UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31, 2019February 29, 2020
OR
| 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 0-22793
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:
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.
Yes | No |
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).
Yes | No |
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 | Accelerated filer | |
Non-accelerated filer | Smaller Reporting Company | |
Emerging growth company |
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. ☐¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes | No |
The registrant had 30,539,30830,601,301 shares of its common stock, par value $0.0001 per share, outstanding at June 30, 2019.March 31, 2020.
INDEX TO FORM 10-Q
Page | ||
1 | ||
CONSOLIDATED BALANCE SHEETS AS OF | 2 | |
4 | ||
5 | ||
6 | ||
8 | ||
9 | ||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 36 | |
58 | ||
59 | ||
60 | ||
60 | ||
61 | ||
62 | ||
62 | ||
62 | ||
63 |
PriceSmart, Inc.’s (“PriceSmart,” “we” or the “Company”) unaudited consolidated balance sheet as of May 31, 2019February 29, 2020 and the consolidated balance sheet as of August 31, 2018,2019, the unaudited consolidated statements of income for the three and ninesix months ended May 31,February 29, 2020 and February 28, 2019, and 2018, the unaudited consolidated statements of comprehensive income for the three and ninesix months ended May 31,February 29, 2020 and February 28, 2019, and 2018, the unaudited consolidated statements of equity for the three and ninesix months ended May 31,February 29, 2020 and February 28, 2019, and 2018, and the unaudited consolidated statements of cash flows for the ninesix months ended May 31,February 29, 2020 and February 28, 2019 and 2018 are included herein. Also included herein are the notes to the unaudited consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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| May 31, |
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| February 29, | |||||||
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| 2019 |
| August 31, | 2020 | August 31, | ||||||
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| (Unaudited) |
| 2018 | (Unaudited) | 2019 | ||||||
ASSETS |
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Current Assets: |
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Cash and cash equivalents |
| $ | 106,445 |
| $ | 93,460 | $ | 132,845 | $ | 102,653 | ||
Short-term restricted cash |
| 4,136 |
| 405 | 93 | 54 | ||||||
Short-term investments |
| 17,023 |
| 32,304 | 30,448 | 17,045 | ||||||
Receivables, net of allowance for doubtful accounts of $165 as of May 31, 2019 and $97 as of August 31, 2018, respectively. |
| 9,543 |
| 8,859 | ||||||||
Receivables, net of allowance for doubtful accounts of $125 as of February 29, 2020 and $144 as of August 31, 2019, respectively | 10,905 | 9,872 | ||||||||||
Merchandise inventories |
|
| 326,724 |
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| 321,025 | 323,022 | 331,273 | ||||
Prepaid expenses and other current assets |
|
| 36,649 |
|
| 31,800 | ||||||
Prepaid expenses and other current assets (includes $0 and $2,736 as of February 29, 2020 and August 31, 2019, respectively, for the fair value of derivative instruments) | 28,242 | 30,999 | ||||||||||
Total current assets |
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| 500,520 |
|
| 487,853 | 525,555 | 491,896 | ||||
Long-term restricted cash |
| 3,402 |
| 3,049 | 3,831 | 3,529 | ||||||
Property and equipment, net |
| 629,063 |
| 594,403 | 706,848 | 671,151 | ||||||
Operating lease right-of-use assets, net | 123,231 | — | ||||||||||
Goodwill |
| 46,158 |
| 46,329 | 45,413 | 46,101 | ||||||
Other intangibles, net |
| 13,182 |
| 14,980 | 11,378 | 12,576 | ||||||
Deferred tax assets |
| 13,846 |
| 10,166 | 18,823 | 15,474 | ||||||
Other non-current assets (includes $2,742 and $4,364 as of May 31, 2019 and August 31, 2018, respectively, for the fair value of derivative instruments) |
|
| 44,983 |
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| 48,854 | ||||||
Other non-current assets (includes $241 and $0 as of February 29, 2020 and August 31, 2019, respectively, for the fair value of derivative instruments) | 52,578 | 44,987 | ||||||||||
Investment in unconsolidated affiliates |
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| 10,710 |
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| 10,758 | 10,635 | 10,697 | ||||
Total Assets |
| $ | 1,261,864 |
| $ | 1,216,392 | $ | 1,498,292 | $ | 1,296,411 | ||
LIABILITIES AND EQUITY |
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Current Liabilities: |
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Short-term borrowings |
| $ | 2,152 |
| $ | — | $ | 3,579 | $ | 7,540 | ||
Accounts payable |
| 271,298 |
| 255,739 | 281,098 | 286,219 | ||||||
Accrued salaries and benefits |
| 23,813 |
| 22,836 | 25,118 | 25,401 | ||||||
Deferred income |
| 25,070 |
| 23,018 | 27,084 | 25,340 | ||||||
Income taxes payable |
| 4,219 |
| 4,636 | 7,773 | 4,637 | ||||||
Other accrued expenses |
| 29,576 |
| 28,281 | ||||||||
Other accrued expenses and other current liabilities (includes $45 and $0 as of February 29, 2020 and August 31, 2019, respectively, for the fair value of derivative instruments | 41,824 | 32,442 | ||||||||||
Operating lease liabilities, current portion | 8,402 | — | ||||||||||
Dividends payable |
|
| 10,672 |
|
| — | 10,719 | — | ||||
Long-term debt, current portion |
|
| 23,480 |
|
| 14,855 | 16,247 | 25,875 | ||||
Total current liabilities |
|
| 390,280 |
|
| 349,365 | 421,844 | 407,454 | ||||
Deferred tax liability |
| 1,766 |
| 1,894 | 1,718 | 2,015 | ||||||
Long-term portion of deferred rent |
| 9,867 |
| 8,885 | — | 11,198 | ||||||
Long-term income taxes payable, net of current portion |
| 4,538 |
| 4,622 | 4,784 | 5,069 | ||||||
Long-term operating lease liabilities | 127,042 | — | ||||||||||
Long-term debt, net of current portion |
|
| 69,476 |
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| 87,720 | 113,879 | 63,711 | ||||
Other long-term liabilities (includes $1,161 and $502 for the fair value of derivative instruments and $5,376 and $4,715 for post-employment plans as of May 31, 2019 and August 31, 2018, respectively) |
|
| 6,882 |
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| 5,268 | ||||||
Other long-term liabilities (includes $3,920 and $2,910 for the fair value of derivative instruments and $5,828 and $5,421 for post-employment plans as of February 29, 2020 and August 31, 2019, respectively) | 10,158 | 8,685 | ||||||||||
Total Liabilities |
|
| 482,809 |
|
| 457,754 | 679,425 | 498,132 |
Stockholders' Equity: | ||||||
Common stock $0.0001 par value, 45,000,000 shares authorized; 31,450,817 and 31,461,359 shares issued and 30,599,058 and 30,538,788 shares outstanding (net of treasury shares) as of February 29, 2020 and August 31, 2019, respectively | 3 | 3 | ||||
Additional paid-in capital | 441,372 | 443,084 | ||||
Tax benefit from stock-based compensation | 11,486 | 11,486 | ||||
Accumulated other comprehensive loss | (152,573) | (144,339) | ||||
Retained earnings | 549,703 | 525,804 | ||||
Less: treasury stock at cost, 851,759 shares as of February 29, 2020 and 924,332 shares as of August 31, 2019 | (32,098) | (38,687) | ||||
Total stockholders' equity attributable to PriceSmart, Inc. stockholders | 817,893 | 797,351 | ||||
Noncontrolling interest in consolidated subsidiaries | 974 | 928 | ||||
Total stockholders' equity | 818,867 | 798,279 | ||||
Total Liabilities and Equity | $ | 1,498,292 | $ | 1,296,411 |
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Stockholders' Equity: |
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Common stock $0.0001 par value, 45,000,000 shares authorized; 31,440,379 and 31,372,752 shares issued and 30,539,966 and 30,460,353 shares outstanding (net of treasury shares) as of May 31, 2019 and August 31, 2018, respectively |
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| 3 |
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| 3 |
Additional paid-in capital |
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| 440,373 |
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| 432,882 |
Tax benefit from stock-based compensation |
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| 11,486 |
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| 11,486 |
Accumulated other comprehensive loss |
|
| (141,168) |
|
| (121,216) |
Retained earnings |
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| 505,127 |
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| 473,954 |
Less: treasury stock at cost, 900,413 shares as of May 31, 2019 and 912,399 shares as of August 31, 2018 |
|
| (37,228) |
|
| (39,107) |
Total stockholders' equity attributable to PriceSmart, Inc. stockholders |
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| 778,593 |
|
| 758,002 |
Noncontrolling interest in consolidated subsidiaries |
|
| 462 |
|
| 636 |
Total stockholders' equity |
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| 779,055 |
|
| 758,638 |
Total Liabilities and Equity |
| $ | 1,261,864 |
| $ | 1,216,392 |
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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| Three Months Ended |
| Nine Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||||
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| May 31, |
| May 31, |
| May 31, |
| May 31, | February 29, | February 28, | February 29, | February 28, | ||||||||||||
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| 2019 |
| 2018 |
| 2019 |
| 2018 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Revenues: |
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Net merchandise sales |
| $ | 755,009 |
| $ | 750,473 |
| $ | 2,322,742 |
| $ | 2,312,447 | $ | 871,726 | $ | 820,290 | $ | 1,650,454 | $ | 1,567,733 | ||||
Export sales |
| 8,281 |
| 9,967 |
| 23,314 |
| 27,252 | 8,434 | 6,844 | 16,708 | 15,033 | ||||||||||||
Membership income |
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| 13,132 |
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| 12,852 |
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| 38,717 |
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| 37,930 | 14,093 | 12,845 | 27,839 | 25,585 | ||||||||
Other revenue and income |
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| 12,134 |
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| 8,909 |
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| 37,845 |
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| 11,207 | 12,482 | 14,446 | 23,675 | 25,711 | ||||||||
Total revenues |
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| 788,556 |
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| 782,201 |
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| 2,422,618 |
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| 2,388,836 | 906,735 | 854,425 | 1,718,676 | 1,634,062 | ||||||||
Operating expenses: |
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Cost of goods sold: |
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Net merchandise sales |
| 649,894 |
| 641,249 |
| 1,996,595 |
| 1,977,840 | 743,434 | 705,546 | 1,406,158 | 1,346,701 | ||||||||||||
Export sales |
| 7,872 |
| 9,466 |
| 22,136 |
| 25,900 | 8,078 | 6,486 | 16,049 | 14,264 | ||||||||||||
Non-merchandise |
| 4,121 |
| 1,979 |
| 13,194 |
| 1,979 | 4,662 | 4,826 | 8,913 | 9,073 | ||||||||||||
Selling, general and administrative: |
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Warehouse club and other operations |
| 78,231 |
| 76,259 |
| 228,161 |
| 217,712 | 84,022 | 75,708 | 163,395 | 149,930 | ||||||||||||
General and administrative |
| 24,532 |
| 24,079 |
| 76,835 |
| 63,167 | 27,618 | 24,968 | 53,502 | 52,303 | ||||||||||||
Pre-opening expenses |
| 1,647 |
| 352 |
| 1,759 |
| 863 | 44 | 97 | 997 | 112 | ||||||||||||
Asset impairment |
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| — |
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| — |
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| — |
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| 1,929 | ||||||||||||
Loss/(gain) on disposal of assets |
|
| 262 |
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| 388 |
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| 735 |
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| 587 | ||||||||||||
Loss on disposal of assets | 68 | 258 | 139 | 473 | ||||||||||||||||||||
Total operating expenses |
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| 766,559 |
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| 753,772 |
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| 2,339,415 |
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| 2,289,977 | 867,926 | 817,889 | 1,649,153 | 1,572,856 | ||||||||
Operating income |
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| 21,997 |
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| 28,429 |
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| 83,203 |
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| 98,859 | 38,809 | 36,536 | 69,523 | 61,206 | ||||||||
Other income (expense): |
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Interest income |
| 310 |
| 370 |
| 1,124 |
| 1,138 | 586 | 423 | 879 | 814 | ||||||||||||
Interest expense |
|
| (915) |
|
| (1,362) |
|
| (2,949) |
|
| (3,609) | (1,690) | (1,001) | (2,552) | (2,034) | ||||||||
Other income (expense), net |
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| 159 |
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| (575) |
|
| (2,032) |
|
| (87) | 723 | (372) | (262) | (2,191) | ||||||||
Total other income (expense) |
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| (446) |
|
| (1,567) |
|
| (3,857) |
|
| (2,558) | ||||||||||||
Income before provision for income taxes and |
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| 21,551 |
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| 26,862 |
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| 79,346 |
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| 96,301 | ||||||||||||
Total other expense | (381) | (950) | (1,935) | (3,411) | ||||||||||||||||||||
Income before provision for income taxes and | 38,428 | 35,586 | 67,588 | 57,795 | ||||||||||||||||||||
Provision for income taxes |
|
| (7,478) |
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| (8,128) |
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| (26,721) |
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| (40,950) | (12,702) | (11,703) | (22,105) | (19,243) | ||||||||
Income (loss) of unconsolidated affiliates |
|
| (4) |
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| (18) |
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| (48) |
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| 3 | ||||||||||||
Loss of unconsolidated affiliates | (15) | (20) | (63) | (44) | ||||||||||||||||||||
Net income |
| $ | 14,069 |
| $ | 18,716 |
| $ | 52,577 |
| $ | 55,354 | 25,711 | 23,863 | 45,420 | 38,508 | ||||||||
Less: net (income) loss attributable to noncontrolling interest |
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| 27 |
|
| (22) |
|
| (59) |
|
| (22) | ||||||||||||
Less: net income attributable to noncontrolling interest | (111) | (53) | (92) | (86) | ||||||||||||||||||||
Net income attributable to PriceSmart, Inc. |
| $ | 14,096 |
| $ | 18,694 |
| $ | 52,518 |
| $ | 55,332 | $ | 25,600 | $ | 23,810 | $ | 45,328 | $ | 38,422 | ||||
Net income attributable to PriceSmart, Inc. per share available for distribution: |
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Basic |
| $ | 0.46 |
| $ | 0.61 |
| $ | 1.73 |
| $ | 1.82 | $ | 0.85 | $ | 0.79 | $ | 1.49 | $ | 1.27 | ||||
Diluted |
| $ | 0.46 |
| $ | 0.61 |
| $ | 1.73 |
| $ | 1.82 | $ | 0.85 | $ | 0.79 | $ | 1.49 | $ | 1.27 | ||||
Shares used in per share computations: |
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Basic |
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| 30,198 |
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| 30,137 |
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| 30,192 |
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| 30,105 | 30,255 | 30,206 | 30,266 | 30,189 | ||||||||
Diluted |
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| 30,205 |
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| 30,137 |
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| 30,202 |
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| 30,105 | 30,258 | 30,211 | 30,271 | 30,200 | ||||||||
Dividends per share |
| $ | — |
| $ | — |
| $ | 0.70 |
| $ | 0.70 | $ | 0.70 | $ | 0.70 | $ | 0.70 | $ | 0.70 |
See accompanying notes.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS)
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| Three Months Ended |
| Nine Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||||
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| May 31, |
| May 31, |
| May 31, |
| May 31, | February 29, | February 28, | February 29, | February 28, | ||||||||||||
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| 2019 |
| 2018 |
| 2019 |
| 2018 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Net income |
| $ | 14,069 |
| $ | 18,716 |
| $ | 52,577 |
| $ | 55,354 | $ | 25,711 | $ | 23,863 | $ | 45,420 | $ | 38,508 | ||||
Less: net (income) loss attributable to noncontrolling interest |
|
| 27 |
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| (22) |
|
| (59) |
|
| (22) | (111) | (53) | (92) | (86) | ||||||||
Net income attributable to PriceSmart, Inc. |
| $ | 14,096 |
| $ | 18,694 |
| $ | 52,518 |
| $ | 55,332 | $ | 25,600 | $ | 23,810 | $ | 45,328 | $ | 38,422 | ||||
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Other Comprehensive Income, net of tax: |
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Foreign currency translation adjustments (1) |
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| (9,697) |
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| (2,461) |
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| (17,972) |
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| (126) | (3,384) | 5,121 | (7,107) | (8,276) | ||||||||
Defined benefit pension plan: |
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Net gain (loss) arising during period |
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| 42 |
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| — |
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| 129 |
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| — | ||||||||||||
Net gain arising during period | 6 | 4 | 13 | 13 | ||||||||||||||||||||
Amortization of prior service cost and actuarial gains included in net periodic pensions cost |
|
| (19) |
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| 42 |
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| (56) |
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| 101 | 19 | 18 | 37 | 37 | ||||||||
Total defined benefit pension plan |
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| 23 |
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| 42 |
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| 73 |
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| 101 | 25 | 22 | 50 | 50 | ||||||||
Derivative instruments: (2) |
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Unrealized gains/(losses) on change in |
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| (1,385) |
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| 79 |
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| (2,053) |
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| 1,516 | ||||||||||||
Unrealized gains (losses) on change in derivative obligations | 1,691 | 236 | 1,263 | (70) | ||||||||||||||||||||
Unrealized losses on change in fair value of interest rate swaps | (6,128) | (1,027) | (5,191) | (598) | ||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) to other expense, net for settlement of derivatives | 2,747 | — | 2,751 | — | ||||||||||||||||||||
Total derivative instruments |
|
| (1,385) |
|
| 79 |
|
| (2,053) |
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| 1,516 | (1,690) | (791) | (1,177) | (668) | ||||||||
Other comprehensive income (loss) |
|
| (11,059) |
|
| (2,340) |
|
| (19,952) |
|
| 1,491 | (5,049) | 4,352 | (8,234) | (8,894) | ||||||||
Comprehensive income |
|
| 3,037 |
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| 16,354 |
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| 32,566 |
|
| 56,823 | 20,551 | 28,162 | 37,094 | 29,528 | ||||||||
Less: comprehensive income/(loss) attributable to noncontrolling interest |
|
| 59 |
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| 8 |
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| 80 |
|
| 8 | ||||||||||||
Less: comprehensive income attributable to noncontrolling interest | 21 | 22 | 55 | 21 | ||||||||||||||||||||
Comprehensive income attributable to PriceSmart, Inc. to stockholders |
| $ | 2,978 |
| $ | 16,346 |
| $ | 32,486 |
| $ | 56,815 | $ | 20,530 | $ | 28,140 | $ | 37,039 | $ | 29,507 |
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(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.
See accompanying notes.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)
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|
|
|
|
|
| Total |
|
|
|
|
|
| Total | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Tax Benefit |
| Accumulated |
|
|
|
|
|
|
|
|
|
| Stockholder's |
|
|
|
|
|
| Tax Benefit | Accumulated | Stockholders' | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
| Additional |
| From |
| Other |
|
|
|
|
|
|
|
|
|
| Equity |
|
|
|
|
|
| Additional | From | Other | Equity | ||||||||||||||||||||||||||||||
|
| Common Stock |
| Paid-in |
| Stock Based |
| Comprehensive |
| Retained |
| Treasury Stock |
|
| Attributable to |
|
| Noncontrolling |
| Total | Common Stock | Paid-in | Stock Based | Comprehensive | Retained | Treasury Stock | Attributable to | Noncontrolling | Total | |||||||||||||||||||||||||||||||||
|
| Shares |
| Amount |
| Capital |
| Compensation |
| Income (Loss) |
| Earnings |
| Shares |
| Amount |
|
| PriceSmart, Inc. |
|
| Interest |
| Equity | Shares | Amount | Capital | Compensation | Loss | Earnings | Shares | Amount | PriceSmart, Inc. | Interest | Equity | |||||||||||||||||||||||||||
Balance at February 28, 2018 |
| 31,311 |
| $ | 3 |
| $ | 427,545 |
| $ | 11,486 |
| $ | (106,250) |
| $ | 436,207 |
| 896 |
| $ | (37,757) |
| $ | 731,234 |
| $ | — |
| $ | 731,234 | |||||||||||||||||||||||||||||||
Acquisition of Aeropost |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 562 |
|
| 562 | |||||||||||||||||||||||||||||||
Balance at November 30, 2018 | 31,405 | $ | 3 | $ | 438,928 | $ | 11,486 | $ | (134,462) | $ | 488,566 | 912 | $ | (39,107) | $ | 765,414 | $ | 668 | $ | 766,082 | ||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| 2 |
|
| (83) |
|
| (83) |
|
| — |
|
| (83) | — | — | — | — | — | — | 39 | (2,417) | (2,417) | — | (2,417) | ||||||||||||||||||||
Issuance of restricted stock |
| 58 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — | |||||||||||||||||||||||||||||||
Issuance of restricted stock award | 44 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Forfeiture of restricted stock awards |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — | (2) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Exercise of stock options |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — | |||||||||||||||||||||||||||||||
Stock-based compensation |
| — |
|
| — |
|
| 2,588 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 2,588 |
|
| — |
|
| 2,588 | — | — | 3,345 | — | — | — | — | — | 3,345 | — | 3,345 | ||||||||||||||||||||
Dividend paid to stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — | — | — | — | — | — | (10,672) | — | — | (10,672) | (313) | (10,985) | ||||||||||||||||||||
Dividend payable to stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — | — | — | — | — | — | (10,672) | — | — | (10,672) | — | (10,672) | ||||||||||||||||||||
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 18,694 |
| — |
|
| — |
|
| 18,694 |
|
| 22 |
|
| 18,716 | — | — | ��� | — | — | 23,810 | — | — | 23,810 | 53 | 23,863 | ||||||||||||||||||||
Other comprehensive income (loss) |
| — |
|
| — |
|
| — |
|
| — |
|
| (2,326) |
|
| — |
| — |
|
| — |
|
| (2,326) |
|
| 8 |
|
| (2,318) | — | — | — | — | 4,352 | — | — | — | 4,352 | 22 | 4,374 | ||||||||||||||||||||
Balance at May 31, 2018 |
| 31,369 |
| $ | 3 |
| $ | 430,133 |
| $ | 11,486 |
| $ | (108,576) |
| $ | 454,901 |
| 898 |
| $ | (37,840) |
| $ | 750,107 |
| $ | 592 |
| $ | 750,699 | |||||||||||||||||||||||||||||||
Balance at February 28, 2019 | 31,447 | $ | 3 | $ | 442,273 | $ | 11,486 | $ | (130,110) | $ | 491,032 | 951 | $ | (41,524) | $ | 773,160 | $ | 430 | $ | 773,590 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Balance at February 28, 2019 |
| 31,447 |
| $ | 3 |
| $ | 442,273 |
| $ | 11,486 |
| $ | (130,109) |
| $ | 491,031 |
| 951 |
| $ | (41,524) |
| $ | 773,160 |
| $ | 430 |
| $ | 773,590 | |||||||||||||||||||||||||||||||
Balance at November 30, 2019 | 31,475 | $ | 3 | $ | 440,756 | $ | 11,486 | $ | (147,524) | $ | 545,532 | 862 | $ | (33,424) | $ | 816,829 | $ | 943 | $ | 817,772 | ||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| 12 |
|
| (728) |
|
| (728) |
|
| — |
|
| (728) | — | — | — | — | — | — | 15 | (920) | (920) | — | (920) | ||||||||||||||||||||
Issuance of treasury stock |
| (63) |
|
| — |
|
| (5,024) |
|
| — |
|
| — |
|
| — |
| (63) |
|
| 5,024 |
|
| — |
|
| — |
|
| — | (25) | — | (2,246) | — | — | — | (25) | 2,246 | — | — | — | ||||||||||||||||||||
Issuance of restricted stock |
| 79 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — | |||||||||||||||||||||||||||||||
Issuance of restricted stock award | 24 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Forfeiture of restricted stock awards |
| (23) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — | (23) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Exercise of stock options |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — | |||||||||||||||||||||||||||||||
Stock-based compensation |
| — |
|
| — |
|
| 3,124 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 3,124 |
|
| — |
|
| 3,124 | — | — | 2,862 | — | — | — | — | — | 2,862 | — | 2,862 | ||||||||||||||||||||
Dividend paid to stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — | — | — | — | — | — | (10,710) | — | — | (10,710) | (101) | (10,811) | ||||||||||||||||||||
Dividend payable to stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
|
|
|
| — | — | — | — | — | — | (10,719) | — | — | (10,719) | — | (10,719) | ||||||||||||||||||||
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 14,096 |
| — |
|
| — |
|
| 14,096 |
|
| (27) |
|
| 14,069 | — | — | — | — | — | 25,600 | — | — | 25,600 | 111 | 25,711 | ||||||||||||||||||||
Other comprehensive income (loss) |
| — |
|
| — |
|
| — |
|
| — |
|
| (11,059) |
|
| — |
| — |
|
| — |
|
| (11,059) |
|
| 59 |
|
| (11,000) | — | — | — | — | (5,049) | — | — | — | (5,049) | 21 | (5,028) | ||||||||||||||||||||
Balance at May 31, 2019 |
| 31,440 |
| $ | 3 |
| $ | 440,373 |
| $ | 11,486 |
| $ | (141,168) |
| $ | 505,127 |
| 900 |
| $ | (37,228) |
| $ | 778,593 |
| $ | 462 |
| $ | 779,055 | |||||||||||||||||||||||||||||||
Balance at February 29, 2020 | 31,451 | $ | 3 | $ | 441,372 | $ | 11,486 | $ | (152,573) | $ | 549,703 | 852 | $ | (32,098) | $ | 817,893 | $ | 974 | $ | 818,867 |
See accompanying notes.
