aeropost subsidiary and its marketplace and casillero operations on October 1, 2021.
Total comparable net merchandise sales increase/(decrease)
5.8%
12.8%
(7.0)%
Total revenue margin
Total revenue margin
$
184,060
$
161,193
$
22,867
Total revenue margin percentage
16.8%
15.6%
1.2%
Selling, general and administrative
Selling, general and administrative
$
141,008
$
127,431
$
13,577
Selling, general and administrative percentage of total revenues
12.9%
12.4%
0.5
%
Operational data
Adjusted EBITDA (1)
$
63,192
$
51,337
$
11,855
(1) See “Item 2. Management’s Discussion & Analysis – Non - GAAP Financial Measures” for the definition of Adjusted EBITDA and a reconciliation to GAAP net income attributable to PriceSmart as reported.
Three Months Ended
Results of Operations Consolidated
May 31, 2023
% of
Total Revenue
May 31, 2022
% of
Total Revenue
Operating income- by segment
Central America
$
46,023
4.2
%
$
39,458
3.8
%
Caribbean
21,184
1.9
19,163
1.9
Colombia
2,961
0.3
4,652
0.4
United States
4,066
0.4
2,821
0.3
Reconciling Items (1)
(31,182)
(2.9)
(32,332)
(3.1)
Operating income - Total
$
43,052
3.9
%
$
33,762
3.3
%
(1)The reconciling items reflect the amount eliminated upon consolidation of intersegment transactions.
(Amounts in thousands, except percentages and number of warehouse clubs)
Net merchandise sales
Net merchandise sales
$
3,211,725
$
2,954,950
$
256,775
Total gross margin
$
508,582
$
451,312
$
57,270
Total gross margin percentage
15.8%
15.3%
0.5%
Revenues
Total revenues
$
3,293,649
$
3,044,723
$
248,926
Percentage change from comparable period
8.2%
Comparable net merchandise sales
Total comparable net merchandise sales increase/(decrease)
6.5%
10.8%
(4.3)%
Total revenue margin
Total revenue margin
$
567,973
$
508,189
$
59,784
Total revenue margin percentage
17.2%
16.7%
0.5%
Selling, general and administrative
Selling, general and administrative
$
415,594
$
380,088
$
35,506
Selling, general and administrative percentage of total revenues
12.6%
12.5%
0.1
%
Operational data
Adjusted EBITDA (1)
$
215,636
$
178,334
$
37,302
Warehouse clubs at period end
51
50
1
Warehouse club sales floor square feet at period end
2,642
2,484
158
(1) See “Item 2. Management’s Discussion & Analysis – Non - GAAP Financial Measures” for the definition of Adjusted EBITDA and a reconciliation to GAAP net income attributable to PriceSmart as reported.
Nine Months Ended
Results of Operations Consolidated
May 31, 2023
% of
Total Revenue
May 31, 2022
% of
Total Revenue
Operating income- by segment
Central America
$
152,786
4.6
%
$
128,889
4.2
%
Caribbean
71,161
2.2
60,796
2.0
Colombia
12,491
0.4
17,154
0.6
United States
24,622
0.7
17,377
0.6
Reconciling Items (1)
(108,681)
(3.3)
(96,115)
(3.2)
Operating income - Total
$
152,379
4.6
%
$
128,101
4.2
%
(1)The reconciling items reflect the amount eliminated upon consolidation of intersegment transactions.
The following table summarizes the selling, general and administrative expense for the periods disclosed:
Separation costs associated with Chief Executive Officer departure
7,747
0.3
—
—
Pre-opening expenses
584
—
1,406
—
Loss on disposal of assets
295
—
881
—
Total Selling, general and administrative
$
415,594
12.6
%
$
380,088
12.5
%
Comparison of Three and Nine Months Ended May 31, 2023 and May 31, 2022
Total gross margin is derived from our Revenue – Net merchandise sales less our Cost of goods sold – Net merchandise sales and represents our sales and cost of sales generated from the business activities of our warehouse clubs. We express our Total gross margin percentage as a percentage of our Net merchandise sales.
