UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 30, 2019May 31, 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 x | 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 x | 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 x | 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 x |
The registrant had 30,612,51130,648,990 shares of its common stock, par value $0.0001 per share, outstanding at December 31, 2019.June 30, 2020.
PRICESMART, INC.
INDEX TO FORM 10-Q
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CONSOLIDATED BALANCE SHEETS AS OF | 2 | |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PriceSmart, Inc.’s (“PriceSmart,” “we” or the “Company”) unaudited consolidated balance sheet as of November 30, 2019May 31, 2020 and the consolidated balance sheet as of August 31, 2019, the unaudited consolidated statements of income for the three and nine months ended November 30,May 31, 2020 and 2019, and 2018, the unaudited consolidated statements of comprehensive income for the three and nine months ended November 30,May 31, 2020 and 2019, and 2018, the unaudited consolidated statements of equity for the three and nine months ended November 30,May 31, 2020 and 2019, and 2018, and the unaudited consolidated statements of cash flows for the threenine months ended November 30,May 31, 2020 and 2019 and 2018 are included herein. Also included herein are the notes to the unaudited consolidated financial statements.
PRICESMART, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
November 30, | May 31, | |||||||||||
2019 | August 31, | 2020 | August 31, | |||||||||
(Unaudited) | 2019 | (Unaudited) | 2019 | |||||||||
ASSETS | ||||||||||||
Current Assets: | ||||||||||||
Cash and cash equivalents | $ | 111,359 | $ | 102,653 | $ | 261,788 | $ | 102,653 | ||||
Short-term restricted cash | 65 | 54 | 240 | 54 | ||||||||
Short-term investments | 25,098 | 17,045 | 40,042 | 17,045 | ||||||||
Receivables, net of allowance for doubtful accounts of $125 as of November 30, 2019 and $144 as of August 31, 2019, respectively | 10,293 | 9,872 | ||||||||||
Receivables, net of allowance for doubtful accounts of $126 as of May 31, 2020 and $144 as of August 31, 2019, respectively | 10,886 | 9,872 | ||||||||||
Merchandise inventories | 388,072 | 331,273 | 268,762 | 331,273 | ||||||||
Prepaid expenses and other current assets (includes $2,747 and $2,736 as of November 30, 2019 and August 31, 2019, respectively, for the fair value of derivative instruments) | 36,990 | 30,999 | ||||||||||
Prepaid expenses and other current assets (includes $0 and $2,736 as of May 31, 2020 and August 31, 2019, respectively, for the fair value of derivative instruments) | 24,736 | 30,999 | ||||||||||
Total current assets | 571,877 | 491,896 | 606,454 | 491,896 | ||||||||
Long-term restricted cash | 3,689 | 3,529 | 3,996 | 3,529 | ||||||||
Property and equipment, net | 693,275 | 671,151 | 700,388 | 671,151 | ||||||||
Operating lease right-of-use assets, net | 118,203 | — | 121,802 | — | ||||||||
Goodwill | 45,425 | 46,101 | 45,316 | 46,101 | ||||||||
Other intangibles, net | 11,977 | 12,576 | 10,772 | 12,576 | ||||||||
Deferred tax assets | 17,790 | 15,474 | 21,178 | 15,474 | ||||||||
Other non-current assets (includes $436 and $0 as of November 30, 2019 and August 31, 2019, respectively, for the fair value of derivative instruments) | 51,226 | 44,987 | ||||||||||
Other non-current assets (includes $428 and $0 as of May 31, 2020 and August 31, 2019, respectively, for the fair value of derivative instruments) | 53,965 | 44,987 | ||||||||||
Investment in unconsolidated affiliates | 10,649 | 10,697 | 10,618 | 10,697 | ||||||||
Total Assets | $ | 1,524,111 | $ | 1,296,411 | $ | 1,574,489 | $ | 1,296,411 | ||||
LIABILITIES AND EQUITY | ||||||||||||
Current Liabilities: | ||||||||||||
Short-term borrowings | $ | 23,018 | $ | 7,540 | $ | 70,886 | $ | 7,540 | ||||
Accounts payable | 328,585 | 286,219 | 283,045 | 286,219 | ||||||||
Accrued salaries and benefits | 24,131 | 25,401 | 28,017 | 25,401 | ||||||||
Deferred income | 25,147 | 25,340 | 24,154 | 25,340 | ||||||||
Income taxes payable | 6,640 | 4,637 | 9,613 | 4,637 | ||||||||
Other accrued expenses and other current liabilities (includes $127 and $0 as of November 30, 2019 and August 31, 2019, respectively, for the fair value of foreign currency forward contracts) | 40,519 | 32,442 | ||||||||||
Other accrued expenses and other current liabilities (includes $30 and $0 as of May 31, 2020 and August 31, 2019, respectively, for the fair value of derivative instruments) | 35,622 | 32,442 | ||||||||||
Operating lease liabilities, current portion | 8,310 | — | 8,409 | — | ||||||||
Dividends payable | 10,719 | — | ||||||||||
Long-term debt, current portion | 13,726 | 25,875 | 22,784 | 25,875 | ||||||||
Total current liabilities | 470,076 | 407,454 | 493,249 | 407,454 | ||||||||
Deferred tax liability | 1,829 | 2,015 | 1,489 | 2,015 | ||||||||
Long-term portion of deferred rent | — | 11,198 | — | 11,198 | ||||||||
Long-term income taxes payable, net of current portion | 5,346 | 5,069 | 4,865 | 5,069 | ||||||||
Long-term operating lease liabilities | 121,698 | — | 126,275 | — | ||||||||
Long-term debt, net of current portion | 98,084 | 63,711 | 117,045 | 63,711 | ||||||||
Other long-term liabilities (includes $3,259 and $2,910 for the fair value of derivative instruments and $5,675 and $5,421 for post-employment plans as of November 30, 2019 and August 31, 2019, respectively) | 9,306 | 8,685 | ||||||||||
Other long-term liabilities (includes $5,567 and $2,910 for the fair value of derivative instruments and $6,099 and $5,421 for post-employment plans as of May 31, 2020 and August 31, 2019, respectively) | 11,963 | 8,685 | ||||||||||
Total Liabilities | 706,339 | 498,132 | 754,886 | 498,132 | ||||||||
Stockholders' Equity: | ||||||||||||
Common stock $0.0001 par value, 45,000,000 shares authorized; 31,474,818 and 31,461,359 shares issued and 30,612,511 and 30,538,788 shares outstanding (net of treasury shares) as of November 30, 2019 and August 31, 2019, respectively | 3 | 3 | ||||||||||
Common stock $0.0001 par value, 45,000,000 shares authorized; 31,425,075 and 31,461,359 shares issued and 30,648,990 and 30,538,788 shares outstanding (net of treasury shares) as of May 31, 2020 and August 31, 2019, respectively | 3 | 3 | ||||||||||
Additional paid-in capital | 440,756 | 443,084 | 444,403 | 443,084 | ||||||||
Tax benefit from stock-based compensation | 11,486 | 11,486 | 11,486 | 11,486 | ||||||||
Accumulated other comprehensive loss | (147,524) | (144,339) | (168,019) | (144,339) | ||||||||
Retained earnings | 545,532 | 525,804 | 562,408 | 525,804 | ||||||||
Less: treasury stock at cost, 862,307 shares as of November 30, 2019 and 924,332 shares as of August 31, 2019 | (33,424) | (38,687) | ||||||||||
Less: treasury stock at cost, 776,085 shares as of May 31, 2020 and 924,332 shares as of August 31, 2019 | (31,615) | (38,687) | ||||||||||
Total stockholders' equity attributable to PriceSmart, Inc. stockholders | 816,829 | 797,351 | 818,666 | 797,351 | ||||||||
Noncontrolling interest in consolidated subsidiaries | 943 | 928 | 937 | 928 | ||||||||
Total stockholders' equity | 817,772 | 798,279 | 819,603 | 798,279 | ||||||||
Total Liabilities and Equity | $ | 1,524,111 | $ | 1,296,411 | $ | 1,574,489 | $ | 1,296,411 | ||||
See accompanying notes.
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
November 30, | November 30, | May 31, | May 31, | May 31, | May 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues: | ||||||||||||||||||
Net merchandise sales | $ | 778,728 | $ | 747,443 | $ | 768,368 | $ | 755,009 | $ | 2,418,822 | $ | 2,322,742 | ||||||
Export sales | 8,274 | 8,189 | 8,321 | 8,281 | 25,029 | 23,314 | ||||||||||||
Membership income | 13,746 | 12,740 | 13,525 | 13,132 | 41,364 | 38,717 | ||||||||||||
Other revenue and income | 11,193 | 11,265 | 9,717 | 12,134 | 33,392 | 37,845 | ||||||||||||
Total revenues | 811,941 | 779,637 | 799,931 | 788,556 | 2,518,607 | 2,422,618 | ||||||||||||
Operating expenses: | ||||||||||||||||||
Cost of goods sold: | ||||||||||||||||||
Net merchandise sales | 662,724 | 641,155 | 661,258 | 649,894 | 2,067,416 | 1,996,595 | ||||||||||||
Export sales | 7,971 | 7,778 | 7,995 | 7,872 | 24,044 | 22,136 | ||||||||||||
Non-merchandise | 4,251 | 4,247 | 3,503 | 4,121 | 12,416 | 13,194 | ||||||||||||
Selling, general and administrative: | ||||||||||||||||||
Warehouse club and other operations | 79,373 | 74,222 | 78,431 | 78,231 | 241,826 | 228,161 | ||||||||||||
General and administrative | 25,884 | 27,335 | 24,408 | 24,532 | 77,910 | 76,835 | ||||||||||||
Pre-opening expenses | 953 | 15 | 257 | 1,647 | 1,254 | 1,759 | ||||||||||||
Loss on disposal of assets | 71 | 215 | 112 | 262 | 251 | 735 | ||||||||||||
Total operating expenses | 781,227 | 754,967 | 775,964 | 766,559 | 2,425,117 | 2,339,415 | ||||||||||||
Operating income | 30,714 | 24,670 | 23,967 | 21,997 | 93,490 | 83,203 | ||||||||||||
Other income (expense): | ||||||||||||||||||
Interest income | 293 | 391 | 554 | 310 | 1,433 | 1,124 | ||||||||||||
Interest expense | (862) | (1,033) | (2,564) | (915) | (5,116) | (2,949) | ||||||||||||
Other expense, net | (985) | (1,819) | ||||||||||||||||
Total other income (expense) | (1,554) | (2,461) | ||||||||||||||||
Income before provision for income taxes and loss of unconsolidated affiliates | 29,160 | 22,209 | ||||||||||||||||
Other income (expense), net | (1,564) | 159 | (1,826) | (2,032) | ||||||||||||||
Total other expense | (3,574) | (446) | (5,509) | (3,857) | ||||||||||||||
Income before provision for income taxes and | 20,393 | 21,551 | 87,981 | 79,346 | ||||||||||||||
Provision for income taxes | (9,403) | (7,540) | (7,744) | (7,478) | (29,849) | (26,721) | ||||||||||||
Loss of unconsolidated affiliates | (48) | (24) | (16) | (4) | (79) | (48) | ||||||||||||
Net income | 19,709 | 14,645 | 12,633 | 14,069 | 58,053 | 52,577 | ||||||||||||
Less: net (income) loss attributable to noncontrolling interest | 19 | (33) | 72 | 27 | (20) | (59) | ||||||||||||
Net income attributable to PriceSmart, Inc. | $ | 19,728 | $ | 14,612 | $ | 12,705 | $ | 14,096 | $ | 58,033 | $ | 52,518 | ||||||
Net income attributable to PriceSmart, Inc. per share available for distribution: | ||||||||||||||||||
Basic | $ | 0.64 | $ | 0.48 | $ | 0.41 | $ | 0.46 | $ | 1.90 | $ | 1.73 | ||||||
Diluted | $ | 0.64 | $ | 0.48 | $ | 0.41 | $ | 0.46 | $ | 1.90 | $ | 1.73 | ||||||
Shares used in per share computations: | ||||||||||||||||||
Basic | 30,277 | 30,172 | 30,271 | 30,198 | 30,268 | 30,192 | ||||||||||||
Diluted | 30,284 | 30,189 | 30,275 | 30,205 | 30,273 | 30,202 | ||||||||||||
Dividends per share | $ | — | $ | — | $ | — | $ | — | $ | 0.70 | $ | 0.70 | ||||||
See accompanying notes.