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)
Six Months Ended | |||||||||||||||||||||||||||||||
Total | |||||||||||||||||||||||||||||||
Tax Benefit | Accumulated | Stockholders' | |||||||||||||||||||||||||||||
Additional | From | Other | Equity | ||||||||||||||||||||||||||||
Common Stock | Paid-in | Stock Based | Comprehensive | Retained | Treasury Stock | Attributable to | Noncontrolling | Total | |||||||||||||||||||||||
Shares | Amount | Capital | Compensation | Income (Loss) | Earnings | Shares | Amount | PriceSmart, Inc. | Interest | Equity | |||||||||||||||||||||
Balance at August 31, 2018 | 31,373 | $ | 3 | $ | 432,882 | $ | 11,486 | $ | (121,216) | $ | 473,954 | 912 | $ | (39,107) | $ | 758,002 | $ | 636 | $ | 758,638 | |||||||||||
Purchase of treasury stock | — | — | — | — | — | — | 39 | (2,417) | (2,417) | — | (2,417) | ||||||||||||||||||||
Issuance of restricted stock award | 76 | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Forfeiture of restricted stock awards | (2) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Stock-based compensation | — | — | 9,391 | — | — | — | — | — | 9,391 | — | 9,391 | ||||||||||||||||||||
Dividend paid to stockholders | — | — | — | — | — | (10,672) | — | — | (10,672) | (313) | (10,985) | ||||||||||||||||||||
Dividend payable to stockholders | — | — | — | — | — | (10,672) | — | — | (10,672) | — | (10,672) | ||||||||||||||||||||
Net income | — | — | — | — | — | 38,422 | — | — | 38,422 | 86 | 38,508 | ||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | (8,894) | — | — | — | (8,894) | 21 | (8,873) | ||||||||||||||||||||
Balance at February 28, 2019 | 31,447 | $ | 3 | $ | 442,273 | $ | 11,486 | $ | (130,110) | $ | 491,032 | 951 | $ | (41,524) | $ | 773,160 | $ | 430 | $ | 773,590 | |||||||||||
Balance at August 31,2019 | 31,461 | $ | 3 | $ | 443,084 | $ | 11,486 | $ | (144,339) | $ | 525,804 | 924 | $ | (38,687) | $ | 797,351 | $ | 928 | $ | 798,279 | |||||||||||
Purchase of treasury stock | — | — | — | — | — | — | 22 | (1,381) | (1,381) | — | (1,381) | ||||||||||||||||||||
Issuance of treasury stock | (94) | — | (7,970) | — | — | — | (94) | 7,970 | — | — | — | ||||||||||||||||||||
Issuance of restricted stock award | 109 | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Forfeiture of restricted stock awards | (25) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Stock-based compensation | — | — | 6,258 | — | — | — | — | — | 6,258 | — | 6,258 | ||||||||||||||||||||
Dividend paid to stockholders | — | — | — | — | — | (10,710) | — | — | (10,710) | (101) | (10,811) | ||||||||||||||||||||
Dividend payable to stockholders | — | — | — | — | — | (10,719) | — | — | (10,719) | — | (10,719) | ||||||||||||||||||||
Net income | — | — | — | — | — | 45,328 | — | — | 45,328 | 92 | 45,420 | ||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | (8,234) | — | — | — | (8,234) | 55 | (8,179) | ||||||||||||||||||||
Balance at February 29, 2020 | 31,451 | $ | 3 | $ | 441,372 | $ | 11,486 | $ | (152,573) | $ | 549,703 | 852 | $ | (32,098) | $ | 817,893 | $ | 974 | $ | 818,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Tax Benefit |
| Accumulated |
|
|
|
|
|
|
|
|
|
| Stockholder's |
|
|
|
|
|
| ||
|
|
|
|
|
|
| Additional |
| From |
| Other |
|
|
|
|
|
|
|
|
|
| Equity |
|
|
|
|
|
| |||
|
| Common Stock |
| Paid-in |
| Stock Based |
| Comprehensive |
| Retained |
| Treasury Stock |
|
| Attributable to |
|
| Noncontrolling |
| Total | |||||||||||
|
| Shares |
| Amount |
| Capital |
| Compensation |
| Income (Loss) |
| Earnings |
| Shares |
| Amount |
|
| PriceSmart, Inc. |
|
| Interest |
| Equity | |||||||
Balance at August 31, 2017 |
| 31,276 |
| $ | 3 |
| $ | 422,395 |
| $ | 11,486 |
| $ | (110,059) |
| $ | 420,866 |
| 875 |
| $ | (35,924) |
| $ | 708,767 |
| $ | — |
| $ | 708,767 |
Acquisition of Aeropost |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 562 |
|
| 562 |
Purchase of treasury stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| 23 |
|
| (1,916) |
|
| (1,916) |
|
| — |
|
| (1,916) |
Issuance of restricted stock award |
| 96 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Forfeiture of restricted stock awards |
| (7) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Exercise of stock options |
| 4 |
|
| — |
|
| 269 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 269 |
|
| — |
|
| 269 |
Stock-based compensation |
| — |
|
| — |
|
| 7,469 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 7,469 |
|
| — |
|
| 7,469 |
Dividend paid to stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (10,645) |
| — |
|
| — |
|
| (10,645) |
|
| — |
|
| (10,645) |
Dividend payable to stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (10,652) |
| — |
|
| — |
|
| (10,652) |
|
| — |
|
| (10,652) |
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 55,332 |
| — |
|
| — |
|
| 55,332 |
|
| 22 |
|
| 55,354 |
Other comprehensive income (loss) |
| — |
|
| — |
|
| — |
|
| — |
|
| 1,483 |
|
| — |
| — |
|
| — |
|
| 1,483 |
|
| 8 |
|
| 1,491 |
Balance at May 31, 2018 |
| 31,369 |
| $ | 3 |
| $ | 430,133 |
| $ | 11,486 |
| $ | (108,576) |
| $ | 454,901 |
| 898 |
| $ | (37,840) |
| $ | 750,107 |
| $ | 592 |
| $ | 750,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31,2018 |
| 31,373 |
| $ | 3 |
| $ | 432,882 |
| $ | 11,486 |
| $ | (121,216) |
| $ | 473,954 |
| 912 |
| $ | (39,107) |
| $ | 758,002 |
| $ | 636 |
| $ | 758,638 |
Purchase of treasury stock |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| 51 |
|
| (3,145) |
|
| (3,145) |
|
| — |
|
| (3,145) |
Issuance of treasury stock |
| (63) |
|
| — |
|
| (5,024) |
|
| — |
|
| — |
|
| — |
| (63) |
|
| 5,024 |
|
| — |
|
| — |
|
| — |
Issuance of restricted stock award |
| 155 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Forfeiture of restricted stock awards |
| (25) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Stock-based compensation |
| — |
|
| — |
|
| 12,515 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 12,515 |
|
| — |
|
| 12,515 |
Dividend paid to stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (10,673) |
| — |
|
| — |
|
| (10,673) |
|
| (313) |
|
| (10,986) |
Dividend payable to stockholders |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (10,672) |
| — |
|
| — |
|
| (10,672) |
|
| — |
|
| (10,672) |
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 52,518 |
| — |
|
| — |
|
| 52,518 |
|
| 59 |
|
| 52,577 |
Other comprehensive income (loss) |
| — |
|
| — |
|
| — |
|
| — |
|
| (19,952) |
|
| — |
| — |
|
| — |
|
| (19,952) |
|
| 80 |
|
| (19,872) |
Balance at May 31, 2019 |
| 31,440 |
| $ | 3 |
| $ | 440,373 |
| $ | 11,486 |
| $ | (141,168) |
| $ | 505,127 |
| 900 |
| $ | (37,228) |
| $ | 778,593 |
| $ | 462 |
| $ | 779,055 |
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED—AMOUNTS IN THOUSANDS)
|
|
|
|
|
| |||||||
|
|
|
|
|
| |||||||
|
| Nine Months Ended | Six Months Ended | |||||||||
|
| May 31, |
| May 31, | February 29, | February 28, | ||||||
|
| 2019 |
| 2018 | 2020 | 2019 | ||||||
Operating Activities: |
|
|
|
|
|
| ||||||
Net income |
| $ | 52,577 |
| $ | 55,354 | $ | 45,420 | $ | 38,508 | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| |||||||
Depreciation and amortization |
| 40,365 |
|
| 38,378 | 29,988 | 27,829 | |||||
Allowance for doubtful accounts |
| 68 |
|
| 25 | (19) | 23 | |||||
Asset impairment and closure costs |
| — |
|
| 1,929 | |||||||
(Gain)/loss on sale of property and equipment |
| 735 |
|
| 587 | |||||||
Loss on sale of property and equipment | 139 | 473 | ||||||||||
Deferred income taxes |
| (2,737) |
|
| 6,537 | (4,063) | (916) | |||||
Equity in (gains)/losses of unconsolidated affiliates |
| 48 |
|
| (3) | |||||||
Equity in losses of unconsolidated affiliates | 63 | 44 | ||||||||||
Stock-based compensation |
| 12,515 |
|
| 7,469 | 6,258 | 9,391 | |||||
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 |
| 1,668 |
|
| 3,173 | 4,711 | (417) | |||||
Merchandise inventories |
|
| (5,699) |
|
| (15,254) | 8,251 | (13,874) | ||||
Accounts payable |
|
| 13,412 |
|
| (7,408) | (1,683) | 15,239 | ||||
Net cash provided by (used in) operating activities |
|
| 112,952 |
|
| 90,787 | ||||||
Net cash provided by operating activities | 89,065 | 76,300 | ||||||||||
Investing Activities: |
|
|
|
|
| |||||||
Business acquisition, net of cash acquired |
| — |
|
| (23,895) | |||||||
Additions to property and equipment |
| (86,409) |
|
| (74,788) | (70,818) | (62,655) | |||||
Short-term investments |
| (14,204) |
|
| (72,953) | |||||||
Purchases of short-term investments | (20,507) | (9,142) | ||||||||||
Proceeds from settlements of short-term investments |
| 29,485 |
|
| 19,063 | 7,059 | 17,876 | |||||
Deposits for land purchase option agreements |
|
| — |
|
| 300 | ||||||
Purchases of long-term investments | (1,478) | — | ||||||||||
Proceeds from disposal of property and equipment |
|
| 157 |
|
| 93 | 23 | 104 | ||||
Net cash provided by (used in) investing activities |
|
| (70,971) |
|
| (152,180) | ||||||
Net cash used in investing activities | (85,721) | (53,817) | ||||||||||
Financing Activities: |
|
|
|
|
| |||||||
Proceeds from long-term bank borrowings |
| — |
|
| 28,500 | 45,820 | — | |||||
Repayment of long-term bank borrowings |
| (9,509) |
|
| (28,931) | (5,308) | (6,345) | |||||
Proceeds from short-term bank borrowings |
| 5,180 |
|
| 82,092 | 90,019 | — | |||||
Repayment of short-term bank borrowings |
| (3,028) |
|
| (81,758) | (93,825) | — | |||||
Cash dividend payments |
| (10,986) |
|
| (10,645) | (10,811) | (10,985) | |||||
Purchase of treasury stock for tax withholding on stock compensation |
| (3,145) |
|
| (1,916) | (1,381) | (2,417) | |||||
Proceeds from exercise of stock options |
|
| — |
|
| 269 | ||||||
Other financing activities |
|
| (59) |
|
| (22) | (92) | (86) | ||||
Net cash provided by (used in) financing activities |
|
| (21,547) |
|
| (12,411) | 24,422 | (19,833) | ||||
Effect of exchange rate changes on cash and cash equivalents and restricted cash |
|
| (3,365) |
|
| (985) | 2,767 | (1,487) | ||||
Net increase (decrease) in cash, cash equivalents |
|
| 17,069 |
|
| (74,789) | ||||||
Net increase in cash, cash equivalents | 30,533 | 1,163 | ||||||||||
Cash, cash equivalents and restricted cash at beginning of period |
|
| 96,914 |
|
| 165,712 | 106,236 | 96,914 | ||||
Cash, cash equivalents and restricted cash at end of period |
| $ | 113,983 |
| $ | 90,923 | $ | 136,769 | $ | 98,077 | ||
|
|
|
|
|
|
| ||||||
Supplemental disclosure of cash flow information: |
|
|
|
|
| |||||||
Dividends declared but not paid |
| $ | 10,672 |
| $ | 10,652 | ||||||
Supplemental disclosure of noncash investing activities: | ||||||||||||
Capital expenditures accrued, but not yet paid | $ | 10,357 | $ | 4,815 | ||||||||
Dividends declared but not yet paid | 10,719 | 10,672 |
8
The following table provides a breakdown of cash and cash equivalents, and restricted cash reported within the statement of cash flows:
|
|
|
|
| ||||||||
|
| Nine Months Ended | Six Months Ended | |||||||||
|
| May 31, |
| May 31, | February 29, | February 28, | ||||||
|
| 2019 |
| 2018 | 2020 | 2019 | ||||||
Cash and cash equivalents |
| $ | 106,445 |
| $ | 87,274 | $ | 132,845 | $ | 90,261 | ||
Short-term restricted cash |
|
| 4,136 |
|
| 676 | 93 | 4,464 | ||||
Long-term restricted cash |
| $ | 3,402 |
| $ | 2,973 | $ | 3,831 | $ | 3,352 | ||
Total cash, cash equivalents, and restricted cash shown in the Consolidated statements of cash flows |
| $ | 113,983 |
| $ | 90,923 | ||||||
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 136,769 | $ | 98,077 |
See accompanying notes.
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
May 31, 2019February 29, 2020
NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION
PriceSmart, Inc.’s (“PriceSmart,” the “Company,” or "we") business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States. As of May 31, 2019,February 29, 2020, the Company had 4245 warehouse clubs in operation in 12 countries and one1 U.S. territory (seven(7 each in Colombia, Costa Rica, and Costa Rica; sixPanama; 5 in Panama; fourthe Dominican Republic, 4 each in Trinidad and Dominican Republic; three eachGuatemala; 3 in Guatemala and Honduras, twoHonduras; 2 each in El Salvador and Nicaragua; and one1 each in Aruba, Barbados, Jamaica 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 May 2018,Due to the Company acquired landuncertainty created from the outbreak of the novel coronavirus (COVID-19) and the potential social and economic impacts in the Dominican Republic upon whichmarkets where we operate and any resulting impacts on the Company built a new warehouse club, which opened in June 2019. This warehouse club,Company’s results of operations and cash flows, we have reevaluated the fifth in the Dominican Republic, was designed usingtiming of our new small warehouse club format with sales floor square footage between 30,000 to 40,000 square feet, compared to 50,000 to 60,000 sales floor square footage within our most recent standard formatcapital investments and warehouse club openings. In September 2018 (fiscal year 2019),While we have decided to proceed with the Company acquired land in San Cristobal, Guatemala, upon which the Company is constructing a standard format warehouse club. San Cristobal is expected to open in the fallconstruction of 2019 (fiscal year 2020). In November 2018 (fiscal year 2019), PriceSmart leased land within the Metropark development on the south eastern side of Panama City, Panama, upon which the Company is constructing a standard format warehouse club. The Metropark club will be the Company’s seventhan additional warehouse club in Panama andLiberia, Costa Rica, which is expectedcurrently scheduled to openfinalize in May 2020, we have decided to postpone the fallopening of 2019 (fiscal year 2020). Once these new warehouse clubs are open, the Company will operate 45 warehouse clubs. The Company continuesthat club. Additionally, with respect to explore and negotiate for other potential sites forour previously announced future warehouse club openings on land we have acquired in Bogota and Bucaramanga, Colombia and in Jamaica, we have decided, temporarily, to halt or not to initiate construction and opening of those clubs in Central America, the Caribbean and Colombia.at this time.
PriceSmart is expanding itsinvesting in technology to increase efficiencies and to enable omni-channel capabilities, including through its e-commerce, platform, by investing in and integrating technology, talent and cross-border logistics infrastructure obtained as part of the acquisition of a company in March 2018. PriceSmart expects these investments and this integration to enhance the membership shopping experience, drive efficiencies and fuel sales growth. The Company acquired bymember experience. PriceSmart also operates a legacy (i.e., marketplace(casillero and casillero)marketplace) Aeropost business through the Aeropost brand in 38 countries in Latin America and the Caribbean, many of which overlap with markets where PriceSmart operates itswe operate warehouse clubs.
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”).
Effective September 1, 2019, we adopted the requirements of Accounting Standards Update (ASU) 2016-02, "Leases (Topic 842)" (ASC 842) using the modified retrospective approach, under which financial results reported in prior periods were not restated. As a result, the consolidated balance sheet as of February 29, 2020 is not comparable, in this respect, with that as of August 31, 2019.
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, 20182019 (the “2018“2019 Form 10-K”). The interim consolidated financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries. Inter-company 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 reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. The Company’s net income excludes income attributable to its noncontrolling interests. Additionally, the 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.
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS — (Continued)
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) that will absorb a majority of the VIE's expected losses, receive a majority of the VIE's expected residual returns, or both. A reporting entity must consider the rights and obligations conveyed by its variable interests and the relationship of its variable interests with variable interests held by other parties to determine whether its variable interests will absorb a majority of a VIE's expected losses, receive a majority of the VIE's expected residual returns, or both. The reporting entity that consolidates a VIE is called the primary beneficiary of that VIE. 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.
The Company has determined that for its ownership interest in store-front joint ventures within its marketplace and casillero business, the Company has the power to direct the activities that most significantly impact the economic performance of these VIE’s.VIEs. Therefore, the Company has determined that it is the primary beneficiary of these VIEs and has consolidated these entities within its consolidated financial statements. The Company's ownership interest in these store-front joint ventures for which the Company has consolidated their financial statements as of May 31, 2019February 29, 2020 are listed below:
Marketplace and Casillero Store-front Joint Ventures | Countries | Ownership | Basis of | ||||||
|
|
| 60.0 | % | Consolidated | ||||
|
|
| 50.0 | % | Consolidated | ||||
|
|
| 50.0 |
| |||||
|
|
| Consolidated |
ForIn the case of the Company's ownership interest in real estate development joint ventures, sinceboth parties to each joint venture share all rights, obligations and the power to direct the activities of athe VIE that most significantly impact the VIE's economic performance is shared equally by both parties within each joint venture,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 for which the Company has recorded under the equity method as of May 31, 2019February 29, 2020 are listed below:
Real Estate Development Joint Ventures | Countries | Ownership | Basis of | ||||||
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 interim consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
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.
Restricted Cash – The changes in restricted cash are disclosed within the consolidated statement of cash flows based on the nature of the restriction. The following table summarizes the restricted cash reported by the Company (in thousands):
|
|
|
|
|
|
| ||||||||
|
| May 31, |
|
| August 31, | February 29, | August 31, | |||||||
|
| 2019 |
|
| 2018 | 2020 | 2019 | |||||||
Short-term restricted cash: |
|
|
|
|
|
|
| |||||||
Restricted cash for land purchase option agreements |
| $ | 4,136 |
|
| $ | 400 | $ | 50 | $ | 50 | |||
Other short-term restricted cash |
|
| — |
|
|
| 5 | 43 | 4 | |||||
Total short-term restricted cash |
| $ | 4,136 |
|
| $ | 405 | $ | 93 | $ | 54 | |||
|
|
|
|
|
|
|
| |||||||
Long-term restricted cash: |
|
|
|
|
|
|
| |||||||
Other long-term restricted cash (1) |
| $ | 3,402 |
|
| $ | 3,049 | $ | 3,831 | $ | 3,529 | |||
Total long-term restricted cash |
| $ | 3,402 |
|
| $ | 3,049 | $ | 3,831 | $ | 3,529 | |||
Total restricted cash |
| $ | 7,538 |
|
| $ | 3,454 | $ | 3,924 | $ | 3,583 |
|
|
(1)Other long-term restricted cash consists mainly of cash deposits held within banking institutions in compliance with federal regulatory requirements in Costa Rica and Panama.
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 and Other Intangibles, net – Goodwill and other intangibles totaled $59.3$56.8 million as of MayFebruary 29, 2020 and $58.7 million as of August 31, 2019 and $61.3 million as of August 31, 2018.. The Company reviews reported goodwill and other intangibles at the cash-generating unit level for impairment. The Company tests Goodwillgoodwill 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.
Tax Receivables –The Company pays Value Added Tax (“VAT”) or similar taxes (“input VAT”), income taxes, and other taxes within the normal course of the Company’s business in most of the countries in which the Company operates related to the procurement of merchandise and/or services it acquires and/or on sales and taxable income. The Company also collects VAT or similar taxes on behalf of the government (“output VAT”) for merchandise and/or services it sells. If the output VAT exceeds the input VAT, then the difference is remitted to the government, usually on a monthly basis. If the input VAT exceeds the output VAT, this creates a VAT 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 card directly to the government as advance payments of VAT and/or income tax. In the case of VAT, these procedures alter the natural offset of input and output VAT and generally leave us with a net VAT receivable, forcing us to process significant refund claims on a recurring basis. 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. The Company either requests a refund of these tax receivables or applies the balance to expected future tax payments. These refund or offset processes can take anywhere from several months to several years to complete.
In most countries where the Company operates, the VAT refund process isthere are defined and structured with regularprocesses to recover VAT receivables via refunds or offsets. However, the Company, together with its tax and legal advisers, is currently seeking clarification in court in one country without a clearly defined refund process, and expectsthe Company is actively engaged with the local government to prevail. The balance of therecover VAT receivable in the country with undefined refund mechanisms was approximately $4.3receivables totaling $6.1 million and $3.1$5.1 million as of May 31, 2019February 29, 2020 and August 31, 2018,2019, respectively. In another country in which the Company has warehouse clubs, beginning in fiscal year 2015, a newtwo other countries, minimum income tax mechanism took effect, which requiresrules 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 rules (which the Company has challenged in court) effective for fiscal years 2015 to 2018 do not clearly allow us to obtain a refund or offset this excesshad income tax against other taxes. Asreceivables of May 31, 2019, the Company had$9.7 million and $7.8 million and deferred tax assets of approximately $2.3$2.9 million in this country. Also, the Company had an income tax receivable balance of $7.5and $2.7 million as of MayFebruary 29, 2020 and August 31, 2019, respectively, in these countries. While the rules related to excess payments from fiscal years 2015 to 2019. In the third quarterrefunds of fiscal year 2018, a revised minimumincome tax law was passedreceivables in this country, which beginning in fiscal year 2020 will reduce the minimum tax rate. Additionally, this law clarifies rules on a go-forward basis for reimbursement of excess minimum tax paid beginning in fiscal year 2019, but does not address periods prior to fiscal year 2019. Nevertheless,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, related appeals and/or court challenge on these matters.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 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.
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, |
| August 31, | February 29, | August 31, | ||||||
|
| 2019 |
| 2018 | 2020 | 2019 | ||||||
Prepaid expenses and other current assets |
| $ | 3,751 |
| $ | 5,921 | $ | 1,443 | $ | 1,639 | ||
Other non-current assets |
|
| 21,385 |
|
| 19,224 | 25,247 | 22,691 | ||||
Total amount of VAT receivables reported |
| $ | 25,136 |
| $ | 25,145 | $ | 26,690 | $ | 24,330 |
The following table summarizes the Income tax receivables reported by the Company (in thousands):
|
|
|
|
| ||||||||
|
|
|
|
| ||||||||
|
| May 31, |
| August 31, | February 29, | August 31, | ||||||
|
| 2019 |
| 2018 | 2020 | 2019 | ||||||
Prepaid expenses and other current assets |
| $ | 13,080 |
| $ | 6,344 | $ | 6,801 | $ | 9,009 | ||
Other non-current assets |
|
| 15,294 |
|
| 18,165 | 19,439 | 16,381 | ||||
Total amount of Income tax receivables reported |
| $ | 28,374 |
| $ | 24,509 | $ | 26,240 | $ | 25,390 |
Lease Accounting – Certain 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 does not have finance leases. 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.
Operating lease liabilities are recognized at commencement date based on the present value of the Company's operatingfuture minimum lease payments over the lease term. The Company’s leases wheregenerally 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 similar credit characteristics that approximate the lessee provideCompany'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 annuallease payments that increaseis recognized on a straight-line basis over the lifelease term. Variable lease payments are
not included in the calculation of the lease. The aggregate minimum annual payments are expensed on the straight-line basis beginning when the Company takes possession of the propertyROU asset and extending over the term of the related lease including renewal options when the exercise of the optionliability and are recognized as this lease expense is reasonably assured as an economic penalty may be incurred if the option is not exercised.incurred. The amount by which straight-line rent exceeds actualCompany’s variable lease payment requirements in the early years of the leases is accrued as deferred rent and reduced in later years when the actual cash payment requirements exceed the straight-line expense. The Company also accounts in its straight-line computation for the effect of any “rental holidays” and lessor-paid tenant improvements. In additionpayments generally relate to the minimum annual payments, in certain locations, amounts the Company pays for additional contingent rent based on a contractually stipulated percentage of sales.
Operating leases where the Company is the lessor with lease payments that have fixed and determinable rent increases are recognized as revenue on a straight-line basis over the lease term. The Company also accounts in its straight-line computation for the effect of any "rental holidays."
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 between physical inventory counts on the basis of a percentage of sales. The provision is adjusted periodically to reflect the trend of actual physical inventory count results, with physical inventories occurring primarily in the second and fourth fiscal quarters. In addition, the Company may be required to take markdowns below the carrying cost of certain inventory to expedite the sale of such merchandise.
Stock Based Compensation– The Company utilizes three3 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. The Company assesses
13
the probability of vesting for awards with performance conditions and adjusts compensation cost based on 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.
In October 2018, the Company’s then Chief Executive Officer (“former C.E.O.”), resigned by mutual agreement with the Board of Directors. In connection with his departure, the Company recognized a one-time separation charge of approximately $3.8 million ($3.6 million net of tax) in the first quarter of fiscal year 2019. This amount was comprised of approximately $2.9 million of non-cash charges related to the acceleration of certain equity awards and approximately $892,000 for other separation costs. Given that the former C.E.O. had substantially rendered the required services per his separation agreement, the Company recorded these charges in the first quarter of fiscal 2019. This charge was recorded in the General and administrative caption within the Consolidated Statements of Income and is recorded in the Company’s United States segment. The Company will substantially fulfill all payment obligations by the end of the third quarter of fiscal year 2020.
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.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 ninesix months ended May 31, 2019,February 29, 2020, the Company reissued 63,000approximately 94,000 treasury shares.
Fair Value Measurements – The Company measures the fair value for all financial and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring or nonrecurring 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. The Company did not make any significant transfers in and out of Level 1 and Level 2 fair value tiers during the periods reported on herein.
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, no0 impairment of such non-financial assets was recorded.
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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 there have been no material changes to the valuation techniques utilized in the fair value measurement of assets and liabilities as disclosed in the Company’s 20182019 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, providing 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 income (loss)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. See 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, 2019February 29, 2020 and August 31, 2018.2019.
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.
Other Instruments. Other derivatives not designated as hedging instruments consist primarily of written call options in which the Company receives a premium that it uses to reduce the costs associated with its hedging activities. For derivative instruments not designated as hedging instruments, the Company recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Other expense, net in the consolidated statements of income in the period of change.
Revenue Recognition – The accounting policies and other disclosures such as the disclosure of disaggregated revenues are described in Note 3 – Revenue Recognition.
Insurance Reimbursements – Receipts from insurance reimbursements up to the amount of the losses recognized are considered recoveries. These recoveries are accounted for when they are probable of receipt. Insurance recoveries are not recognized prior to the recognition of the related cost. Anticipated proceeds in excess of the amount of loss recognized are considered gains and are subject to gain contingency guidance. Anticipated proceeds in excess of a loss recognized in the financial statements are not recognized until all contingencies related to the insurance claim are resolved.
Self-Insurance –AsThe Company changed health insurance providers and is no longer self-insured as of October 1, 2017, PriceSmart, Inc. became self-insured2019. The remaining accrued liability for its U.S. employee medical health benefits and in doing so the Company has assumed the financial risk for providingpotential health care benefits to its employees. The Company contracted with Cigna Health and Life Insurance Company (“CHLIC”), a third party administrator, to process claims on its behalf under an Administrative Services Only (ASO) agreement. The Company has elected to purchase “Stop Loss Insurance” to cover the risk in excess of certain dollar limits. The Company establishes an estimated accrual for its insurance program based on available comparable claims data, trends and projected ultimate costs of claims. This accrual is based on estimates prepared with the assistance of outside actuaries, and the ultimate cost of these claims may vary from initial estimates and established accrual. The actuaries periodically update their estimates, and the Company records such adjustments in the period in which such determination is made. The accrued obligation for this self-insurance program is included in “Accrued salaries and benefits” in the consolidated balance sheets and is $637,000immaterial as of May 31, 2019 and $801,000 as of August 31, 2018. February 29, 2020.
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Cost of Goods Sold – The Company includes the cost of merchandise, 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. 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-store 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.
For the marketplace and casillero operations, the Company includes the costs 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, slotting fees, demonstration reimbursements and prompt payment discounts. Volume rebates that are not threshold based are incorporated into the unit cost of merchandise reducing the inventory cost and cost of goods sold. Volume rebates that are threshold based are recorded as a reduction to cost of goods sold when the Company achieves established purchase levels that are confirmed by the vendor in writing or upon receipt of funds. 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. 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 storein-store promotion of the vendors' products. The Company records the reduction in cost of goods sold on a transactional basis for these programs. 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 are comprised primarily of expenses associated with operating warehouse clubs and freight forwarding operations. These operations include the operating costs of the Company’s warehouse clubs and freight forwarding activities, including payroll and related costs, 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.
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.
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.
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.
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The following table discloses the net effect of translation into the reporting currency on other comprehensive income (loss)loss for these local currency denominated accounts for the three and ninesix months ended May 31, 2019February 29, 2020 and 2018:February 28, 2019:
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| May 31, |
| May 31, |
| May 31, |
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| May 31, | |||
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| 2019 |
| 2018 |
| 2019 |
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| 2018 | |||
Effect on other comprehensive (loss) income due to foreign currency translation |
| $ | (9,697) |
| $ | (2,461) |
| $ | (17,972) |
| $ | (126) |
Three Months Ended | Six Months Ended | |||||||||||
February 29, | February 28, | February 29, | February 28, | |||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
Effect on other comprehensive (loss) income due to foreign currency translation | $ | (3,384) | $ | 5,121 | $ | (7,107) | $ | (8,276) |
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.
For the three and nine months ended May 31, 2019, we had a net expense associated with foreign currency transactions
Three Months Ended | Six Months Ended | |||||||||||
February 29, | February 28, | February 29, | February 28, | |||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
Currency gain (loss) | $ | 755 | $ | (368) | $ | (902) | $ | (2,123) |
Table of approximately $192,000 and $1.9 million, respectively.Contents
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recent Accounting Pronouncements – Not Yet Adopted
FASB ASC 815740 ASU 2018-16 – Derivatives2019-12—Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. ASU No. 2019-12 removes certain exceptions to the general principles in Topic 740 and Hedging — Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
In October 2018, the Financial Accounting Standards Board “FASB” issued Accounting Standards Update (ASU) No. 2018-16, Derivativesalso clarifies and Hedging—Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which expands the list of United States benchmark interest rates permitted in the application of hedge accounting.amends existing guidance to improve consistent application. The amendments in this ASU allow use of the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, Derivatives and Hedging. The amendments in this ASU areis effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods.2020. Early adoption is permitted. The Company expects to adopt ASU No. 2019-12 on September 1, 2021, the first quarter of fiscal year 2022. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.
FASB ASC 810 ASU 2018-15 – Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Isis a Service Contract
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). As such, the amendment in this ASU requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in subtopic 350-40 in order to determine which implementation costs to capitalize as an asset and which costs to expense.
Additionally, the amendments in this ASU require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments in this ASU are effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption is permitted. The Company expects to adopt ASU No. 2018-15 on September 1, 2020, the first quarter of fiscal year 2021. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.
FASB ASC 715 ASU 2018-14 – Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement benefits (Topic 715-20). The standard amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. This ASU is effective for fiscal years ending after December 15, 2020 and must be applied on a retrospective basis. The Company expects to adopt ASU No. 2018-14 on September 1, 2021, the first quarter of fiscal year 2022. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.
FASB ASC 820 ASU 2018-13 – Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). The standard eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. ASU No. 2018-13 adds new disclosure requirements for Level 3 measurements. The amendments in this ASU are effective for annual periods beginning after December 15, 2019. Early adoption is permitted. The Company expects to adopt ASU No. 2018-13 on September 1, 2020, the first quarter of fiscal year 2021. The Company is evaluating this new standard, but does not expect it to have a significant impact on its financial statement disclosures.
FASB ASC 350 ASU 2017-04 – Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under the amendments in this ASU, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize
an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
Additionally, ASU No. 2017-04 requires any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. The amendments in this ASU are effective for annual periods beginning after December 15, 2019. Early adoption is permitted. The Company expects to adopt ASU No. 2017-04 on September 1, 2020, the first quarter of fiscal year 2021. While the Company is still in the process of determining the impact that adoption of this guidance will have on its consolidated financial statements, it does not anticipate that the new guidance will have a material impact on its consolidated financial statements.
FASB ASC 326 ASU 2016-13 – Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), which amends the FASB’s guidance on the impairment of financial instruments. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments to clarify and address certain items related to the amendments in ASU 2016-13. These amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company expects to adopt the amendments on September 1, 2020, the first quarter of fiscal year 2021. While the Company is still in the process of determining the impact that adoption of this guidance will have on its consolidated financial statements, it does not anticipate that the new guidance will have a material impact on its consolidated financial statements given the materiality and nature of the financial assets currently held.
Recent Accounting Pronouncements Adopted
FASB ASC 815 ASU 2018-16 – Derivatives and Hedging — Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
In October 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-16, Derivatives and Hedging—Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which expands the list of United States benchmark interest rates permitted in the application of hedge accounting. The amendments in this ASU allow use of the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, Derivatives and Hedging. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
FASB ASC 718 ASU 2018-07 -Compensation—Stock Compensation (Topic 718) —Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope to include share-based payment transactions for acquiring goods and services from non-employees. The amendments in this ASU apply to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in the grantor’s own operations by issuing share-based payment awards. The amendments in this ASU are effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted. The Company will evaluate the impact adoptionAdoption of this guidance maydid not have a material impact on the Company’s consolidated financial statements.
FASB ASC 350 ASU 2017-04-Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under the amendments in this ASU, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
Additionally, ASU 2017-04 requires any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. The amendments in this ASU are effective for annual periods beginning after December 15, 2019. Early adoption is permitted. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.
FASB ASC 842 ASU 2016-02 -Leases (Topic 842): Amendments to the FASB Accounting Standards Codification
In February 2016, the FASB issued guidance codified in ASC 842, Leases, which requiresamends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments.