On a consolidated basis, total gross margin as a percent of net merchandise sales for the three and nine months ended May 31, 2023 was 15.3% and 15.8%, 110 basis points (1.1%) and 50 basis points (0.5%) higher than the comparable prior year period, respectively. This increase was primarily due to significant markdowns we took in the third quarter of fiscal year 2022 when we had excessive amounts of slow-moving inventory because of changing consumer preferences as they began to resume more normal buying patterns similar to our pre-pandemic sales mix. In addition, supply chain disruptions lead to out-of-season merchandise because of shipping delays in the prior year period that had to be liquidated to free up sales floor space for the past holiday season.
Total Gross Margin rate in the third quarter decreased compared to the first two quarters of fiscal year 2023. This decrease is primarily due to the elimination of our COVID premium, reduction in our Trinidad foreign currency exchange premium and a margin decrease in our Colombia market due to pricing actions taken by management based on the deteriorating conditions in that market. In Colombia we have determined to strategically decrease sales prices on select items across all of our imported merchandise categories in an effort to reduce the cost burden to our Members in this market during this period of exceptionally high inflation and significant devaluation of the Colombian Peso. In addition, we took pricing actions across all of our markets in response to increasingly challenging economic conditions in those markets and to alleviate some economic burden on our Members. We will further reduce our Trinidad foreign currency exchange premium in the fourth quarter.
Total revenue margin is derived from Total revenues, which includes our Net merchandise sales, Membership income, Export sales, and Other revenue and income less our Cost of goods sold for net merchandise sales, Export sales, and Non-merchandise revenues. We express our Total revenue margin as a percentage of Total revenues.
Total revenue margin increased 120 basis points (1.2%) for the three months ended May 31, 2023 compared to the prior-year period, which is primarily the result of the higher total gross margin percentage of 110 basis points (1.1%). Total revenue margin increased 50 basis points (0.5%) for the nine months ended May 31, 2023 compared to the prior-year period, which is primarily the result of higher total gross margin percentage of 50 basis points (0.5%).
Selling, general, and administrative expenses consist of warehouse club and other operations, general and administrative expenses, separation costs associated with the Chief Executive Officer departure, pre-opening expenses, and loss (gain) on disposal of assets. In total, Selling, general and administrative expenses increased $13.6 million compared to the prior year, and increased as a percentage of total revenue, increasing by 50 basis points (0.5%) to 12.9% of total revenue for the third quarter of fiscal year 2023 compared to 12.4% of total revenues for the third quarter of fiscal year 2022. Selling, general and administrative expenses increased $35.5 million compared to the prior year and increased as a percentage of total revenue, increasing 10 basis points (0.1%) to 12.6% of total revenue for the first nine months of fiscal year 2023 compared to 12.5% of total revenues for the first nine months of fiscal year 2022 offset, in part, by our Interim Chief Executive Officer's election not to receive compensation.
Warehouse club and other operations expenses increased to 9.7% of total revenues for the first three months of fiscal year 2023 compared to 9.3% for the prior-year period. This was primarily due to our Costa Rica market which increased 30 basis points (0.30%) and our Jamaica market which increased 10 basis points (0.10%) as a percentage of revenue year over year due to the appreciation of the Costa Rica colón and the Jamaican dollar, and a 20 basis points (0.20%) increase due to a VAT receivable write-off, partially offset by our Colombia market which decreased 20 basis points (0.20%) as a percentage of revenue year over year due to the devaluation of the Colombian peso.
Warehouse club and other operations expenses remained unchanged as 9.3% of total revenues for the first nine months of fiscal year 2023 and 2022.
General and administrative expenses increased to 3.1% of total revenues for the third quarter of fiscal year 2023 compared to 3.0% for the third quarter of fiscal year 2022. The 10 basis point (0.1%) increase is primarily due to increased compensation costs and travel along with certain non-recurring expenses related to severance and professional fees.
General and administrative expenses decreased to 3.0% of total revenues for the first nine months of fiscal year 2023 compared to 3.2% for the first nine months of fiscal year 2022. The 20 basis point (0.2%) decrease is primarily due to the leveraging of general and administrative expenses.
In the second quarter of fiscal year 2023, we recorded $7.7 million for separation and other related termination benefits for our former Chief Executive Officer who resigned effective February 3, 2023. Of this amount $4.2 million in net charges related to adjustments to non-cash stock-based compensation. We substantially fulfilled all payment obligations by the end of the second quarter of fiscal year 2023; however, some vesting of PSUs will occur in the first quarter of fiscal year 2024.