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED—AMOUNTS IN THOUSANDS)
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
November 30, | November 30, | May 31, | May 31, | May 31, | May 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income | $ | 19,709 | $ | 14,645 | $ | 12,633 | $ | 14,069 | $ | 58,053 | $ | 52,577 | ||||||
Less: net (income) loss attributable to noncontrolling interest | 19 | (33) | 72 | 27 | (20) | (59) | ||||||||||||
Net income attributable to PriceSmart, Inc. | $ | 19,728 | $ | 14,612 | $ | 12,705 | $ | 14,096 | $ | 58,033 | $ | 52,518 | ||||||
Other Comprehensive Income, net of tax: | ||||||||||||||||||
Foreign currency translation adjustments (1) | (3,724) | (13,397) | (12,874) | (9,697) | (19,981) | (17,972) | ||||||||||||
Defined benefit pension plan: | ||||||||||||||||||
Net gain arising during period | 7 | 9 | 22 | 42 | 109 | 129 | ||||||||||||
Amortization of prior service cost and actuarial gains included in net periodic pensions cost | 19 | 19 | (19) | (19) | (56) | (56) | ||||||||||||
Total defined benefit pension plan | 26 | 28 | 3 | 23 | 53 | 73 | ||||||||||||
Derivative instruments: (2) | ||||||||||||||||||
Unrealized losses on change in derivative obligations | (432) | (306) | (1,471) | (267) | (208) | (337) | ||||||||||||
Unrealized gains on change in fair value of interest rate swaps | 941 | 429 | ||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to other expense, net for settlement of derivatives | 4 | — | ||||||||||||||||
Unrealized losses on change in fair value of interest rate swaps | (1,104) | (1,118) | (6,295) | (1,716) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) to other expense, net for settlement of derivatives | — | — | 2,751 | — | ||||||||||||||
Total derivative instruments | 513 | 123 | (2,575) | (1,385) | (3,752) | (2,053) | ||||||||||||
Other comprehensive loss | (3,185) | (13,246) | (15,446) | (11,059) | (23,680) | (19,952) | ||||||||||||
Comprehensive income | 16,543 | 1,366 | ||||||||||||||||
Comprehensive income (loss) | (2,741) | 3,037 | 34,353 | 32,566 | ||||||||||||||
Less: comprehensive income attributable to noncontrolling interest | 34 | 1 | 35 | 59 | 90 | 80 | ||||||||||||
Comprehensive income attributable to PriceSmart, Inc. to stockholders | $ | 16,509 | $ | 1,365 | ||||||||||||||
Comprehensive income (loss) attributable to PriceSmart, Inc. to stockholders | $ | (2,776) | $ | 2,978 | $ | 34,263 | $ | 32,486 | ||||||||||
(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.
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | Loss | Earnings | Shares | Amount | PriceSmart, Inc. | Interest | Equity | Shares | Amount | Capital | Compensation | 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 | ||||||||||||||||||||||||||||||||||||||||||
Balance at February 28, 2019 | 31,447 | $ | 3 | $ | 442,273 | $ | 11,486 | $ | (130,109) | $ | 491,031 | 951 | $ | (41,524) | $ | 773,160 | $ | 430 | $ | 773,590 | ||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | — | 12 | (728) | (728) | — | (728) | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of treasury stock | (63) | — | (5,024) | — | — | — | (63) | 5,024 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock award | 32 | — | — | — | — | — | — | — | — | — | — | 79 | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Forfeiture of restricted stock awards | (23) | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 6,046 | — | — | — | — | — | 6,046 | — | 6,046 | — | — | 3,124 | — | — | — | — | — | 3,124 | — | 3,124 | ||||||||||||||||||||||||||||||||||||||||
Dividend paid to stockholders | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Dividend payable to stockholders | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 14,612 | — | — | 14,612 | 33 | 14,645 | — | — | — | — | — | 14,096 | — | — | 14,096 | (27) | 14,069 | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | (13,246) | — | — | — | (13,246) | 1 | (13,245) | — | — | — | — | (11,059) | — | — | — | (11,059) | 59 | (11,000) | ||||||||||||||||||||||||||||||||||||||||
Balance at November 30, 2018 | 31,405 | $ | 3 | $ | 438,928 | $ | 11,486 | $ | (134,462) | $ | 488,566 | 912 | $ | (39,107) | $ | 765,414 | $ | 670 | $ | 766,084 | ||||||||||||||||||||||||||||||||||||||||||
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 August 31, 2019 | 31,461 | $ | 3 | $ | 443,084 | $ | 11,486 | $ | (144,339) | $ | 525,804 | 924 | $ | (38,687) | $ | 797,351 | $ | 928 | $ | 798,279 | ||||||||||||||||||||||||||||||||||||||||||
Balance at February 29, 2020 | 31,451 | $ | 3 | $ | 441,372 | $ | 11,486 | $ | (152,573) | $ | 549,703 | 852 | $ | (32,098) | $ | 817,893 | $ | 974 | $ | 818,867 | ||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | — | 7 | (461) | (461) | — | (461) | — | — | — | — | — | — | 4 | (204) | (204) | — | (204) | ||||||||||||||||||||||||||||||||||||||||
Issuance of treasury stock | (69) | — | (5,724) | — | — | — | (69) | 5,724 | — | — | — | (80) | — | (687) | — | — | — | (80) | 687 | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock award | 85 | — | — | — | — | — | — | — | — | — | — | 57 | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Forfeiture of restricted stock awards | (2) | — | — | — | — | — | — | — | — | — | — | (3) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 3,396 | — | — | — | — | — | 3,396 | — | 3,396 | — | — | 3,718 | — | — | — | — | — | 3,718 | — | 3,718 | ||||||||||||||||||||||||||||||||||||||||
Dividend paid to stockholders | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Dividend payable to stockholders | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 19,728 | — | — | 19,728 | (19) | 19,709 | — | — | — | — | — | 12,705 | — | — | 12,705 | (72) | 12,633 | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | (3,185) | — | — | — | (3,185) | 34 | (3,151) | — | — | — | — | (15,446) | — | — | — | (15,446) | 35 | (15,411) | ||||||||||||||||||||||||||||||||||||||||
Balance at November 30, 2019 | 31,475 | $ | 3 | $ | 440,756 | $ | 11,486 | $ | (147,524) | $ | 545,532 | 862 | $ | (33,424) | $ | 816,829 | $ | 943 | $ | 817,772 | ||||||||||||||||||||||||||||||||||||||||||
Balance at May 31, 2020 | 31,425 | $ | 3 | $ | 444,403 | $ | 11,486 | $ | (168,019) | $ | 562,408 | 776 | $ | (31,615) | $ | 818,666 | $ | 937 | $ | 819,603 | ||||||||||||||||||||||||||||||||||||||||||
See accompanying notes.
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)
Nine 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 | — | — | — | — | — | — | 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 | |||||||||||
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 | — | — | — | — | — | — | 26 | (1,585) | (1,585) | — | (1,585) | ||||||||||||||||||||
Issuance of treasury stock | (174) | — | (8,657) | — | — | — | (174) | 8,657 | — | — | — | ||||||||||||||||||||
Issuance of restricted stock award | 166 | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Forfeiture of restricted stock awards | (28) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Stock-based compensation | — | — | 9,976 | — | — | — | — | — | 9,976 | — | 9,976 | ||||||||||||||||||||
Dividend paid to stockholders | — | — | — | — | — | (10,710) | — | — | (10,710) | (101) | (10,811) | ||||||||||||||||||||
Dividend payable to stockholders | — | — | — | — | — | (10,719) | — | — | (10,719) | — | (10,719) | ||||||||||||||||||||
Net income | — | — | — | — | — | 58,033 | — | — | 58,033 | 20 | 58,053 | ||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | (23,680) | — | — | — | (23,680) | 90 | (23,590) | ||||||||||||||||||||
Balance at May 31, 2020 | 31,425 | $ | 3 | $ | 444,403 | $ | 11,486 | $ | (168,019) | $ | 562,408 | 776 | $ | (31,615) | $ | 818,666 | $ | 937 | $ | 819,603 | |||||||||||
See accompanying notes.