The Company adopted ASU 2016-02 using the modified retrospective transition method in the first quarter of fiscal year 2020. In accordance with ASC 842, the Company did not restate comparative periods in transition to ASC 842 and instead reported comparative periods under ASC 840. Adoption of the standard resulted in the initial recognition of $120.6 million of operating lease right-of-use (“ROU”) assets and $132.1 million of short-term and long-term operating lease liabilities as of September 1, 2019. The difference between the assets and liabilities primarily represents the deferred rent recorded as of August 31, 2019, which was eliminated upon adoption. NaN cumulative-effect adjustments were recorded to beretained earnings, and there was no material impact to the Company’s interim consolidated statements of income, consolidated statements of comprehensive income, or consolidated statements of cash flows. However, several of the Company’s leases are denominated in a currency that is not the functional currency of the Company’s local subsidiary. The resulting monetary liability is revalued to the functional currency at each balance sheet date, with the resulting gain or loss being recorded onin Other income (expense). The monetary lease liability subject to revaluation as of February 29, 2020 was $34.0 million. Due to the balance sheet. Certain qualitativemix of foreign currency exchange rate fluctuations during the second quarter of fiscal year 2020, the impact to the interim consolidated statements of income of revaluing this liability was immaterial.
The Company elected the transition package of practical expedients permitted within the new standard which, among other things, allowed it to carry-forward the historical lease classification. The Company also elected the practical expedient to carry forward the accounting treatment for land easements and quantitative disclosures are also required. ASC 842 will be effective forthe practical expedient allowing the Company on September 1, 2019, and the Company expectsnot to apply the transition practical expedients allowed by the standard. Additionally, the Company expects to elect the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and will not restate prior periods. The Company is currently implementing a new lease system and evaluating the changes to business processes and controls to support the adoption of this accounting standard update.
While the Company continues to evaluate the provisionsrecognition requirements of ASC 842 we currently expectto short-term leases. However, the adoptionCompany did not elect to combine lease and non-lease components. Please refer to Note 10 – Leases for further discussion on the Company's leases.
There were no other new accounting standards that had a material impact on the Company’s consolidated financial statements during the three and six month periods ended February 29, 2020, and there were no other new accounting standards or pronouncements that were issued but not yet effective as of this guidanceFebruary 29, 2020 that the Company expects to have a material impact on the Company's consolidated balance sheets due to the creation of lease liabilities with corresponding right-of-use assets, resulting in a significant increase in the assets and liabilities on the consolidated balance sheet upon adoption. However, the Company does not expect a material change to its net income attributable to the company on its consolidated statement of income or opening retained earnings on its consolidated balance sheet, or on the net increase (decrease) in cash, cash equivalents as reported on its consolidated statement of cash flows.
Recent Accounting Pronouncements Adopted
FASB ASC 715 ASU 2017-09 -Compensation—Stock Compensation (Topic 718)—Scope of Modification Accounting
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which seeks to provide clarity, reduce diversity in practice, and reduce cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, regarding a change to the terms or conditions of a share-based payment award. This ASU provides guidance concerning which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Specifically, an entity is to account for the effects of a modification unless all of the following are satisfied: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company adopted this guidance, prospectively, as of September 1, 2018.
FASB ASC 715 ASU 2017-07-Compensation—Retirement Benefits (Topic 715) —Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715) — Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU is designed to improve guidance related to the presentation of defined benefit costs in the income statement. In particular, ASU 2017-07 requires that an employer report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company adopted this ASU retrospectively, beginning September 1, 2018, and elected to use the practical expedient as the estimation basis for applying the retrospective presentation requirements. The service cost component of the Company’s pension and postretirement expenses
18
is reported in the Warehouse club and other operations financial statement line item. The other components of pension and post-retirement expenses are classified in Other income (expense), net. Adoption of this guidance did not have a material impact on the Company’s financial statements.
FASB ASC 606 ASU 2014-09 - Revenue from Contracts with Customers
In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers. The guidance converges the requirements for reporting revenue and requires disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company adopted this guidance at the beginning of its first quarter of fiscal year 2019, using the modified retrospective approach through a cumulative effect adjustment to retained earnings. The Company adopted this guidance as of September 1, 2018 and has disclosed the impact adoption that this guidance had for the Company’s consolidated financial statements with Note 3 – Revenue Recognition.
NOTE 3 – REVENUE RECOGNITION
Revenue Recognition - In May 2014,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 FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The Company adopted the ASU on September 1, 2018, using the modified retrospective approach. The Company’s updated accounting policies and related disclosures are set forth below, including the disclosure for disaggregated revenue. The impact of adopting the ASU was not material to the Condensed Consolidated Financial Statements.customer.
The Company uses the five-step model to recognize revenue:
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Performance Obligations
Merchandise Sales. The Company recognizes 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 costs may include shipping commitments and/or shipping revenue if the transaction involves delivery to the customer.
Non-merchandise Sales. The Company recognizes non-merchandise revenue, net of sales taxes, on transactions where the Company has determined that it is the agent in the transaction. These transactions primarily consist of contracts the Company enters into with its customers to provide delivery, insurance and customs processing services for products its customers purchase online in the United States either directly from other vendors utilizing the vendor’s website or through the Company’s marketplace site. Revenue is recognized when the Company’s performance obligations have been completed (that is when delivery of the items have been made to the destination point) and is recorded in “non-merchandise revenue” on the Consolidated Statements of Income. Prepayment offor orders for which the Company has not fulfilled its performance obligation are recorded as unearned revenue.deferred income. Additionally, the Company records 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 is acting as an agent and is 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. Membership refunds are prorated over the remaining term of the membership; accordingly, no refund reserve is required to be established for the periods presented. Membership fee revenue is included in membership income in the Company's Consolidated Statementsconsolidated statements of Income.income. The deferred membership fee is included in deferred income in the Company's Condensed Consolidated Balance Sheets.consolidated balance sheets.
Platinum Points Reward Programs. The Company began offeringcurrently offers Platinum memberships in Costa Rica during fiscal year 2013 and expanded this offering into Panama, Dominican Republic, Trinidad, the United States Virgin Islands, Honduras, Jamaica and Barbados during fiscal years 2018 and 2019. The Company plans to offer this program to additional markets during fiscal year 2019.ten of its thirteen countries. The annual fee for a Platinum membership in most markets 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
19
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 periodically reviews expired unused rebates outstanding, and the expired unused rebates are recognized as “Other revenue and income” on the consolidated statements of income. 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 club.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.
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 gift cardsand 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 certificates; therefore, the Company assumes a 100% redemption rate prior to expiration of the gift certificate. The Company periodically reviews unredeemed outstanding gift certificates, and the gift certificates 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.revenue during the period it is earned. As a result of the adoption of ASC 606, the Company has determined that this revenue should be recognized as “Other revenue and income” on the consolidated statements of income. In prior periods, this income was recognized as a reduction of credit card transaction fees in “Warehouse club and other operations” financial statement line item under Selling, general, and administrative expenses. Since the Company determined to adopt this guidance under the modified retrospective approach, this reclassification slightly reduces the comparability year over year of “Other revenue and income” and “Warehouse club and other operations.” Please see “Item 2: Management and Discussion Analysis – Other Revenue” for the Company’s explanation of the changes.
Determining the Transaction Price
The transaction price is the amount of consideration the Company expects to receive under the arrangement. The Company is required to estimate variable consideration (if any) and to factor that estimate into the determination of the transaction price. The Company may offer sales incentives to customers, including discounts. For retail transactions, the Company has significant experience with returns and refund patterns and relied on this experience in its determination that expected returns are not material; therefore, returns are not factored when determining the transaction price.
Discounts given to customers are usually in the form of coupons and instant markdowns and are recognized as redeemed and recorded in contra revenue accounts, as they are part of the transaction price of the merchandise sale. Manufacturer coupons that are available for redemption at all retailers are not recorded as a reduction to the sale price of merchandise. Manufacturer coupons or discounts that are specific to the Company are recorded as a reduction to the cost of sales.
Agent Relationships
The Company evaluates the criteria outlined in ASC 606-10-55, Principal versus Agent Considerations, in determining whether it is appropriate in these arrangements to record the gross amount of merchandise sales and related costs, or the net amount earned as commissions. When the Company is considered the principal in a transaction, revenue is recorded gross; otherwise, revenue is recorded on a net basis. The Company's Non-merchandise Sales revenues are recorded on a net basis.
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Significant Judgments
For arrangements that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation on a relative standalone selling price basis.
Incremental costs to obtain contracts are not material to the Company.
Policy Elections
In addition to those previously disclosed, the Company has made the following accounting policy elections and practical expedients:
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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 Condensed Consolidated Balance Sheets.Company’s consolidated balance sheets. The following table provides these contract balances from transactions with customers as of the dates listed (in thousands):
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| Contract Liabilities | Contract Liabilities | ||||||||
| May 31, 2019 |
| August 31, 2018 | February 29, 2020 | August 31, 2019 | |||||
Deferred membership income | $ | 24,571 |
| $ | 22,996 | $ | 26,440 | $ | 24,901 | |
Other contract performance liabilities | $ | 2,808 |
| $ | 2,773 | $ | 8,862 | $ | 4,048 |
Disaggregated Revenues
In the following table, net merchandise sales are disaggregated by merchandise category (in thousands):
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| Three Months Ended |
| Nine Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||
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| May 31, 2019 |
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| May 31, 2018 |
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| May 31, 2019 |
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| May 31, 2018 | February 29, 2020 | February 28, | February 29, | February 28, | |||||||
Foods & Sundries | $ | 384,902 |
| $ | 383,546 |
| $ | 1,174,087 |
| $ | 1,169,928 | $ | 438,345 | $ | 412,857 | $ | 831,150 | $ | 789,185 | |||
Fresh Foods |
| 209,452 |
| 205,144 |
| 630,657 |
| 617,713 | 241,317 | 220,499 | 456,555 | 421,205 | ||||||||||
Hardlines |
| 83,606 |
| 85,122 |
| 274,596 |
| 285,021 | 100,419 | 98,947 | 191,422 | 191,101 | ||||||||||
Softlines |
| 38,700 |
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| 38,514 |
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| 127,158 |
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| 123,696 | 49,904 | 47,975 | 90,263 | 88,364 | |||||||
Other Business |
| 38,349 |
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| 38,147 |
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| 116,244 |
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| 116,089 | 41,741 | 40,012 | 81,064 | 77,878 | |||||||
Net Merchandise Sales | $ | 755,009 |
| $ | 750,473 |
| $ | 2,322,742 |
| $ | 2,312,447 | $ | 871,726 | $ | 820,290 | $ | 1,650,454 | $ | 1,567,733 |
H
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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 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 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 ninesix months ended May 31,February 29, 2020 and February 28, 2019 and 2018 (in thousands, except per share amounts):
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| Three Months Ended |
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| May 31, |
| May 31, |
| May 31, | February 29, | February 28, | February 29, | February 28, | ||||||||||||
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| 2019 |
| 2018 |
| 2019 |
| 2018 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Net income attributable to PriceSmart, Inc. |
| $ | 14,096 |
| $ | 18,694 |
| $ | 52,518 |
| $ | 55,332 | $ | 25,600 | $ | 23,810 | $ | 45,328 | $ | 38,422 | ||||
Less: Allocation of income to unvested stockholders |
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| (189) |
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| (244) |
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| (414) |
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| (642) | (64) | (27) | (339) | (219) | ||||||||
Net income attributable to PriceSmart, Inc. per share available for distribution |
| $ | 13,907 |
| $ | 18,450 |
| $ | 52,104 |
| $ | 54,690 | $ | 25,536 | $ | 23,783 | $ | 44,989 | $ | 38,203 | ||||
Basic weighted average shares outstanding |
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| 30,198 |
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| 30,137 |
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| 30,192 |
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| 30,105 | 30,255 | 30,206 | 30,266 | 30,189 | ||||||||
Add dilutive effect of performance stock units (two-class method) |
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| 7 |
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| 10 |
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Diluted average shares outstanding |
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| 30,205 |
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| 30,137 |
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| 30,202 |
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| 30,105 | 30,258 | 30,211 | 30,271 | 30,200 | ||||||||
Basic net income per share |
| $ | 0.46 |
| $ | 0.61 |
| $ | 1.73 |
| $ | 1.82 | $ | 0.85 | $ | 0.79 | $ | 1.49 | $ | 1.27 | ||||
Diluted net income per share |
| $ | 0.46 |
| $ | 0.61 |
| $ | 1.73 |
| $ | 1.82 | $ | 0.85 | $ | 0.79 | $ | 1.49 | $ | 1.27 |
NOTE 5 – STOCKHOLDERS’ EQUITY
Dividends
The following table summarizes the dividends declared and paid during fiscal year 20192020 and 20182019 (amounts are per share).
First Payment | Second Payment | ||||||||||||||||||||
Declared | Amount | Record | Date | Date | Amount | Record | Date | Date | Amount | ||||||||||||
2/6/2020 |
| $ | 0.70 |
| 2/15/2020 |
| 2/28/2020 |
| N/A |
| $ | 0.35 |
| 8/15/2020 |
| N/A |
| 8/31/2020 |
| $ | 0.35 |
1/30/2019 |
| $ | 0.70 |
| 2/15/2019 |
| 2/28/2019 |
| N/A |
| $ | 0.35 |
| 8/15/2019 |
| 8/30/2019 |
| N/A |
| $ | 0.35 |
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| First Payment |
| Second Payment | ||||||||||||||
Declared |
| Amount |
| Record |
| Date |
| Date |
| Amount |
| Record |
| Date |
| Date |
| Amount | |||
1/30/2019 |
| $ | 0.70 |
| 2/15/2019 |
| 2/28/2019 |
| N/A |
| $ | 0.35 |
| 8/15/2019 |
| N/A |
| 8/30/2019 |
| $ | 0.35 |
1/24/2018 |
| $ | 0.70 |
| 2/14/2018 |
| 2/28/2018 |
| N/A |
| $ | 0.35 |
| 8/15/2018 |
| 8/31/2018 |
| N/A |
| $ | 0.35 |
The Company anticipates the ongoing payment of semi-annual dividends in subsequent periods, although the actual declaration of future dividends, 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.
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Comprehensive Income and Accumulated Other Comprehensive Loss
The following tables disclose the effects of each component of other comprehensive income (loss), net of tax (in thousands):
Attributable to | Noncontrolling | |||||||
PriceSmart | Interests | Total | ||||||
Beginning balance, September 1, 2019 | $ | (144,339) | $ | 20 | $ | (144,319) | ||
Foreign currency translation adjustments | (7,107) | 55 | (7,052) | |||||
Defined benefit pension plans | 50 | — | 50 | |||||
Derivative instruments (1) | (1,177) | — | (1,177) | |||||
Ending balance, February 29, 2020 | $ | (152,573) | $ | 75 | $ | (152,498) |
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| Attributable to |
| Noncontrolling |
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| Attributable to | Noncontrolling | ||||||||
| PriceSmart |
| Interests |
| Total | PriceSmart | Interests | Total | ||||||||
Beginning balance, September 1, 2018 | $ | (121,216) |
| $ | (1) |
| $ | (121,217) | $ | (121,216) | $ | (1) | $ | (121,217) | ||
Foreign currency translation adjustments |
| (17,972) |
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| 80 |
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| (17,892) | (8,276) | 21 | (8,255) | |||||
Defined benefit pension plans |
| 73 |
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| — |
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| 73 | 50 | — | 50 | |||||
Derivative instruments (1) |
| (2,053) |
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| — |
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| (2,053) | ||||||||
Ending balance, May 31, 2019 | $ | (141,168) |
| $ | 79 |
| $ | (141,089) | ||||||||
Derivative Instruments (1) | (668) | — | (668) | |||||||||||||
Ending balance, February 28, 2019 | $ | (130,110) | $ | 20 | $ | (130,090) |
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| Attributable to | Noncontrolling | |||||||||||||
| Attributable to |
| Noncontrolling |
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| PriceSmart | Interests | Total | |||||||
| PriceSmart |
| Interests |
| Total | |||||||||||
Beginning balance, September 1, 2017 | $ | (110,059) |
| $ | — |
| $ | (110,059) | ||||||||
Beginning balance, September 1, 2018 | $ | (121,216) | $ | (1) | $ | (121,217) | ||||||||||
Foreign currency translation adjustments |
| (134) |
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| 8 |
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| (126) | (19,717) | 21 | (19,696) | |||||
Defined benefit pension plans |
| 101 |
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| — |
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| 101 | (112) | — | (112) | |||||
Derivative Instruments (1) |
| 1,516 |
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| — |
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| 1,516 | (3,369) | — | (3,369) | |||||
Ending balance, May 31, 2018 | $ | (108,576) |
| $ | 8 |
| $ | (108,568) | ||||||||
Amounts reclassified from accumulated other comprehensive income (loss) (2) | 75 | — | 75 | |||||||||||||
Ending balance, August 31, 2019 | $ | (144,339) | $ | 20 | $ | (144,319) |
(1)See Note 8 - Derivative Instruments and Hedging Activities.
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| Attributable to |
| Noncontrolling |
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| PriceSmart |
| Interests |
| Total | |||
Beginning balance, September 1, 2017 | $ | (110,059) |
| $ | — |
| $ | (110,059) |
Foreign currency translation adjustments |
| (12,890) |
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| (1) |
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| (12,891) |
Defined benefit pension plans |
| (87) |
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| — |
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| (87) |
Derivative Instruments (1) |
| 1,779 |
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| — |
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| 1,779 |
Amounts reclassified from accumulated other comprehensive income (loss) (2) |
| 41 |
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| — |
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| 41 |
Ending balance, August 31, 2018 | $ | (121,216) |
| $ | (1) |
| $ | (121,217) |
(2)Amounts reclassified from accumulated other comprehensive loss related to the minimum pension liability are included in warehouse club and other operations in the Company's consolidated statements of income.
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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):
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| May 31, |
| August 31, | ||
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| 2019 |
| 2018 | ||
Retained earnings not available for distribution |
| $ | 7,378 |
| $ | 6,798 |
February 29, | August 31, | |||||
2020 | 2019 | |||||
Retained earnings not available for distribution | $ | 8,250 | $ | 7,843 |
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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.
On May 22, 2019, a class action complaint was filed against PriceSmart, Inc., as well as certain former and current officers in the United States District Court for the Southern District of California. TheOn October 7, 2019, the Court granted Public Employees Retirement Association of New Mexico’s (PERA’s) Motion for Appointment as Lead Plaintiff. On January 3, 2020, PERA filed a consolidated class action complaint, which alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, in connectionthereunder. The Company intends to vigorously defend itself against any obligations or liability to the plaintiffs with the Company’s 2017 Form 10-K and 2018 Form 10-Qs. The complaint has not yet been served. respect to such claims. The Company believes the claims are without merit and intends to vigorously defend itself against such claims. However,merit. Per a briefing schedule adopted by the outcome of the legal proceeding is uncertain at this point. Based on information available toCourt, the Company at present,filed a Motion to Dismiss the Plaintiff's Consolidated Amended Complaint in its entirety on March 3, 2020.
Taxes
Income Taxes – For interim reporting, the Company cannot reasonably estimate a range of loss and accordingly has not accrued any liability associated with this action.
Taxes
uses an estimated annual effective tax rate (AETR), pursuant to ASC 740-279, to calculate income tax expense. Income Taxes – The Company accounts for income taxes using the asset and liability method. Under the asset and liability method,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. The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are recognized forrequired in the futuredetermination of the consolidated income tax consequences attributed toexpense. Deferred income taxes arise from temporary differences between the financial statement carrying amountstax basis of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable incomereported amounts in the yearsfinancial statements, which will result in which those temporary differences and carry-forwards are expectedtaxable or deductible amounts in the future. In evaluating its ability to be recovered or settled. The effect onrecover deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includesjurisdictions from which they arise, the enactment date. A valuation allowance is established when necessary to reduceCompany considers all available positive and negative evidence, including scheduled reversals of deferred tax assets to amounts expected to be realized.
The Company has historically applied foreign tax credits, generated from taxes withheld on certain payments PriceSmart receives from its foreign subsidiaries, to reduce U.S.liabilities, projected future taxable income, tax liabilities. However, as an incidental resulttax-planning strategies, and results of U.S. tax reform, following the reduction of the U.S. corporaterecent operations. In projecting future taxable income, tax rate from 35% to 21%, the Company expects foreign tax credits generated to exceed U.S. income tax liabilitiesbegins with historical results adjusted for the foreseeable future. Therefore, asresults of May 31, 2019,discontinued operations and incorporates 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 has recorded a valuation allowanceconsiders three years of $2.8 million against its foreign tax credits.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 respect to 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 significant changes in the Company's uncertain income tax positions since August 31, 2018. 2019.
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, 2019February 29, 2020 and August 31, 2018,2019, the Company
24
has recorded within other accrued expenses and other current liabilities a total of $3.4$3.1 million and 3.0$3.2 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.
The Company has various appeals pending before tax courts in its subsidiaries' jurisdictions. Any possible settlement could increase or decrease earnings but is not expected to be significant. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. One of the Company’s subsidiaries received assessments claiming $2.6 million of taxes, penalties and interest related to withholding taxes on certain charges for services rendered by the Company. Based on a review of the Company's tax advisers' interpretation of local law, rulings and jurisprudence (including Supreme Court precedents with respect to the deductibility assessment),In two other countries where the Company expects to prevail in this instance and has not recorded a provision for these assessments. However, the Company had to submit $2.6 million as advance payments to the government while it appeals.
In another country in which the Company has warehouse clubs, beginning in fiscal year 2015, a newoperates, minimum income tax mechanism took effect, which requiresrules 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 current rules (which the Company has challenged in court) do not clearly allow the Company to obtain a refund or to offset this excesshad income tax against other taxes. Asreceivables of May 31, 2019$9.7 million and August 31, 2018, the Company had$7.8 million and deferred tax assets of approximately $2.3$2.9 million and $2.1 million in this country, respectively. Also, the Company had an income tax receivable balance of $7.5 million and $7.1$2.7 million as of May 31, 2019February 29, 2020 and August 31, 2018,2019, respectively, in these countries. While the rules related to excess payments from fiscal years 2015 to 2019. In the third quarterrefunds of fiscal year 2018, a revised minimumincome tax law was passedreceivables in this country, which beginning in fiscal 2020 will reduce the minimum tax rate. Additionally, this law clarifies rules on a going-forward basis for reimbursement of excess minimum tax paid beginning in fiscal year 2019, but does not address periods prior to fiscal year 2019. Nevertheless,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 request and/or court challenge on this matter.requests.
Other Commitments
The Company is committed under non-cancelable operating leases for the rental of facilities and land. Future minimum lease commitments for facilities under these leases with an initial term in excess of one year are as follows (in thousands):
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| Open |
| |
Years ended May 31, |
| Locations(1) |
| |
2020 |
| $ | 13,583 |
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2021 |
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| 13,708 |
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2022 |
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| 12,903 |
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2023 |
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| 13,069 |
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2024 |
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| 12,770 |
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Thereafter |
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| 183,840 |
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Total |
| $ | 249,873 | (2) |
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In January 2017, the Company purchased a distribution center in Medley, Miami-Dade County, Florida. The Company transferred its Miami dry distribution center activities that were previously in the leased facility to the new facility during the third quarter of fiscal year 2017. As of May 31, 2019,February 29, 2020, all of the vacated space has been subleased (and/or returned to the landlord). As part of the subleases, the Company provided the landlord of the leased facility a letter of credit (“LOC”) for the initial amount of $500,000 which entitled the landlord to draw on the LOC based on a decreasing scale over four years if certain conditions were to occur related to nonpayment by the new tenant. The balance of this LOC decreases at an annual rate of $125,000 starting in
25
August 2018. As of May 31, 2019,February 29, 2020, the remaining balance of the LOC was $375,000.$250,000. Although this agreement is considered a guarantee, in measuring the fair value, the Company considers the risk and probability of default by the third party tenant as not likely nor probable based on the Company’s review of the third party tenant’s financial position as well as the third party’s considerable capital investment into the leased facility. Therefore, the Company has not recorded a liability for this guarantee.
The Company is also committed to non-cancelable construction servicesservice obligations for various warehouse club developments and expansions. As of May 31, 2019February 29, 2020 and August 31, 2018,2019, the Company had approximately $18.3$10.8 million and $10.6$14.9 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 that have not been recorded as commitments, for which the Company has recorded within restricted cash and deposits as of May 31, 2019 and August 31, 2018 approximately $4.1 million and $400,000, respectively. agreements. The Company’s land purchase option 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 our agreements to purchase land without cause by forfeiture of some or all of the deposits we have made pursuant to the agreement. The As of February 29, 2020, the Company does not havehad entered into a timetable of when or if it will exercise these land purchase options, dueoption agreement that, if completed, would have resulted in the use of approximately $4.3 million in cash. However, subsequent to this date, the uncertainty relatedCompany decided not to the completionexecute this land purchase option agreement, as a result of the Company's due diligence reviews. The Company's due diligence reviews include evaluations ofuncertainties surrounding the legal status of each property,economic implications from the zoning and permitting issues related to acquiring approval for the construction and operation of a warehouse club and any other issues related to the property itself that could render the property unsuitable or limit the property's economic viability as a warehouse club site. If the purchase option agreements are exercised, the cash use would be approximately $52.1 million.COVID-19 outbreak.
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, 2019February 29, 2020 (in thousands):
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Entity |
| % |
| Initial |
| Additional |
| Net |
| Company’s |
| Commitment |
| Company's | % | Initial | Additional | Net Income Inception to Date | Company’s | Commitment | Company's | |||||||||||||||||||||
GolfPark Plaza, S.A. |
| 50 | % |
| $ | 4,616 |
| $ | 2,402 |
| $ | 194 |
| $ | 7,212 |
| $ | 99 |
| $ | 7,311 | 50 | % | $ | 4,616 | $ | 2,402 | $ | 114 | $ | 7,132 | $ | 99 | $ | 7,231 | |||||||
Price Plaza Alajuela PPA, S.A. |
| 50 | % |
|
| 2,193 |
|
| 1,236 |
|
| 69 |
|
| 3,498 |
|
| 785 |
|
| 4,283 | 50 | % | 2,193 | 1,236 | 74 | 3,503 | 785 | 4,288 | |||||||||||||
Total |
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|
| $ | 6,809 |
| $ | 3,638 |
| $ | 263 |
| $ | 10,710 |
| $ | 884 |
| $ | 11,594 | $ | 6,809 | $ | 3,638 | $ | 188 | $ | 10,635 | $ | 884 | $ | 11,519 |
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(1)The parties intend to seek alternate financing for the project, which could reduce the amount of investments each party would be required to provide. The parties may mutually agree on changes to the project, 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 contracts for distribution center services in Mexico and for off-site data recovery services, as part of its disaster recovery plan. Future minimum service commitments related to both these contracts are not material. provide additional financial support.
26
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):
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| Facilities Used |
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| Total Amount |
| Short-term |
| Letters of |
| Facilities |
| Weighted average |
| ||||
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| of Facilities |
| Borrowings |
| Credit |
| Available |
| interest rate |
| ||||
May 31, 2019 |
| $ | 69,000 |
| $ | 2,152 |
| $ | 572 |
| $ | 66,276 |
| 6.5 | % |
August 31, 2018 |
| $ | 69,000 |
| $ | — |
| $ | 632 |
| $ | 68,368 |
| — | % |
Facilities Used | |||||||||||||||
Total Amount | Short-term | Letters of | Facilities | Weighted average | |||||||||||
of Facilities | Borrowings | Credit | Available | interest rate | |||||||||||
February 29, 2020 | $ | 76,200 | $ | 3,579 | $ | 638 | $ | 71,983 | 4.3 | % | |||||
August 31, 2019 | $ | 69,000 | $ | 7,540 | $ | 486 | $ | 60,974 | 6.1 | % |
As of May 31, 2019February 29, 2020 and August 31, 2018,2019, the Company had approximately $40.0 million of short-term facilities in the U.S. that require compliance with certain quarterly financial covenants. As of May 31, 2019February 29, 2020 and August 31, 2018,2019, the Company was in compliance with respect to these covenants. Each of the facilities expires annually except for the U.S. facility, which expires bi-annually. The facilities are normally renewed.
The following table provides the changes in long-term debt for the nine-monthssix-months ended May 31, 2019:February 29, 2020:
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(Amounts in thousands) |
| Current |
| Long-term |
| Total |
| Current | Long-term | Total | ||||||||||
Balances as of August 31, 2018 |
| $ | 14,855 |
| $ | 87,720 |
| $ | 102,575 | (1) | ||||||||||
Balances as of August 31, 2019 | $ | 25,875 | $ | 63,711 | $ | 89,586 | (1) | |||||||||||||
Proceeds from long-term debt incurred during the period: | ||||||||||||||||||||
Colombia subsidiary | — | 25,000 | 25,000 | |||||||||||||||||
Guatemala subsidiary | — | 20,820 | 20,820 | |||||||||||||||||
Regularly scheduled loan payments |
| (2,838) |
| (6,671) |
| (9,509) |
| (1,268) | (4,040) | (5,308) | ||||||||||
Reclassifications of long-term debt |
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| 11,644 |
|
| (11,644) |
|
| — |
| ||||||||||
Reclassifications of short-term debt | (8,421) | 8,421 | — | |||||||||||||||||
Translation adjustments on foreign currency debt of subsidiaries whose functional currency is not the U.S. dollar (2) |
|
| (181) |
|
| 71 |
|
| (110) |
| 61 | (33) | 28 | |||||||
Balances as of May 31, 2019 |
| $ | 23,480 |
| $ | 69,476 |
| $ | 92,956 | (3) | ||||||||||
Balances as of February 29, 2020 | $ | 16,247 | $ | 113,879 | $ | 130,126 | (3) |
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(1)The carrying amount of non-cash assets assigned as collateral for these loans was $111.3 million. NaN cash assets were assigned as collateral for these loans.
(2)These foreign currency translation adjustments are recorded within Other comprehensive income.
(3)The carrying amount of non-cash assets assigned as collateral for these loans was $156.7 million. No cash assets were assigned as collateral for these loans.
As of May 31, 2019,February 29, 2020, the Company had approximately $86.0$104.1 million of long-term loans in the U.S., Trinidad, Panama, El Salvador, Honduras, Costa Rica and Colombiaseveral foreign subsidiaries that require these subsidiaries to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of May 31, 2019,February 29, 2020, the Company was in compliance with all covenants or amended covenants.
As of August 31, 2018,2019, the Company had approximately $93.6$83.1 million of long-term loans in Trinidad, Panama, El Salvador, Honduras, Costa Rica, Barbados, and Colombiaseveral foreign subsidiaries that require these subsidiaries to comply with certain annual or quarterly financial covenants.