On a go-forward basis, our Interim Chief Executive Officer has declined to receive compensation for his services during his term; therefore, we expect Selling, general and administrative expenses will be positively impacted by $2.5 million of savings each quarter during his term, reduced by salary increases for other executives related to the change in leadership.
Operating income in the third quarter of fiscal year 2023 increased to $43.1 million (3.9% of total revenue) compared to $33.8 million (3.3% of total revenue) for the same period last year. This reflects the increase in total revenue margin of 120 basis points (1.2%), partially offset by a 50 basis point (0.5%) decrease due to the deleveraging of selling, general and administrative expenses over the comparable prior-year period.
Operating income for the nine months ended May 31, 2023 increased to $152.4 million (4.6% of total revenue) compared to $128.1 million (4.2% of total revenue) for the same period last year.
Net interest income represents the earnings generated from interest-bearing assets held by PriceSmart, Inc. and our wholly owned foreign subsidiaries. These assets include investments in fixed income securities and deposits held with financial institutions. The interest income is derived from the interest payments received on these assets, which serve to enhance our overall financial returns. This contributes to the financial strength and liquidity of PriceSmart, Inc. and supports various operations such as funding new ventures, meeting working capital needs, and ensuring adequate U.S. dollar liquidity in our Trinidad subsidiary.
Three Months Ended
May 31, 2023
May 31, 2022
Amount
Change
Amount
Interest income
$
3,161
$
2,688
$
473
Nine Months Ended
May 31, 2023
May 31, 2022
Amount
Change
Amount
Interest income
$
6,260
$
4,720
$
1,540
Comparison of Three and Nine Months Ended May 31, 2023 and May 31, 2022
Net interest income increased for the three and nine-month period ended May 31, 2023 primarily due to an increase in investments at higher yields when compared to the comparable prior year period.
Interest Expense
Net interest expense reflects borrowings by PriceSmart, Inc. and our wholly owned foreign subsidiaries to finance new land acquisition and construction for new warehouse clubs and distribution centers, warehouse club expansions, the capital requirements of warehouse clubs and other operations, increase U.S. dollar liquidity in our Trinidad subsidiary and ongoing working capital requirements.
Comparison of Three and Nine Months Ended May 31, 2023 and May 31, 2022
Net interest expense increased for the nine-month period ended May 31, 2023 primarily due to higher interest rates on short-term borrowings and higher long-term borrowings outstanding when compared to the comparable prior year period.
Other Expense, Net
Other expense, net consists of currency gains or losses, as well as net benefit costs related to our defined benefit plans and other items considered to be non-operating in nature.
Three Months Ended
May 31, 2023
May 31, 2022
Amount
Change
% Change
Amount
Other expense, net
$
(1,885)
$
538
(22.2)
%
$
(2,423)
Nine Months Ended
May 31, 2023
May 31, 2022
Amount
Change
% Change
Amount
Other expense, net
$
(11,795)
$
(9,962)
543.5%
$
(1,833)
Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains/(losses) are recorded as currency gains or losses. Additionally, gains or losses from transactions denominated in currencies other than the functional currency of the respective entity also generate currency gains or losses.
Comparison of Three and Nine Months Ended May 31, 2023 and 2022
For the three and nine-months ended May 31, 2023 the primary driver of Other expense, net included $1.0 million and $8.3 million of losses, respectively, due to revaluation of monetary assets and liabilities (primarily U.S. dollars) in several of our markets. Of those amounts, Costa Rica contributed a $477,000 and $3.3 million revaluation loss, respectively, due to the impact of the appreciation of the Costa Rican Colón on our U.S. dollar monetary net assets in Costa Rica. In addition, we had transaction costs of $1.1 million and $3.8 million during the quarter and nine months ended May 31, 2023, respectively, associated with converting Trinidad dollars into available tradable currencies, such as euros or Canadian dollars, before converting them to U.S. dollars.
Comparison of Three and Nine Months Ended May 31, 2023 and May 31, 2022
For the three months ended May 31, 2023, the effective tax rate was 28.9% compared to 33.7% for the prior year period. The decrease in the effective tax rate versus the prior year was primarily attributable to the following factors:
•A comparably favorable net tax impact from recurring items of 6.5%, primarily resulting from the expected cost savings for CEO compensation; and
•A comparably unfavorable net tax impact from non-recurring items of 1.7%, primarily related to foreign exchange and assets written down.