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED—AMOUNTS IN THOUSANDS)
Three Months Ended | Nine Months Ended | |||||||||||
November 30, | November 30, | May 31, | May 31, | |||||||||
2019 | 2018 | 2020 | 2019 | |||||||||
Operating Activities: | ||||||||||||
Net income | $ | 19,709 | $ | 14,645 | $ | 58,053 | $ | 52,577 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 14,814 | 13,723 | 44,867 | 40,365 | ||||||||
Allowance for doubtful accounts | (19) | 7 | (18) | 68 | ||||||||
Loss on sale of property and equipment | 71 | 215 | 251 | 735 | ||||||||
Deferred income taxes | (1,234) | 316 | (4,079) | (2,737) | ||||||||
Equity in losses of unconsolidated affiliates | 48 | 24 | 79 | 48 | ||||||||
Stock-based compensation | 3,396 | 6,046 | 9,976 | 12,515 | ||||||||
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 | (9,762) | (6,200) | (157) | 1,668 | ||||||||
Merchandise inventories | (56,799) | (59,054) | 62,511 | (5,699) | ||||||||
Accounts payable | 45,880 | 55,985 | 2,647 | 13,412 | ||||||||
Net cash provided by operating activities | 16,104 | 25,707 | 174,130 | 112,952 | ||||||||
Investing Activities: | ||||||||||||
Additions to property and equipment | (37,582) | (35,673) | (89,713) | (86,409) | ||||||||
Short-term investments | (10,184) | (6,190) | ||||||||||
Purchases of short-term investments | (31,711) | (14,204) | ||||||||||
Proceeds from settlements of short-term investments | 2,066 | 12,406 | 8,891 | 29,485 | ||||||||
Purchases of long-term investments | (1,489) | — | ||||||||||
Proceeds from disposal of property and equipment | 13 | 93 | 44 | 157 | ||||||||
Net cash used in investing activities | (45,687) | (29,364) | (113,978) | (70,971) | ||||||||
Financing Activities: | ||||||||||||
Proceeds from long-term bank borrowings | 25,000 | — | 57,820 | — | ||||||||
Repayment of long-term bank borrowings | (2,836) | (3,463) | (7,542) | (9,509) | ||||||||
Proceeds from short-term bank borrowings | 81,202 | — | 271,014 | 5,180 | ||||||||
Repayment of short-term bank borrowings | (65,581) | — | (207,368) | (3,028) | ||||||||
Cash dividend payments | (10,811) | (10,986) | ||||||||||
Purchase of treasury stock for tax withholding on stock compensation | (1,585) | (3,145) | ||||||||||
Other financing activities | 19 | (33) | (20) | (59) | ||||||||
Purchase of treasury stock | (461) | — | ||||||||||
Net cash provided by (used in) financing activities | 37,343 | (3,496) | 101,508 | (21,547) | ||||||||
Effect of exchange rate changes on cash and cash equivalents and restricted cash | 1,117 | (1,375) | (1,872) | (3,365) | ||||||||
Net increase (decrease) in cash, cash equivalents | 8,877 | (8,528) | ||||||||||
Net increase in cash, cash equivalents | 159,788 | 17,069 | ||||||||||
Cash, cash equivalents and restricted cash at beginning of period | 106,236 | 96,914 | 106,236 | 96,914 | ||||||||
Cash, cash equivalents and restricted cash at end of period | $ | 115,113 | $ | 88,386 | $ | 266,024 | $ | 113,983 | ||||
Supplemental disclosure of noncash investing activities: | ||||||||||||
Capital expenditures incurred but not yet paid | $ | 10,282 | $ | 2,148 | ||||||||
Capital expenditures accrued, but not yet paid | $ | 7,975 | $ | 3,628 | ||||||||
Dividends declared but not yet paid | 10,719 | 10,672 | ||||||||||
The following table provides a breakdown of cash and cash equivalents, and restricted cash reported within the statement of cash flows:
Three Months Ended | Nine Months Ended | |||||||||||
November 30, | November 30, | May 31, | May 31, | |||||||||
2019 | 2018 | 2020 | 2019 | |||||||||
Cash and cash equivalents | $ | 111,359 | $ | 81,047 | $ | 261,788 | $ | 106,445 | ||||
Short-term restricted cash | 65 | 4,164 | 240 | 4,136 | ||||||||
Long-term restricted cash | $ | 3,689 | $ | 3,175 | $ | 3,996 | $ | 3,402 | ||||
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 115,113 | $ | 88,386 | $ | 266,024 | $ | 113,983 | ||||
See accompanying notes.
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 2019May 31, 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 typically smaller in size than, warehouse clubs in the United States. As of November 30, 2019,May 31, 2020, the Company had 45 warehouse clubs in operation in 12 countries and 1 U.S. territory (7 each in Colombia, Costa Rica, and Panama; 5 in the Dominican Republic, 4 each in Trinidad and Guatemala; 3 in Honduras; 2 each in El Salvador and Nicaragua; and 1 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). TheOn June 17, 2020, the Company is currently constructingopened its 46th warehouse club and plans to open warehouse clubs8h club in Liberia, Costa Rica, located in the summercity of 2020 and Bogota, ColombiaLiberia, in the fall of 2020.Guanacaste region. The Company also plansexpects to build newopen its third warehouse clubs in Portmore, Jamaica and Bucaramanga, Colombia and open themclub in the fallgreater metropolitan area of 2020. Once these 4 new clubs are open, the Company will operate 49 warehouse clubs. The Company continues to explore and negotiate for other potential sites for future warehouse clubsBogota, its 8h in Central America, the Caribbean and Colombia.Colombia, during its second fiscal quarter of 2021.
PriceSmart is investingcontinues to invest in technology to increase efficiencies and to enableenhance the member experience by enabling omni-channel capabilities, including e-commerce to enhanceonline shopping and services. During the member experience.third quarter of Fiscal 2020, the Company launched its online order and curbside pickup service, which provides for contactless shopping, called Click & Go™. In June 2020, this service was operational in all 13 PriceSmart markets and substantially all clubs. PriceSmart also operates a legacy business (casillero and marketplace) Aeropost businessunder the “Aeropost” banner in 38 countries in Latin America and the Caribbean, many of which overlap with markets where we 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”). The novel coronavirus (COVID-19) pandemic has severely impacted the economies of the U.S. and the countries where the Company operates. The Company has assessed the impact that COVID-19 has had on our estimates, assumptions and accounting policies and made additional disclosures, if and as necessary.
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 November 30, 2019May 31, 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, 2019 (the “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’s net income excludes income attributable to noncontrolling interests. 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.
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 partiesis determined 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 calledbe the primary beneficiary of that VIE.beneficiary. If the Company determines that it is not the primary beneficiary of the VIE, then the Company records its investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method. Due to the nature of the joint ventures that the Company participates in and the continued commitments for additional financing, the Company determined these joint ventures are VIEs.
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 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 store-front joint ventures for which the Company has consolidated their financial statements as of November 30, 2019 are listed below:
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In the case of the Company's ownership interest in real estate development joint ventures, both parties to each joint venture share all rights, obligations and the power to direct the activities of the VIE that most significantly impact the VIE's economic performance. As a result, the Company has determined that it is not the primary beneficiary of the VIEs and, therefore, has accounted for these entities under the equity method. Under the equity method, the Company's investments in unconsolidated affiliates are initially recorded as an investment in the stock of an investee at cost and are adjusted for the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee after the date of the initial investment. The Company's ownership interest in real estate development joint ventures the Company has recorded under the equity method as of November 30, 2019May 31, 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.
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 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 store-front joint ventures for which the Company has consolidated their financial statements as of May 31, 2020 are listed below:
Marketplace and Casillero Store-front Joint Ventures | Countries | Ownership | Basis of | ||||
Guatemala | Guatemala | 60.0 | % | Consolidated | |||
Tortola | British Virgin Islands | 50.0 | % | Consolidated | |||
Trinidad | Trinidad | 50.0 | % | Consolidated | |||
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):
November 30, | August 31, | ||||||
2019 | 2019 | ||||||
Short-term restricted cash: | |||||||
Restricted cash for land purchase option agreements | $ | 50 | $ | 50 | |||
Other short-term restricted cash | 15 | 4 | |||||
Total short-term restricted cash | $ | 65 | $ | 54 | |||
Long-term restricted cash: | |||||||
Other long-term restricted cash (1) | $ | 3,689 | $ | 3,529 | |||
Total long-term restricted cash | $ | 3,689 | $ | 3,529 | |||
Total restricted cash | $ | 3,754 | $ | 3,583 | |||
May 31, | August 31, | ||||||
2020 | 2019 | ||||||
Short-term restricted cash | $ | 240 | $ | 54 | |||
Long-term restricted cash (1) | 3,996 | 3,529 | |||||
Total restricted cash | $ | 4,236 | $ | 3,583 | |||
(1)Other long-termLong-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 $57.4$56.1 million as of November 30, 2019May 31, 2020 and $58.7 million as of August 31, 2019. 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, there are defined and structured processes to recover VAT receivables via refunds or offsets. However, in one country without a clearly defined refund process, the Company is actively engaged with the local government to recover VAT receivables totaling $6.2 million and $5.1 million as of November 30, 2019May 31, 2020 and August 31, 2019, respectively. In two other countries, minimum income tax rules require the Company to pay taxes based on a percentage of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those it would expect to pay based on taxable income. The Company had income tax receivables of $9.7$9.8 million and $7.8 million and deferred tax assets of $2.8 million and $2.7 million as of November 30, 2019May 31, 2020 and August 31, 2019, respectively, in these countries. While the rules related to refunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets, because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests.
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 OtherPrepaid expenses and other current assets: This classification is used for any countries where the Company’s subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. The Company also classifies as short-term any approved refunds or credit notes to the extent that the Company expects to receive the refund or use the credit notes within one year.
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):
November 30, | August 31, | May 31, | August 31, | |||||||||
2019 | 2019 | 2020 | 2019 | |||||||||
Prepaid expenses and other current assets | $ | 3,068 | $ | 1,639 | $ | 724 | $ | 1,639 | ||||
Other non-current assets | 24,990 | 22,691 | 25,235 | 22,691 | ||||||||
Total amount of VAT receivables reported | $ | 28,058 | $ | 24,330 | $ | 25,959 | $ | 24,330 | ||||
The following table summarizes the Income tax receivables reported by the Company (in thousands):
November 30, | August 31, | May 31, | August 31, | |||||||||
2019 | 2019 | 2020 | 2019 | |||||||||
Prepaid expenses and other current assets | $ | 10,065 | $ | 9,009 | $ | 8,084 | $ | 9,009 | ||||
Other non-current assets | 19,654 | 16,381 | 20,652 | 16,381 | ||||||||
Total amount of Income tax receivables reported | $ | 29,719 | $ | 25,390 | ||||||||
Total amount of income tax receivables reported | $ | 28,736 | $ | 25,390 | ||||||||
Lease Accounting – The Company’s leases are operating leases for warehouse clubs and non-warehouse club facilities such as corporate headquarters, regional offices, and regional distribution centers. The Company 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 future minimum lease payments over the lease term. The Company’s leases generally do not have a readily determinable implicit rate; therefore, the Company uses a collateralized incremental borrowing rate at the commencement date in determining the present value of future payments. The incremental borrowing rate is based on a yield curve derived byfrom publicly traded bond offerings for companies with similar credit characteristics that approximate the Company's market risk profile. In addition, we adjust the incremental borrowing rate for jurisdictional risk derived from quoted interest rates from financial institutions to reflect the cost of borrowing in the Company’s local markets. The Company’s lease terms may include options to purchase, extend or terminate the lease, which are recognized when it is reasonably certain that the Company will exercise that option. The Company does not combine lease and non-lease components.
The Company measures Right-of-use (“ROU”) assets based on the corresponding lease liabilities, adjusted for any initial direct costs and prepaid lease payments made to the lessor before or at the commencement date (net of lease incentives). The lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are not included in the calculation of the ROU asset and the related lease liability and are recognized as this lease expense is incurred.
The Company’s variable lease payments generally relate to amounts the Company pays for additional contingent rent based on a contractually stipulated percentage of sales.
TableIn April 2020, the Financial Accounting Standards Board (“FASB”) issued a Staff Question-and-Answer (“Q&A”) to clarify whether lease concessions related to the effects of ContentsCOVID-19 require the application of the lease modification guidance under the new lease standard, which the Company adopted on September 1, 2019. The Company has elected to apply the temporary practical expedient and not treat changes to certain leases due to the effects of COVID-19 as modifications. The Company has recorded accruals for rent payment deferrals.
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 basedperformance-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 the probabilityperiod of vesting for awards with performance conditions and adjusts compensationeach tranche, adjusting this 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.
Treasury Stock – Shares of common stock repurchased by the Company are recorded at cost as treasury stock and result in the reduction of stockholders’ equity in the Company’s consolidated balance sheets. The Company may reissue these treasury shares as part of its stock-based compensation programs. When treasury shares are reissued, the Company uses the first in/first out (“FIFO”) cost method for determining cost of the reissued shares. If the issuance price is higher than the cost, the excess of the issuance price over the cost is credited to additional paid-in capital (“APIC”). If the issuance price is lower than the cost, the difference is first charged against any credit balance in APIC from treasury stock and the balance is charged to retained earnings. During the threenine months ended November 30, 2019,May 31, 2020, the Company reissued approximately 69,000174,000 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), written foreign currency call options, 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, 0 impairment of such non-financial assets was recorded.