Annual maturities of long-term debt are as follows (in thousands):
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| ||||
Twelve Months Ended May 31, |
| Amount | ||||
2020 |
| $ | 23,480 | |||
Twelve Months Ended February 28, | Amount | |||||
2021 |
| 8,342 | $ | 16,247 | ||
2022 |
| 11,640 | 11,470 | |||
2023 |
| 4,827 | 19,057 | |||
2024 |
|
| 15,554 | 16,489 | ||
2025 | 26,136 | |||||
Thereafter |
|
| 29,113 | 40,727 | ||
Total |
| $ | 92,956 | $ | 130,126 |
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 three 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 income (loss).loss. Amounts are deferred in other comprehensive income (loss)loss and reclassified into earnings in the same income statement line item that is used to present 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.
The Company uses other derivatives not designated as hedging instruments that consist primarily of written call options in which the Company receives a premium from the holder. This premium lowers the cost of the Company’s hedging activities. The Company recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Other expense, net in the consolidated statements of income in the period of change.
Cash Flow Hedges
As of May 31, 2019,February 29, 2020, 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.
28
The following table summarizes agreements for which the Company has recorded cash flow hedge accounting for the ninesix months ended May 31, 2019:February 29, 2020:
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Subsidiary |
| Date |
| Derivative |
| Derivative |
| Initial |
| Bank |
| Floating Leg |
| Fixed Rate |
| Settlement |
| Effective | Date | Derivative | Derivative | Initial | Bank | Floating Leg | Fixed Rate | Settlement | Effective | |||||||||||||
Colombia | 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 on March 3, 2020 | December 3, 2019 - December 3, 2024 | |||||||||||||||||||||||||||||
Colombia | 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 | November 27, 2019 - November 27, 2024 | |||||||||||||||||||||||||||||
Colombia | 24-Sep-19 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | 12,500,000 | PriceSmart, Inc. | Variable rate 3-month Libor plus 2.50% | 7.09 | % | 24th day of each December, March, June and September beginning December 24, 2019 | September 24, 2019 - September 26, 2022 | |||||||||||||||||||||||||||||
Panama |
| 25-Jun-18 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 14,625,000 |
| Bank of Nova Scotia |
| Variable rate 3-month Libor plus 3.0% |
| 5.99 | % |
| 23rd day of each month beginning on July 23, 2018 |
| June 25, 2018 - | 25-Jun-18 | Bank of Nova Scotia ("Scotiabank") | Interest rate swap | $ | 14,625,000 | Bank of Nova Scotia | Variable rate 3-month Libor plus 3.0% | 5.99 | % | 23rd day of each month beginning on July 23, 2018 | June 25, 2018 - March 23, 2023 | |||||||||
Honduras |
| 26-Feb-18 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 13,500,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 3.00% |
| 9.75 | % |
| 29th day of May, August, November and February beginning May 29, 2018 |
| February 26, 2018 - | 26-Feb-18 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | 13,500,000 | Citibank, N.A. | Variable rate 3-month Libor plus 3.00% | 9.75 | % | 29th day of May, August, November and February beginning May 29, 2018 | February 26, 2018 - February 24, 2024 | |||||||||
PriceSmart, Inc |
| 7-Nov-16 |
| MUFG Union Bank, N.A. ("Union Bank") |
| Interest rate swap |
| $ | 35,700,000 |
| Union Bank |
| Variable rate 1-month Libor plus 1.7% |
| 3.65 | % |
| 1st day of each month beginning on April 1, 2017 |
| March 1, 2017 - March 1, 2027 | 7-Nov-16 | MUFG Union Bank, N.A. ("Union Bank") | Interest rate swap | $ | 35,700,000 | Union Bank | Variable rate 1-month Libor plus 1.7% | 3.65 | % | 1st day of each month beginning on April 1, 2017 | March 1, 2017 - March 1, 2027 | |||||||||
Costa Rica |
| 28-Aug-15 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 7,500,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 2.50% |
| 7.65 | % |
| 28th day of August, November, February, and May beginning on November 30, 2015 |
| August 28, 2015 - | 28-Aug-15 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | 7,500,000 | Citibank, N.A. | Variable rate 3-month Libor plus 2.50% | 7.65 | % | 28th day of August, November, February, and May beginning on November 30, 2015 | August 28, 2015 - August 28, 2020 | |||||||||
El Salvador |
| 16-Dec-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 4,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.78 | % |
| 29th day of each month beginning on December 29, 2014 |
| December 1, 2014 - | ||||||||||||||||||||
Colombia |
| 10-Dec-14 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 15,000,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 2.8% |
| 8.25 | % |
| 4th day of March, June, Sept, Dec. beginning on March 4, 2015 |
| December 4, 2014 - | ||||||||||||||||||||
Panama |
| 9-Dec-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 10,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 5.16 | % |
| 28th day of each month beginning December 29, 2014 |
| November 28, 2014 - | ||||||||||||||||||||
Panama |
| 1-Aug-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 5,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.89 | % |
| 21st day of each month beginning on September 22, 2014 |
| August 21, 2014 - |
For the three and ninesix months ended May 31,February 29, 2020 and February 28, 2019, and 2018, 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):
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Income Statement Classification |
| Interest |
| Cost of |
| Total | |||
Interest expense for the three months ended May 31, 2019 |
| $ | 1,204 |
| $ | 110 |
| $ | 1,314 |
Interest expense for the three months ended May 31, 2018 |
| $ | 1,136 |
| $ | 277 |
| $ | 1,413 |
Interest expense for the nine months ended May 31, 2019 |
| $ | 3,606 |
| $ | 380 |
| $ | 3,986 |
Interest expense for the nine months ended May 31, 2018 |
| $ | 2,859 |
| $ | 774 |
| $ | 3,633 |
Income Statement Classification | Interest | Cost of | Total | ||||||
Interest expense for the three months ended February 29, 2020 | $ | 1,206 | $ | 596 | $ | 1,802 | |||
Interest expense for the three months ended February 28, 2019 | $ | 1,210 | $ | 102 | $ | 1,312 | |||
Interest expense for the six months ended February 29, 2020 | $ | 2,219 | $ | 857 | $ | 3,076 | |||
Interest expense for the six months ended February 28, 2019 | $ | 2,403 | $ | 269 | $ | 2,672 |
(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 cross-currency interest rate swaps designated as cash flow hedging instruments. |
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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 | ||||||
February 29, | August 31, | |||||
Floating Rate Payer (Swap Counterparty) | 2020 | 2019 | ||||
Union Bank | $ | 34,531 | $ | 35,169 | ||
Citibank N.A. | 52,425 | 24,225 | ||||
Scotiabank | 17,125 | 18,375 | ||||
Total | $ | 104,081 | $ | 77,769 |
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| Notional Amount as of | ||||
|
| May 31, |
| August 31, | ||
Floating Rate Payer (Swap Counterparty) |
| 2019 |
| 2018 | ||
Union Bank |
| $ | 35,487 |
| $ | 35,700 |
Citibank N.A. |
|
| 25,125 |
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| 27,825 |
Scotiabank |
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| 19,658 |
|
| 25,149 |
Total |
| $ | 80,270 |
| $ | 88,674 |
29
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):
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| May 31, 2019 |
| August 31, 2018 | February 29, 2020 | August 31, 2019 | ||||||||||||||||||||||||||||||||
Derivatives designated as cash flow hedging instruments |
| Balance Sheet |
| Fair |
| Net Tax |
| Net |
| Fair |
| Net Tax |
| Net | Balance Sheet Classification | Fair | Net Tax | Net | Fair | Net Tax | Net | |||||||||||||||||||
Cross-currency interest rate swaps |
| Other non-current assets |
| $ | 2,741 |
| $ | (862) |
| $ | 1,879 |
| $ | 2,405 |
| $ | (819) |
| $ | 1,586 | Other non-current assets | $ | 241 | $ | (75) | $ | 166 | $ | — | $ | — | $ | — | |||||||
Interest rate swaps |
| Other non-current assets |
|
| 1 |
|
| — |
|
| 1 |
|
| 1,959 |
|
| (434) |
|
| 1,525 | ||||||||||||||||||||
Cross-currency interest rate swaps | Other current assets | — | — | — | 2,736 | (903) | 1,833 | |||||||||||||||||||||||||||||||||
Interest rate swaps |
| Other long-term liabilities |
|
| (587) |
|
| 154 |
|
| (433) |
|
| (8) |
|
| 2 |
|
| (6) | Other long-term liabilities | (2,714) | 638 | (2,076) | (2,178) | 517 | (1,661) | |||||||||||||
Cross-currency interest rate swaps |
| Other long-term liabilities |
|
| (574) |
|
| 172 |
|
| (402) |
|
| (494) |
|
| 148 |
|
| (346) | Other long-term liabilities | (1,206) | 367 | (839) | (732) | 220 | (512) | |||||||||||||
Cross-currency interest rate swaps | Other current liabilities | (45) | 14 | (31) | — | — | — | |||||||||||||||||||||||||||||||||
Net fair value of derivatives designated as hedging instruments |
|
|
| $ | 1,581 |
| $ | (536) |
| $ | 1,045 |
| $ | 3,862 |
| $ | (1,103) |
| $ | 2,759 | $ | (3,724) | $ | 944 | $ | (2,780) | $ | (174) | $ | (166) | $ | (340) |
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. As of February 29, 2020, the Company did not have any material non-deliverable forward foreign-exchange contracts.
Other Instruments
Other derivatives not designated as hedging instruments consist primarily of written call options in which the Company receives a premium that it uses to reduce the costs associated with its hedging activities. As of February 29, 2020, the Company has settled its outstanding call options and does not have any other contracts not designated as hedging instruments.
For the three and six months ended February 29, 2020, the Company included in its consolidated statements of income the loss of its other non-designated derivative contracts as follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||
February 29, | February 28, | February 29, | February 28, | |||||||||
Income Statement Classification | 2020 | 2019 | 2020 | 2019 | ||||||||
Other income (expense), net | $ | 358 | $ | — | $ | (912) | $ | — |
NOTE 9 – SEGMENTS
The Company and its subsidiaries are principally engaged in the international operation of membership shopping in 4245 warehouse clubs located in 12 countries and one1 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, used by management and the Company's chief operating decision maker 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 the Company's chief operating decision maker. When the Company does so, the previous period amounts and balances are reclassified to conform to the current period's presentation.
The following tables summarize by segment certain revenues, operating costs and balance sheet items (in thousands):
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| United |
| Central |
| Caribbean Operations (1) |
| Colombia Operations |
| Reconciling |
| Total | United | Central | Caribbean | Colombia Operations | Reconciling | Total | ||||||||||||||||||
Three Months Ended May 31, 2019 |
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Three Months Ended February 29, 2020 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers |
| $ | 17,454 |
| $ | 448,118 |
| $ | 228,586 |
| $ | 94,398 |
| $ | — |
| $ | 788,556 | $ | 18,848 | $ | 522,607 | $ | 261,683 | $ | 103,597 | — | $ | 906,735 | |||||||
Intersegment revenues |
|
| 284,205 |
|
| 3,401 |
|
| 1,032 |
|
| 444 |
|
| (289,082) |
|
| — | 287,362 | 3,909 | 860 | 547 | (292,678) | — | ||||||||||||
Depreciation, Property and equipment |
|
| 1,312 |
|
| 6,200 |
|
| 3,551 |
|
| 2,132 |
|
| — |
|
| 13,195 | 1,338 | 7,568 | 3,826 | 1,844 | — | 14,576 | ||||||||||||
Amortization, Intangibles |
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| 606 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 606 | 599 | — | — | — | — | 599 | ||||||||||||
Operating income (loss) |
|
| 1,139 |
|
| 26,314 |
|
| 10,295 |
|
| 3,294 |
|
| (19,045) |
|
| 21,997 | 1,928 | 37,667 | 15,079 | 5,400 | (21,265) | 38,809 | ||||||||||||
Net income (loss) attributable to PriceSmart, Inc. (3) |
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| (1,655) |
|
| 22,725 |
|
| 9,514 |
|
| 2,528 |
|
| (19,016) |
|
| 14,096 | ||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. | (841) | 30,339 | 13,810 | 3,666 | (21,374) | 25,600 | ||||||||||||||||||||||||||||||
Capital expenditures, net |
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| 143 |
|
| 13,322 |
|
| 8,010 |
|
| 1,093 |
|
| — |
|
| 22,568 | 3,489 | 18,128 | 7,230 | 4,465 | — | 33,312 | ||||||||||||
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Nine Months Ended May 31, 2019 |
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Six Months Ended February 29, 2020 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers |
| $ | 51,614 |
| $ | 1,372,918 |
| $ | 702,954 |
| $ | 295,132 |
| $ | — |
| $ | 2,422,618 | $ | 36,187 | $ | 989,409 | $ | 496,700 | $ | 196,380 | $ | — | $ | 1,718,676 | ||||||
Intersegment revenues |
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| 924,624 |
|
| 7,620 |
|
| 3,375 |
|
| 1,119 |
|
| (936,738) |
|
| — | 637,312 | 7,954 | 2,079 | 1,083 | (648,428) | — | ||||||||||||
Depreciation, Property and equipment |
|
| 3,958 |
|
| 18,072 |
|
| 10,181 |
|
| 6,356 |
|
| — |
|
| 38,567 | 2,687 | 14,450 | 7,792 | 3,861 | — | 28,790 | ||||||||||||
Amortization, Intangibles |
|
| 1,798 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,798 | 1,198 | — | — | — | — | 1,198 | ||||||||||||
Operating income |
|
| 4,565 |
|
| 90,681 |
|
| 37,346 |
|
| 10,327 |
|
| (59,716) |
|
| 83,203 | 4,516 | 69,367 | 26,889 | 9,924 | (41,173) | 69,523 | ||||||||||||
Net income (loss) attributable to PriceSmart, Inc. (3) |
|
| (3,885) |
|
| 75,009 |
|
| 32,536 |
|
| 8,632 |
|
| (59,774) |
|
| 52,518 | ||||||||||||||||||
Long-lived assets (other than deferred tax assets) |
|
| 85,638 |
|
| 339,950 |
|
| 157,186 |
|
| 105,384 |
|
| — |
|
| 688,158 | ||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. | (1,564) | 57,091 | 24,129 | 6,937 | (41,265) | 45,328 | ||||||||||||||||||||||||||||||
Long-lived assets (other than deferred tax assets) (3) | 86,306 | 477,195 | 187,641 | 145,981 | — | 897,123 | ||||||||||||||||||||||||||||||
Intangibles, net |
|
| 13,182 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 13,182 | 11,378 | — | — | — | — | 11,378 | ||||||||||||
Goodwill |
|
| 11,315 |
|
| 24,606 |
|
| 10,237 |
|
| — |
|
| — |
|
| 46,158 | 10,695 | 24,522 | 10,196 | — | — | 45,413 | ||||||||||||
Total assets |
|
| 152,322 |
|
| 605,399 |
|
| 331,999 |
|
| 172,144 |
|
| — |
|
| 1,261,864 | 157,116 | 723,673 | 390,000 | 227,503 | — | 1,498,292 | ||||||||||||
Capital expenditures, net |
|
| 3,759 |
|
| 56,695 |
|
| 24,271 |
|
| 3,831 |
|
| — |
|
| 88,556 | 4,118 | 33,371 | 11,750 | 25,299 | — | 74,538 | ||||||||||||
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Three Months Ended May 31, 2018 |
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Three Months Ended February 28, 2019 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers |
| $ | 17,802 |
| $ | 451,597 |
| $ | 214,506 |
| $ | 98,296 |
| $ | — |
| $ | 782,201 | $ | 16,821 | $ | 484,994 | $ | 249,360 | $ | 103,250 | $ | — | $ | 854,425 | ||||||
Intersegment revenues |
|
| 291,925 |
|
| — |
|
| 1,087 |
|
| 376 |
|
| (293,388) |
|
| — | 289,699 | 3,783 | 1,249 | 397 | (295,128) | — | ||||||||||||
Depreciation and amortization |
|
| 2,245 |
|
| 6,050 |
|
| 2,934 |
|
| 2,337 |
|
| — |
|
| 13,566 | ||||||||||||||||||
Operating income/(loss) |
|
| (883) |
|
| 31,257 |
|
| 11,538 |
|
| 2,989 |
|
| (16,472) |
|
| 28,429 | ||||||||||||||||||
Depreciation, Property and equipment | 1,950 | 6,003 | 3,439 | 2,121 | — | 13,513 | ||||||||||||||||||||||||||||||
Amortiazation, Intangibles | 593 | — | — | — | — | 593 | ||||||||||||||||||||||||||||||
Operating income (loss) | 4,477 | 35,574 | 15,024 | 3,617 | (22,156) | 36,536 | ||||||||||||||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. |
|
| (2,792) |
|
| 25,485 |
|
| 10,074 |
|
| 2,377 |
|
| (16,450) |
|
| 18,694 | 1,596 | 28,099 | 13,037 | 3,289 | (22,211) | 23,810 | ||||||||||||
Capital expenditures, net |
|
| 3,024 |
|
| 12,803 |
|
| 14,368 |
|
| 873 |
|
| — |
|
| 31,068 | 1,930 | 20,602 | 5,766 | 1,351 | — | 29,649 | ||||||||||||
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Nine Months Ended May 31, 2018 |
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Six Months Ended February 28, 2019 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers |
| $ | 35,087 |
| $ | 1,397,668 |
| $ | 663,317 |
| $ | 292,764 |
| $ | — |
| $ | 2,388,836 | $ | 34,160 | $ | 924,800 | $ | 474,369 | $ | 200,733 | $ | — | $ | 1,634,062 | ||||||
Intersegment revenues |
|
| 906,114 |
|
| — |
|
| 3,265 |
|
| 693 |
|
| (910,072) |
|
| — | 640,418 | 4,220 | 2,342 | 675 | (647,655) | — | ||||||||||||
Depreciation and amortization |
|
| 5,680 |
|
| 17,459 |
|
| 8,343 |
|
| 6,896 |
|
| — |
|
| 38,378 | ||||||||||||||||||
Depreciation, Property and equipment | 3,910 | 11,873 | 6,630 | 4,224 | — | 26,637 | ||||||||||||||||||||||||||||||
Amortization, Intangibles | 1,192 | — | — | — | — | 1,192 | ||||||||||||||||||||||||||||||
Operating income |
|
| 3,354 |
|
| 100,463 |
|
| 36,763 |
|
| 8,198 |
|
| (49,919) |
|
| 98,859 | 3,427 | 64,366 | 27,051 | 7,033 | (40,671) | 61,206 | ||||||||||||
Net income (loss) attributable to PriceSmart, Inc. |
|
| (17,182) |
|
| 82,997 |
|
| 33,000 |
|
| 6,414 |
|
| (49,897) |
|
| 55,332 | (2,229) | 52,284 | 23,022 | 6,104 | (40,759) | 38,422 | ||||||||||||
Long-lived assets (other than deferred tax assets) |
|
| 72,343 |
|
| 312,468 |
|
| 148,789 |
|
| 125,699 |
|
| — |
|
| 659,299 | 89,594 | 331,289 | 151,729 | 114,258 | — | 686,870 | ||||||||||||
Intangibles, net |
|
| 15,593 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 15,593 | 13,788 | — | — | — | — | 13,788 | ||||||||||||
Goodwill |
|
| 16,033 |
|
| 30,770 |
|
| 4,548 |
|
| — |
|
| — |
|
| 51,351 | 11,315 | 24,670 | 10,278 | — | — | 46,263 | ||||||||||||
Total assets |
|
| 160,793 |
|
| 562,401 |
|
| 333,985 |
|
| 189,291 |
|
| — |
|
| 1,246,470 | 149,192 | 592,121 | 329,049 | 187,868 | — | 1,258,230 | ||||||||||||
Capital expenditures, net |
|
| 4,612 |
|
| 35,364 |
|
| 33,997 |
|
| 2,729 |
|
| — |
|
| 76,702 | 3,616 | 43,373 | 16,261 | 2,738 | — | 65,988 | ||||||||||||
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As of August 31, 2018 |
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| ||||||||||||||||||
As of August 31, 2019 | ||||||||||||||||||||||||||||||||||||
Long-lived assets (other than deferred tax assets) |
| $ | 67,650 |
| $ | 320,612 |
| $ | 150,516 |
| $ | 118,284 |
| $ | — |
| $ | 657,062 | $ | 65,278 | $ | 383,665 | $ | 165,584 | $ | 115,838 | $ | — | $ | 730,365 | ||||||
Intangibles, net |
|
| 14,980 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 14,980 | 12,576 | — | — | — | — | 12,576 | ||||||||||||
Goodwill |
|
| 11,230 |
|
| 30,646 |
|
| 4,453 |
|
| — |
|
| — |
|
| 46,329 | 11,315 | 24,593 | 10,193 | — | — | 46,101 | ||||||||||||
Total assets |
|
| 186,174 |
|
| 536,756 |
|
| 310,411 |
|
| 183,051 |
|
| — |
|
| 1,216,392 | 161,583 | 614,579 | 340,216 | 180,033 | — | 1,296,411 | ||||||||||||
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(1)Management considers its club in the U.S. Virgin Islands to be part of its Caribbean operations.
(2)The reconciling items reflect the amount eliminated on consolidation of intersegment transactions. (3)Effective September 1, 2019, we adopted the requirements of Accounting Standards Update (ASU) 2016-02, "Leases (Topic 842)" (ASC 842) using the modified retrospective approach, under which financial results reported in prior periods were not restated. As a result, the Long-lived assets (other than deferred tax assets)as of February 29, 2020 is not comparable with that as of February 28, 2019 and August 31, 2019. |
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PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS — (Continued)
NOTE 10 – ACQUISITIONLEASES
On March 15, 2018,The Company adopted ASC 842 as of September 1, 2019, using the modified retrospective method and applying transitional relief allowing entities to initially apply the requirements at the adoption date by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, results and disclosures for the reporting periods beginning September 1, 2019 are reported and presented under ASC 842, while prior period amounts and disclosures are not adjusted and continue to be reported and presented under ASC 840.
As part of the adoption, the Company acquired technology, talentelected the following practical expedients:
A package of practical expedients allowing the Company to: a) carry forward its historical lease classification; b) avoid reassessing whether any expired or existing contracts are or contain leases; and cross-border logistics infrastructure through a marketplacec) avoid reassessing initial direct costs for any existing lease.
A practical expedient related to land easements, allowing the Company to carry forward the accounting treatment for land easements on existing agreements and casillero business operated by Aeropost, Inc. This acquisition has been accountedeliminating the need to reassess existing lease contracts to determine if land easements are separate leases under ASC 842.
A practical expedient allowing the Company not to apply the recognition requirements of ASC 842 to short-term leases (12 months or less).
The Company did not elect the following practical expedients:
A practical expedient that would allow the Company to use hindsight in determining the lease term and to assess impairment of the entity’s right-of use (“ROU”) assets, since election of this expedient could make adoption more complex given that reevaluation of the lease term.
A practical expedient allowing the Company to not separate lease components from nonlease components (e.g., common area maintenance costs), since the Company does not combine lease and nonlease components for in conformityany of its real estate leases.
In accordance with ASC Topic 805, Business Combinations. PriceSmart842, the Company determines if an arrangement is actively integratinga lease at inception or modification of a contract and investingclassifies each lease as either operating or finance lease at commencement. The Company only reassesses lease classification subsequent to commencement upon a change to the expected lease term or the contract being modified. As of February 29, 2020, the Company only has operating leases for its clubs, distribution centers, office space, and land. Operating leases, net of accumulated amortization, are included in operating lease ROU assets, and current and non-current operating lease liabilities, on the Company’s consolidated balance sheets. Lease expense for operating leases is included in selling, general and administrative expense on the Company’s consolidated statements of income. Leases with an initial term of twelve months or less are not recorded on the Company’s consolidated balance sheet.
The Company is generally obligated for the cost of property taxes, insurance, and maintenance relating to its leases, which are often variable lease payments. Such costs are included in selling, general and administrative expense on the interim unaudited consolidated statements of income.
Certain of the Company's lease agreements provide for lease payments based on future sales volumes at the leased location, or include rental payments adjusted periodically for inflation or based on an index, which are not measurable at the inception of the lease. The Company expenses such variable amounts in the technology, talent and infrastructure from this business to expand its omni-channel capabilities. The Company paid $29.0 millionperiod incurred, which is the period in cash for this acquisition. Underwhich it becomes probable that the merger agreement, $5.0 million ofspecified target that triggers the total consideration has been placed in escrow and its release to the sellers is contingent upon certain key Aeropost, Inc. executives remaining employed with the Company for 15 months from the date of closing. The amount placed in escrow also can be used to satisfy any indemnification claims and post-closing adjustments in favor of the Company. This contingent consideration is accounted for as post-combination compensation expense, reduces the total consideration andvariable lease payments will be recorded over this 15 month period.achieved. The post-acquisition compensation expense is recorded as prepaid expenses and other current assets on the consolidated balance sheet, and has been treated as use of cash from operating activities on the consolidated statement of cash flows. The 15-month period lapsed on June 15, 2019, and the key Aeropost, Inc. executives remained employed with the Company during this time, as such, no claim in this respect will be made against the escrow balance for this concept. However, certain indemnification claims and post-closing adjustments submitted by the Company are still pending final resolution with the sellers.Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The fair
ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the intangible assetsreasonably certain lease term. The operating lease terms may include options to extend or terminate the lease when it is measuredreasonably certain that the Company will exercise that option or if an economic penalty may be incurred if the option is not exercised. The initial lease term of the Company’s operating leases range from two to 30 years.
Where the Company's leases do not provide an implicit rate, a collateralized incremental borrowing rate ("IBR") is used to determine the present value of lease payments. The IBR is based on assumptionsa yield curve derived by publicly traded bond offerings for companies with similar credit characteristics that approximate the Company's market risk profile. In addition, we adjust the IBR for jurisdictional risk derived from quoted interest rates from financial institutions to reflect the cost of borrowing in the Company’s local markets.
Adoption of the standard resulted in the initial recognition of $120.6 million of operating lease ROU assets and estimations with regards$132.1 million of short-term and long-term operating lease liabilities as of September 1, 2019. The difference between the newly recorded assets and liabilities is $11.5 million, which was recorded against our deferred rent balance of $11.2 million as of August 31, 2019. The difference of $0.3 million was expensed in the first quarter of fiscal year 2020. NaN cumulative-effect adjustments were recorded to variable factors such asretained earnings, and there was no material impact to the amount and timing of future cash flows, appropriate risk-adjusted discount rates, nonperformance risk or other factors that market participants would consider. The trade name and developed technology were valued using the income-based approach and royalty income method, respectively. Intangible assets are amortized on a straight-line basis over the amortization periods noted above, which is included in general and administrative expenses on the accompanyingCompany’s interim consolidated statements of income.income, consolidated statements of comprehensive income, or consolidated statements of cash flows.
The following unaudited pro forma financial information shows the combined results of operationstable is a summary of the Company, including Aeropost, Inc., as ifCompany’s components of total lease costs for the acquisition had occurredthree and six months of fiscal year 2020 (in thousands):
Three Months Ended | Six Months Ended | |||||
February 29, | February 29, | |||||
2020 | 2020 | |||||
Operating lease cost | $ | 4,272 | $ | 8,493 | ||
Short-term lease cost | 29 | 82 | ||||
Variable lease cost | 1,046 | 2,127 | ||||
Sublease income | (282) | (571) | ||||
Total lease costs | $ | 5,065 | $ | 10,131 |
The weighted average remaining lease term and weighted average discount rate for operating leases as of the beginning of the periods presented (in thousands):February 29, 2020 were as follows:
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|
| Three Months Ended |
| Nine Months Ended | ||
|
| May 31, |
| May 31, | ||
|
| 2018 |
| 2018 | ||
Pro forma total revenues |
| $ | 791,413 |
| $ | 2,410,581 |
Pro forma net income attributable to PriceSmart, Inc. (1) |
| $ | 15,778 |
| $ | 46,202 |
Pro forma net income attributable to noncontrolling interest |
| $ | 124 |
| $ | 415 |
| ||
| Operating leases | |
Weighted average remaining | 18.34 | |
Weighted average discount rate percentage | 6.4% |
Supplemental cash flow information related to leases under which the Company is the lessee was as follows (amounts in thousands):
Three Months Ended | Six Months Ended | |||||
February 29, | February 29, | |||||
2020 | 2020 | |||||
Operating cash flows paid for operating leases | $ | 3,848 | $ | 7,653 |
The followingCompany is summary financial informationcommitted under non-cancelable operating leases for Aeropost, Inc., including costs to expand omni-channel capabilitiesthe rental of facilities and land. Future minimum lease commitments for fiscalfacilities under these leases with an initial term in excess of one year 2019are as follows (in thousands):
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| Three Months Ended |
| Nine Months Ended | ||||||||
|
| May 31, |
| May 31, |
| May 31, |
| May 31, | ||||
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| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Total revenue |
| $ | 8,973 |
| $ | 7,835 |
| $ | 28,100 |
| $ | 7,835 |
Net loss (net of tax benefits) |
| $ | (2,879) |
| $ | (2,290) |
| $ | (10,980) |
| $ | (2,290) |
Leased | ||||
Years Ended February 28, | Locations(1) | |||
2021 | $ | 14,569 | ||
2022 | 14,714 | |||
2023 | 14,599 | |||
2024 | 14,448 | |||
2025 | 13,739 | |||
Thereafter | 175,252 | |||
Total future lease payments | 247,321 | |||
Less imputed interest | (111,877) | |||
Total operating lease liabilities | $ | 135,444 | (2) |
(1)Operating lease obligations have been reduced by approximately $1.7 million to reflect expected sub-lease income. Certain obligations under leasing arrangements are collateralized by the underlying asset being leased.
(2)Future minimum lease payments include $1.2 million of lease payment obligations for the prior leased Miami distribution center. For purposes of calculating the minimum lease payments, a reduction is reflected for the actual sub-lease income the Company expects to receive during the remaining lease term. This sub-lease income was also considered for the purposes of calculating the exit obligation, which was immaterial as of February 29, 2020.
NOTE 11 – SUBSEQUENT EVENTS
The Company has evaluated all events subsequent to the balance sheet date of May 31, 2019February 29, 2020 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.