For the nine months ended May 31, 2023, the effective tax rate was 32.2% compared to 32.8% for the prior year period. The decrease in the effective tax rate versus the prior year was primarily attributable to the following factors:
•A comparably favorable net tax impact from recurring items of 1.8%, primarily resulting from valuation allowances we took with respect to deferred tax assets from foreign tax credits that are no longer deemed recoverable; and
•A comparably unfavorable net tax from non-recurring items of 1.2%, primarily related to assets written down.
On a go-forward basis, we estimate an annualized effective tax rate of approximately 32% to 33%.
Comparison of Three and Nine Months Ended May 31, 2023 and May 31, 2022
Our other comprehensive income of approximately $14.1 million for the third quarter of fiscal year 2023 resulted primarily from the comprehensive gain of approximately $15.3 million from foreign currency translation adjustments related to assets and liabilities and the translation of revenue, costs and expenses on the statements of income of our subsidiaries whose functional currency is not the U.S. dollar, offset by approximately $1.2 million related to unrealized losses on changes in our derivative obligations. Other comprehensive income for the nine-months ended May 31, 2023 of approximately $26.0 million was primarily the result of the comprehensive gain of $26.6 million from foreign currency translation adjustments along with approximately $0.6 million related to unrealized losses on changes in the fair value of our derivative obligations. For the quarter, the largest translation adjustments were related to the appreciation of the local currency against the U.S. dollar for our Costa Rica subsidiary. For the nine-month period, the largest translation adjustments were related to the appreciation of the local currency against the U.S. dollar of our Costa Rica subsidiary, partially offset by the devaluation of the local currencies against the U.S. dollar for our Dominican Republic and Colombia subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Financial Position and Cash Flow
Our operations have historically supplied us with a significant source of liquidity. We generate cash from operations primarily through net merchandise sales and membership fees. Cash used in operations generally consists of payments to our merchandise vendors, warehouse club and distribution center operating costs (including payroll, employee benefits and utilities), as well as payments for income taxes. Our cash flows provided by operating activities, supplemented with our long-term debt and short-term borrowings, have generally been sufficient to fund our operations while allowing us to invest in activities that support the long-term growth of our operations and to pay dividends on our common stock. We evaluate our funding requirements on a regular basis to cover any shortfall in our ability to generate sufficient cash from operations to meet our capital requirements. We may consider funding alternatives to provide additional liquidity if necessary. Refer to “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 7 - Debt” for additional information regarding our available short-term facilities, short-term and long-term borrowings, and any repayments.
Repatriation of cash and cash equivalents held by foreign subsidiaries may require us to accrue and pay taxes for certain jurisdictions. Should we decide to repatriate cash through the payment of a cash dividend by our foreign subsidiaries to our domestic operations, we will accrue taxes if and when appropriate.
The following table summarizes the cash and cash equivalents, including restricted cash, held by our foreign subsidiaries and domestically (in thousands):
May 31, 2023
August 31, 2022
Amounts held by foreign subsidiaries
$
194,562
$
203,952
Amounts held domestically
41,810
47,421
Total cash and cash equivalents, including restricted cash
$
236,372
$
251,373
The following table summarizes the short-term investments held by our foreign subsidiaries and domestically (in thousands):
May 31, 2023
August 31, 2022
Amounts held by foreign subsidiaries
$
60,842
$
11,160
Amounts held domestically
51,787
—
Total short-term investments
$
112,629
$
11,160
As of May 31, 2023 and August 31, 2022, there were no certificates of deposit with a maturity of over a year held by our foreign subsidiaries or domestically.
From time to time, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products or otherwise fund our operations. Since fiscal year 2017, we have experienced this situation in Trinidad and have been unable to source a sufficient level of tradable currencies. We are working with our banks in Trinidad and government officials to convert all of our Trinidad dollars into tradable currencies. During the third quarter of fiscal year 2023, the Honduran Central Bank began limiting the availability and controlling the allocation of U.S. dollars for the conversion from Honduran lempiras to U.S. dollars.We are actively working with our banking partners and government authorities to address this situation. We have and continue to take additional actions in this respect. Refer to “Management’s Discussion & Analysis – Factors Affecting Our Business” for our quantitative analysis and discussion.