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 2019 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 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 November 30, 2019May 31, 2020 and August 31, 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 InstrumentsInstruments.. 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 – The Company changed health insurance providers and is no longer self-insured as of October 1, 2019. The remaining accrued liability for potential health care claims is immaterial as of November 30, 2019.
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.clubs, and, when applicable, costs of shipping to members. External costs include inbound freight, duties, drayage, fees, insurance, and non-recoverable value-added tax related to inventory shrink, spoilage and damage. Internal costs include payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense and building and equipment depreciation at the Company's distribution facilities and payroll and other direct costs for in-storein-club demonstrations.
For export sales, the Company includes the cost of merchandise and external and internal distribution and handling costs for supplying merchandise in cost of goods sold, exports.
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-club 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 operationscosts 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.
The following table discloses the net effect of translation into the reporting currency on other comprehensive loss for these local currency denominated accounts for the three and nine months ended November 30, 2019May 31, 2020 and 2018:2019:
Three Months Ended | ||||||
November 30, | November 30, | |||||
2019 | 2018 | |||||
Effect on other comprehensive loss due to foreign currency translation | $ | (3,724) | $ | (13,397) | ||
Three Months Ended | Nine Months Ended | |||||||||||
May 31, | May 31, | May 31, | May 31, | |||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
Effect on other comprehensive loss due to foreign currency translation | $ | (12,874) | $ | (9,697) | $ | (19,981) | $ | (17,972) | ||||
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.
Three Months Ended | ||||||
November 30, | November 30, | |||||
2019 | 2018 | |||||
Currency loss | $ | (1,657) | $ | (1,819) | ||
Three Months Ended | Nine Months Ended | |||||||||||
May 31, | May 31, | May 31, | May 31, | |||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
Currency gain (loss) | $ | (1,529) | $ | 192 | $ | (2,431) | $ | (1,930) | ||||
Recent Accounting Pronouncements – Not Yet Adopted
FASB ASC 848 ASU 2020-04—Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU No. 2020-04 provides optional expedients and exceptions for a limited period of time to ease the potential burden in accounting for contracts, hedging relationships, and other transactions affected by reference rate reform. The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.
FASB ASC 740 ASU 2019-12—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 also clarifies and amends existing guidance to improve consistent application. The ASU is effective for annual periods beginning after December 15, 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 is 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. TheWhile the Company will evaluateis still in the process of determining the impact that adoption of this guidance maywill have on its consolidated financial statements, it does not anticipate that the Company’snew guidance will have a material impact on its consolidated financial statements.
FASB ASC 715 ASU 2018-14 – Compensation—Retirement Benefits—Defined Benefit Plans--GeneralPlans—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 postretirementpost-retirement 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. TheWhile the Company will evaluateis still in the process of determining the impact that adoption of
this guidance maywill have on its consolidated financial statements, it does not anticipate that the Company’snew guidance will have a material impact on its 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 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. TheWhile 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 expect thisanticipate that the new guidance towill have a material impact on the Company’sits 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. This standard requiresIn 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. This standard isThe 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 ASU No. 2016-13the amendments on September 1, 2020, the first quarter of fiscal year 2021. TheWhile 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 expect thisanticipate that the new guidance towill have a material impact on the Company’sits consolidated financial statements.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. The Company adopted ASU 2018-16 in the first quarter of fiscal year 2020. 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. The Company adopted ASU 2018-07 in the first quarter of fiscal year 2020. Adoption of this guidance did not have a material impact 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 amends 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 - 022016-02 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 retained 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, which resultssubsidiary. The resulting monetary liability is revalued to the functional currency at each balance sheet date, with the resulting gain or loss being recorded in additional potential foreign currency exchange rate fluctuation exposure.Other income (expense). The exposure for the period ended November 30, 2019monetary lease liability subject to revaluation as of May 31, 2020 was a $34.1 million liability.$33.7 million. Due to the mix of foreign currency exchange rate fluctuations during the firstthird quarter of fiscal year 2020, the impact to the interim consolidated statements of income and comprehensive incomeof 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 the practical expedient allowing the Company not to apply the recognition requirements of ASC 842 to short-term leases. leases. However, the Company 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 nine month periods ended May 31, 2020, and there were no other new accounting standards or pronouncements that were issued but not yet effective as of May 31, 2020 that the Company expects to have a material impact on its consolidated financial statements.
NOTE 3 – REVENUE RECOGNITION
Performance Obligations
The Company identifies each distinct performance obligation to transfer goods (or bundle of goods) or services. The Company recognizes revenue when (or as) it satisfies a performance obligation by transferring control of the goods or services to the customer.
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 statements of income. The deferred membership fee is included in deferred income in the Company's consolidated balance sheets.
Platinum Points Reward Programs. The Company currently offers Platinum memberships in nine11 of its thirteen13 countries. The annual fee for a Platinum membership is approximately $75. The Platinum membership provides members with a 2% rebate on most items, up to an annual maximum of $500. The rebate is issued annually to Platinum members on March 1 and expires August 31. Platinum members can apply this rebate to future purchases at the warehouse club during the redemption period. The Company records this 2% rebate as a reduction of revenue at the time of the sales transaction. Accordingly, the Company has reduced warehouse sales and has accrued a liability within other accrued expenses and other current liabilities,
platinum rewards. The Company has determined that breakage revenue is 5% of the awards issued; therefore, it records 95% of the Platinum membership liability at the time of sale. Annually, the Company reviews for expired unused rebates outstanding, and the expired unused rebates are recognized as “Other revenue and income” on the consolidated statements of income.
Co-branded Credit Card Points Reward Programs. Most of the Company’s subsidiaries have points reward programs related to Co-branded Credit Cards. These points reward programs provide incremental points that can be used at a future time to acquire merchandise within the Company’s warehouse clubs. This results in two performance obligations, the first performance obligation being the initial sale of the merchandise or services purchased with the co-branded credit card and the second performance obligation being the future use of the points rewards to purchase merchandise or services. As a result, upon the initial sale, the Company allocates the transaction price to each performance obligation with the amount allocated to the future use points rewards recorded as a contract liability within other accrued expenses and other current liabilities on the consolidated balance sheet. The portion of the selling price allocated to the reward points is recognized as Net merchandise sales when the points are used or when the points expire. The Company reviews on an annual basis expired points rewards outstanding, and the expired rewards are recognized as Net merchandise sales on the consolidated statements of income within markets where the co-branded credit card agreement allows for such treatment.
Gift Cards. Members’ purchases of gift cards to be utilized at the Company's warehouse clubs are not recognized as sales until the card is redeemed and the customer purchases merchandise using the gift card. The outstanding gift cards are reflected as other accrued expenses and other current liabilities in the consolidated balance sheets. These gift cards generally have a one-year stated expiration date from the date of issuance and are generally redeemed prior to expiration. However, the absence of a large volume of transactions for gift cards impairs the Company's ability to make a reasonable estimate of the redemption levels for gift 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. As a result ofrevenue during the adoption of ASC 606, theperiod it is earned. The Company has determined that this revenue should be recognized as “Other revenue and income” on the consolidated statements of income.
Contract Performance Liabilities
Contract performance liabilities as a result of transactions with customers primarily consist of deferred membership income, other deferred income, deferred gift card revenue, Platinum points programs, and liabilities related to co-branded credit card points rewards programs which are included in deferred income and other accrued expenses and other current liabilities in the Company’s consolidated balance sheets. The following table provides these contract balances from transactions with customers as of the dates listed (in thousands):
Contract Liabilities | Contract Liabilities | |||||||||
November 30, 2019 | August 31, 2019 | May 31, 2020 | August 31, 2019 | |||||||
Deferred membership income | $ | 24,599 | $ | 24,901 | $ | 23,380 | $ | 24,901 | ||
Other contract performance liabilities | $ | 6,397 | $ | 4,048 | $ | 4,892 | $ | 4,048 | ||
Disaggregated Revenues
In the following table, net merchandise sales are disaggregated by merchandise category (in thousands):
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||
November 30, 2019 | November 30, | May 31, 2020 | May 31, 2019 | May 31, 2020 | May 31, 2019 | |||||||||||
Foods & Sundries | $ | 392,805 | $ | 376,328 | $ | 419,579 | $ | 384,902 | $ | 1,250,728 | $ | 1,174,087 | ||||
Fresh Foods | 215,238 | 200,705 | 228,858 | 209,452 | 685,413 | 630,657 | ||||||||||
Hardlines | 90,804 | 92,154 | 70,374 | 83,606 | 261,796 | 274,596 | ||||||||||
Softlines | 40,324 | 40,481 | 25,597 | 38,700 | 115,860 | 127,158 | ||||||||||
Other Business | 39,557 | 37,775 | 23,960 | 38,349 | 105,025 | 116,244 | ||||||||||
Net Merchandise Sales | $ | 778,728 | $ | 747,443 | $ | 768,368 | $ | 755,009 | $ | 2,418,822 | $ | 2,322,742 | ||||
NOTE 4 – EARNINGS PER SHARE
The Company presents basic net income per share using the two-class method. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders and that determines basic net income per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings that would have been available to common stockholders. A participating security is defined as a security that may participate in undistributed earnings with common stock. The Company’s capital structure includes securities that participate with common stock on a one-for-one basis for distribution of dividends. These are the restricted stock awards and restricted stock units issued pursuant to the 2013 Equity Incentive Award Plan. The Company does not include performance stock units as participating securities until they vest. 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 nine months ended November 30,May 31, 2020 and 2019 and 2018 (in thousands, except per share amounts):
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
November 30, | November 30, | May 31, | May 31, | May 31, | May 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income attributable to PriceSmart, Inc. | $ | 19,728 | $ | 14,612 | $ | 12,705 | $ | 14,096 | $ | 58,033 | $ | 52,518 | ||||||
Less: Allocation of income to unvested stockholders | (258) | (193) | (188) | (189) | (527) | (414) | ||||||||||||
Net income attributable to PriceSmart, Inc. per share available for distribution | $ | 19,470 | $ | 14,419 | $ | 12,517 | $ | 13,907 | $ | 57,506 | $ | 52,104 | ||||||
Basic weighted average shares outstanding | 30,277 | 30,172 | 30,271 | 30,198 | 30,268 | 30,192 | ||||||||||||
Add dilutive effect of performance stock units (two-class method) | 7 | 17 | 4 | 7 | 5 | 10 | ||||||||||||
Diluted average shares outstanding | 30,284 | 30,189 | 30,275 | 30,205 | 30,273 | 30,202 | ||||||||||||
Basic net income per share | $ | 0.64 | $ | 0.48 | $ | 0.41 | $ | 0.46 | $ | 1.90 | $ | 1.73 | ||||||
Diluted net income per share | $ | 0.64 | $ | 0.48 | $ | 0.41 | $ | 0.46 | $ | 1.90 | $ | 1.73 | ||||||
NOTE 5 – STOCKHOLDERS’ EQUITY
Dividends
No dividends were declared by the Company’s Board of Directors during the first three months of fiscal year 2020. The following table summarizes the dividends declared and paid during fiscal year 2019.
2020 and 2019 (amounts are per share).