Real Estate Transactions
In June 2019,March 2020, the World Health Organization recognized the novel strain of coronavirus, COVID-19, as a pandemic. This coronavirus outbreak has severely restricted the level of economic activity in our markets. In response to this coronavirus outbreak, the governments of certain countries in which the Company acquired landoperates have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes. In some of the countries, temporary closures of non-essential businesses have been ordered. Further, individuals' ability to travel has been curtailed through mandated travel restrictions and may be further limited through additional voluntary or mandated closures of travel-related businesses.
In countries where social distancing is required or recommended, the Company is restricting the traffic in Guatemala City, Guatemala,its warehouse clubs to enhance safety. To promote convenience for members, we have established an online catalog that enables our members to see, almost real-time, the availability of products for all clubs, and for certain warehouse clubs, we have launched curbside pickup and home delivery by us or in coordination with third-party delivery services. We also are launching online ordering and pick-up at club, which we refer to as “Click and Go.” Where we have experienced the most significant limitations, we have offered a “drive-through” alternative with a limited offering of basic goods. We continue to believe that PriceSmart represents an essential business in our markets because of our offerings of fresh food and a variety of essential goods and services. However, it is difficult to predict how traffic will be affected in the near term and for how long.
Due to this uncertainty, the Company has reevaluated its needs for liquidity given the potential development. No date has yet been setsocial and economic impacts in the markets where we operate and any resulting impacts on our results of operations and cash flow. Sales for the startmonth of construction.
March 2020 increased by 17.1% to $306.1 million from $261.5 million in March of 2019, in part because of consumers’ reaction to health warnings associated with this pandemic. However, toward the end of March, there was a noticeable reduction of traffic due to restrictive government mandates and consumer concerns about potential exposure. Many markets have imposed limitations on access to the Company’s clubs and on the Company’s club operations, including temporary club closures, limits on the number of days during the week and hours per day the Company’s clubs can be open, restrictions on segments of the population permitted to shop on particular days, and limits on the number of people that can be in a club. These restrictions change day-to-day and market-by-market. In addition, the governments of some of the countries in which we operate have expressed a preference in favor of imports of essential items over discretionary goods. The ultimate impact of the pandemic and secondary social and economic effects on the Company's results of operations, financial position, liquidity or capital resources cannot be reasonably estimated at this time. Therefore, as a precautionary measure, we have accessed $63.2 million of funding available in several of our lines of credit to increase available cash on-hand and have delayed strategic capital expenditures.
PRICESMART, INC.
ITEMITEM 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,"PriceSmart", the "Company" or "we") anticipated future revenues and earnings, adequacy of future cash flows, 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,” and like expressions, and the negative thereof. These statements are subject to risks and uncertainties that could cause actual results to differ materially including, but not limited to, the following risks:
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The risks described above as well as the other risks detailedto: adverse changes in economic conditions in the Company’s U.S. SecuritiesCompany's markets, natural disasters, compliance risks, volatility in currency exchange rates, competition, consumer and Exchange Commission (“SEC”) reports, includingsmall business spending patterns, political instability, increased costs associated with the Company’sintegration of online commerce with our traditional business, whether the Company can successfully execute strategic initiatives, breaches of security or privacy of member or business information, cost increases from product and service providers, interruption of supply chains, epidemic, pandemic or other public health issues, exposure to product liability claims and product recalls, recoverability of moneys owed to PriceSmart from governments, and other important factors discussed under the captions "Item 1A. Risk Factors" and "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, 20182019 filed with the United States Securities and Exchange Commission ("SEC") on October 25, 2018 (see “Part I - Item 1A - Risk Factors”) could materially29, 2019. Forward-looking statements speak only as of the date that they are made, and adversely affect our business, financial condition and results of operations. These risks are not the only risks that the Company faces. The Company could also be affecteddoes not undertake to update them, except as required 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.law.
34
The following discussion and analysis compares the results of operations for the three and ninesix months ended May 31,February 29, 2020 and February 28, 2019 and 2018 and should be read in conjunction with the consolidated financial statements and the accompanying notes included therein.
Our business consists primarily of operating internationalOverview
PriceSmart began operations in 1996 in San Diego, California. We own and operate U.S. style membership shopping warehouse clubs similarin Central America, the Caribbean and Colombia. We also function as a wholesale supplier to buta retailer in the Philippines. We sell high quality brand name and private label consumer products and provide services at low prices to individuals and businesses. Historically, our typical no-frills standard warehouse buildings have ranged in sales floor size from approximately 40,000 to 60,000 square feet and are located primarily in and around the major cities in our markets to take advantage of dense populations and relatively higher levels of disposable income. However, starting in fiscal year 2019, we also began opening smaller format clubs, with sales floors ranging from approximately 30,000 to 40,000 square feet. These smaller format clubs are intended to serve markets where the population is likely to support a smaller club or densely populated urban areas where it is challenging to secure sufficient real estate at a reasonable cost for a larger club. This smaller format has the potential to expand our geographic reach in sizeexisting markets and provide more convenience for our members.
As warehouse club operators, we believe that our business success depends on our ability to be the lowest cost operators in our markets and, in turn, to offer the lowest prices on high quality products and services in our markets. We believe that lower prices on products and services should drive sales volume, which increases the Company’s buying leverage, which in turn leads to better pricing that can be offered to our members, validating the membership investment that our customers make.
Our warehouse clubs operate in emerging markets that historically have had higher growth rates and lower warehouse club market penetration than the U.S. market. In the countries in which we operate, we do not currently face direct competition from U.S. membership warehouse club operators. However, we do face competition from various retail formats such as hypermarkets, supermarkets, cash and carry, home improvement centers, electronic retailers, specialty stores, convenience stores, traditional wholesale distribution and growing online sales.
The numbers of warehouse clubs in the United States. We operate in 12 countries and one U.S. territory that are located in Latin America and the Caribbean. Our ownership in all operating subsidiariesoperation as of May 31, 2019 is 100%, and they are presented on a consolidated basis. The number of warehouse clubsFebruary 29, 2020 for each country or territory arewere as follows:
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| Number of |
| Number of |
| Anticipated |
| Anticipated | Number of | Number of | ||||||
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| Warehouse Clubs |
| Warehouse Clubs |
| Warehouse |
| Warehouse | Warehouse Clubs | Warehouse Clubs | ||||||
|
| in Operation as of |
| in Operation as of |
| Club Openings |
| Club Openings | in Operation as of | in Operation as of | ||||||
Country/Territory |
| May 31, 2018 |
| May 31, 2019 |
| In Fiscal Year 2019 |
| In Fiscal Year 2020 | February 28, 2019 | February 29, 2020 | ||||||
Colombia |
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| 7 |
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| 7 |
|
| — |
|
| — | 7 | 7 | ||
Costa Rica |
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| 7 |
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| 7 |
|
| — |
|
| — | 7 | 7 | ||
Panama |
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| 5 |
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| 6 |
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| 1 | 5 | 7 | ||
Dominican Republic | 4 | 5 | ||||||||||||||
Trinidad |
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| 4 |
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| 4 |
|
| — |
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| — | 4 | 4 | ||
Dominican Republic |
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| 4 |
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| 4 |
|
| 1 | (1) |
| — | ||||
Guatemala |
|
| 3 |
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| 3 |
|
| — |
|
| 1 | 3 | 4 | ||
Honduras |
|
| 3 |
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| 3 |
|
| — |
|
| — | 3 | 3 | ||
El Salvador |
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| 2 |
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| 2 |
|
| — |
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| — | 2 | 2 | ||
Nicaragua |
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| 2 |
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| 2 |
|
| — |
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| — | 2 | 2 | ||
Aruba |
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| 1 |
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| 1 |
|
| — |
|
| — | 1 | 1 | ||
Barbados |
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| 1 |
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| 1 |
|
| — |
|
| — | 1 | 1 | ||
U.S. Virgin Islands |
|
| 1 |
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| 1 |
|
| — |
|
| — | 1 | 1 | ||
Jamaica |
|
| 1 |
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| 1 |
|
| — |
|
| — | 1 | 1 | ||
Totals |
|
| 41 |
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| 42 |
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| 1 |
|
| 2 | 41 | 45 |
(1) Small format warehouse club.
Our warehouse clubs and local distribution centers are located in Latin America and the Caribbean, and our corporate headquarters, U.S. buying operations and regional distribution centers are located primarily in the United States. Our operating segments are the United States, Central America, the Caribbean and Colombia.
In May 2018,Due to the Company acquired landuncertainty created from the outbreak of the novel coronavirus (COVID-19) and the uncertainty of the potential social and economic impacts in the Dominican Republic upon whichmarkets where we operate and any resulting impacts on our results of operations and cash flow, we have reevaluated the Company built a new warehouse club, which opened in June 2019. This warehouse club, the fifth in the Dominican Republic, was designed usingtiming of our new small warehouse club format with sales floor square footage between 30,000 to 40,000 square feet, compared to 50,000 to 60,000 sales floor square footage within our most recent standard formatcapital investments and warehouse club openings. This warehouse club represents oneWhile we have decided to proceed with the construction of our first developments of these smaller format stores intended to reach intoan additional geographic areas and provide more convenience for our members. In September 2018 (fiscal year 2019), we acquired land in San Cristobal, Guatemala, upon which the Company is constructing a standard format warehouse club. San Cristobal is expected to open in the fall of 2019. In November 2018 (fiscal year 2019), PriceSmart leased land within the Metropark development on the south eastern side of Panama City, Panama, upon which the Company is constructing a standard format warehouse club. The Metropark club will be the Company’s seventh warehouse club in PanamaLiberia, Costa Rica, which is currently scheduled to finalize in May of 2020, we have decided to postpone the opening of that club. Additionally, with respect to our previously announced future warehouse club openings on land we have acquired in Bogota and is expectedBucaramanga, Colombia and in Jamaica, we have decided, temporarily, to openhalt or not initiate construction of those clubs at this time. We are considering and planning for additional cost savings measures in the fall of 2019. Once these three new clubs are open,U.S. and in the markets where we will operate 45 warehouse clubs. operate.
We continue to exploreinvest in technology to increase efficiencies and negotiate for other potential sites for future warehouse clubsto enable our omni-channel capabilities, including e-commerce, to enhance the member experience.
We also operate a legacy (casillero and marketplace) Aeropost business in Central38 countries in Latin America and the Caribbean, and Colombia.many of which overlap with markets where we operate warehouse clubs.
General Market Factors Affecting Our Business
Our sales and profits vary from market to market depending on general economic factors, including GDP growth; consumer spending patterns; 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.
Currency fluctuations can be one of the largest variables affecting our overall sales and profit performance, as we have experienced in prior fiscal years,profitability because many of our markets are susceptible to foreign currency exchange rate volatility. During the first ninesix months of fiscal year 20192020 and fiscal year 2018,2019, approximately 78% of our net merchandise sales were in currencies other than the U.S. dollar. Of those sales, 52% were comprised of sales of products we purchased in U.S. dollars.
35
A devaluation of local currency versus the U.S. dollar 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 a 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 in order to mitigate the impact of currency fluctuations. Information
about the effect of local currency devaluations is discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Net Merchandise Sales and Comparable Sales.”
From time to time, one or more markets in which we operate may experience economic slowdowns, which can negatively impact our business. For example, Trinidad, which depends on oil and gas exports as a major source of income, has been experiencing overall difficult economic conditions for the past three years. TheseAlthough we continue to experience adverse economic conditions, combined with government policies intended to manage foreign currency reserves, have adversely affected consumer spending. Other countries where recent general market conditions have provided a difficult operating environment during fiscal year 2019 include Costa Rica, Panama, Dominican Republic, Guatemala, Nicaragua and Barbados. Our business in USVI, where Hurricanes Irma and Maria had a severe impact on the infrastructureour Central America segment, some of the islandcountries in September 2017this region have begun to stabilize from recent political unrest. However, slowing global economy activity and October 2017, has rebounded duetrade, decreasing levels of public investment and fiscal reform continue to the re-construction efforts and the difficulty other retailers are havingbe significant challenges for our countries in becoming fully operational. Significant reductions in US Financial Aid to countries where we operate may also impact our markets.this region.
Our 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. In larger,Our business in the U.S. Virgin Islands, where Hurricanes Irma and Maria had a severe impact on the infrastructure of the island in September 2017 and October 2017, initially benefitted from the difficulty other retailers had in becoming fully operational, but those same retailers have rebuilt, thereby restoring competition in that market. Additionally, in more developed countries, such as Costa Rica, Dominican Republic, Guatemala, Panama and Colombia, customers may have more alternatives available to them to satisfy their shopping needs, than in othercompared to smaller countries, such as Jamaica and Nicaragua, where consumers have a limited number of shopping options.
Demographic characteristics within each of our markets can also affect both the overall level of sales and also future sales growth opportunities. Island countries such as Aruba, Barbados and the U.S. Virgin Islands offer us limited upside for sales growth given their overall market size. Countries with a smaller upper and middle class consumer population, such as Honduras, El Salvador, Jamaica and Nicaragua, alsooffer growth potential but they may have a more limited potentialmarket opportunity for sales growth as compared to more developed countries with larger upper and middle class consumer populations.
Political and other factors in each of our markets may have significant effects on our business. For example, beginning in April 2018, protests against social reforms and violent clashes with national security forces significantly impeded normal economic activity in Nicaragua, the effect of which has continued during the first nine months of fiscal year 2019. Also, labor strikes in Costa Rica disrupted normal commerce in September 2018. Social unrest in Honduras in May 2019 caused similar disruptions to commerce. U.S. foreign policy can also have an impact on social and economic stability in the countries where we operate. Additionally, changesFor example, the U.S. State Department has announced varying strategies regarding if, when and how it would authorize disbursement of foreign aid that had been previously approved by the U.S. Congress to Guatemala, Honduras and El Salvador. Changes in taxU.S. policies regarding financial assistance could cause political or financial instability in certainthe countries which affect consumers’ personal tax rates and/or added consumption taxes, such as VAT (value-added taxes), can effectively raise the prices of our products. we serve.
In the past, 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, increasing our foreign exchange exposure to any devaluation of the local currency relative to the U.S. dollar. During fiscal year 2018 and during the first nine months of fiscal year 2019, we experiencedWe continued to experience this situation in Trinidad (“TT”).during the start of fiscal year 2020. We are working with our banks in Trinidad to source tradeable currencies (including Euros, British Pounds, and Canadian dollars), but until the central bank in Trinidad makes more U.S. dollars available, this illiquidity condition is likely to continue. As of May 31, 2019,February 29, 2020, our Trinidad subsidiary had a net U.S.Trinidad dollar denominated asset position measured in U.S dollars of approximately $62.4 million, an increase of $37.5 million from August 31, 2019 when it had a net Trinidad dollar denominated asset position of approximately $37.3 million, an increase of $24.3 million from August 31, 2018 when our Trinidad subsidiary had net U.S. dollar denominated asset position of approximately $13.0$24.9 million. We are carefully monitoring the situation, which may require us to limit future shipments from the U.S. to Trinidad in line with our ability to exchange Trinidad dollars for tradeable currencies to manage our exposure to any potential devaluation.
Additionally, we are monitoring the impact of the novel coronavirus (COVID-19) outbreak on our business and implementing plans to take appropriate actions to adapt to changing circumstances arising from this outbreak. Specifically, we are adapting to its effects on our ability to serve our members effectively, our vendors and the global supply chain, our operating hours and processes, and the types of products our members favor. This includes, but is not limited to, seeking alternative sources of products in cases where supply cannot keep up with demand and we continue to review and update our plans as circumstances evolve. To facilitate social distancing and convenience for members, we have established an online catalog that enables our members to see, almost real-time, the availability of products for all clubs, and for certain warehouse clubs we have launched curbside pickup and home delivery by us or in coordination with third-party delivery services. Additionally, we have established a special management task force response team comprised of various executives spanning all parts of the Company that closely monitors and is able to quickly respond to the varied and dynamic issues and challenges arising from the outbreak. Further, we have established a Cash Management Committee comprised of members of our Board of Directors and management that provides enhanced oversight and monitoring of cash flow to maintain appropriate liquidity in all of our markets.
Although we have recently incurred significant disruptions in certain of our markets due to the outbreak, and expect the impact of the pandemic and the related varied restrictions on our operations to adversely affect traffic and sales over the next few months, we are unable to accurately quantify the impact that COVID-19 will have due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities and other unintended consequences. In addition, there could be weakening demand for items that are not basic goods, and our supply chain could be further disrupted as a result of the outbreak, either of which could have a materially adverse impact on our operating results. Please refer to Part II Item 1A for updated risk factors related to the COVID-19 outbreak.
Mission and Business Strategy
Our business strategymission is to improve the quality of life for our end-consumer and business and family members. WeTo do this, we make available a wide range of high quality, curated merchandise sourced from around the world at exceptional values.value prices. The annual membership fee enables us to operate our business as well as offer services, and offer a tailored selection of products with lower margins than traditional retail stores. Through the use of technology and the development of an omni-channel platform, we are pursuing opportunities to respond to howsatisfy our members expect to shop,members’ shopping expectations, create additional efficiencies in the distribution processsupply chain and increase our significance in our members’ lives. We are working to create a shopping experience that blends the attributes and appeal of our brick and mortar business with the conveniences associated with technology-supported transactions, services and online shopping.
Growth
36
Growth
We measure our growth primarily by the amount of the period-over-period activity in our net merchandise sales, our comparable store net merchandise sales and our membership income. Our investments are focused on the long-term growth of the Company. These investments can impact near-term results, such as when we incur fixed costs in advance of achieving full projected sales, negatively impacting near-term operating profit and net income, or whenincome. When we open a new warehouse club in an existing market, which canmay reduce reported comparable net merchandise sales due to the transfer of sales from existing warehouse clubs.clubs, we do so to protect the member experience, grow membership and support long-term sales growth and profitability.
Current and Future Management Actions
Logistics and distribution efficiencies are fundamental to delivering high quality merchandise at low prices to our members. We continue to explore ways to improve efficiency, reduce costs and ensure a good flow of high quality, curated merchandise to our warehouse clubs. As we continue to refine our logistics and distribution infrastructure, we are exploringexplore ways to improve our supply chain effectiveness through regional distribution centers that place our merchandise closer to our members. During fiscal year 2018, we entered into a long-term lease for a 165,000 square foot distribution center in Costa Rica. We began operating in this distribution center during the fall of 2018.
Purchasing land and constructing warehouse clubs is generally our largest ongoing capital investment. Securing land for warehouse club locations is challenging withinin several of our markets especially in Colombia, because suitable sites at economically feasible prices are difficult to find. We believe real estate ownership provides a number of advantages as compared to leasing, including lower operating expenses, flexibility to expand or otherwise enhance our buildings, long-term control over the use of the property and the residual value that the real estate may have in future years. While our preference is to own rather than lease real estate, we have entered into real estate leases in certain cases and will likely do so in the future. Most recently, we have entered into a real estate lease in Panama City, Panama, for the construction of a warehouse club.
In recent years we have been evaluating options to replace our existing Enterprise Resource Planning (ERP) system. While we are not currently undergoing an ERP migration, we continue to enhance our IT systems and infrastructure to respond to and focus on evolving business requirements, but we are doing so in a manner we believe to be consistent with a future ERP migration process.
We are developing an expansion of our omni-channel capability, including through our e-commerce platform, by investing in technology to increase efficiencies and integrating the technology, talent and cross-border logistics infrastructure obtained as part of the acquisition, in March 2018, of a company which also operates a marketplace and casillero business. We expect these investments and this integrationto enable omni-channel capabilities, including e-commerce, to enhance the membership shopping experience, including greater convenience for our members, drive efficiencies and fuel sales growth. The first significant step in this process is the launch in the Dominican Republic of an e-commerce platform in conjunction with the opening of our new club there, which opened in June of 2019.member experience.
Financial highlights for the three months ended May 31,February 29, 2020 included:
Total revenues increased 6.1% over the comparable prior year period. The extra day from leap year, Saturday, February 29, 2020 had a favorable impact on total revenue compared to the comparable prior year period.
Net merchandise sales increased 6.3% over the comparable prior year period. We ended the quarter with 45 warehouse clubs compared to 41 warehouse clubs at the end of the second quarter of fiscal year 2019. Foreign currency exchange rate fluctuations impacted net merchandise sales negatively by 0.3% versus the same three-month period in the prior year.
Comparable net merchandise sales (that is, sales in the 41 warehouse clubs that have been open for greater than 13 ½ calendar months) for the 13 weeks ended March 1, 2020 increased 0.4%. Foreign currency exchange rate fluctuations impacted comparable net merchandise sales negatively by 0.4%.
Membership income increased 9.7% to $14.1 million over the comparable prior-year period primarily driven by new member sign-ups for the four club openings in Panama, Dominican Republic, and Guatemala in calendar year 2019.
Merchandise gross profits (net merchandise sales less associated cost of goods sold) increased 11.8% over the comparable prior year period and warehouse gross profits as a percent of net merchandise club sales were 14.7%, an increase of 70 basis points (0.7%) from the same period last year.
Operating income was $38.8 million, an increase of 6.2%, or $2.3 million, compared to the second quarter of fiscal year 2019.
We recorded a $755,000 net currency gain from currency transactions in the current quarter compared to a $368,000 net loss in the same period last year.
The effective tax rate for the second quarter of fiscal year 2020 was 33.1%, as compared to the effective tax rate for the second quarter of fiscal year 2019 included:of 32.9%.
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Net income attributable to PriceSmart, Inc. for the second quarter of fiscal year 2020 was $25.6 million, or $0.85 per diluted share, compared to $23.8 million, or $0.79 per diluted share, in the comparable prior year period.
Financial highlights for the ninesix months ended May 31,February 29, 2020 included:
Total revenues increased 5.2% over the comparable prior year period. The extra day from leap year, Saturday, February 29, 2020 had a favorable impact on total revenue compared to the comparable prior year period.
Net merchandise sales increased 5.3% over the comparable prior year period. We ended the quarter with 45 warehouse clubs compared to 41 warehouse clubs at the end of the second quarter of fiscal year 2019. Foreign currency exchange rate fluctuations impacted net merchandise sales negatively by 0.9%.
Comparable net merchandise sales (that is, sales in the 41 warehouse clubs that have been open for greater than 13 ½ calendar months) for the 26 weeks ended March 1, 2020 increased 0.7%. Foreign currency exchange rate fluctuations impacted comparable net merchandise sales negatively by 0.9%.
Membership income increased 8.8% to $27.8 million membership over the comparable prior-year period primarily driven by new member sign-ups for the four club openings in Panama, Dominican Republic, and Guatemala in calendar year 2019.
Merchandise gross profits (net merchandise sales less associated cost of goods sold) increased 10.5% over the comparable prior year period and warehouse gross profits as a percent of net merchandise club sales were 14.8%, an increase of 70 basis points (0.7%) from the same period last year.
Operating income was $69.5 million, an increase of 13.6%, or $8.3 million, compared to the first six months fiscal year 2019.
We recorded a $902,000 net currency loss from currency transactions in the current six-month period compared to a $2.1 million net loss in the same period last year.
The effective tax rate for the first six months of fiscal year 2020 was 32.7%, as compared to the effective tax rate for the first six months of fiscal year 2019 included:of 33.3%.
Net income attributable to PriceSmart, Inc. for the first six months of fiscal year 2020 was $45.3 million, or $1.49 per diluted share, compared to $38.4 million, or $1.27 per diluted share, in the comparable prior year period.
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38
COMPARISON OF THE three and ninesix months ended May 31,February 29, 2020 and February 28, 2019 and 2018
The following discussion and analysis compares the results of operations for the three-month and nine-monthsix-month periods ended on May 31, 2019February 29, 2020 with the three-month and nine-monthsix-month periods ended on May 31, 2018February 28, 2019 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 monthssix-months ended May 31, 2019February 29, 2020 and 2018.February 28, 2019.
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| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||
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| May 31, 2019 |
| May 31, 2018 | February 29, 2020 | February 28, 2019 | ||||||||||||||||||||||||||||||
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| Amount |
| % of net |
| Increase/ |
| Change |
| Amount |
| % of net | Amount | % of net | Increase/ | Change | Amount | % of net | ||||||||||||||||||
Central America |
| $ | 437,602 |
| 58.0 | % |
| $ | (5,378) |
| (1.2) | % |
| $ | 442,980 |
| 59.0 | % | $ | 512,452 | 58.7 | % | $ | 39,291 | 8.3 | % | $ | 473,161 | 57.7 | % | ||||||
Caribbean |
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| 224,906 |
| 29.8 |
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| 13,717 |
| 6.5 |
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|
| 211,189 |
| 28.2 |
| 257,687 | 29.6 | 11,959 | 4.9 | 245,728 | 30.0 | ||||||||||||
Colombia |
|
| 92,501 |
| 12.2 |
|
|
| (3,803) |
| (3.9) |
|
|
| 96,304 |
| 12.8 |
| 101,587 | 11.7 | 186 | 0.2 | 101,401 | 12.3 | ||||||||||||
Net merchandise sales |
| $ | 755,009 |
| 100.0 | % |
| $ | 4,536 |
| 0.6 | % |
| $ | 750,473 |
| 100.0 | % | $ | 871,726 | 100.0 | % | $ | 51,436 | 6.3 | % | $ | 820,290 | 100.0 | % |
Six Months Ended | ||||||||||||||||||
February 29, 2020 | February 28, 2019 | |||||||||||||||||
Amount | % of net | Increase/ | Change | Amount | % of net | |||||||||||||
Central America | $ | 969,203 | 58.7 | % | $ | 65,658 | 7.3 | % | $ | 903,545 | 57.6 | % | ||||||
Caribbean | 488,838 | 29.6 | 21,615 | 4.6 | 467,223 | 29.8 | ||||||||||||
Colombia | 192,413 | 11.7 | (4,552) | (2.3) | 196,965 | 12.6 | ||||||||||||
Net merchandise sales | $ | 1,650,454 | 100.0 | % | $ | 82,721 | 5.3 | % | $ | 1,567,733 | 100.0 | % |
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|
|
| Nine Months Ended | ||||||||||||||||
|
| May 31, 2019 |
| May 31, 2018 | ||||||||||||||
|
| Amount |
| % of net |
| Increase/ |
| Change |
| Amount |
| % of net | ||||||
Central America |
| $ | 1,341,147 |
| 57.7 | % |
| $ | (30,779) |
| (2.2) | % |
| $ | 1,371,926 |
| 59.3 | % |
Caribbean |
|
| 692,129 |
| 29.8 |
|
|
| 38,670 |
| 5.9 |
|
|
| 653,459 |
| 28.3 |
|
Colombia |
|
| 289,466 |
| 12.5 |
|
|
| 2,404 |
| 0.8 |
|
|
| 287,062 |
| 12.4 |
|
Net merchandise sales |
| $ | 2,322,742 |
| 100.0 | % |
| $ | 10,295 |
| 0.4 | % |
| $ | 2,312,447 |
| 100.0 | % |
Comparison of Three and NineSix Months Ended May 31,February 29, 2020 and February 28, 2019 and 2018
Overall, total net merchandise sales grew 0.6%6.3% for the thirdsecond quarter and 0.4%5.3% for the nine-monthsix-month period ended May 31, 2019.February 29, 2020. The thirdsecond quarter increase resulted from a 3.9%5.9% increase in transactions and a 3.2% decrease0.3% increase in average ticket. For the nine-monthsix-month period, the increase resulted from a 3.3%4.9% increase in transactions and a 2.8% decrease0.4% increase in average ticket. Transactions represent the number of visits our members make to our warehouse clubs and average ticket represents the amount our members spend on each visit.
Net merchandise sales in our Central America segment decreased 1.2%increased 8.3% and 2.2%7.3% for the thirdsecond quarter and the nine-monthssix-months ended May 31, 2019,February 29, 2020, respectively, when compared to the same period last year. These declines had a 70 basis point (0.7%) and 130 basis point (1.3%) negative impact on total net merchandise sales growth, respectively. Economic weakness, currency devaluation, and political instability led to decreased sales within our Costa Rica, Panama, Guatemala, Honduras, and Nicaragua markets, offset by year-on-year increased merchandise sales within our El Salvador market.
Net merchandise sales in our Caribbean segment grew 6.5% and 5.9% for the third quarter and the nine-months ended May 31, 2019, when compared to the same period last year. These increases had a 180480 basis point (1.8%(4.8%) and 160420 basis point (1.6%(4.2%) positive impact on total net merchandise sales growth, respectively. With the exception of our Barbados market, allAll markets within this segment showed increased net merchandise sales year-on-year. We added three new clubs to the segment when compared to the period ended February 28, 2019. In Panama, we opened our sixth club in May 2019 and seventh club in October 2019, and in Guatemala, we opened our fourth club in November 2019.
Net merchandise sales in our ColombiaCaribbean segment decreased 3.9%grew 4.9% and 4.6% for the thirdsecond quarter and increased 0.8% for the nine-monthssix-months ended May 31, 2019,February 29, 2020, respectively, when compared to the same period last year. The decrease for the third quarterThese increases had a 50150 basis point (0.5%(1.5%) negative impact, while the increase for the nine-month period had a 10and 140 basis points (0.1%point (1.4%) positive impact on total net merchandise sales growth, respectively. Our Dominican Republic and Jamaica markets led the way in this segment with 17.4% and 10.5% growth for the second quarter ended February 29, 2020, and 16.1% and 11.3% growth for the six-months ended February 29, 2020, respectively. In the Dominican Republic, we launched our fifth club in June 2019, while in Jamaica, strong comparable sales growth was the primary driver of growth for the second quarter and the six-months ended February 29, 2020.
Net merchandise sales in our Colombia segment increased 0.2% and decreased 2.3% for the second quarter and the six-months ended February 29, 2020, respectively, when compared to the same period last year. Net merchandise sales in our Colombia segment had no material impact on total net merchandise sales growth for the second quarter ended February 29, 2020. The decrease for the six-month period had a 30 basis point (0.3%) negative impact on total net merchandise sales growth. The minimal growth and decline for the thirdsecond quarter and the six-months ended February 29, 2020,is primarily due to unfavorable foreign currency devaluation during the current period.