Our cash flows are summarized as follows (in thousands):
Nine Months Ended
May 31, 2023
May 31, 2022
Change
Net cash provided by operating activities
$
184,681
$
64,311
$
120,370
Net cash used in investing activities
(197,814)
(61,404)
(136,410)
Net cash provided by (used in) financing activities
(13,051)
11,365
(24,416)
Effect of exchange rates
11,183
(7,034)
18,217
Net increase (decrease) in cash and cash equivalents
$
(15,001)
$
7,238
$
(22,239)
Net cash provided by operating activities totaled $184.7 million and $64.3 million for the nine months ended May 31, 2023 and May 31, 2022, respectively. For the nine-months ended May 31, 2023, cash provided by operating activities increased primarily due to shifts in working capital generated from changes in our merchandise inventory and accounts payable positions, which contributed $91.1 million, a positive net change in our other various operating assets and liabilities and from higher net income when compared to the nine-months ended May 31, 2022.
Net cash used in investing activities totaled $197.8 million and $61.4 million for the nine months ended May 31, 2023 and May 31, 2022, respectively. The $136.4 million increase in cash used in investing activities is primarily the result of a net decrease in proceeds from settlements of short-term investments and an increase in purchases of short-term investments, primarily in the U.S., compared to the same nine-month period a year-ago. The decrease in proceeds from settlements is primarily due to the overall net decrease of short-term investments in Trinidad as fewer of those investments settled comparatively and we are investing our excess U.S. dollar balances in that market in shorter dated certificates of deposits or other liquid investments classified as cash or cash equivalents.
Net cash used in financing activities totaled $13.1 million and net cash provided by financing activities totaled $11.4 million for the nine months ended May 31, 2023 and May 31, 2022, respectively. We use cash flows provided by financing primarily to fund our working capital needs, our warehouse club and distribution center acquisitions and expansions, and investments in technology to support our omni-channel initiatives. The $24.4 million shift from cash provided by, to cash used in, financing activities is primarily the result of a net decrease of proceeds from short-term borrowings compared to the same nine-month period a year-ago.
The following table summarizes the dividends declared and paid during fiscal years 2023 and 2022 (amounts are per share):
First Payment
Second Payment
Declared
Amount
Record Date
Date Paid
Date Payable
Amount
Record Date
Date Paid
Date Payable
Amount
2/3/2023
$
0.92
2/16/2023
2/28/2023
N/A
$
0.46
8/15/2023
N/A
8/31/2023
$
0.46
2/3/2022
$
0.86
2/15/2022
2/28/2022
N/A
$
0.43
8/15/2022
8/31/2022
N/A
$
0.43
Short-Term Borrowings and Long-Term Debt
Our financing strategy is to ensure liquidity and access to capital markets while minimizing our borrowing costs. The proceeds of these borrowings were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, acquisitions, dividends and repayment of existing debt. Please refer to “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 7 – Debt.”
Derivatives
Please refer to “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 8 – Derivative Instruments and Hedging Activities” for further discussion.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on its financial condition or consolidated financial statements.
Repurchase of Equity Securities and Reissuance of Treasury Shares
At the vesting dates for restricted stock awards to our employees, we repurchase a portion of the shares that have vested at the prior day's closing price per share and apply the proceeds to pay the employees' minimum statutory tax withholding requirements related to the vesting of restricted stock awards. The Company expects to continue this practice going forward.
Shares of common stock repurchased by us are recorded at cost as treasury stock and result in the reduction of stockholders’ equity in our consolidated balance sheets. We may reissue these treasury shares in the future.
We have reissued treasury shares as part of our stock-based compensation programs. During the nine-months ended May 31, 2023, we reissued approximately 7,000 treasury shares.
The Board of Directors authorized a program to repurchase up to $75 million of our common stock (the "Stock Buyback Program"). Under the Stock Buyback Program, shares of common stock may be repurchased from time to time on a discretionary basis through open market repurchases, privately negotiated transactions, block purchases, or other means, and will be structured to occur in compliance with applicable securities laws. In addition, open market repurchases of common stock could be made pursuant to trading plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which would permit common stock to be repurchased at a time that we might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The Stock Buyback Program does not obligate us to acquire any specific number of shares.