First Payment | Second Payment | First Payment | Second Payment | |||||||||||||||||||||||||||||||||||
Declared | Amount | Record | Date | Amount | Record | Date | Amount | 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 |
| $ | 0.35 |
| 8/15/2019 |
| 8/30/2019 |
| $ | 0.35 |
| $ | 0.70 |
| 2/15/2019 |
| 2/28/2019 |
| N/A |
| $ | 0.35 |
| 8/15/2019 |
| 8/30/2019 |
| 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.
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 | Attributable to | Noncontrolling | |||||||||||||
PriceSmart | Interests | Total | PriceSmart | Interests | Total | |||||||||||
Beginning balance, September 1, 2019 | $ | (144,339) | $ | 20 | $ | (144,319) | $ | (144,339) | $ | 20 | $ | (144,319) | ||||
Foreign currency translation adjustments | (3,724) | 34 | (3,690) | (19,981) | 90 | (19,891) | ||||||||||
Defined benefit pension plans | 26 | — | 26 | 53 | — | 53 | ||||||||||
Derivative instruments (1) | 513 | — | 513 | (3,752) | — | (3,752) | ||||||||||
Ending balance, November 30, 2019 | $ | (147,524) | $ | 54 | $ | (147,470) | ||||||||||
Ending balance, May 31, 2020 | $ | (168,019) | $ | 110 | $ | (167,909) | ||||||||||
Attributable to | Noncontrolling | 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 | (13,397) | (1) | (13,398) | (17,972) | 80 | (17,892) | ||||||||||
Defined benefit pension plans | 28 | — | 28 | 73 | — | 73 | ||||||||||
Derivative Instruments (1) | 123 | — | 123 | (2,053) | — | (2,053) | ||||||||||
Ending balance, November 30, 2018 | $ | (134,462) | $ | (2) | $ | (134,464) | ||||||||||
Ending balance, May 31, 2019 | $ | (141,168) | $ | 79 | $ | (141,089) | ||||||||||
Attributable to | Noncontrolling | |||||||
PriceSmart | Interests | Total | ||||||
Beginning balance, September 1, 2018 | $ | (121,216) | $ | (1) | $ | (121,217) | ||
Foreign currency translation adjustments | (19,717) | 21 | (19,696) | |||||
Defined benefit pension plans | (112) | — | (112) | |||||
Derivative Instruments (1) | (3,369) | — | (3,369) | |||||
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.
(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.
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):
November 30, | August 31, | |||||
2019 | 2019 | |||||
Retained earnings not available for distribution | $ | 7,926 | $ | 7,843 | ||
May 31, | August 31, | |||||
2020 | 2019 | |||||
Retained earnings not available for distribution | $ | 8,478 | $ | 7,843 | ||
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. On 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. The Company believes the case lacks merit and intends to vigorously defend itself against any obligations or liability to the plaintiffs with respectplaintiffs. During the third quarter of fiscal 2020, the Company filed a Motion to such claims. TheDismiss the Plaintiff’s Consolidated Amended Complaint and the Plaintiff filed an Opposition to the Motion to Dismiss. During the fourth quarter of fiscal 2020, the Company believesplans to file a Reply to the claimsOpposition. Oral arguments are without merit.
Taxesscheduled for the first quarter of fiscal 2021.
Income Taxes – For interim reporting, the Company uses an estimated annual effective tax rate (AETR), pursuant to ASC 740-279, to calculate income tax expense. Income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of the consolidated income tax expense. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating its ability to recover deferred tax assets in the jurisdictions from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, the Company begins with historical results adjusted for the results of 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 considers three years of cumulative operating income (loss).
The Company is required to file federal and state tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with the interpretations the Company used to calculate its tax liability and therefore require the Company to pay additional taxes.
The Company accrues an amount for its estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. There were no significant changes in the Company's uncertain income tax positions since August 31, 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 November 30, 2019May 31, 2020 and August 31, 2019, the Company has recorded within other accrued expenses and other current liabilities a total of $3.1 million and $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.
In two other countries where the Company operates, minimum income tax rules require the Company to pay taxes based on a percentage of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those it would expect to pay based on taxable income. The Company had income tax receivables of $9.7$9.8 million and $7.8 million and deferred tax assets of $2.8 million and $2.7 million as of November 30, 2019May 31, 2020 and August 31, 2019, respectively, in these countries. While the rules related to refunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets, because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests.
Other Commitments
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 November 30, 2019,May 31, 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 August 2018. As of November 30, 2019,May 31, 2020, the remaining balance of the LOC was $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 partythird-party tenant as not likely nor probable based on the Company’s review of the third partythird-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 service obligations for various warehouse club developments and expansions. As of November 30, 2019May 31, 2020 and August 31, 2019, the Company had approximately $15.1$7.8 million and $14.9 million, respectively, in contractual obligations for construction services not yet rendered.
TheFrom time to time, the Company has entered into general land purchase and land purchase option agreements. The Company’s land purchase agreements are typically subject to various conditions, including, but not limited to, the ability to obtain necessary governmental permits or approvals. A deposit under an agreement is typically returned to the Company if all permits or approvals are not obtained. Generally, the Company has the right to cancel any of ourits agreements to purchase land without cause by forfeiture of some or all of the deposits we haveit has made pursuant to the agreement. The As of May 31, 2020, the Company does notdid 0t have a timetable of when or if it will exercise itsany pending land purchase options or complete its other land purchase agreements, due to the uncertainty related to the completion of the Company's due diligence reviews or required governmental permits or approvals. The Company's due diligence reviews include evaluations of the legal status of each property, 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 all land purchase agreements were completed, the cash use would be approximately $6.7 million.
option agreements.
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 November 30, 2019May 31, 2020 (in thousands):
Entity | % | Initial | Additional | Net Income Inception to Date | 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 | $ | 132 | $ | 7,150 | $ | 99 | $ | 7,249 | 50 | % | $ | 4,616 | $ | 2,402 | $ | 92 | $ | 7,110 | $ | 99 | $ | 7,209 | ||||||||||||||
Price Plaza Alajuela PPA, S.A. | 50 | % | 2,193 | 1,236 | 70 | 3,499 | 785 | 4,284 | 50 | % | 2,193 | 1,236 | 79 | 3,508 | 785 | 4,293 | ||||||||||||||||||||||||||
Total | $ | 6,809 | $ | 3,638 | $ | 202 | $ | 10,649 | $ | 884 | $ | 11,533 | $ | 6,809 | $ | 3,638 | $ | 171 | $ | 10,618 | $ | 884 | $ | 11,502 | ||||||||||||||||||
(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 to provide additional financial support.
NOTE 7 – DEBT
Short-term borrowings consist of unsecured lines of credit. The following table summarizes the balances of total facilities, facilities used and facilities available (in thousands):
Facilities Used | Facilities Used | |||||||||||||||||||||||||||||
Total Amount | Short-term | Letters of | Facilities | Weighted average | Total Amount | Short-term | Letters of | Facilities | Weighted average | |||||||||||||||||||||
of Facilities | Borrowings | Credit | Available | interest rate | of Facilities | Borrowings | Credit | Available | interest rate | |||||||||||||||||||||
November 30, 2019 | $ | 69,000 | $ | 23,018 | $ | 534 | $ | 45,448 | 4.8 | % | ||||||||||||||||||||
May 31, 2020 | $ | 81,210 | $ | 70,886 | $ | 472 | $ | 9,852 | 3.6 | % | ||||||||||||||||||||
August 31, 2019 | $ | 69,000 | $ | 7,540 | $ | 486 | $ | 60,974 | 6.1 | % | $ | 69,000 | $ | 7,540 | $ | 486 | $ | 60,974 | 6.1 | % | ||||||||||
As of November 30, 2019May 31, 2020 and August 31, 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 November 30, 2019May 31, 2020 and August 31, 2019, the Company was in compliance with respect to these covenants.all covenants or amended covenants for each of its short-term facility agreements. 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 three-monthsnine-months ended November 30, 2019:May 31, 2020:
(Amounts in thousands) | Current | Long-term | Total | Current | Long-term | Total | ||||||||||||||
Balances as of August 31, 2019 | $ | 25,875 | $ | 63,711 | $ | 89,586 | (1) | $ | 25,875 | $ | 63,711 | $ | 89,586 | (1) | ||||||
Proceeds from long-term debt incurred during the period: | ||||||||||||||||||||
Colombia subsidiary | — | 25,000 | 25,000 | — | 25,000 | 25,000 | ||||||||||||||
Guatemala subsidiary | — | 20,820 | 20,820 | |||||||||||||||||
Trinidad subsidiary | 6,000 | 6,000 | 12,000 | |||||||||||||||||
Regularly scheduled loan payments | (947) | (1,889) | (2,836) | (1,539) | (6,003) | (7,542) | ||||||||||||||
Reclassifications of short-term debt | (11,253) | 11,253 | (0) | |||||||||||||||||
Refinances of short-term debt | (11,046) | 11,046 | — | |||||||||||||||||
Reclassifications of long-term debt due in the next 12 months | 3,402 | (3,402) | — | |||||||||||||||||
Translation adjustments on foreign currency debt of subsidiaries whose functional currency is not the U.S. dollar (2) | 51 | 9 | 60 | 92 | (127) | (35) | ||||||||||||||
Balances as of November 30, 2019 | $ | 13,726 | $ | 98,084 | $ | 111,810 | (1) | |||||||||||||
Balances as of May 31, 2020 | $ | 22,784 | $ | 117,045 | $ | 139,829 | (3) | |||||||||||||
(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)
As of November 30, 2019,May 31, 2020, the Company had approximately $105.9$114.3 million of long-term loans in several foreign subsidiaries that require these subsidiaries to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of November 30, 2019,May 31, 2020, the Company was in compliance with all covenants or amended covenants.
As of August 31, 2019, the Company had approximately $83.1 million of long-term loans in several 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):
Twelve Months Ended November 30, | Amount | |||||
2020 | $ | 13,726 | ||||
Twelve Months Ended May 31, | Amount | |||||
2021 | 13,348 | $ | 22,784 | |||
2022 | 10,211 | 17,900 | ||||
2023 | 21,341 | 25,845 | ||||
2024 | 20,771 | 8,577 | ||||
2025 | 24,983 | |||||
Thereafter | 32,413 | 39,740 | ||||
Total | $ | 111,810 | $ | 139,829 | ||
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 loss. Amounts are deferred in other comprehensive 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 November 30, 2019,May 31, 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.
The following table summarizes agreements for which the Company has recorded cash flow hedge accounting for the threenine months ended November 30, 2019:May 31, 2020:
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 November, February, May and August beginning February 27, 2020 | November 27, 2019 - | 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 December, March, June and September beginning December 24, 2019 | September 24, 2019 - | 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 - | 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 | ||||||||||||||||||
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 - | |||||||||||||||||||||||||||||
For the three and nine months ended November 30,May 31, 2020 and 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):
Income Statement Classification | Interest | Cost of | Total | ||||||
Interest expense for the three months ended November 30, 2019 | $ | 1,014 | $ | 261 | $ | 1,275 | |||
Interest expense for the three months ended November 30, 2018 | $ | 1,160 | $ | 167 | $ | 1,327 | |||
Income Statement Classification | Interest | Cost of | Total | ||||||
Interest expense for the three months ended May 31, 2020 | $ | 1,067 | $ | 620 | $ | 1,687 | |||
Interest expense for the three months ended May 31, 2019 | $ | 1,204 | $ | 110 | $ | 1,314 | |||
Interest expense for the nine months ended May 31, 2020 | $ | 3,287 | $ | 1,477 | $ | 4,764 | |||
Interest expense for the nine months ended May 31, 2019 | $ | 3,606 | $ | 380 | $ | 3,986 | |||
(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.