Comparison of Three and Six Months Ended February 29, 2020 and February 28, 2019 in Constant Currency
39
In discussing our operating results, the term “currency exchange rates” refers to the currency exchange rates we use to convert the operating results for all countries where the functional currency is not the U.S. dollar into U.S. dollars. We calculate the effect of changes in currency exchange rates as the difference between current period activities translated using the current period's currency exchange rates and the comparable prior year period's currency exchange rates. The disclosure of constant currency amounts or results permits investors to better understand our underlying performance without the effects of currency exchange rate fluctuations. 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-three and nine-monthsix-month periods ended May 31, 2019.February 29, 2020.
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| ||||||
|
| Currency exchange rate fluctuations for the | Currency exchange rate fluctuations for the | |||||||||
|
| Three Months Ended | Three Months Ended | |||||||||
|
| May 31, 2019 | February 29, 2020 | |||||||||
|
| Amount |
| % change |
| Amount | % change | |||||
Central America |
| $ | (13,281) |
| (3.0) | % | $ | 8,397 | 1.6 | % | ||
Caribbean |
|
| (2,522) |
| (1.1) |
| (5,067) | (2.0) | ||||
Colombia |
|
| (12,070) |
| (13.0) |
| (6,215) | (6.1) | ||||
Net merchandise sales |
| $ | (27,872) |
| (3.7) | % | $ | (2,885) | (0.3) | % |
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|
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|
|
| ||||||
|
| Currency exchange rate fluctuations for the | Currency exchange rate fluctuations for the | |||||||||
|
| Nine Months Ended | Six Months Ended | |||||||||
|
| May 31, 2019 | February 29, 2020 | |||||||||
|
| Amount |
| % change to prior year |
| Amount | % change | |||||
Central America |
| $ | (42,123) |
| (3.1) | % | $ | 9,993 | 1.0 | % | ||
Caribbean |
|
| (9,218) |
| (1.3) |
| (9,810) | (2.0) | ||||
Colombia |
|
| (25,599) |
| (8.8) |
| (15,244) | (7.9) | ||||
Net merchandise sales |
| $ | (76,940) |
| (3.3) | % | $ | (15,061) | (0.9) | % |
Overall, the effects of currency devaluationsfluctuations within our markets had an approximate $27.9approximately $2.9 million and $76.9$15.1 million, or 37030 basis point (3.7%(0.3%) and 33090 basis points (3.3%point (0.9%), negative constant currency impact on net merchandise sales for the quarter and nine-monthssix-months ended May 31, 2019.February 29, 2020, respectively.
Currency devaluationsfluctuations had a $13.3an $8.4 million and $42.1$10.0 million, or 300160 basis point (3.0%(1.6%) and 310100 basis point (3.1%(1.0%), negativepositive constant currency impact on net merchandise sales in our Central America segment for the threequarter and ninesix months ended May 31, 2019.February 29, 2020, respectively. The currency devaluationsfluctuations contributed approximately 18080 basis points (1.8%(0.8%) and 60 basis points (0.6%) of the total negativepositive impact on total net merchandise sales, for both the quarter and year-to-date period.respectively. The Costa Rica Guatemala, Honduras and our Nicaragua markets all experienced currency devaluation whenColón appreciated significantly against the dollar as compared to the same three and six-month period last year. a year ago, and was a significant factor in the contribution to the favorably of currency exchange rate fluctuations in this segment.
Currency devaluations had a $2.5$5.1 million and $9.2$9.8 million, or 110200 basis point (1.1%(2.0%) and 130 basis point (1.3%),in both cases, negative constant currency impact on reported net merchandise sales in our Caribbean segment for the threequarter and ninesix months ended May 31, 2019.February 29, 2020, respectively. The currency devaluations contributed approximately 3050 basis points (0.3%(0.5%) and 4060 basis points (0.4%(0.6%) of the total negative impact on total net merchandise sales for the quarter and six months ended February 29, 2020, respectively. Jamaica and the nine months period, respectively. This is reflective of the offsettingDominican Republic markets both experienced currency devaluation and appreciation of the mix of currencies within the markets in this segment when compared to the same period a year ago.periods last year.
Currency devaluations had a $12.1$6.2 million and $25.6$15.2 million, or 1,300610 basis point (13.0%(6.1%) and 880790 basis point (8.8%(7.9%), negative constant currency impact on net merchandise sales in our Colombia segment for the threequarter and nine monthssix-months ended May 31, 2019.February 29, 2020, respectively. The currency devaluations contributed approximately 16060 basis points (1.6%(0.6%) and 11090 basis points (1.1%(0.9%) toof the total negative impact on total net merchandise sales, respectively.
40
Comparable Merchandise Sales
We report comparable net merchandise club sales on a “same week” basis with 13 weeks in each quarter beginning on a Monday and ending on a Sunday. The periods are established at the beginning of the fiscal year to provide as close 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. For example,As a result, sales related to our four warehouse club in the Dominican Republicclubs opened on May 3, 2018 will not be used in the calculation of comparable sales until July 2019, and the sales related to our warehouse club opened in Panama on May 1,during calendar year 2019 will not be used in the calculation of comparable sales until July 2020.they have been open for at least the 13 ½ months. Therefore, comparable net merchandise sales includes 40only 41 warehouse clubs for the thirteen and thirty-ninetwenty-six week periods ended June 2, 2019.March 1, 2020.
The following table indicatestables indicate the comparable net merchandise sales in the reportable segments in which we operate and the percentage increase or decreasegrowth in net merchandise sales by segment during fiscal years 2019the thirteen week and 2018.twenty-six week periods ended March 1, 2020 and March 3, 2019.
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| Thirteen Weeks Ended | Thirteen Weeks Ended | |||||||||
|
| June 2, 2019 |
| June 3, 2018 | March 1, 2020 | March 3, 2019 | ||||||
|
| % Increase/(decrease) in comparable net merchandise sales |
| % Increase/(decrease) in comparable net merchandise sales | % Increase/(decrease) in comparable net merchandise sales | % Increase/(decrease) in comparable net merchandise sales | ||||||
Central America |
| (1.8) | % |
| (1.0) | % | 0.1 | % | (2.5) | % | ||
Caribbean |
| 2.9 |
|
| 4.5 |
| 1.3 | 1.7 | ||||
Colombia |
| (4.5) |
|
| 17.9 |
| (0.6) | 1.1 | ||||
Consolidated segments |
| (0.8) | % |
| 2.7 | % | 0.4 | % | (0.9) | % |
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| ||||||
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| Thirty-Nine Weeks Ended | Twenty-Six Weeks Ended | |||||||||
|
| June 2, 2019 |
| June 3, 2018 | March 1, 2020 | March 3, 2019 | ||||||
|
| % Increase/(decrease) in comparable net merchandise sales |
| % Increase/(decrease) in comparable net merchandise sales | % Increase/(decrease) in comparable net merchandise sales | % Increase/(decrease) in comparable net merchandise sales | ||||||
Central America |
| (2.9) | % |
| 0.1 | % | 0.9 | % | (3.5) | % | ||
Caribbean |
| 1.4 |
|
| 5.1 |
| 1.6 | 0.8 | ||||
Colombia |
| 0.6 |
|
| 13.6 |
| (2.9) | 3.1 | ||||
Consolidated segments |
| (1.3) | % |
| 3.0 | % | 0.7 | % | (1.4) | % |
Comparison of Thirteen and Twenty-Six Week PeriodPeriods Ended March 1, 2020 and Thirty-Nine Week Period Ended May 31,March 3, 2019 and 2018
Comparable net merchandise club 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 2, 2019 decreased 0.8% when compared to the prior year.March 1, 2020 increased 0.4%. Comparable net merchandise club sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the thirty-ninetwenty-six week period ended on June 2, 2019 decreased 1.3%March 1, 2020 increased 0.7%.
Comparable net merchandise sales in our Central America segment decreased 1.8%increased 0.1% and 2.9%0.9% for the thirteen week period and the thirty-ninetwenty-six week periodperiods ended June 2, 2019.March 1, 2020. These decreasesincreases contributed approximately 10010 basis points (1.0%(0.1%) and 17050 basis points (1.7%(0.5%) of the decreaseincrease in total comparable merchandise sales, respectively.
For the thirteen week period, the negative economic conditions,weeks ended March 1, 2020, significant foreign currency devaluation, and socio-political conditionsappreciation within our Costa Rica Panama,market as well as strong performances in our Honduras, El Salvador and Nicaragua markets, contributed approximately 150240 basis points (1.5%(2.4%) of the decrease,increase, which was offset by a 50230 basis point (0.5%(2.3%) increasedecrease in Guatemala and El Salvador.Panama. The decreases in Guatemala and Panama are primarily due to cannibalization by the Company’s recent club openings, with two in Panama and one in Guatemala. For the thirty-ninetwenty-six week period this segment’sended March 1, 2020, comparable net merchandise sales were impacted by the openingexperienced growth of our seventh warehouse club10.6% in Costa RicaEl Salvador and 13.6% in an area called Santa Ana. Often times, new warehouse clubs that we open are not far from existing warehouse clubs that are included in the calculation for comparable warehouse club sales resulting in a transfer of some sales from an existing club (inNicaragua, this case Escazu) to the new club. This transfer of sales from existing warehouse clubs that are included in the calculation of comparable merchandise sales to new warehouse clubs that are not included in the calculation can have an adverse impact on reported comparable warehouse club sales. New warehouse clubs attract new members from areas not previously served by us and also create the opportunity for some existing members, particularly those who now find the new clubs closer to their homes or businesses, to shop more frequently. We estimate that the transfer of sales associated with the Santa Ana opening negatively impacted the Central America segment comparable merchandise sales by 50 basis points (0.5%) for the thirty-nine week period ending June 2, 2019. The balance of the decline in comparable merchandise sales for the Central America segment in the thirty-
41
nine week period is attributable to negative economic conditions,growth as well as foreign currency devaluation, and socio-political conditionsappreciation in our Costa Rica Panama, Guatemala, and Nicaragua markets. These conditions market
contributed approximately 150200 basis points (1.5%(2.0%) of the decrease,increase, which was offset by a 30150 basis point (0.3%(1.5%) increasedecrease in HondurasGuatemala and El Salvador.Panama, primarily due to cannibalization.
Comparable net merchandise sales in our Caribbean segment increased 2.9% and 1.4%1.3% for the thirteen week period and thirty-nine week period ended June 2, 2019. These increasesMarch 1, 2020. This increase contributed approximately 8040 basis points (0.8%) and 30 basis points (0.3%(0.4%) of the positive impact in total comparable merchandise sales, respectively.
The opening of our fourth warehouse club insales. For the Dominican Republic in May 2018 impacted this segment’stwenty-six week period ended March 1, 2020, comparable net merchandise sales. We estimate that the transfer of sales associated with this warehouse club opening negatively impacted the in our Caribbean segment comparable merchandise sales byincreased 1.6%, which contributed approximately 50 basis points (0.5%) of positive impact in total comparable merchandise sales.
For the thirteen and 70 basis points (0.7%)twenty-six week periods ended March 1, 2020, all markets in our Caribbean segment, with the exception of the U.S. Virgin Islands, showed strong growth compared to the same period in the prior year. Notably, investments we made in our Jamaica market resulted in 9.6% and 10.6% growth in comparable net merchandise sales for the respective periods.thirteen and twenty-six week periods ended March 1, 2020. In our U.S. Virgin Islands market, comparable net merchandise sales experienced a decline when compared to the same period in prior year. Hurricanes Irma and Maria had a severe impact on the infrastructure of the islands in the fall of calendar year 2017. From that time until the end the first quarter of fiscal year 2020, the Company benefitted from the difficulty other retailers had in becoming fully operational, but those same retailers have rebuilt, contributing to increased competition in that market.
Comparable net merchandise sales in our Colombia segment decreased 4.5%0.6% and 2.9% for the thirteen and twenty-six week period and 0.6% for the thirty-nine week periodperiods ended June 2, 2019. The decreaseMarch 1, 2020. These decreases contributed approximately 6010 basis points (0.6%(0.1%) and 30 basis points (0.3%) of negative impact in total comparable sales for the respective period and 10 basis points (0.1%)period. These declines were largely due to the devaluation of the positive impact in total comparable merchandise sales forColombian peso relative to the respective period.U.S. dollar.
The following table illustratestables illustrate the impact that changes in foreign currency exchange rates had on our comparable merchandise sales in dollars and the percentage change from the thirteen week and thirty-ninetwenty-six week periods ended June 2, 2019.March 1, 2020.
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| ||||||
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| Currency Exchange Rate Fluctuations for the | Currency Exchange Rate Fluctuations for the | |||||||||
|
| Thirteen Weeks Ended | Thirteen Weeks Ended | |||||||||
|
| June 2, 2019 | March 1, 2020 | |||||||||
|
| Amount |
| % change |
| Amount | % change | |||||
Central America |
| $ | (13,057) |
| (3.0) | % | $ | 8,151 | 1.7 | % | ||
Caribbean |
|
| (2,303) |
| (1.1) |
| (4,952) | (2.0) | ||||
Colombia |
|
| (12,136) |
| (13.3) |
| (6,474) | (6.4) | ||||
Comparable merchandise sales |
| $ | (27,496) |
| (3.8) | % | $ | (3,275) | (0.4) | % |
|
|
|
|
|
|
| ||||||
|
| Currency Exchange Rate Fluctuations for the | Currency Exchange Rate Fluctuations for the | |||||||||
|
| Thirty-Nine Weeks Ended | Twenty-Six Weeks Ended | |||||||||
|
| June 2, 2019 | March 1, 2020 | |||||||||
|
| Amount |
| % change |
| Amount | % change | |||||
Central America |
| $ | (42,084) |
| (3.2) | % | $ | 9,967 | 1.1 | % | ||
Caribbean |
|
| (8,149) |
| (1.2) |
| (9,319) | (2.0) | ||||
Colombia |
|
| (25,899) |
| (9.0) |
| (15,237) | (7.9) | ||||
Comparable merchandise sales |
| $ | (76,132) |
| (3.4) | % | $ | (14,589) | (0.9) | % |
Overall, the effectsmix of currency devaluationsfluctuations within our markets had an approximate $27.5$3.3 million and $76.1$14.6 million, or 38040 basis point (3.8%points (0.4%) and 34090 basis points (3.4%(0.9%), of negative constant currency impact on comparable net merchandise sales for the thirteen week and thirty-ninetwenty-six week periods ended June 2, 2019, respectively.March 1, 2020.
Currency devaluationsfluctuations within our Central America segment accounted for approximately 18040 basis points (1.8%(0.4%) and 19060 basis points (1.9%(0.6%) of thepositive impact of currency devaluations onin total comparable merchandise sales for the thirteen and twenty-six week and thirty-nine week period, respectively. Our Costa Rica, Guatemala, Honduras and Nicaragua markets all experienced currency devaluation when compared to the same period last year.
Currency devaluations within our Caribbean segment accounted for approximately 30 basis points (0.3%) and 40 basis points (0.4%) of the impact of currency devaluations on total comparable merchandise sales for the thirteen week and thirty-nine week period, respectively.periods. This is reflective of the offsetting devaluation and appreciation of the mix of currencies within the markets in this segment when compared to the same periodperiods a year ago.
Currency devaluations within our ColombiaCaribbean segment accounted for approximately 17060 basis points (1.7%) and 110 basis points (1.1%(0.6%) of thenegative impact of currency devaluations on total comparable merchandise sales for the thirteen and twenty-six week periods, respectively. Our Dominican Republic and thirty-nineJamaica markets experienced currency devaluation when compared to the same period respectively.last year.
Currency devaluations within our Colombia segment accounted for approximately 80 basis points (0.8%) and 90 basis points (0.9%) of negative impact in total comparable merchandise sales for the thirteen and twenty-six week periods ended March 1, 2020. This reflects the devaluation of the ColombiaColombian peso when compared to the same period a year ago.
42
Membership Income
Membership income is recognized ratably over the one-year life of the membership. The increase in membership income primarily reflects a growth in membership accounts. The table below represents the change in membership income by segment and as a percentage of net merchandise club sales of each segment:
Three Months Ended | |||||||||||||||
February 29, | February 28, | ||||||||||||||
2020 | 2019 | ||||||||||||||
Amount | Increase | % Change | Membership | Amount | |||||||||||
Membership income - Central America | $ | 8,447 | $ | 743 | 9.6 | % | 1.6 | % | $ | 7,704 | |||||
Membership income - Caribbean | 3,768 | 341 | 9.9 | 1.5 | 3,427 | ||||||||||
Membership income - Colombia | 1,878 | 164 | 9.6 | 1.8 | 1,714 | ||||||||||
Membership income - Total | $ | 14,093 | $ | 1,248 | 9.7 | % | 1.6 | % | $ | 12,845 |
Six Months Ended | |||||||||||||||
February 29, | February 28, | ||||||||||||||
2020 | 2019 | ||||||||||||||
Amount | Increase/ | % Change | Membership | Amount | |||||||||||
Membership income - Central America | $ | 16,744 | $ | 1,371 | 8.9 | % | 1.7 | % | $ | 15,373 | |||||
Membership income - Caribbean | 7,446 | 687 | 10.2 | 1.5 | 6,759 | ||||||||||
Membership income - Colombia | 3,649 | 196 | 5.7 | 1.9 | 3,453 | ||||||||||
Membership income - Total | $ | 27,839 | $ | 2,254 | 8.8 | % | 1.7 | % | $ | 25,585 | |||||
Number of accounts - Central America | 881,019 | 37,906 | 4.5 | % | 843,113 | ||||||||||
Number of accounts - Caribbean | 439,785 | 14,783 | 3.5 | 425,002 | |||||||||||
Number of accounts - Colombia | 335,071 | (4,977) | (1.5) | 340,048 | |||||||||||
Number of accounts - Total | 1,655,875 | 47,712 | 3.0 | % | 1,608,163 |
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| Three Months Ended | |||||||||||||
|
| May 31, |
| May 31, | |||||||||||
|
| 2019 |
| 2018 | |||||||||||
|
| Amount |
| Increase/ |
| % Change |
| Membership |
| Amount | |||||
Membership income - Central America |
| $ | 7,908 |
| $ | 38 |
| 0.5 | % |
| 1.8 | % |
| $ | 7,870 |
Membership income - Caribbean |
|
| 3,475 |
|
| 349 |
| 11.2 |
|
| 1.5 |
|
|
| 3,126 |
Membership income - Colombia |
|
| 1,749 |
|
| (107) |
| (5.8) |
|
| 1.9 |
|
|
| 1,856 |
Membership income - Total |
| $ | 13,132 |
| $ | 280 |
| 2.2 | % |
| 1.7 | % |
| $ | 12,852 |
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| Nine Months Ended | |||||||||||||
|
| May 31, |
| May 31, | |||||||||||
|
| 2019 |
| 2018 | |||||||||||
|
| Amount |
| Increase |
| % Change |
| Membership income % to net merchandise club sales |
| Amount | |||||
Membership income - Central America |
| $ | 23,281 |
| $ | (83) |
| (0.4) | % |
| 1.7 | % |
| $ | 23,364 |
Membership income - Caribbean |
|
| 10,235 |
|
| 945 |
| 10.2 |
|
| 1.5 |
|
|
| 9,290 |
Membership income - Colombia |
|
| 5,201 |
|
| (75) |
| (1.4) |
|
| 1.8 |
|
|
| 5,276 |
Membership income - Total |
| $ | 38,717 |
| $ | 787 |
| 2.1 | % |
| 1.7 | % |
| $ | 37,930 |
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Number of accounts - Central America |
|
| 852,013 |
|
| 10,357 |
| 1.2 | % |
|
|
|
|
| 841,656 |
Number of accounts - Caribbean |
|
| 423,987 |
|
| 14,897 |
| 3.6 |
|
|
|
|
|
| 409,090 |
Number of accounts - Colombia |
|
| 342,016 |
|
| 11,927 |
| 3.6 |
|
|
|
|
|
| 330,089 |
Number of accounts - Total |
|
| 1,618,016 |
|
| 37,181 |
| 2.4 | % |
|
|
|
|
| 1,580,835 |
Comparison of Three and NineSix Months Ended May 31,February 29, 2020 and February 28, 2019 and 2018
The number of member accounts during the first ninesix months of fiscal year 20192020 was 2.4%3.0% higher than the year before. Membership income increased 2.1%8.8% over the same period.
The growth in membership accounts and income during fiscal year 20192020 in our Central America segment is primarily the result of the opening of three new warehouse clubs – Santiago de Veraguas and Metropark in Panama and San Cristobal in Guatemala. In our Caribbean market, membership account and income growth was primarily attributable to the opening of the new San IsidroBolivar warehouse club in the Dominican Republic in May 2018. Membership accountsJune 2019. In Colombia, we increased the Diamond membership fee from 75,000 (COP) to 90,000 (COP) (including VAT) beginning in Colombia increasedApril 2019, providing a converted membership price of approximately $26, which has contributed to the increase in membership income as a percentage of merchandise sales during the same period primarily due to an improving economy and the continued growth in the market’s acceptance of the warehouse club concept. Membership accounts in Central America during the same period remained stable at 1.2% growth. The Company’s twelve-month renewal rate was 85% for the nine-month periods ended May 31, 2019 and May 31, 2018.
Additionally, we continued expanding our platinum membership program. During the thirdsecond quarter of fiscal year 2019,2020 compared to the same prior year period. We continued expanding our Platinum membership program during the six months ended February 29, 2020, and we began offering platinum memberships in Honduras in March 2019 along with Jamaica and Barbados both in May 2019. We expectintend to expand our platinumPlatinum membership program to additional markets this year. The annual fee for a Platinum membership in most markets is approximately $75, which is also contributing to the increase in membership income as a percentage of merchandise club sales in our Central America segment where our penetration is the greatest. The Platinum membership 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.
Lastly, our trailing twelve-month renewal rate was 86.0% and 85.0% for the periods ended February 29, 2020 and February 28, 2019, respectively. Growth in membership accounts and income as well as high renewal rates, demonstrate that our members recognize the value we bring and is a key indicator of membership satisfaction and loyalty.
Other Revenue
Other revenue primarily consists of non-merchandise revenue from freight and handling fees generated from our marketplace and casillero operations,operations; miscellaneous income, comprised primarily of revenue from an interest generating portfolio (“IGP”) from our co-branded credit cards,cards; and rental income from operating leases where the Company is the lessor.
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| ||||||||||||
|
| Three Months Ended | Three Months Ended | ||||||||||||||||||||||
|
| May 31, 2019 |
| May 31, 2018 | February 29, 2020 | February 28, 2019 | |||||||||||||||||||
|
| Amount |
| Increase from |
| % Change |
| Amount | Amount | Increase (decrease) from | % Change | Amount | |||||||||||||
Non-merchandise revenue |
| $ | 8,891 |
|
| $ | 1,056 |
| 13.5 | % |
| $ | 7,835 | $ | 10,101 | $ | 201 | 2.0 | % | $ | 9,900 | ||||
Miscellaneous income |
|
| 2,401 |
|
|
| 2,064 |
| 612.5 |
|
|
| 337 | 1,619 | (2,081) | (56.2) | 3,700 | ||||||||
Rental income |
|
| 842 |
|
|
| 105 |
| 14.2 |
|
|
| 737 | 762 | (84) | (9.9) | 846 | ||||||||
Other revenue |
| $ | 12,134 |
|
| $ | 3,225 |
| 36.2 | % |
| $ | 8,909 | $ | 12,482 | $ | (1,964) | (13.6) | % | $ | 14,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Nine Months Ended | Six Months Ended | ||||||||||||||||||||||
|
| May 31, 2019 |
| May 31, 2018 | February 29, 2020 | February 28, 2019 | |||||||||||||||||||
|
| Amount |
| Increase from |
| % Change |
| Amount | Amount | Decrease from | % Change | Amount | |||||||||||||
Non-merchandise revenue |
| $ | 27,910 |
|
| $ | 20,075 |
| 256.2�� | % |
| $ | 7,835 | $ | 18,946 | $ | (73) | (0.4) | % | $ | 19,019 | ||||
Miscellaneous income |
|
| 7,465 |
|
|
| 6,330 |
| 557.9 |
|
|
| 1,135 | 3,228 | (1,836) | (36.3) | 5,064 | ||||||||
Rental income |
|
| 2,470 |
|
|
| 233 |
| 10.4 |
|
|
| 2,237 | 1,501 | (127) | (7.8) | 1,628 | ||||||||
Other revenue |
| $ | 37,845 |
|
| $ | 26,638 |
| 237.7 | % |
| $ | 11,207 | $ | 23,675 | $ | (2,036) | (7.9) | % | $ | 25,711 |
Comparison of Three and NineSix Months Ended May 31,February 29, 2020 and February 28, 2019 and 2018
Other revenue decreased for the quarter and nine-months ended May 31, 2019 includes non-merchandise revenue generated by our marketplace and casillero operations$2.0 million, primarily from freight and handlings charges for on-line orders placed from customers in Latin America to retailersas a result of miscellaneous income decreasing by $2.1 million because of a prior year $2.2 million payment we received in the United States and delivered to locations throughout Latin America from a business we acquired in March 2018. For the quarter, the net increase of $2.1 million in Miscellaneous income was primarily due to a $1.2 million increase mainly resulting from the adoption of the new revenue standard ASC 606 in the firstsecond quarter of fiscal year 2019 which results in interest generating portfolio (“IGP”) income being included in Miscellaneous income. In prior periods, includingfrom the third quarter of fiscal 2018, IGP was recorded as a reduction of general and administrative costs in accordance with the previous revenue guidance in effect at that time. There was also a $666,000 reimbursement, from a credit card vendor for underpayment of income earned on our co-branded credit card IGP. interest generating portfolios balance over several years. Non-merchandise revenue from our marketplace and casillero operations increased primarily due to favorable traffic attributable to Cyber Monday promotions that occurred in December 2019 this year compared to November in the prior year. Additionally, the extra day from leap year, Saturday February 29, impacted non-merchandise revenue favorably versus the same period in the prior year.
For the nine-monthssix months ended May 31, 2019, Miscellaneouson February 29, 2020, miscellaneous income increased $6.3decreased by $1.8 million, of which $3.4 million is theprimarily as a result of the inclusion of IGP in Miscellaneous income. The remaining $2.9$2.2 million is a reimbursement we received during the second and third quarter of thisin fiscal year for underpayment of income earned on our co-branded credit card IGP. 2019 described above.
Results of Operations
|
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|
|
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| ||||||||||||
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| ||||||||||||
|
| Three Months Ended | Three Months Ended | |||||||||||||||||||||
Results of Operations Consolidated |
|
| May 31, 2019 |
|
|
| May 31, 2018 |
|
|
| Increase/(Decrease) |
| February 29, 2020 | February 28, 2019 | Increase | |||||||||
(Amounts in thousands, except percentages and number of warehouse clubs) |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net merchandise sales |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net merchandise sales |
| $ | 755,009 |
|
| $ | 750,473 |
|
| $ | 4,536 |
| $ | 871,726 | $ | 820,290 | $ | 51,436 | ||||||
Merchandise sales gross margin |
| $ | 105,115 |
|
| $ | 109,224 |
|
| $ | (4,109) |
| $ | 128,292 | $ | 114,744 | $ | 13,548 | ||||||
Merchandise sales gross margin percentage |
|
| 13.9 | % |
|
| 14.6 | % |
|
| (0.7) | % | 14.7 | % | 14.0 | % | 0.7 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total revenues |
| $ | 788,556 |
|
| $ | 782,201 |
|
| $ | 6,355 |
| $ | 906,735 | $ | 854,425 | $ | 52,310 | ||||||
Percentage change from prior period |
|
|
|
|
|
|
|
|
|
| 0.8 | % | 6.1 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Comparable merchandise sales |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total comparable merchandise sales increase (decrease) |
|
| (0.8) | % |
|
| 2.7 | % |
|
| (3.5) | % | 0.4 | % | (0.9) | % | 1.3 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Gross margin |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total gross margin |
| $ | 126,669 |
|
| $ | 129,507 |
|
| $ | (2,838) |
| $ | 150,561 | $ | 137,567 | $ | 12,994 | ||||||
Gross margin percentage to total revenues |
|
| 16.1 | % |
|
| 16.6 | % |
|
| (0.5) | % | 16.6 | % | 16.1 | % | 0.5 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Selling, general and administrative |
| $ | 104,672 |
|
| $ | 101,078 |
|
| $ | 3,594 |
| $ | 111,752 | $ | 101,031 | $ | 10,721 | ||||||
Selling, general and administrative percentage of total revenues |
|
| 13.3 | % |
|
| 12.9 | % |
|
| 0.4 | % | 12.3 | % | 11.8 | % | 0.5 | % |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| Three Months Ended | Three Months Ended | |||||||||||||||||||||
|
|
| May 31, |
| % of |
|
| May 31, |
| % of |
| February 29, | % of | February 28, | % of | |||||||||
Results of Operations Consolidated |
|
| 2019 |
| Total Revenue |
|
|
| 2018 |
| Total Revenue |
| 2020 | Total Revenue | 2019 | Total Revenue | ||||||||
Operating income- by segment |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Central America |
| $ | 26,314 |
| 3.4 | % |
| $ | 31,257 |
| 4.0 | % | $ | 37,667 | 4.2 | % | $ | 35,574 | 4.2 | % | ||||
Caribbean |
| 10,295 |
| 1.3 |
|
| 11,538 |
| 1.5 |
| 15,079 | 1.7 | 15,024 | 1.8 | ||||||||||
Colombia |
| 3,294 |
| 0.4 |
|
| 2,989 |
| 0.3 |
| 5,400 | 0.6 | 3,617 | 0.4 | ||||||||||
United States |
|
| 1,139 |
| 0.1 |
|
|
| (883) |
| (0.1) |
| 1,928 | 0.2 | 4,477 | 0.5 | ||||||||
Reconciling Items (1) |
|
| (19,045) |
| (2.4) |
|
|
| (16,472) |
| (2.1) |
| (21,265) | (2.3) | (22,156) | (2.6) | ||||||||
Operating income - Total |
| $ | 21,997 |
| 2.8 | % |
| $ | 28,429 |
| 3.6 | % | $ | 38,809 | 4.3 | % | $ | 36,536 | 4.3 | % |
|
|
(1)The reconciling items reflect the amount eliminated upon consolidation of intersegment transactions.