The timing and actual number of shares repurchased will depend on a variety of factors, including the common stock price, trading volume, market conditions, our cash flow and liquidity profile, the capital needs of the business, and other considerations. Repurchases are funded with existing cash on hand. The Stock Buyback Program has no expiration date and may be modified, suspended or terminated at any time by the Board of Directors at its discretion.
During the three and nine-months ended May 31, 2023, no repurchases were made under the Stock Buyback Program.
Critical Accounting Estimates
The preparation of our consolidated financial statements requires that management make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require management to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Management continues to review its accounting policies and evaluate its estimates, including those related to business acquisitions, contingencies and litigation, income taxes, value added taxes, and long-lived assets. We base our estimates on historical experience and on other assumptions that management believes to be reasonable under the present circumstances. Using different estimates could have a material impact on our financial condition and results of operations.
Income Taxes
For interim reporting, we estimate an annual effective tax rate (AETR) to calculate income tax expense. Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of the consolidated income tax expense. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).
We are required to file federal and state income tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires us to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by us. We, in consultation with our tax advisors, base our tax returns on interpretations that we believe to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which we file our tax returns. As part of these reviews, a taxing authority may disagree with respect to the interpretations we used to calculate our tax liability and therefore require us to pay additional taxes.
We accrue an amount for our estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has 50% or less likelihood of being sustained. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as appropriate. There were no material changes in our uncertain income tax positions for the period ended on May 31, 2023.
Tax Receivables
We pay Value Added Tax (“VAT”) or similar taxes, income taxes, and other taxes within the normal course of our business in most of the countries in which we operate related to the procurement of merchandise and/or services we acquire and/or on sales and taxable income. VAT is a form of indirect tax applied to the value added at each stage of production (primary, manufacturing, wholesale and retail). This tax is similar to, but operates somewhat differently than, sales tax paid in the United States. We generally collect VAT from our Members upon sale of goods and services and pay VAT to our vendors upon purchase of goods and services. Periodically, we submit VAT reports to governmental agencies and reconcile the VAT paid and VAT received. The net overpaid VAT may be refunded or applied to subsequent returns, and the net underpaid VAT must be remitted to the government.
With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due this creates an income tax receivable. In most countries where we operate, the governments have implemented additional collection procedures, such as requiring credit card processors to remit a portion of sales processed via credit and debit cards directly to the government as advance payments of VAT and/or income tax. This collection mechanism generally leaves us with net VAT and/or income tax receivables, forcing us to process significant refund claims on a recurring basis. These refund or offset processes can take anywhere from several months to several years to complete.
In two countries where the Company operates, there have been changes in the method of computing minimum tax payments, under which the governments have sought to require the Company to pay taxes based on a percentage of sales rather than taxable income. As a result, we have made and may continue to make income tax payments substantially in excess of those we would expect to pay based on taxable income. The Company had income tax receivables of $11.3 million and $11.0 million as of May 31, 2023 and August 31, 2022, respectively, and deferred tax assets of $3.6 million and $3.5 million as of May 31, 2023 and August 31, 2022, respectively, in these countries.
In one of the countries with a significant VAT receivable balance, the Company received unfavorable rulings at the supreme court level of that country denying a portion of the Company’s appeals for refund of over-withholdings of VAT. After evaluating the merits of the Company’s arguments, the court’s decision, and probability that the other related refund appeals would receive the same judgment, the Company concluded that a total of $2.3 million of related VAT receivable would not be recoverable and this amount was written-off in the third quarter of fiscal year 2023. These charges were recorded in the Warehouse club and other expenses line item under the Selling, general and administrative caption within the consolidated statements of income.
The Company’s various outstanding VAT receivables and/or income tax receivables are based on cases or appeals with their own set of facts and circumstances. The Company consults and evaluates with legal and tax advisors regularly to understand the strength of its legal arguments and probability of successful outcomes in addition to its own experience handling these complex tax issues. While the rules related to refunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of the remaining tax receivables or deferred tax assets, because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests. Similarly, we have not placed any recoverability allowances on tax receivables that arise from payments we are required to make originating from tax assessments that we are appealing, as we believe it is more likely than not that we will ultimately prevail in the related appeals. There can be no assurance, however, that the Company will be successful in recovering all tax receivables or deferred tax assets.