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 | Notional Amount as of | |||||||||||
November 30, | August 31, | May 31, | August 31, | |||||||||
Floating Rate Payer (Swap Counterparty) | 2019 | 2019 | 2020 | 2019 | ||||||||
Union Bank | $ | 34,850 | $ | 35,169 | $ | 34,213 | $ | 35,169 | ||||
Citibank N.A. | 60,825 | 24,225 | 50,650 | 24,225 | ||||||||
Scotiabank | 17,750 | 18,375 | 16,500 | 18,375 | ||||||||
Total | $ | 113,425 | $ | 77,769 | $ | 101,363 | $ | 77,769 | ||||
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):
November 30, 2019 | August 31, 2019 | May 31, 2020 | August 31, 2019 | |||||||||||||||||||||||||||||||||||||
Derivatives designated as cash flow hedging instruments | Balance Sheet Classification | 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 | $ | 436 | $ | (144) | $ | 292 | $ | — | $ | — | $ | — | Other non-current assets | $ | 428 | $ | (132) | $ | 296 | $ | — | $ | — | $ | — | ||||||||||||||
Cross-currency interest rate swaps | Other current assets | 2,747 | (906) | 1,841 | 2,736 | (903) | 1,833 | Other current assets | — | — | — | 2,736 | (903) | 1,833 | ||||||||||||||||||||||||||
Interest rate swaps | Other long-term liabilities | (1,429) | 344 | (1,085) | (2,178) | 517 | (1,661) | Other long-term liabilities | (4,005) | 933 | (3,072) | (2,178) | 517 | (1,661) | ||||||||||||||||||||||||||
Cross-currency interest rate swaps | Other long-term liabilities | (580) | 174 | (406) | (732) | 220 | (512) | Other long-term liabilities | (1,562) | 475 | (1,087) | (732) | 220 | (512) | ||||||||||||||||||||||||||
Cross-currency interest rate swaps | Other current liabilities | (60) | 18 | (42) | — | — | — | Other current liabilities | (30) | 9 | (21) | — | — | — | ||||||||||||||||||||||||||
Net fair value of derivatives designated as hedging instruments | $ | 1,114 | $ | (514) | $ | 600 | $ | (174) | $ | (166) | $ | (340) | $ | (5,169) | $ | 1,285 | $ | (3,884) | $ | (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
November 30, 2019, May 31, 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.
The following table summarizes As of May 31, 2020, the fair value of the Company’sCompany has settled its outstanding call options and does not have any other contracts not designated as hedging instruments:instruments.
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For the three and nine months ended November 30, 2019,May 31, 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 | Three Months Ended | Nine Months Ended | ||||||||||||||||
November 30, | November 30, | May 31, | May 31, | May 31, | May 31, | |||||||||||||
Income Statement Classification | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Other expense, net | $ | (1,270) | $ | — | $ | — | $ | — | $ | (912) | $ | — | ||||||
NOTE 9 – SEGMENTS
The Company and its subsidiaries are principally engaged in the international operation of membership shopping in 45 warehouse clubs located in 12 countries and 1 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):
United | Central | Caribbean | Colombia Operations | Reconciling | Total | United | Central | Caribbean | Colombia Operations | Reconciling | Total | |||||||||||||||||||||||||
Three Months Ended November 30, 2019 | ||||||||||||||||||||||||||||||||||||
Three Months Ended May 31, 2020 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 15,852 | $ | 452,927 | $ | 250,304 | $ | 80,848 | — | $ | 799,931 | |||||||||||||||||||||||||
Intersegment revenues | 230,826 | 4,791 | 1,548 | 787 | (237,952) | — | ||||||||||||||||||||||||||||||
Depreciation, Property and equipment | 1,294 | 7,577 | 3,810 | 1,591 | — | 14,272 | ||||||||||||||||||||||||||||||
Amortization, Intangibles | 607 | — | — | — | — | 607 | ||||||||||||||||||||||||||||||
Operating income (loss) | (1,115) | 27,606 | 13,547 | 3,487 | (19,558) | 23,967 | ||||||||||||||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. | (3,785) | 22,724 | 10,849 | 2,403 | (19,486) | 12,705 | ||||||||||||||||||||||||||||||
Capital expenditures, net | 1,446 | 9,395 | 2,163 | 3,508 | — | 16,512 | ||||||||||||||||||||||||||||||
Nine Months Ended May 31, 2020 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 17,339 | $ | 466,802 | $ | 235,017 | $ | 92,783 | $ | — | $ | 811,941 | $ | 52,039 | $ | 1,442,336 | $ | 747,004 | $ | 277,228 | $ | — | $ | 2,518,607 | ||||||||||||
Intersegment revenues | 349,950 | 4,045 | 1,202 | 536 | (355,733) | — | 868,137 | 12,745 | 3,627 | 1,870 | (886,379) | — | ||||||||||||||||||||||||
Depreciation, Property and equipment | 1,348 | 6,882 | 3,966 | 2,018 | — | 14,214 | 3,981 | 22,027 | 11,602 | 5,452 | — | 43,062 | ||||||||||||||||||||||||
Amortization, Intangibles | 599 | — | — | — | 599 | 1,805 | — | — | — | — | 1,805 | |||||||||||||||||||||||||
Operating income | 2,587 | 31,700 | 11,810 | 4,524 | (19,907) | 30,714 | 3,401 | 96,972 | 40,436 | 13,411 | (60,730) | 93,490 | ||||||||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. | (724) | 26,751 | 10,318 | 3,271 | (19,888) | 19,728 | (5,350) | 79,815 | 34,978 | 9,340 | (60,750) | 58,033 | ||||||||||||||||||||||||
Long-lived assets (other than deferred tax assets) (3) | 84,117 | 471,366 | 177,742 | 143,818 | — | 877,043 | 83,813 | 481,942 | 181,578 | 143,437 | — | 890,770 | ||||||||||||||||||||||||
Intangibles, net | 11,977 | — | — | — | — | 11,977 | 10,772 | — | — | — | — | 10,772 | ||||||||||||||||||||||||
Goodwill | 10,695 | 24,532 | 10,198 | — | — | 45,425 | 10,695 | 24,484 | 10,137 | — | — | 45,316 | ||||||||||||||||||||||||
Total assets | 168,375 | 754,364 | 369,575 | 231,797 | — | 1,524,111 | 224,682 | 727,527 | 384,168 | 238,112 | — | 1,574,489 | ||||||||||||||||||||||||
Capital expenditures, net | 629 | 15,243 | 4,520 | 20,834 | — | 41,226 | 5,564 | 42,766 | 13,913 | 28,807 | — | 91,050 | ||||||||||||||||||||||||
Three Months Ended November 30, 2018 | ||||||||||||||||||||||||||||||||||||
Three Months Ended May 31, 2019 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 17,339 | $ | 439,806 | $ | 225,009 | $ | 97,483 | $ | — | $ | 779,637 | $ | 17,454 | $ | 448,118 | $ | 228,586 | $ | 94,398 | $ | — | $ | 788,556 | ||||||||||||
Intersegment revenues | 350,719 | 437 | 1,093 | 278 | (352,527) | — | 284,205 | 3,401 | 1,032 | 444 | (289,082) | — | ||||||||||||||||||||||||
Depreciation, Property and equipment | 1,960 | 5,870 | 3,191 | 2,103 | — | 13,124 | 1,312 | 6,200 | 3,551 | 2,132 | — | 13,195 | ||||||||||||||||||||||||
Amortiazation, Intangibles | 599 | — | — | — | — | 599 | ||||||||||||||||||||||||||||||
Amortization, Intangibles | 606 | — | — | — | — | 606 | ||||||||||||||||||||||||||||||
Operating income (loss) | (1,050) | 28,792 | 12,027 | 3,416 | (18,515) | 24,670 | 1,139 | 26,314 | 10,295 | 3,294 | (19,045) | 21,997 | ||||||||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. | (3,825) | 24,185 | 9,985 | 2,815 | (18,548) | 14,612 | (1,655) | 22,725 | 9,514 | 2,528 | (19,016) | 14,096 | ||||||||||||||||||||||||
Long-lived assets (other than deferred tax assets)(3) | 90,061 | 320,136 | 149,823 | 110,969 | — | 670,989 | ||||||||||||||||||||||||||||||
Capital expenditures, net | 143 | 13,322 | 8,010 | 1,093 | — | 22,568 | ||||||||||||||||||||||||||||||
Nine Months Ended May 31, 2019 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 51,614 | $ | 1,372,918 | $ | 702,954 | $ | 295,132 | $ | — | $ | 2,422,618 | ||||||||||||||||||||||||
Intersegment revenues | 924,624 | 7,620 | 3,375 | 1,119 | (936,738) | — | ||||||||||||||||||||||||||||||
Depreciation, Property and equipment | 3,958 | 18,072 | 10,181 | 6,356 | — | 38,567 | ||||||||||||||||||||||||||||||
Amortization, Intangibles | 1,798 | — | — | — | — | 1,798 | ||||||||||||||||||||||||||||||
Operating income | 4,565 | 90,681 | 37,346 | 10,327 | (59,716) | 83,203 | ||||||||||||||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. | (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 | ||||||||||||||||||||||||||||||
Intangibles, net | 14,381 | — | — | — | — | 14,381 | 13,182 | — | — | — | — | 13,182 | ||||||||||||||||||||||||
Goodwill | 11,230 | 24,726 | 10,292 | — | — | 46,248 | 11,315 | 24,606 | 10,237 | — | — | 46,158 | ||||||||||||||||||||||||
Total assets | 158,591 | 592,114 | 346,397 | 180,141 | — | 1,277,243 | 152,322 | 605,399 | 331,999 | 172,144 | — | 1,261,864 | ||||||||||||||||||||||||
Capital expenditures, net | 1,686 | 22,771 | 10,495 | 1,387 | — | 36,339 | 3,759 | 56,695 | 24,271 | 3,831 | — | 88,556 | ||||||||||||||||||||||||
As of August 31, 2019 | ||||||||||||||||||||||||||||||||||||
Long-lived assets (other than deferred tax assets) | $ | 65,278 | $ | 383,665 | $ | 165,584 | $ | 115,838 | $ | — | $ | 730,365 | $ | 65,278 | $ | 383,665 | $ | 165,584 | $ | 115,838 | $ | — | $ | 730,365 | ||||||||||||
Intangibles, net | 12,576 | — | — | — | — | 12,576 | 12,576 | — | — | — | — | 12,576 | ||||||||||||||||||||||||
Goodwill | 11,315 | 24,593 | 10,193 | — | — | 46,101 | 11,315 | 24,593 | 10,193 | — | — | 46,101 | ||||||||||||||||||||||||
Total assets | 161,583 | 614,579 | 340,216 | 180,033 | — | 1,296,411 | 161,583 | 614,579 | 340,216 | 180,033 | — | 1,296,411 | ||||||||||||||||||||||||
(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 November 30, 2019May 31, 2020 is not comparable with that as of November 30, 2018May 31, 2019 and August 31, 2019.