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Nine Months Ended | Six Months Ended | |||||||||||||||||||||
Results of Operations Consolidated |
|
| May 31, 2019 |
|
|
| May 31, 2018 |
|
|
| Increase/(Decrease) |
| February 29, 2020 | February 28, 2019 | Increase | |||||||||
(Amounts in thousands, except percentages and number of warehouse clubs) |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net merchandise sales |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net merchandise sales |
| $ | 2,322,742 |
|
| $ | 2,312,447 |
|
| $ | 10,295 |
| $ | 1,650,454 | $ | 1,567,733 | $ | 82,721 | ||||||
Merchandise sales gross margin |
| $ | 326,147 |
|
| $ | 334,607 |
|
| $ | (8,460) |
| $ | 244,296 | $ | 221,032 | $ | 23,264 | ||||||
Merchandise gross margin percentage |
|
| 14.0 | % |
|
| 14.5 | % |
|
| (0.5) | % | ||||||||||||
Merchandise sales gross margin percentage | 14.8 | % | 14.1 | % | 0.7 | % | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total revenues |
| $ | 2,422,618 |
|
| $ | 2,388,836 |
|
| $ | 33,782 |
| $ | 1,718,676 | $ | 1,634,062 | $ | 84,614 | ||||||
Percentage change from comparable period |
|
|
|
|
|
|
|
|
|
| 1.4 | % | 5.2 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Comparable merchandise sales |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total calendar comparable merchandise sales increase (decrease) |
|
| (1.3) | % |
|
| 3.0 | % |
|
| (4.3) | % | 0.7 | % | (1.4) | % | 2.1 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Gross margin |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total gross margin |
| $ | 390,693 |
|
| $ | 383,117 |
|
| $ | 7,576 |
| $ | 287,556 | $ | 264,024 | $ | 23,532 | ||||||
Gross Margin percentage to total revenues |
|
| 16.1 | % |
|
| 16.0 | % |
|
| 0.1 | % | ||||||||||||
Gross margin percentage to total revenues | 16.7 | % | 16.2 | % | 0.5 | % | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Selling, general and administrative |
| $ | 307,490 |
|
| $ | 284,258 |
|
| $ | 23,232 |
| $ | 218,033 | $ | 202,818 | $ | 15,215 | ||||||
Selling, general and administrative percentage of total revenues |
|
| 12.7 | % |
|
| 11.9 | % |
|
| 0.8 | % | 12.7 | % | 12.4 | % | 0.3 | % |
Six Months Ended | ||||||||||||
February 29, | % of | February 28, | % of | |||||||||
Results of Operations Consolidated | 2020 | Total Revenue | 2019 | Total Revenue | ||||||||
Operating income- by segment | ||||||||||||
Central America | $ | 69,367 | 4.0 | % | $ | 64,366 | 3.9 | % | ||||
Caribbean | 26,889 | 1.6 | 27,051 | 1.7 | ||||||||
Colombia | 9,924 | 0.6 | 7,033 | 0.4 | ||||||||
United States | 4,516 | 0.3 | 3,427 | 0.2 | ||||||||
Reconciling Items (1) | (41,173) | (2.4) | (40,671) | (2.5) | ||||||||
Operating income - Total | $ | 69,523 | 4.0 | % | $ | 61,206 | 3.7 | % |
Warehouse clubs | |||||||||||
Warehouse clubs at period end | 45 | 41 | 4 | ||||||||
Warehouse club sales square feet at period end | 2,232 | 2,085 | 147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||||||||
|
|
| May 31, |
| % of |
|
|
| May 31, |
| % of |
|
Results of Operations Consolidated |
|
| 2019 |
| Total Revenue |
|
|
| 2018 |
| Total Revenue |
|
Operating income- by segment |
|
|
|
|
|
|
|
|
|
|
|
|
Central America |
| $ | 90,681 |
| 3.7 | % |
| $ | 100,463 |
| 4.2 | % |
Caribbean |
|
| 37,346 |
| 1.5 |
|
|
| 36,763 |
| 1.5 |
|
Colombia |
|
| 10,327 |
| 0.4 |
|
|
| 8,198 |
| 0.4 |
|
United States |
|
| 4,565 |
| 0.2 |
|
|
| 3,354 |
| 0.1 |
|
Reconciling Items (1) |
|
| (59,716) |
| (2.4) |
|
|
| (49,919) |
| (2.1) |
|
Operating income - Total |
| $ | 83,203 |
| 3.4 | % |
| $ | 98,859 |
| 4.1 | % |
(1)The reconciling items reflect the amount eliminated on consolidation of intersegment transactions.
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse clubs |
|
|
|
|
|
|
|
|
|
|
|
Warehouse clubs at period end |
|
| 42 |
|
|
| 41 |
|
|
| 1 |
Warehouse club square feet at period end |
|
| 2,123 |
|
|
| 2,074 |
|
|
| 49 |
The following table summarizes the selling, general and administrative expense for the periods disclosed.
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Three Months Ended |
| Three Months Ended | ||||||||||||||||||||
|
|
| May 31, |
| % of |
|
|
| May 31, |
| % of |
| February 29, | % of | February 28, | % of | ||||||||
|
|
| 2019 |
| Total Revenue |
|
|
| 2018 |
| Total Revenue |
| 2020 | Total Revenue | 2019 | Total Revenue | ||||||||
Warehouse club and other operations |
| $ | 78,231 |
| 9.9 | % |
| $ | 76,259 |
| 9.8 | % | $ | 84,022 | 9.3 | % | $ | 75,708 | 8.9 | % | ||||
General and administrative |
| 24,532 |
| 3.1 |
|
|
| 24,079 |
| 3.1 |
| 27,618 | 3.0 | 24,968 | 2.9 | |||||||||
Pre-opening expenses |
|
| 1,647 |
| 0.3 |
|
|
| 352 |
| — |
| 44 | — | 97 | — | ||||||||
Loss/(gain) on disposal of assets |
|
| 262 |
| — |
|
|
| 388 |
| — |
| ||||||||||||
Loss on disposal of assets | 68 | — | 258 | — | ||||||||||||||||||||
Total Selling, General and Administrative |
| $ | 104,672 |
| 13.3 | % |
| $ | 101,078 |
| 12.9 | % | $ | 111,752 | 12.3 | % | $ | 101,031 | 11.8 | % |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Nine Months Ended |
| Six Months Ended | ||||||||||||||||||||
|
|
| May 31, |
| % of |
|
|
| May 31, |
| % of |
| February 29, | % of | February 28, | % of | ||||||||
|
|
| 2019 |
| Total Revenue |
|
|
| 2018 |
| Total Revenue |
| 2020 | Total Revenue | 2019 | Total Revenue | ||||||||
Warehouse club and other operations |
| $ | 228,161 |
| 9.4 | % |
| $ | 217,712 |
| 9.1 | % | $ | 163,395 | 9.5 | % | $ | 149,930 | 9.2 | % | ||||
General and administrative |
| 76,835 |
| 3.2 |
|
|
| 63,167 |
| 2.7 |
| 53,502 | 3.1 | 52,303 | 3.2 | |||||||||
Pre-opening expenses |
| 1,759 |
| 0.1 |
|
|
| 863 |
| — |
| 997 | 0.1 | 112 | — | |||||||||
Asset impairment |
|
| — |
| — |
|
|
| 1,929 |
| 0.1 |
| ||||||||||||
Loss/(gain) on disposal of assets |
|
| 735 |
| — |
|
|
| 587 |
| — |
| ||||||||||||
Total Selling, General and Administrative |
| $ | 307,490 |
| 12.7 | % |
| $ | 284,258 |
| 11.9 | % | ||||||||||||
Loss on disposal of assets | 139 | — | 473 | — | ||||||||||||||||||||
Total Selling, general and administrative | $ | 218,033 | 12.7 | % | $ | 202,818 | 12.4 | % |
The following table summarizes the costs recorded as part of our consolidation of Aeropost-related activities (net of tax benefit), including costs to expand our omni-channel capabilities, the net operating results of our marketplace and casillero business and ongoing costs we recorded as part of our post-acquisition purchase accounting.
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Nine Months Ended | ||
|
| May 31, 2019 |
|
| May 31, 2019 | ||
Negative impact of Aeropost-related activities (net of tax benefit) on Net income attributable to PriceSmart, Inc., before amortization |
| $ | 1,714 |
|
| $ | 7,415 |
Amortization of intangibles (net of tax benefit) |
|
| 471 |
|
|
| 1,398 |
Amortization of compensation expense |
|
| 694 |
|
|
| 2,167 |
Negative impact of Aeropost-related activities (net of tax benefit) on Net income attributable to PriceSmart, Inc. |
| $ | 2,879 |
|
| $ | 10,980 |
Impact of Aeropost-related activities (net of tax benefit) on earnings per share |
| $ | (0.09) |
|
| $ | (0.36) |
Comparison of Three and NineSix Months Ended May 31,February 29, 2020 and February 28, 2019 and 2018
On a consolidated basis, net merchandise sales gross margin for the thirdsecond quarter of fiscal year 20192020 as a percentage of total net merchandise sales were 13.9%was 14.7%, 70 basis points (0.7%) lowerhigher than the thirdsecond quarter of fiscal year 2018.2019. Net merchandise margins decreasedincreased across all segments with the Central America segment contributing 40 basis points (0.4%), the Caribbean segment contributing 20 basis points (0.2%), and the Colombia segment contributing 10 basis points (0.1%) to the overall decline. The decline was driven largely from pricing actions to drive sales.increase.
For the nine-monthsix-month period, consolidated net merchandise sales gross margin as a percentage of total net merchandise sales were 14.0%was 14.8%, which is 5070 basis points (0.5%(0.7%) lowerhigher than the same period of fiscal year 2018.2019. Net merchandise margins decreasedincreased across all segments with the Central America segment contributing 3040 basis points (0.3%(0.4%), the Caribbean segment contributing 20 basis points (0.2%), and the Caribbean and Colombia segments eachsegment contributing 10 basis pointpoints (0.1%) to the overall decline. The decline was driven largely from pricing actions to drive sales. increase.
Total gross margin to total revenues decreasedincreased 50 basis points (0.5%) for the three-month period presented. The quarter to date decreasethree and six-month periods, which is mainly due to lower net merchandise margins along with lower margins on non-merchandise revenues of our marketplace and casillero business, which decreased the gross margin to total revenues ratio by approximately 10 basis points (0.1%). Membership income, rental income and miscellaneous income gross margin percentage remained unchanged. The reclassification of income generated from the IGP as a result of the implementation of new revenue recognition standards along with a credit card contract incentive increasedincrease in total gross margins by approximately 30 basis points (0.3%) for the quarter.
47
Totalnet merchandise sales gross margin to total revenuesexplained previously. Gross margin during the three and six months ended February 29, 2020 increased 10 basis points (0.1%) for the nine-month period presented. The year to date increase is mainlyprimarily due to higherimproved product margins, on non-merchandise revenues of our marketplaceattributable to more focused merchandising strategies and casillero business, which increased the gross margin to total revenues ratio by approximately 30 basis points (0.3%). Membership income, rental income and miscellaneous income gross margin percentage remained unchanged. The reclassification of income generated from the IGP as a result of the implementation of new revenue recognition standards along with a refund payment from a credit card vendor increased total gross margins by approximately 30 basis points (0.3%) for the year to date period.inventory management.
Selling, general, and administrative expenses consist of warehouse club and other operations, general and administrative expenses, pre-opening expenses, and loss/(gain) on disposal of assets. In total, selling, general and administrative expenses increased $3.6$10.7 million to 13.3%12.3% of total revenues compared to 12.9%11.8% of total revenues in the thirdsecond quarter of fiscal year 2018.2019.
Warehouse club and other operations expense increased to 9.9%9.3% of total revenues compared to 9.8%8.9% for the thirdsecond quarter of fiscal year 2018.2020. This slight increase was primarily attributable to operating an additional four warehouse clubclubs compared to the prior year period. These four new clubs had not reached sales maturity as of February 29, 2020, thus increasing operational expenses by 40 basis points (0.4%) as a percentage of total revenues.
General and administrative expenses remained flat atincreased to 3.0% compared to 2.9% of total revenues for the second quarter of fiscal year 2020. This ten basis points increase (0.1%) as a percentage of total revenues was primarily the result of investments in talent acquisition, development of our employees, and technology spend.
Selling, general and administrative expenses increased $15.2 million to 12.7% of total revenues for the six-month period ended February 29, 2020, compared to 12.4% of total revenues in the same prior year period.
Warehouse club and other operations expense increased to 9.5% of total revenues compared to 9.2% for the six-month period ended fiscal year 2019. This increase was primarily attributable to operating an additional four warehouse clubs compared
to the prior year period. These four new clubs had not reached sales maturity as of February 29, 2020, thus increasing operational expenses by 30 basis points (0.3%) as a percentage of total revenues.
General and administrative expenses decreased to 3.1% of total revenues compared to 3.2% of total revenues for both comparable periods. the six-months ended February 29, 2020 when compared to the same prior year period. In the prior six-months ended February 28, 2019, two non-recurring transactions increased general and administrative expenses. First, was the $3.8 million, or a 20 basis points (0.2%) decrease, recorded in the first quarter of fiscal year 2019 for separation and other related termination benefits for our former Chief Executive Officer and President who resigned in October 2018 by mutual agreement with the Board of Directors. These costs, net of tax, negatively impacted earnings per share for the six months ended February 28, 2019, by $0.13 per share. An additional decrease of approximately $1.5 million, or 10 basis points (0.10%), was due to the expiration of the amortization of post-combination compensation expense related to the Aeropost business we acquired in March 2018. These decreases were offset by increases of $6.5 million, or 40 basis points (0.4%), in general and administrative expenses primarily due to additions to headcount to support technology development and implementation and other administrative functions made during the six-month period ended February 29, 2020.
Pre-opening expenses remained stable in the second quarter ended February 29, 2020 compared to the same prior year period. For the six-months ended February 29, 2020, pre-opening expense increased to $1.3 million$953,000 or 0.2%0.1% of total revenues compared to the prior year period. This increase is attributable to costs incurred to open our 42nd44th and 45th warehouse clubclubs and for the three remainingfour additional warehouse clubs expected to open this calendar year. in our real estate pipeline.
Selling, general, and administrative expenses increased $23.2 million to 12.7% of total revenues for the nine-month period ended May 31, 2019 compared to 11.9% for the same period during fiscal year 2018.
Warehouse club and other operations expense increased to 9.4% of total revenues compared to 9.1% for the nine-month period ended of fiscal year 2018. Our marketplace and casillero business added approximately $8.1 million or 30 basis points (0.3%) for the nine-month period.
General and administrative expenses increased to 3.2% compared to 2.7% for the nine-month period ended fiscal year 2018. Our investments to expand our omni-channel capabilities, together with our marketplace and casillero business added approximately $12.1 million or 50 basis points (0.5%), in costs to this line item for the nine-month period.
Operating income in the thirdsecond quarter of fiscal year 2019 decreased2020 increased to $22.0$38.8 million (2.8%(4.3% of total revenue) compared to $28.4$36.5 million (3.6%(4.3% of total revenue) for the same period last year, whichyear. This reflects the decreaseincrease in gross margins onfrom net merchandise sales, offset by higher selling, general and higheradministrative expenses year-on-year related to investments to expandinvestments in talent acquisition, development of our omni-channel capabilities, together with net operating results from our marketplaceemployees and casillero business.technology spend.
Operating income for the nine-monthssix months ended May 31, 2019, decreasedFebruary 29, 2020 increased to $83.2$69.5 million (3.4%(4.0% of total revenue) compared to $98.9$61.2 million (4.1%(3.7% of total revenue) for the same period last year. As described above, lowerhigher merchandise margins as a percent of sales, offset by incrementally higher expenses year-on-year related to investments to expand our omni-channel capabilities, together with the inclusion for the full nine months ended May 31, 2019 of the net operating results from our marketplacegeneral and casillero business acquired in March 2018administrative expenses were the primary factors for the decreaseoverall 30 basis point (0.3%) increase in operating income.
Interest Expense
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| Three Months Ended | Three Months Ended | |||||||||||||||
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| May 31, |
| May 31, | February 29, | February 28, | ||||||||||||
|
| 2019 |
| 2018 | 2020 | 2019 | ||||||||||||
|
| Amount |
| Increase/ |
| Amount | Amount | Increase | Amount | |||||||||
Interest expense on loans |
| $ | 1,407 |
| $ | (40) |
| $ | 1,447 | $ | 1,781 | $ | 382 | $ | 1,399 | |||
Interest expense related to hedging activity |
|
| 110 |
|
| (167) |
|
| 277 | 596 | 494 | 102 | ||||||
Capitalized interest |
|
| (602) |
|
| (240) |
|
| (362) | (687) | (187) | (500) | ||||||
Net interest expense |
| $ | 915 |
| $ | (447) |
| $ | 1,362 | $ | 1,690 | $ | 689 | $ | 1,001 |
Six Months Ended | |||||||||
February 29, | February 28, | ||||||||
2020 | 2019 | ||||||||
Amount | Increase | Amount | |||||||
Interest expense on loans | $ | 3,046 | $ | 244 | $ | 2,802 | |||
Interest expense related to hedging activity | 857 | 587 | 270 | ||||||
Less: Capitalized interest | (1,351) | (313) | (1,038) | ||||||
Net interest expense | $ | 2,552 | $ | 518 | $ | 2,034 |
48
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| Nine Months Ended | |||||||
|
| May 31, |
| May 31, | |||||
|
| 2019 |
| 2018 | |||||
|
| Amount |
| Increase/ |
| Amount | |||
Interest expense on loans |
| $ | 4,209 |
| $ | 425 |
| $ | 3,784 |
Interest expense related to hedging activity |
|
| 380 |
|
| (394) |
|
| 774 |
Less: Capitalized interest |
|
| (1,640) |
|
| (691) |
|
| (949) |
Net interest expense |
| $ | 2,949 |
| $ | (660) |
| $ | 3,609 |
Comparison of Three and NineSix Months Ended May 31,February 29, 2020 and February 28, 2019 and 2018
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, warehouse club expansions and distribution centers, the capital requirements of warehouse club and other operations and ongoing working capital requirements.
Net interest expense decreased for the three- and nine-month periods ended May 31, 2019. Interest expense related to loans decreased for the three- month period ended May 31, 2019 due to lower average loan balances, while the expense increased for the nine-month periodthree and six month periods ended May 31, 2019February 29, 2020 primarily due to higher variable interest rates.average loan balances. Interest expense related to hedging activity decreased during the three- and nine-month periodsincreased due to the pay-offan increase in hedging activity as we seek to mitigate our exposure to interest rate risk on our recently executed loan agreements to finance our anticipated warehouse club openings in fiscal year 2020 and 2021. A greater portion of the various loans held by our subsidiaries that were hedged and the remaining hedged loans having positive, or “in the money,” positions. Additionaltotal interest was capitalized interest for the three-three and nine-monthsix month periods of fiscal year 2019 comparedended February 29, 2020 due to fiscal year 2018 resulted from higher levels of construction activities. activities during the period.
Other Income (Expense)income (expense), net
Other income (expense), net consists of currency gaingains or loss,losses, as well as net benefit costs related to our defined benefit plans.plans and the one time settlement of a business combination escrow account.
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| Three Months Ended | ||||||||||
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| May 31, |
| May 31, | ||||||||
|
| 2019 |
| 2018 | ||||||||
|
| Amount |
| Increase from prior year |
| %Change |
| Amount | ||||
Other income (expense), net |
| $ | 159 |
| $ | 734 |
| 127.7 | % |
| $ | (575) |
Three Months Ended | ||||||||||||
February 29, | February 28, | |||||||||||
2020 | 2019 | |||||||||||
Amount | Increase | % Change | Amount | |||||||||
Other income (expense), net | $ | 723 | $ | 1,095 | 294.4 | % | $ | (372) |
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| Nine Months Ended | ||||||||||
|
| May 31, |
| May 31, | ||||||||
|
| 2019 |
| 2018 | ||||||||
|
| Amount |
| (Decrease) from prior year |
| %Change |
| Amount | ||||
Other income (expense), net |
| $ | (2,032) |
| $ | (1,945) |
| (2,235.6) | % |
| $ | (87) |
Six Months Ended | ||||||||||||
February 29, | February 28, | |||||||||||
2020 | 2019 | |||||||||||
Amount | Increase | % Change | Amount | |||||||||
Other expense, net | $ | (262) | $ | 1,929 | 88.0 | % | $ | (2,191) |
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 that the functional currency of the respective entity also generate currency gains or losses.
49
Comparison of Three and NineSix Months Ended May 31,February 29, 2020 and February 28, 2019 and 2018
For the three-month periodthree and six months ended May 31, 2019, we had aFebruary 29, 2020 Other income (expense), net included $755,000 of net gain and $902,000 of net expense, respectively, associated with foreign currency transactions and the revaluation of approximately $192,000. For the nine-month period ended May 31, 2019, we had a net expense associated with foreign currency transactions of approximately $1.9 million.monetary assets and liabilities. These gains and losses resulted from the revaluation of net U.S. dollar assets and liabilities in markets where the local functional currency revalued or devalued against the U.S. dollar, and from exchange transactions, net of any exchange reserve movements. The main driver of the gain in the quarter and the loss for the year to date period is attributable to movements in the Jamaican dollar. Although, the Jamaican dollar depreciated resulting in a gain of $406,000 for
For the three-month period, the net gain is attributable primarily to foreign currency transactions. For the six months ended May 31, 2019, we incurred a $1.2 million lossFebruary 29, 2020, the primary driver for the nine-month period ended May 31, 2019 duenet expense was $902,000 of net expense associated with foreign currency transactions, offset by a $705,000 gain resulting from the settlement of outstanding claims related to the Jamaican dollar appreciating 7.6% during the first seven months of this fiscal year. The appreciationacquisition of the Jamaican dollar adversely affected the overall valuebusiness that we purchased in March of our Jamaican assets due to our having an average U.S. dollar net asset position2018.
Provision for Income Taxes
U.S. Tax Reform in December 2017 lowered the federal corporate tax rate from 35% to 21% and made numerous other law changes. The table below summarizes the effect that U.S. Tax Reform had on net income and earnings per share attributable to PriceSmart available for distribution:
Three Months Ended | |||||||||||
February 29, | February 28, | ||||||||||
2020 | 2019 | ||||||||||
Amount | Increase from prior year | Amount | |||||||||
Provision for income taxes | $ | 12,702 | $ | 999 | $ | 11,703 | |||||
Effective tax rate | 33.1 | % | 32.9 | % |
Six Months Ended | |||||||||||
February 29, | February 28, | ||||||||||
2020 | 2019 | ||||||||||
Amount | Increase | Amount | |||||||||
Provision for income taxes | $ | 22,105 | $ | 2,862 | $ | 19,243 | |||||
Effective tax rate | 32.7 | % | 33.3 | % |
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| Three Months Ended |
| Nine Months Ended | ||||||||
(In thousands, except per share amounts) |
| May 31, |
| May 31, |
| May 31, |
| May 31, | ||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and |
| $ | 21,551 |
| $ | 26,862 |
| $ | 79,346 |
| $ | 96,301 |
Provision for income taxes calculated prior to U.S. tax law change |
|
| (6,568) |
|
| (9,204) |
|
| (26,553) |
|
| (29,231) |
U.S. Tax Reform: Current tax rate reduction |
|
| 557 |
|
| 587 |
|
| 1,666 |
|
| 2,014 |
U.S. Tax Reform: Re-measurement of net deferred tax assets/liabilities |
|
| — |
|
| 489 |
|
| — |
|
| (333) |
U.S. Tax Reform: Other tax incentives |
|
| 317 |
|
| — |
|
| 951 |
|
| — |
Incidental to U.S. Tax Reform: Valuation Allowances on Deferred Tax Assets |
|
| (1,784) |
|
| — |
|
| (2,785) |
|
| — |
U.S. Tax Reform: Transition Tax |
|
| — |
|
| — |
|
| — |
|
| (13,400) |
Subtotal of U.S. Tax Reform Effects |
|
| (910) |
|
| 1,076 |
|
| (168) |
|
| (11,719) |
Total provision for income taxes |
| $ | (7,478) |
| $ | (8,128) |
| $ | (26,721) |
| $ | (40,950) |
Income (loss) of unconsolidated affiliates |
|
| (4) |
|
| (18) |
|
| (48) |
|
| 3 |
Net income |
| $ | 14,069 |
| $ | 18,716 |
| $ | 52,577 |
| $ | 55,354 |
Less: net income (loss) attributable to noncontrolling interest |
|
| 27 |
|
| (22) |
|
| (59) |
|
| (22) |
Net income attributable to PriceSmart, Inc. |
| $ | 14,096 |
| $ | 18,694 |
| $ | 52,518 |
| $ | 55,332 |
Net income attributable to PriceSmart, Inc. per share available for distribution: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
| $ | 0.46 |
| $ | 0.61 |
| $ | 1.73 |
| $ | 1.82 |
Diluted net income per share |
| $ | 0.46 |
| $ | 0.61 |
| $ | 1.73 |
| $ | 1.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal of U.S. Tax Reform Effects |
| $ | (910) |
| $ | 1,076 |
| $ | (168) |
| $ | (11,719) |
Impact of U.S Tax Reform on basic and diluted net income per share |
| $ | (0.03) |
| $ | 0.03 |
| $ | — |
| $ | (0.38) |
50
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| Three Months Ended | |||||||||
|
| May 31, |
| May 31, | |||||||
|
| 2019 |
| 2018 | |||||||
|
| Amount |
| Increase/ |
| Amount | |||||
Current tax expense |
| $ | 9,298 |
|
| $ | 1,039 |
| $ | 8,259 |
|
Net deferred tax provision (benefit) |
|
| (1,820) |
|
|
| (1,689) |
|
| (131) |
|
Provision for income taxes |
| $ | 7,478 |
|
| $ | (650) |
| $ | 8,128 |
|
Effective tax rate |
|
| 34.7 | % |
|
|
|
|
| 30.3 | % |
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| Nine Months Ended | |||||||||
|
| May 31, |
| May 31, | |||||||
|
| 2019 |
| 2018 | |||||||
|
| Amount |
| Increase/ |
| Amount | |||||
Current tax expense |
| $ | 29,457 |
|
| $ | (4,956) |
| $ | 34,413 |
|
Net deferred tax provision (benefit) |
|
| (2,736) |
|
|
| (9,273) |
|
| 6,537 |
|
Provision for income taxes |
| $ | 26,721 |
|
| $ | (14,229) |
| $ | 40,950 |
|
Effective tax rate |
|
| 33.7 | % |
|
|
|
|
| 42.5 | % |
Comparison of Three and NineSix Months Ended May 31,February 29, 2020 and February 28, 2019 and 2018
For the three months ended May 31, 2019,February 29, 2020, the effective tax rate was 34.7%33.1%. The increase in the effective tax rate versus the prior year was primarily attributable to the following factors:
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|
|
|
A comparably unfavorable net impact of 3.6% in the current period resulting from the loss of benefit of foreign tax credits, which are no longer recoverable as a result of U.S. Tax Reform; and
A comparably favorable impact of 2.7% resulting from changes in income tax liabilities for uncertain tax positions.
For the ninesix months ended May 31, 2019,February 29, 2020, the effective tax rate was 33.7%32.7%. The decrease in the effective tax rate versus the prior year was primarily attributable to the following factors:
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|
|
|
A comparably unfavorable net impact of 3.3% in the current period resulting from the loss of benefit of foreign tax credits, which are no longer recoverable as a result of U.S. Tax Reform;
The comparably favorable impact of 1.4% resulting from non-deductible separation costs, in the prior period, associated with the departure of our former CEO;
A comparably favorable impact of 0.8% resulting from changes in income tax liabilities for uncertain tax positions; and
The comparably favorable impact of 0.7% in the current period from the effect of changes in foreign currency value.
Other Comprehensive Income (Loss)Loss
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| Three Months Ended | ||||||||||
|
| May 31, |
| May 31, | ||||||||
|
| 2019 |
| 2018 | ||||||||
|
| Amount |
| (Decrease) from prior year |
| % Change |
| Amount | ||||
Other comprehensive income (loss) |
| $ | (11,059) |
| $ | (8,719) |
| (372.6) | % |
| $ | (2,340) |
Three Months Ended | ||||||||||||
February 29, | February 28, | |||||||||||
2020 | 2019 | |||||||||||
Amount | (Decrease) | % Change | Amount | |||||||||
Other comprehensive income (loss) | $ | (5,049) | $ | (9,401) | 216.0 | % | $ | 4,352 |
Six Months Ended | ||||||||||||
February 29, | February 28, | |||||||||||
2020 | 2019 | |||||||||||
Amount | Increase from prior year | % Change | Amount | |||||||||
Other comprehensive loss | $ | (8,234) | $ | 660 | (7.4) | % | $ | (8,894) |
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| Nine Months Ended | ||||||||||
|
| May 31, |
| May 31, | ||||||||
|
| 2019 |
| 2018 | ||||||||
|
| Amount |
| (Decrease) |
| % Change |
| Amount | ||||
Other comprehensive income (loss) |
| $ | (19,952) |
| $ | (21,443) |
| (1,438.2) | % |
| $ | 1,491 |
Comparison of Three and NineSix Months Ended May 31,February 29, 2020 and February 28, 2019 and 2018
Our other comprehensive loss of approximately $11.1$5.0 million for the thirdsecond quarter of fiscal year 20192020 resulted primarily from the comprehensive loss of approximately $9.7$3.4 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, combined with comprehensive lossadditional losses of approximately $1.4$1.7 million related to unrealized gainslosses on changes in derivative obligations. When the functional currency in our international subsidiaries is the local currency and not U.S. dollars, the assets and liabilities of such 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 differences are recorded as a component of accumulated other comprehensive income or loss. These adjustments would not affect net income unless the underlying investment in our local subsidiaries were liquidated. The reported other comprehensive income or loss reflects the unrealized increase or decrease in the value in U.S. dollars of the net assets of the subsidiaries as of the date of the balance sheet, which will vary from period to period as exchange rates fluctuate. The change year over year for the three months ended is primarily due to higher foreign currency translation adjustments of $7.2 million and losses on our derivative instruments of $1.5 million. For the nine months ended May 31, 2019, other comprehensive loss of approximately $20.0 million resulted primarily from a comprehensive loss of approximately $18.0 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. Additionally, there was a comprehensive loss of approximately $2.1 million related to unrealized gains on changes in derivative obligations. The change year over year for the nine months ended is primarily due to higher foreign currency translation adjustments of $17.8 million and losses on our derivative instruments of $3.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Financial Position and Cash Flow
Our operations have historically supplied us with a significant source of liquidity. 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 when necessary.