Our policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:
•Short-term VAT and Income tax receivables, recorded as Other current assets: This classification is used for any countries where our subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. We also classify as short-term any approved refunds or credit notes to the extent that we expect to receive the refund or use the credit notes within one year.
•Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where our subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when we do not expect to eventually prevail in our recovery of such balances. We do not currently have any allowances provided against VAT and income tax receivables.
Long-lived Assets
We evaluate quarterly our long-lived assets for indicators of impairment. Indicators that an asset may be impaired are:
•the asset's inability to continue to generate income from operations and positive cash flow in future periods;
•loss of legal ownership or title to the asset;
•significant changes in its strategic business objectives and utilization of the asset(s); and
•the impact of significant negative industry or economic trends.
Management's judgments are based on market and operational conditions at the time of the evaluation and can include management's best estimate of future business activity, which in turn drives estimates of future cash flows from these assets. These periodic evaluations could cause management to conclude that impairment factors exist, requiring an adjustment of these assets to their then-current fair market value. Future business conditions and/or activity could differ materially from the projections made by management causing the need for additional impairment charges. We did not record any impairment charges during the third quarter of fiscal year 2023 related to the loss of legal ownership or title to assets; significant changes in the Company's strategic business objectives or utilization of assets; or the impact of significant negative industry or economic trends. Loss on disposal of assets recorded during the years reported resulted from improvements to operations and normal preventive maintenance.
Goodwill
Goodwill is not amortized, but is evaluated for impairment annually or whenever events or changes in circumstances indicate that the value of a certain asset may be impaired. Generally, this evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is necessary. If we determine, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative impairment test would be performed. The quantitative test for impairment requires management to make judgments relating to future cash flows, growth rates and economic and market conditions. These evaluations are based on determining the fair value of a reporting unit or asset using a valuation method such as discounted cash flow or a relative, market-based approach. Historically, our reporting units have generated sufficient returns to recover the cost of our goodwill. Because of the nature of the factors used in these tests, if different conditions occur in future periods, future operating results could be materially impacted. For approximately $43.2 million of certain acquired goodwill, the fair value was greater than the carrying value; however, any deterioration in the fair value may result in an impairment charge.
Seasonality
Historically, our merchandising businesses have experienced holiday retail seasonality in their markets. In addition to seasonal fluctuations, our operating results fluctuate quarter-to-quarter as a result of economic and political events in markets that we serve, the timing of holidays, weather, the timing of shipments, product mix, and currency effects on the cost of U.S.-sourced products which may make these products more or less expensive in local currencies and therefore more or less affordable. Because of such fluctuations, the results of operations of any quarter are not indicative of the results that may be achieved for a full fiscal year or any future quarter. In addition, there can be no assurance that our future results will be consistent with past results or the projections of securities analysts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in interest rates and changes in currency exchange rates. There have been no material changes in our market risk factors at May 31, 2023 compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended August 31, 2022.
From time to time, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products and to otherwise redeploy these funds in our Company. Since fiscal year 2017, we have experienced this situation in Trinidad and have been unable to source a sufficient level of tradable currencies. We are working with our banks in Trinidad to source tradable currencies. During the third quarter of fiscal year 2023, the Honduran Central Bank began limiting the availability and controlling the allocation of U.S. dollars for the conversion from Honduran lempiras to U.S. dollars.We are actively working with our banking partners and government authorities to address this situation. Refer to “Item 2. Management’s Discussion & Analysis – Factors Affecting Our Business” and “Item 2. Management’s Discussion & Analysis – Liquidity: Financial Position and Cash Flow” for our quantitative analysis and discussion.
Information about the financial impact of foreign currency exchange rate fluctuations for the three and nine-month periods ended May 31, 2023 is disclosed in “Item 2. Management’s Discussion & Analysis – Other Expense, net”.
Information about the change in the fair value of our hedges and the financial impact thereof for the three and nine-month periods ended May 31, 2023 is disclosed in “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 8 – Derivative Instruments and Hedging Activities.”
Information about the movements in currency exchange rates and the related impact on the translation of the balance sheets of our subsidiaries whose functional currency is not the U.S. dollar for the three and nine-month period ended May 31, 2023 is disclosed in “Item 2. Management’s Discussion & Analysis – Other Comprehensive Loss.”