NOTE 10 – LEASES
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 elected 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 c) 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 eliminating 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 sincebecause election of this expedient could make adoption more complex given that reevaluation ofthe requirement to reevaluate the lease term.
A practical expedient allowing the Company to not separate lease components from nonlease components (e.g., common area maintenance costs), since because the Company does not combine lease and nonlease components for any of its real estate leases.
In accordance with ASC 842, the Company determines if an arrangement is a lease at inception or modification of a contract and classifies 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 November 30, 2019,May 31, 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 period incurred, which is the period in which it becomes probable that the specified target that triggers the variable lease payments will be achieved. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
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 reasonably certain lease term. The operating lease terms may include options to extend or terminate the lease when it is reasonably 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 a 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 $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 retained 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.
The following table is a summary of the Company’s components of total lease costs for the first quarterthree and nine months of fiscal year 2020 (in thousands):
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Operating lease cost | $ | 4,338 | $ | 12,831 | ||
Short-term lease cost | 64 | 146 | ||||
Variable lease cost | 856 | 2,983 | ||||
Sublease income | (258) | (829) | ||||
Total lease costs | $ | 5,000 | $ | 15,131 | ||
The weighted average remaining lease term and weighted average discount rate for operating leases as of November 30, 2019May 31, 2020 were as follows:
Operating leases | ||
Weighted average remaining lease term in years |
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Supplemental cash flow information related to leases under which the Company is the lessee was as follows (amounts in thousands):
Three Months Ended | |||
November 30, | |||
2019 | |||
Operating cash flows paid for operating leases | $ | 3,805 | |
Three Months Ended | Nine Months Ended | |||||
May 31, | May 31, | |||||
2020 | 2020 | |||||
Operating cash flows paid for operating leases | $ | 3,653 | $ | 11,306 | ||
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):
Leased | Leased | |||||||
Years Ended November 30, | Locations(1) | |||||||
2020 | $ | 14,318 | ||||||
Years Ended May 31, | Locations(1) | |||||||
2021 | 13,403 | $ | 14,914 | |||||
2022 | 13,231 | 14,959 | ||||||
2023 | 13,129 | 14,762 | ||||||
2024 | 12,438 | 14,454 | ||||||
2025 | 13,984 | |||||||
Thereafter | 179,042 | 171,840 | ||||||
Total future lease payments | 245,561 | 244,913 | ||||||
Less imputed interest | (115,553) | (110,229) | ||||||
Total operating lease liabilities | $ | 130,008 | (2) | $ | 134,684 | (2) | ||
(1)Operating lease obligations have been reduced by approximately $2.0$1.2 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 $1.5$0.7 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 November 30, 2019.May 31, 2020.
NOTE 11 – SUBSEQUENT EVENTS
The Company has evaluated all events subsequent to the balance sheet date of November 30, 2019May 31, 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.
Financing Transactions
On December 3, 2019, the Company’s Colombia subsidiary refinanced its existing balloon payment on the original $15.0 million U.S. dollar denominated contractual debt. Upon refinance, the Colombia subsidiary entered into a five year cross currency interest rate swap. The swap contract states that the Company will receive interest based on the three-month LIBOR rate plus 2.45% on a quarterly amortizing initial notional value of $7.9 million and pay fixed interest of approximately 7.9% on a quarterly amortizing initial notional value of $7.9 million.
On December 6, 2019, the Company's Guatemala subsidiary entered into a long-term loan agreement for 160.0 million Guatemalan quetzales, or approximately $20.0 million in U.S. dollars, which is to be repaid in ten years with monthly interest and principal payments beginning in the second year of the loan. The interest rate is fixed at 7.0% for the first five year period and the loan was funded on December 10, 2019.
PRICESMART, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements concerning PriceSmart, Inc.'s ("PriceSmart", the "Company" 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: adverse changes in economic conditions in the Company'sCompany’s markets, natural disasters, compliance risks, volatility in currency exchange rates, competition, consumer and small business spending patterns, political instability, increased costs associated with the integration 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, COVID-19 related factors and challenges, including among others, the duration of the pandemic, the unknown long-term economic impact, the impact of government policies and restrictions that have limited access for our members, and shifts in demand away from discretionary or higher priced products to lower priced products, 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“Item 1A. Risk Factors"Factors” and "Item“Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019 filed with the United States Securities and Exchange Commission ("SEC"(“SEC”) on October 29, 2019.2019 and our Quarterly Report on Form 10-Q for the three months ended February 29, 2020 filed with the SEC on April 8, 2020. These risk factors may be updated from time to time in our other filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. Forward-looking statements speak only as of the date that they are made, and the Company does not undertake to update them, except as required by law.
The following discussion and analysis compares the results of operations for the three and nine months ended November 30,May 31, 2020 and May 31, 2019 and 2018 and should be read in conjunction with the consolidated financial statements, and the accompanying notes included therein.
Overview
PriceSmart began operations in 1996 in San Diego, California. We own and operate U.S. style membership shopping warehouse clubs in Central America, the Caribbean and Colombia. We also function as a wholesale supplier to a retailer in the Philippines. We sell high quality brand name and private label consumer products and provide services such as optical and tires 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,Additionally, 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. ThisWe believe this smaller format has the potential to expand our geographic reach in existing 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. LowerWe 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.
Logistics and distribution efficiencies are fundamental to delivering high quality merchandise at low prices to our members. We continue to explore ways to deliver value, improve efficiency, reduce costs and ensure a flow of high quality, curated merchandise to our warehouse clubs.
Purchasing land and constructing warehouse clubs is generally our largest ongoing capital investment. Securing land for warehouse club locations is challenging in several of our markets because suitable sites at economically feasible prices are difficult to find. We believe 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 continue to do so in the future.
Our warehouse clubs currently 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 numbersnumber of warehouse clubs in operation as of November 30, 2019May 31, 2020 for each country or territory were as follows:
Number of | Number of | Anticipated | Anticipated | Number of | Number of | |||||||||||
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 | November 30, 2018 | November 30, 2019 | In Fiscal Year 2020 | In Fiscal Year 2021 | May 31, 2019 | May 31, 2020 | ||||||||||
Colombia | 7 | 7 | — | 2 | 7 | 7 | ||||||||||
Costa Rica | 7 | 7 | 1 | — | 7 | 7 | ||||||||||
Panama | 5 | 7 | — | — | 6 | 7 | ||||||||||
Dominican Republic | 4 | 5 | — | — | 4 | 5 | ||||||||||
Trinidad | 4 | 4 | — | — | 4 | 4 | ||||||||||
Guatemala | 3 | 4 | — | — | 3 | 4 | ||||||||||
Honduras | 3 | 3 | — | — | 3 | 3 | ||||||||||
El Salvador | 2 | 2 | — | — | 2 | 2 | ||||||||||
Nicaragua | 2 | 2 | — | — | 2 | 2 | ||||||||||
Aruba | 1 | 1 | — | — | 1 | 1 | ||||||||||
Barbados | 1 | 1 | — | — | 1 | 1 | ||||||||||
U.S. Virgin Islands | 1 | 1 | — | — | 1 | 1 | ||||||||||
Jamaica | 1 | 1 | — | 1 | 1 | 1 | ||||||||||
Totals | 41 | 45 | 1 | 3 | 42 | 45 | ||||||||||
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. We opened our 46th warehouse club in Liberia, Costa Rica, on June 17, 2020. The new Liberia club is a smaller warehouse club located approximately 130 miles from the nearest PriceSmart club and three hours from the capital city of San José. We are also currently constructing and expect to open our third warehouse club in Bogota, Colombia during our second fiscal quarter of 2021.
The table below shows whenDue to the newest clubs will open. Once these four clubs are open,uncertainty created from the Company willoutbreak of COVID-19 and the unknown potential social and economic impacts in the markets where we operate 49and any resulting consequences to our results of operations and cash flow, we continue to closely monitor and reevaluate the timing of our future capital investments and warehouse clubs.club openings.
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We are investingcontinue to invest in technology to increase efficiencies and to enableenhance our member experience by enabling omni-channel capabilities, including e-commerce to enhanceonline shopping and services. During the member experience.third quarter of Fiscal 2020, we launched online ordering and our Click & Go™ curbside pickup service. In June 2020, we offered this service in all 13 of our markets and in substantially all clubs.
We also operate a legacy business (casillero and marketplace) Aeropost businessunder the “Aeropost” banner in 38 countries in Latin America and the Caribbean, many of which overlap with markets where we operate warehouse clubs.
Factors Affecting Our Business
COVID-19 Updates
The COVID-19 pandemic resulted in significant challenges across our 13 markets in the third quarter of fiscal 2020. Many markets imposed limitations, varying by market and in frequency, on access to the Company’s clubs and on the Company’s club operations, including in some cases frequent temporary club closures, a reduction in the number of days during the week and hours per day the Company’s clubs are permitted to be open, restrictions on segments of the population permitted to shop or circulate on particular days, and limits on the number of people permitted to be in the club at the same time. 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. We have also experienced product mix shifts due to changing consumer habits, as well as sporadic supply-chain challenges, which can impact inventory levels. In response, we have shifted our focus to four main priorities:
Protect the safety and well-being of our employees and our members.We continue to be vigilant in taking the necessary and prudent measures to provide the safest possible environment for our employees and our members. We are closely tracking numerous decrees and government mandates and are following all local guidelines. We have taken preventative measures that include frequent and enhanced cleaning and sanitizing protocols, providing personal protective equipment, installing protective barriers for the cashiers and in other member-facing areas, reducing or eliminating in-club food service, eliminating food sampling, implementing social distancing measures, metering the number of customers in a club at any one time, requiring masks to be worn by members in the club (where legally permitted), taking temperatures of employees at the beginning of shifts, quickly identifying and cooperating with local health officials about confirmed cases, promptly implementing contact tracing protocols and mapping of potentially exposed employees who are then immediately quarantined while continuing to be paid, off-siting employees whose functions could be performed remotely, offering vulnerable employees with underlying health conditions, employees over 60 and pregnant employees paid leave and vigilantly educating our employees about safe practices and enforcing best practices of good hygiene. We have also expanded our efforts to educate family members of employees about safe practices and to provide them with masks and sanitizing materials. We have modified our sick leave policy to make sure that sick people can take paid time off. We have built reserve teams of employees who do not overlap with each other so that they can step in as needed.
Take proactive measures to protect our supply chain. We are working closely with our suppliers to make sure that we have essential items available for our members. This includes increasing the use of our regional and local distribution centers and merchandise vendors to provide additional flexibility and reduce the risk of interruption of the flow of merchandise to our markets. We have also placed limits on the quantity of certain key items that members can purchase such as cleaning supplies, paper products and core shelf-stable groceries. We have also activated distribution systems and routing to ensure optionality in the event of outbreak or restrictions on mobility in certain geographic areas.
Expand technology-enabled shopping. During the third fiscal quarter of 2020, we launched our Click & Go™ program to allow for a contactless way for our members to shop. In June 2020, we offered the Click & Go™ program in all 13 of our markets and substantially all clubs we operate, providing an alternative and convenient way for our members to shop, while reducing physical contact. Our Click & Go™ program enables members to use our e-commerce platform to identify and select merchandise, order and pay online, and then have their orders placed in their cars at their chosen clubs. We continue to work on improving and expanding our online initiatives, in conjunction with optimizing our club operations to allow members to shop safely, quickly and efficiently.