The following table summarizes There is some uncertainty surrounding the cashpotential impact of the novel coronavirus outbreak (COVID-19) on our results of operations and cash equivalents held byflows. As a result, we are proactively taking steps to increase cash available on-hand, including, but not limited to, drawing funds on our foreign subsidiariesshort-term facilities and domestically (in thousands). delaying strategic capital expenditures. Refer to the Notes to Consolidated Financial Statements – Note 11 – Subsequent Events for additional information regarding our drawdown on our short-term facilities subsequent to the reporting period ended February 29, 2020. We also are considering and planning for additional cost savings measures in the U.S. and in the markets where we operate.
Repatriation of cash and cash equivalents held by foreign subsidiaries may require us to accrue and pay taxes. We have no plans at this time to repatriate cash through the payment of cash dividends by our foreign subsidiaries to our domestic operations and, therefore, have not accrued taxes that would be due from repatriation.
52
The following table summarizes the cash and cash equivalents, including restricted cash, held by our foreign subsidiaries and domestically (in thousands).
February 29, | August 31, | |||||
2020 | 2019 | |||||
Amounts held by foreign subsidiaries | $ | 134,101 | $ | 98,964 | ||
Amounts held domestically | 2,668 | 7,272 | ||||
Total cash and cash equivalents, including restricted cash | $ | 136,769 | $ | 106,236 |
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|
|
|
|
|
|
|
|
|
| May 31, |
| August 31, | ||
|
| 2019 |
| 2018 | ||
Amounts held by foreign subsidiaries |
| $ | 95,915 |
| $ | 79,454 |
Amounts held domestically |
|
| 18,068 |
|
| 17,460 |
Total cash and cash equivalents, including restricted cash |
| $ | 113,983 |
| $ | 96,914 |
The following table summarizes the short-term investments held by our foreign subsidiaries and domestically (in thousands).
February 29, | August 31, | |||||
2020 | 2019 | |||||
Amounts held by foreign subsidiaries | $ | 30,448 | $ | 17,045 | ||
Amounts held domestically | — | — | ||||
Total short-term investments | $ | 30,448 | $ | 17,045 |
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| May 31, |
| August 31, | ||
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| 2019 |
| 2018 | ||
Amounts held by foreign subsidiaries |
| $ | 17,023 |
| $ | 32,304 |
Amounts held domestically |
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| — |
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| — |
Total short-term investments |
| $ | 17,023 |
| $ | 32,304 |
As of February 29, 2020, certificates of deposits with a maturity of over a year held by our foreign subsidiaries and domestically were $1.5 million. There were no certificates of deposits with a maturity of over a year held by our foreign subsidiaries or domestically as of August 31, 2019.
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. Since fiscal year 2017, we have experienced this situation in Trinidad and have been unable to source a sufficient level of tradeable currencies in Trinidad. We are working with our banks in Trinidad to source tradeable currencies. We expect the illiquid market conditions in Trinidad to continue. See Item 2 “Management’s Discussion & Analysis – Factors Affecting Our Business” for our quantitative analysis and discussion.
Our cash flows are summarized as follows (in thousands):
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| Nine Months Ended | |||||||
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| May 31, |
| May 31, |
| Increase/ | |||
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| 2019 |
| 2018 |
| (Decrease) | |||
Net cash provided by (used in) operating activities |
| $ | 112,952 |
| $ | 90,787 |
| $ | 22,165 |
Net cash provided by (used in) investing activities |
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| (70,971) |
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| (152,180) |
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| 81,209 |
Net cash provided by (used in) financing activities |
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| (21,547) |
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| (12,411) |
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| (9,136) |
Effect of exchange rates |
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| (3,365) |
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| (985) |
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| (2,380) |
Net increase (decrease) in cash and cash equivalents |
| $ | 17,069 |
| $ | (74,789) |
| $ | 91,858 |
Six Months Ended | |||||||||
February 29, | February 28, | Increase/ | |||||||
2020 | 2019 | (Decrease) | |||||||
Net cash provided by operating activities | $ | 89,065 | $ | 76,300 | $ | 12,765 | |||
Net cash (used in) investing activities | (85,721) | (53,817) | (31,904) | ||||||
Net cash provided by (used in) financing activities | 24,422 | (19,833) | 44,255 | ||||||
Effect of exchange rates | 2,767 | (1,487) | 4,254 | ||||||
Net increase in cash and cash equivalents | $ | 30,533 | $ | 1,163 | $ | 29,370 |
We reported a year-on-yearNet cash provided by operating activities totaled $89.1 million and $76.3 million for the six months ended February 29, 2020 and February 28, 2019, respectively. Our cash flow provided by operations is primarily derived from net merchandise sales and membership fees. Cash flows used in operations generally consist of payments to our merchandise vendors, warehouse operating costs (including payroll, employee benefits and utilities), as well as payments for income taxes. The $12.8 million increase in net cash provided by operating activities was primarily due to an increase of net income of $6.9 million and a net increase of $5.2 million due to net working capital improvements. The $5.2 million net working capital improvement is the result of a $22.1 million reduction in merchandise inventory offset by $16.9 million more cash and cash equivalents used of approximately $91.9 million. The primary factors in the year-on-year improvementpayment of merchandise payables over the comparable six-months ended February 29, 2020 and February 28, 2019.
Net cash used in investing activities totaled $85.7 million and $53.8 million for the usesix months ended February 29, 2020 and February 28, 2019, respectively. Our cash used in investing activities is primarily for the construction of cash were changesand improvements to our warehouse clubs. The $31.9 million increase in cash used in investing activities is primarily the result of a net $23.7 million increase in short-term and long-term certificate of deposit purchases and fewer settlements compared to the same six-month period a year-ago. We also had $8.2 million of additional construction expenditures made for our future warehouse club openings versus the same six-month period a year ago.
Net cash provided by operatingfinancing activities offset by cash used in financing activities. Net cash used in investing activities decreased approximately $81.2 million year-on-year. This was primarily due to the year-on-year net decrease in cash used for short-term investments of approximately $58.7totaled $24.4 million and net cash paid for Aeropost of $23.9 million in the prior period. The primary driver of the decrease in cash used in short-term investments is greater purchases of surplus hard currency (such as Euros and US dollars) in Trinidad compared to the prior year period. The increase in cash provided from operating activities was approximately $22.2 million. This was primarily due to the year-on-year increase in accounts payable due to timing of payments, a year-on-year decrease in cash used for inventory, and a year-on-year increase in stock-based compensation of approximately $20.8 million, $9.6 million, and $5.0 million, respectively. These factors positively affecting net cash provided by operating activities were offset by a year-on-year decrease in deferred income taxes, the absence of impairment charges in the current year, and a year-on-year net decrease of other operating assets and liabilities of approximately $9.3 million, $1.9 million, and $1.5 million, respectively. The year-on-year increases in cash provided by operating activities were offset by year-on-year increases in cash used in financing activities were $19.8 million for the six months ended February 29, 2020 and February 28, 2019, respectively. Our cash flows provided or used for financing activities are used primarily to fund our working capital needs and our warehouse club expansions and investments. The $44.3 million increase in cash provided by financing activities is primarily the result of $9.1a net increase of proceeds from long-term borrowings of $45.8 million which primarily relatescompared to payments on oura year ago, as we did not have any additional long-term debt.borrowings in fiscal year 2019. This cash provided by long-term borrowings was offset by a net $3.8 million change of cash used in the borrowing and repayment of short-term borrowings, compared to the same six-month period a year-ago.
The following table summarizes the dividends declared and paid during fiscal year 2020 and 2019 and 2018. (amounts are per share).
First Payment | Second Payment | ||||||||||||||||||||
Declared | Amount | Record | Date | Date | Amount | Record | Date | Date | Amount | ||||||||||||
2/6/2020 |
| $ | 0.70 |
| 2/15/2020 |
| 2/28/2020 |
| N/A |
| $ | 0.35 |
| 8/15/2020 |
| N/A |
| 8/31/2020 |
| $ | 0.35 |
1/30/2019 |
| $ | 0.70 |
| 2/15/2019 |
| 2/28/2019 |
| N/A |
| $ | 0.35 |
| 8/15/2019 |
| 8/30/2019 |
| N/A |
| $ | 0.35 |
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| First Payment |
| Second Payment | ||||||||||||||
Declared |
| Amount |
| Record |
| Date |
| Date |
| Amount |
| Record |
| Date |
| Date |
| Amount | |||
1/30/2019 |
| $ | 0.70 |
| 2/15/2019 |
| 2/28/2019 |
| N/A |
| $ | 0.35 |
| 8/15/2019 |
| N/A |
| 8/30/2019 |
| $ | 0.35 |
1/24/2018 |
| $ | 0.70 |
| 2/14/2018 |
| 2/28/2018 |
| N/A |
| $ | 0.35 |
| 8/15/2018 |
| 8/31/2018 |
| N/A |
| $ | 0.35 |
53
We anticipate the ongoing payment of semi-annual dividends in subsequent periods, although the actual declaration of future dividends, 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.
Short-Term Borrowings and Long-Term 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):
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| Facilities Used |
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| ||||
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| Total Amount |
| Short-term |
| Letters of |
| Facilities |
| Weighted average |
| ||||
|
| of Facilities |
| Borrowings |
| Credit |
| Available |
| interest rate |
| ||||
May 31, 2019 |
| $ | 69,000 |
| $ | 2,152 |
| $ | 572 |
| $ | 66,276 |
| 6.5 | % |
August 31, 2018 |
| $ | 69,000 |
| $ | — |
| $ | 632 |
| $ | 68,368 |
| — | % |
As of May 31, 2019 and August 31, 2018, the Company had approximately $40.0 million of short-term facilities in the U.S. that require compliance with certain quarterly financial covenants. As of May 31, 2019 and August 31, 2018, the Company was in compliance with respect to these covenants. Each of the facilities expires annually except for the U.S. facility, which expires bi-annually. The facilities are normally renewed.
The following table provides the changes in our long-term debt for the nine months ended May 31, 2019:
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(Amounts in thousands) |
| Current |
| Long-term |
| Total |
| |||
Balances as of August 31, 2018 |
| $ | 14,855 |
| $ | 87,720 |
| $ | 102,575 | (1) |
Regularly scheduled loan payments |
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| (2,838) |
|
| (6,671) |
|
| (9,509) |
|
Reclassifications of long-term debt |
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| 11,644 |
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| (11,644) |
|
| — |
|
Translation adjustments on foreign currency debt of subsidiaries whose functional currency is not the U.S. dollar (2) |
|
| (181) |
|
| 71 |
|
| (110) |
|
Balances as of May 31, 2019 |
| $ | 23,480 |
| $ | 69,476 |
| $ | 92,956 | (3) |
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As of May 31, 2019, the Company had approximately $86.0 million of long-term loans in the U.S., Trinidad, Panama, El Salvador, Honduras, Costa Rica, Barbados and Colombia that require compliance with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of May 31, 2019, the Company was in compliance with all covenants or amended covenants.
As of August 31, 2018, the Company had approximately $93.6 million of long-term loans in Trinidad, Panama, El Salvador, Honduras, Costa Rica, Barbados and Colombia that require these subsidiaries to comply with certain annual or quarterly financial covenants. As of August 31, 2018, the Company was in compliance with all covenants or amended covenants.
Derivatives
We are exposed to certain risks relating to our ongoing business operations. We manage the exposure associated with interest rate and foreign currency exchange rate risks by using derivative financial instruments. The objective of entering into derivativesOur financing strategy is to eliminate the variabilityensure liquidity and access to capital markets while minimizing our borrowing costs. The proceeds of cash flows resulting from changes in interest ratesthese borrowings were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, acquisitions, and foreign currency exchange rates associated with servicing our debtrepayment of existing debt. Please see Note 7 – Debt for further discussion.
Derivatives
Please see Note 8 – Derivative Instruments and our subsidiaries’ merchandise-related foreign currency commitments. We measure the fair valueHedging Activities for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis during the reporting period.further discussion.
54
The following table summarizes the effect of the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that we have designated and qualify for derivative hedge accounting and its associated tax effect on accumulated other comprehensive (income) / loss (in thousands):
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| May 31, 2019 |
| August 31, 2018 | ||||||||||||||
Derivatives designated as cash flow hedging instruments |
| Balance Sheet |
| Fair |
| Net Tax |
| Net |
| Fair |
| Net Tax |
| Net | ||||||
Cross-currency interest rate swaps |
| Other non-current assets |
| $ | 2,741 |
| $ | (862) |
| $ | 1,879 |
| $ | 2,405 |
| $ | (819) |
| $ | 1,586 |
Interest rate swaps |
| Other non-current assets |
|
| 1 |
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| — |
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| 1 |
|
| 1,959 |
|
| (434) |
|
| 1,525 |
Interest rate swaps |
| Other long-term liabilities |
|
| (587) |
|
| 154 |
|
| (433) |
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| (8) |
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| 2 |
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| (6) |
Cross-currency interest rate swaps |
| Other long-term liabilities |
|
| (574) |
|
| 172 |
|
| (402) |
|
| (494) |
|
| 148 |
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| (346) |
Net fair value of derivatives designated as hedging instruments |
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| $ | 1,581 |
| $ | (536) |
| $ | 1,045 |
| $ | 3,862 |
| $ | (1,103) |
| $ | 2,759 |
From time to time, we enter into non-deliverable forward exchange contracts. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting. As of May 31, 2019 and August 31, 2018, the Company did not have any open non-deliverable forward foreign-exchange contracts.
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. We do not currently have a stock repurchase program. 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. shares in the future.
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| Nine Months Ended | ||||
|
| May 31, |
| May 31, | ||
|
| 2019 |
| 2018 | ||
Shares repurchased |
|
| 51,144 |
|
| 22,519 |
Cost of repurchase of shares (in thousands) |
| $ | 3,145 |
| $ | 1,916 |
We have reissued treasury shares as part of our stock-based compensation programs. During the ninesix months ended May 31, 2019February 29, 2020 the Company reissued 63,00094,000 treasury shares. We did not reissue any treasury shares during the first nine months of fiscal 2018.
55
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: We account forTaxes
For interim reporting, we estimate an annual effective tax rate (AETR) pursuant to ASC 740-279, to calculate income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the futureexpense. Our income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized. As of May 31, 2019, we evaluated ourexpense, deferred tax assets and liabilities, and determined that a valuation allowance was necessaryliabilities for certain deferredunrecognized tax asset balances, primarily because of the existence of significant negative objective evidence, such as the fact that certain subsidiaries are in a cumulative loss position for the past three years, indicating that certain net operating loss carry-forward periods are not sufficient to realize the related deferred tax assets. We also specifically considered whether foreign tax credit balances could be utilized in the foreseeable future in lightbenefits reflect management’s best estimate of current and future U.S. tax liabilities.taxes to be paid. We have historically appliedare subject to income taxes in the United States and numerous foreign tax credits, generated from taxes withheld on certain payments PriceSmart receives from its foreign subsidiaries, to reduce U.S.jurisdictions. Significant judgments and estimates are required in the determination of the consolidated income tax liabilities. However, as an incidentalexpense. 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 U.S.deferred tax reform, following the reductionliabilities, projected future taxable income, tax-planning strategies, and results of the U.S. corporaterecent operations. In projecting future taxable income, tax rate from 35% to 21%, we expect foreign tax credits generated to exceed U.S. income tax liabilitybegin with historical results adjusted for the foreseeable future. Therefore, asresults of May 31, 2019,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 have recorded a valuation allowanceare using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of $2.8 million against our foreign tax credits.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 we pay. 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 less than 50% 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 as of May 31, 2019February 29, 2020 and August 31, 2018. 2019.
Tax Receivables: Receivables
We pay a Value Added Tax (“VAT”) or similar taxes (“input VAT”), 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 acquiresacquire and/or on sales and taxable income. We also collect VAT or similar taxes on behalf of the government (“output VAT”) for merchandise and/or services we sell. If the output VAT exceeds the input VAT, then the difference is remitted to the government, usually on a monthly basis. If the input VAT exceeds the output VAT, this creates a VAT 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 card directly to the government as advance payments of VAT and/or income tax. In the case of VAT, these procedures alter the natural offset of input and output VAT and generally leave us with a net VAT receivable, forcing us to process significant refund claims on a recurring basis. 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. We either request a refund of these tax receivables or apply the balance to expected future tax payments. These refund or offset processes can take anywhere from several months to several years to complete.
In most countries where we operate, the VAT refund process isCompany operates, there are defined and structured withprocesses to recover VAT receivables via regular refunds or offsets. However, we, together with our tax and legal advisers, is currently seeking clarification in court in one country without a clearly defined refund process, but where we expectthe Company is actively engaged with the local government to prevail. The balance of therecover VAT receivable in the country with undefined refund mechanisms was approximately $4.3receivables totaling $6.1 million and $3.1$5.1 million as of May 31, 2019February 29, 2020 and August 31, 2018,2019, respectively. In another country in which we have warehouse clubs, beginning in fiscal year 2015, a newtwo other countries, minimum income tax mechanism took effect,
56
which requires usrules require the Company to pay taxes based on a percentage of sales rather than income. As a result, we arethe Company is making income tax payments substantially in excess of those weit would expect to pay based on taxable income. The rules (which we have challenged in court) effective for fiscal years 2015 to 2018 do not clearly allow us to obtain a refund or offset this excessCompany had income tax against other taxes. Asreceivables of May 31, 2019, we had$9.7 million and $7.8 million and deferred tax assets of approximately $2.3$2.9 million in this country. Also, we had an income tax receivable balance of $7.5and $2.7 million as of MayFebruary 29, 2020 and August 31, 2019, respectively, in these countries. While the rules related to excess payments from fiscal year 2015 to 2019. Inrefunds of income tax receivables in these countries are either unclear or complex, the third quarter of fiscal year 2018, a revised minimum tax law was passed in this country, which beginning in fiscal year 2020 will reduce the minimum tax rate. Additionally, this law clarifies rules on a go-forward basis for reimbursement of excess minimum tax paid beginning in fiscal year 2019, but not for prior years. Nevertheless, we haveCompany has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets, because we believethe Company believes that it is more likely than not that weit will ultimately succeed in theseits refund requests, related appeals and/or court challenge on these matters.requests.
Our policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:
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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 its recovery of such balances. We do not currently have any allowances provided against VAT and income tax receivables.
Long-lived Assets:
We periodically evaluate quarterly our long-lived assets for indicators of impairment. Indicators that an asset may be impaired are:
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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. Loss/(gain) on disposal of assets recorded during the years reported resulted from improvements to operations and normal preventive maintenance.
Business Combinations: We appliedGoodwill and Other Indefinite-Lived Intangibles
Goodwill and other indefinite-lived acquired intangible assets are not amortized, but are evaluated for impairment annually or whenever events or changes in circumstances indicate that the provisionsvalue of ASC 805, Business Combinations, in accounting fora 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 acquisition of Aeropost. It required us to recognize separately from goodwillqualitative factors, that the assets acquired and the liabilities assumed at the acquisition date fair values. Goodwill asvalue of the acquisition datereporting unit is measured asmore likely than not less than the carrying amount, or that a fair value of the reporting unit substantially in excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we used our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. Ascarrying amount cannot be assured, then a result, during the measurement period, which mayquantitative impairment test would be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments will be recorded to our consolidated statements of operations.
Accountingperformed. The quantitative test for a business combination required ourimpairment requires management to make significant estimatesjudgments relating to future cash flows, growth rates and assumptions, especially at the acquisition date, including our estimates of the value of intangible assets, contractual obligations assumed, pre-acquisition contingencieseconomic and any contingent consideration, where applicable. Although we believe that the assumptions and estimates we have made for the acquisition of Aeropost are reasonable and appropriate, theymarket conditions. These evaluations are based in part on historical experience and information obtained from the management of the acquired company and are inherently uncertain.
57
Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to:
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Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
We may identify certain pre-acquisition contingencies as of the acquisition date and may extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess whether we should include these contingencies as a part of the fair value estimates of assets acquired and liabilities assumed and, if so, determine their estimated amounts.
If we cannot reasonably determinedetermining the fair value of a pre-acquisition contingency (non-income tax related) byreporting unit or asset using a valuation method such as discounted cash flow or a relative, market-based approach. Historically, our reporting units and other indefinite-lived acquired intangible assets have generated sufficient returns to recover the endcost of the measurement period, which is generally the case givengoodwill and other indefinite-lived acquired intangible assets. Because of the nature of such matters, we will recognize an asset or a liability for such pre-acquisition contingency if: (1) it is probable that an asset existed or a liability had been incurred at the acquisition date and (2)factors used in these tests, if different conditions occur in future periods, future operating results could be materially impacted. For approximately $45.4 million of certain acquired indefinite-lived intangible assets, the amount offair value approximated the asset or liability can be reasonably estimated.
Subsequent to the measurement period, changes in our estimates of such contingencies will affect earnings and could have a material effect on our results of operations and financial position.
In addition, uncertain tax positions and tax-related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly, withcarrying value; any adjustments to our preliminary estimates being recorded to goodwill if identified within the measurement period. Subsequent to the measurement period or our final determination of the tax allowance’s or contingency’s estimated value, whichever comes first, changes to these uncertain tax positions and tax-related valuation allowances will affect our provision for income taxes in our consolidated statement of operations and could have a material impact on our results of operations and financial position. For the period ended May 31, 2019, there were no significant changesdeterioration in the estimates of these positions or valuation allowances.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 changesAs part of the adoption of the new leasing standard, we recorded several monetary liabilities on the consolidated balance sheet that are exposed to foreign exchange movements. These monetary liabilities arise from leases denominated in our market risk factors at May 31, 2019 compareda currency that is not the functional currency of the Company’s local subsidiary. The monetary liability for these leases as of February 29, 2020 was $34.0 million. Due to thosethe mix of foreign currency exchange rate fluctuations during the second quarter of fiscal year 2020, the impact to the interim consolidated statements of income and comprehensive income from these monetary liabilities was immaterial.
The following table discloses the net effect on other expense, net for U.S. dollar-denominated and other foreign-denominated accounts relative to hypothetical simultaneous currency devaluation based on balances as of February 29, 2020 (in thousands) including the new lease-related monetary liabilities described above:
Overall weighted negative currency movement | Gains based on change in U.S. dollar denominated and other foreign denominated cash, cash equivalents and restricted cash balances | Losses based on change in U.S. dollar denominated inter-company balances | Losses based on change in U.S. dollar denominated other asset/liability balances | Net loss(1) | ||||||||
5% | $ | 1,238 | $ | (1,063) | $ | (1,818) | $ | (1,643) | ||||
10% | $ | 2,476 | $ | (2,127) | $ | (3,637) | $ | (3,288) | ||||
20% | $ | 4,952 | $ | (4,254) | $ | (7,274) | $ | (6,576) |
(1)Amounts are before consideration of income taxes.
Information about the financial impact of foreign currency exchange rate fluctuations for the three and six-month period ended February 29, 2020 is disclosed in our Annual Report on Form 10-K forItem 2 “Management’s Discussion and Analysis – Other Expense, net”.
Information about the fiscal year ended August 31, 2018. The grosschange in the fair value of our derivativehedges and the financial instruments designated as cash flow hedges has decreased by $2.3 million since August 31, 2018, primarily due to the fluctuations in interest rates, fluctuations in exchange ratesimpact thereof for the currencies that are being hedged,three and changessix-month period ended February 29, 2020 is disclosed in the scheduled maturities ofNotes to Consolidated Financial Statements – Note 8 – Derivative Instruments and Hedging Activities.
Information about the underlying instruments during the nine months ended May 31, 2019. Movementsmovements 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 were the cause of the $18.0 million loss in the foreign currency translation adjustments category of accumulated other comprehensive income (loss) for the nine months ended May 31, 2019.
In addition, the monetary assets and liabilities of our subsidiaries whose functional currency is not the U.S. dollar that are 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 currency gain (loss) within Other income (expense) in the consolidated statements of income.
The following table summarizes the amounts recorded for the three and nine months ending May 31, 2019six-month period ended February 29, 2020 is disclosed in Item 2 “Management’s Discussion and 2018 (in thousands):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.
On May 22, 2019, a class action complaint was filed against PriceSmart, Inc., as well as certain former and current officers in the United States District Court for the Southern District of California. The ComplaintOn October 7, 2019, the Court granted Public Employees Retirement Association of New Mexico’s (PERA’s) Motion for Appointment as Lead Plaintiff. On January 3, 2020, PERA filed a consolidated class action complaint, which alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, in connection with the Company’s 2017 Form 10-K and 2018 Form 10-Qs.thereunder. The Company intends to vigorously defend itself against any obligations or liability to the plaintiffs with respect to such claims. The Company believes the claims are without merit. Per a briefing schedule adopted by the Court, the Company filed a Motion to Dismiss the Plaintiff's Consolidated Amended Complaint in its entirety on March 3, 2020.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended August 31, 2018. There2019. Other than the risk factors set forth below, there have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2018.2019.
External Factors that Could Adversely Affect Us
Our operations could be adversely affected by the recent outbreak of the novel coronavirus (COVID-19).
Public health epidemics or outbreaks could adversely impact our business. In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries and infections have been reported globally. The extent to which the coronavirus impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. While the impact on the Company’s business is unknown at this time and difficult to predict, nearly all aspects of the Company’s business could be adversely affected.
Our business depends heavily on the uninterrupted operation of our distribution facilities located in Miami, Florida and San Jose, Costa Rica, our warehouse clubs located in Colombia, Central America and the Caribbean, and our headquarters and buying operations in San Diego, California. The operation of all of our facilities is critically dependent on our employees who staff these locations, and the coronavirus could directly threaten the health of our employees. In addition, governments in many of the countries in which we operate have imposed or are experimenting with policies and restrictions affecting the retail sectors of our markets. Many of these policies and restrictions have resulted in limiting access for our members and have adversely impacted our club operations, including temporary club closures, limits on the number of days during the week and hours per day our clubs can be open, restrictions on segments of the population permitted to shop on particular days, and limits on the number of people that can be in a club. Additionally, in an effort to improve social distancing, we have temporarily switched substantially all of our work force at our San Diego headquarters, our management and administrative personnel in Miami, and office support personnel in the countries where we operate to remote work. Finally, we may seek alternative distribution channels in the case of closure of one or more of our distribution facilities. Events such as these complicate and/or threaten the way we execute and the performance of our business and could have a material adverse effect or our business and operating results.
In addition, as a result of COVID-19 and the measures designed to contain the spread of the virus in China and elsewhere, we have faced and may continue to face delays or difficulty sourcing products, which could negatively affect our business and financial results. Certain of our suppliers have had their manufacturing operations disrupted by the coronavirus outbreak, and even where goods have been completed, they have been subject to weeks-long shipping delays. If our third-party suppliers’ operations continue to be curtailed, or transportation systems continue to be disrupted, we may need to seek alternate sources of supply, which may be more expensive. The duration of the production and supply chain disruption, and related financial impact, cannot be estimated at this time. Should the production and distribution closures continue for an extended period of time, the impact on our supply chain in China and globally could have a material adverse effect on our results of operations and cash flows.
Negative economic conditions created or exacerbated by the recent outbreak of the novel coronavirus (COVID-19) could adversely impact our business in various respects.
A slowdown in the economies of one or more of the countries in which we operate or adverse changes in economic conditions affecting discretionary consumer spending could adversely affect consumer demand for the products we sell, change the mix of products we sell to a mix with a lower average gross margin, cause a slowdown in discretionary purchases of goods, adversely affect our net sales and result in slower inventory turnover and greater markdowns of inventory, or otherwise materially adversely affect our operating results. Any prolonged outbreak of the coronavirus could result in the imposition of quarantines or closures of retailer locations, office spaces, manufacturing facilities, travel and transportation restrictions and/or import and export restrictions, any of which could contribute to a general slowdown in the global economy and the economies of the markets in which we operate. A significant decline in the economies of the countries in which our warehouse clubs are located may lead to decreased sales and profitability, increased governmental ownership or regulation of the economy, higher interest rates and increased barriers to entry such as higher tariffs and taxes. The economic factors that affect our operations also may adversely affect the operations of our suppliers, which can result in an increase in the cost to us of the goods we sell to our customers or, in more extreme cases, in certain suppliers not producing goods in the volume typically available for sale to us.
Employment laws and regulations in the countries in which we operate may limit our ability to effect a reduction in force to reduce our labor expenses in line with declining revenues. In some of the countries in which we operate, before we could effect a reduction in force, we would need to negotiate with labor unions, demonstrate evidence of hardship or force majeure or obtain prior government approval, which may not be given in a timely manner or at all.
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, 2019,February 29, 2020, the Company repurchased 12,00014,468 shares in the indicated months. These were the only repurchases of equity securities made by the Company during the thirdsecond quarter of fiscal year 2019.2020. The Company does not have a stock repurchase program.
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Period |
| (a) |
| (b) |
| (c) |
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March 1, 2019 - March 31, 2019 |
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| 3,698 |
| $ | 61.99 |
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| — |
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| N/A |
April 1, 2019 - April 30, 2019 |
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| 8,502 |
| $ | 58.66 |
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| — |
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| N/A |
May 1, 2019 - May 31, 2019 |
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| — |
| $ | — |
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| — |
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| N/A |
Total |
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| 12,200 |
| $ | 59.67 |
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| — |
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| — |
Period | (a) | (b) | (c) | (d) | ||||||||
December 1, 2019 - December 31, 2019 | — | $ | — | — | N/A | |||||||
January 1, 2020 - January 31, 2020 | 14,468 | $ | 63.59 | — | N/A | |||||||
February 1, 2020 - February 29, 2020 | — | $ | — | — | N/A | |||||||
Total | 14,468 | $ | 63.59 | — | — |
(a) Exhibits:
* | 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. |
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(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 10, 2019.
SIGNATURES
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: |
| By: | /s/ SHERRY S. BAHRAMBEYGUI | |
Sherry S. Bahrambeygui | ||||
Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Date: |
| By: | /s/ | |
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Executive Vice President and Chief Financial Officer | ||||
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