ITEM 4. CONTROLS AND PROCEDURES
Limitations on Effectiveness of Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the timelines specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decision regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, we have investments in certain unconsolidated entities. Because we do not control or manage those entities, our control procedures with respect to those entities were substantially more limited than those we maintain with respect to our consolidated subsidiaries.
Evaluation of Disclosure Controls and Procedures
As required by SEC Rules 13a-15(e) or 15d-15(e), we carried out an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
In the ordinary course of business, we review our system of internal control over financial reporting and make changes to our systems and processes to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems and automating manual processes. There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as Exhibit 31.1 and 31.2 to this report.
We are often involved in claims arising in the ordinary course of business seeking monetary damages and other relief. Based upon information currently available to us, none of these claims is expected to have a material adverse effect on our business, financial condition or results of operations. Refer to Part I. “Item 1. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements, Note 6 – Commitments and Contingencies” for additional information regarding our legal proceedings.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the following risk factor, which supplements and should be read in conjunction with the information appearing under Part I. “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2022.
We may not successfully manage the transition associated with the resignation of our Chief Executive Officer, which could have an adverse impact on the Company.
On December 9, 2022, the Company announced that Sherry Bahrambeygui would resign as Chief Executive Officer, effective February 3, 2023, the date of the Company’s annual stockholder meeting, in order to pursue new professional and philanthropic interests. As a result, Robert Price, a Company founder and Chairman of the Board, became Interim Chief Executive Officer, John Hildebrandt was promoted to President and Chief Operating Officer and David Price was promoted to Executive Vice President, initially serving as Chief of Staff to the Chairman and currently as Chief of Staff to the Interim Chief Executive Officer.
Ms. Bahrambeygui will continue serving stockholders as a member of the Board of Directors of the Company. Prior to her tenure as Chief Executive Officer, she served on the Company’s Board as a director for eight years, including having served as Vice Chair and Chair of the Compensation Committee. She has agreed to make herself available at the Company’s request for up to 100 hours of transition support during the twelve months following the date of her separation agreement.
Leadership transitions can be inherently difficult to manage. An inadequate transition to a new leadership team may cause disruption within the Company, adversely affecting our financial performance and ability to meet operational goals and strategic plans. Management turnover also inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution. In addition, to the extent we experience additional management turnover, competition for top management is high and it may take months to find a candidate that meets our requirements. If we are unable to attract and retain qualified management personnel, our business could suffer.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)None.
(b)None.
(c)Purchase of Equity Securities by the Issuer and Affiliated Purchasers.
Upon vesting of restricted stock awarded by the Company to employees, the Company repurchases shares and withholds the amount of the repurchase payment to cover employees’ tax withholding obligations. As set forth in the table below, during the quarter ended May 31, 2023, the Company repurchased 2,394 shares in the indicated months. These were the only repurchases of equity securities made by the Company during the third quarter of fiscal year 2023.
Period
(a) Total Number of Shares Purchased
(b) Average Price Paid Per Share
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(d)
Maximum
Number of
Shares That
May Yet Be
Purchased
Under the
Plans or
Programs (1)
March 1, 2023 - March 31, 2023
774
$
70.15
—
—
April 1, 2023 - April 30, 2023
526
74.90
—
—
May 1, 2023 - May 31, 2023
1,094
73.52
—
—
Total
2,394
$
72.73
—
—
(1) The Board of Directors authorized a $75 million share repurchase program of our common stock. The shares may be purchased on a discretionary basis from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. However, no repurchases were made under this plan during the quarter ended May 31, 2023.
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
* Identifies management contract or compensatory plan or arrangement.
** These certifications are being furnished solely to accompany this Report pursuant to 18 U.S.C. 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of PriceSmart, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.
(1)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 1997 filed with the Commission on November 26, 1997.
(2)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2004 filed with the Commission on April 14, 2004.
(3)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2004 filed with the Commission on November 24, 2004.
(4)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Commission on July 17, 2015.
(5)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Commission on December 9, 2022.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PRICESMART, INC.
Date:
July 10, 2023
By:
/s/ ROBERT E. PRICE
Robert E. Price
Interim Chief Executive Officer
(Principal Executive Officer)
Date:
July 10, 2023
By:
/s/ MICHAEL L. MCCLEARY
Michael L. McCleary
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