Manage cash and capital resources. Given the uncertainty surrounding the potential impact of the outbreak on our results of operations and cash flows, we are proactively taking steps to secure and preserve available cash. Initially, we suspended most of our capital projects and discretionary spending. As we gained a better understanding of the climate in which we were operating and our resulting performance, we methodically restarted several of our previously postponed investments. We opened our smaller format warehouse club in Liberia, Costa Rica, on June 17, 2020, and we have resumed construction on our third club in the greater metropolitan area of Bogota, the eighth in Colombia, which is expected to open in the second quarter of fiscal 2021. We continue to evaluate when to restart previously announced construction of future warehouse clubs on land that we acquired in Bucaramanga, Colombia and in Jamaica, as well as other capital projects. We also furloughed approximately 80 employees in the United States and implemented temporary salary reductions for employees and executives above a certain income level on a tiered basis increasing from 10% to 30% based on compensation level. Additionally, the Board of Directors waived their cash payment for the calendar quarter ended June 30, 2020. Finally, we have negotiated extended terms with many vendors and have taken advantage of tax deferral arrangements, where available. In the current environment, we believe cash flows from operations, our current cash position and access to capital markets will continue to be sufficient to meet our anticipated operating cash needs, which include any deferred liabilities, funding seasonal buildups in merchandise inventories and funding our capital expenditures, dividend payments and other financing requirements. Refer to Item 2 “Management’s Discussion and Analysis - Liquidity and Capital Resources” for additional information.
We expect continued uncertainty in the economies of our 13 markets with respect to the duration and intensity of the COVID–19 pandemic; the length and impact of stay-at-home orders and other restrictions; volatility in employment trends and consumer confidence; volatility in foreign currency exchange rates and commodity prices; and the fiscal austerity measures taken by governments in our markets, which will likely impact our results in the near future.
Overall economic trends, foreign currency exchange volatility, and other factors impacting the business
Our sales and profits vary from market to market within the 13 markets we serve depending on general economic factors, including GDP growth; consumer spending patterns; foreign currency exchange rates; political policies and employment 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 threenine months of fiscal year 2020 and fiscal year 2019, approximately 77% and 78%, respectively, of our net merchandise sales were in currencies other than the U.S. dollar. Of those sales, 49% and 52% were comprised of sales of products we purchased in U.S. dollars.dollars during the first nine months of fiscal year 2020 and fiscal year 2019, respectively.
A devaluationFluctuation of local currency reducesversus the U.S. dollar can increase or decrease the value of sales and membership income that is generatedwe generate in that country when translated to U.S. dollars for our consolidated financial results. In addition, whencases where 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 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. Most countries in our Central America segment experienced adverse market conditions that resulted in a difficult operating environment during the first three months of fiscal year 2020. Increasing foreign currency exchange volatility, slowing global economy activity and trade, decreasing levels of public investment and tax reform stalled economic growth for most of our countries in 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. 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 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, compared 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,populations, such as Honduras, El Salvador, Jamaica and Nicaragua, offer growth potential but they may have a more limited potentialmarket opportunity for sales growth as compared to more developed countries with larger or growing upper and middle class consumer populations.
Political and other factors in each of our markets may have significant effects on our business. U.S. foreign policy can also have an impact on social and economic stability in the countries where we operate. For 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 U.S. policies regarding financial assistance could cause political or financial instability in the countries we serve.
In the past, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedescan impede our ability to convert local currencies obtained through merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products, or otherwise redeploy in our Company, increasing our foreign exchange exposure to any devaluation of the local currency relative to the U.S. dollar. We continued to experience this situationilliquidity in Trinidad (“TT”) during the start of fiscal year 2020. However, as of May 31, 2020, our Trinidad subsidiary was current on its U.S. dollar payables for imported merchandise. 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 become available, this illiquidity condition is likely to continue. As of November 30, 2019,May 31, 2020, our Trinidad subsidiary had a net Trinidad dollar denominated asset positioncash and cash equivalents and short and long-term investments measured in U.SU.S. dollars of approximately $21.9$72.3 million, a decreasean increase of $3.0$47.4 million from August 31, 2019 when these same balances were approximately $24.9 million. Illiquidity of the Trinidad dollar could signify that it is overvalued, and the Trinidad government could decide to devalue the currency to improve market liquidity, resulting in a devaluation in the U.S. dollar value of these cash and investments balances. If, for example, a hypothetical 20% devaluation of the Trinidad dollar were to occur, the value of our Trinidad subsidiary had netdollar cash and investments position, measured in U.S. dollars, would decrease by approximately $14.5 million, with a corresponding decrease in our Stockholders’ Equity recorded in the Accumulated other comprehensive loss caption of our consolidated balance sheet. Separate from the Trinidad dollar denominated cash and investments illiquidity situation described above, as of May 31, 2020, we had a U.S. dollar denominated net monetary asset position of approximately $24.9 million. $11.2 million in Trinidad that would produce a gain from a potential devaluation of Trinidad dollars. If, for example, a hypothetical 20% devaluation of the Trinidad dollar occurred, the net effect on Other income (expense), net of revaluing these U.S. dollar net monetary assets would be an approximate $2.2 million gain.
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.
Mission and Business Strategy
Our mission is to improve the quality of life for members, their businesses and the communities in which they live and work, while treating our end-consumeremployees well and business members.being supportive of our suppliers. To do this, we make available a wide range of high quality, curated merchandise sourced from around the world at value prices.good value. The annual membership fee enables us to operate our business offer a curated selection of products and services, 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 satisfy our members’ shopping expectations, create additional efficiencies in the supply chain and increase our significance in our members’ lives. We are workingstrive to createestablish a relationship with our members that enhances their lives with quality goods and services and offers a shopping experience that blends the attributesexcitement and appeal of our brick and mortar business with the conveniences associated with technology-supported transactions, servicesconvenience of online shopping and online shopping.services.
Growth
We measure our growth primarily by the amount of the period-over-period activity in our net merchandise sales, our comparable storeclub net merchandise sales, membership income and total revenues. However, our investments are intended to increase the value our membership income.provides to our member. Our investments are focused on the long-termgeared toward creating greater efficiency, to enable lower prices, better services, enhanced convenience and exciting experiences for our members, which we believe will support sustained growth offor the Company. These investments can impact near-term results, such as when we invest in technology and talent that are expected to yield long-term benefits or when we incur fixed costs in advance of achieving full
projected sales, negatively impacting near-term operating profit and net income. When we open a new warehouse club in an existing market, which may reduce reported comparable net merchandise sales due to the transfer of sales from existing warehouse clubs, we do so to protectenhance 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 flow of high quality, curated merchandise to our warehouse clubs. As we continue to refine our logistics and distribution infrastructure, we explore ways to improve our supply chain effectiveness through regional distribution centers that place our merchandise closer to our members.
Purchasing land and constructing warehouse clubs is generally our largest ongoing capital investment. Securing land for warehouse club locations is challenging in several of our markets because suitable sites at economically feasible prices are difficult to find. We believe 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.
We are investing in technology to increase efficiencies and to enable omni-channel capabilities, including e-commerce, to enhance the member experience.
Financial highlights for the first quarter of fiscal yearthree months ended May 31, 2020 included:
Total revenues increased 4.1%1.4% over the comparable prior year period.
Net merchandise sales increased 4.2%1.8% over the comparable prior year period. We ended the quarter with 45 warehouse clubs compared to 4142 warehouse clubs at the end of the firstthird quarter of fiscal year 2019. Foreign currency exchange rate fluctuations impacted net merchandise sales negatively by 1.6%.2.5% 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 December 1, 2019 increased 1.0%May 31, 2020 decreased 3.6%. Foreign currency exchange rate fluctuations impacted comparable net merchandise sales negatively by 1.5%2.5%.
Membership income increased 7.9%3.0% to $13.7$13.5 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 2020.
Total gross margins (net merchandise sales less associated cost of goods sold) increased 1.9% over the comparable prior year period and total gross margins as a percent of net merchandise club sales were 13.9%, remaining flat over the prior year.
Operating income was $24.0 million, an increase of 9.0%, or $2.0 million, compared to the third quarter of fiscal year 2019.
We recorded a $1.5 million net currency loss from currency transactions in the current quarter compared to a $192,000 net gain in the same period last year.
The effective tax rate for the third quarter of fiscal year 2020 was 38.0%, as compared to the effective tax rate for the third quarter of fiscal year 2019 of 34.7%.
Net income attributable to PriceSmart, Inc. for the third quarter of fiscal year 2020 was $12.7 million, or $0.41 per diluted share, compared to $14.1 million, or $0.46 per diluted share, in the comparable prior year period.
Financial highlights for the nine months ended May 31, 2020 included:
Total revenues increased 4.0% over the comparable prior year period.
Net merchandise sales increased 4.1% over the comparable prior year period. We ended the quarter with 45 warehouse clubs compared to 42 warehouse clubs at the end of the third quarter of fiscal year 2019. Foreign currency exchange rate fluctuations impacted net merchandise sales negatively by 1.5%.
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 39 weeks ended May 31, 2020 decreased 0.7%. Foreign currency exchange rate fluctuations impacted comparable net merchandise sales negatively by 1.4%.
Membership income increased 6.8% to $41.4 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 2019.2020.
MerchandiseTotal gross profitsmargin (net merchandise sales less associated cost of goods sold) increased 9.1%7.7% over the comparable prior year period and warehousetotal gross profitsmargins as a percent of net merchandise club sales were 14.9%14.5%, an increase of 7050 basis points (0.7%(0.5%) fromversus the same period last year.
Operating income was $30.7$93.5 million, an increase of 24.5%12.4%, or $6.0$10.3 million, compared to the first quarternine months of fiscal year 2019.
We recorded a $1.7$2.4 million net currency loss from currency transactions in the current quarternine-month period compared to a $1.8$1.9 million net loss in the same period last year.
The effective tax rate for the first quarternine months of fiscal year 2020 was 32.2%33.9%, as compared to the effective tax rate for the first quarternine months of fiscal year 2019 of 33.9%33.7%.
Net income attributable to PriceSmart, Inc. for the first quarternine months of fiscal year 2020 was $19.7$58.0 million, or $0.64$1.90 per diluted share, compared to $14.6$52.5 million, or $0.48$1.73 per diluted share, in the comparable prior year period.
COMPARISON OF THE three and nine months ended November 30,May 31, 2020 and 2019 and 2018
The following discussion and analysis compares the results of operations for the three-month periodand nine-month periods ended on November 30, 2019May 31, 2020 with the three-month periodand nine-month periods ended on November 30, 2018May 31, 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 monthsand nine-months ended November 30, 2019May 31, 2020 and 2018.2019.
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||
November 30, 2019 | November 30, 2018 | May 31, 2020 | May 31, 2019 | |||||||||||||||||||||||||||||||||
Amount | % of net | Increase/ | Change | Amount | % of net | Amount | % of net | Increase/ | Change | Amount | % of net | |||||||||||||||||||||||||
Central America | $ | 456,751 | 58.6 | % | $ | 26,367 | 6.1 | % | $ | 430,384 | 57.6 | % | $ | 442,804 | 57.6 | % | $ | 5,202 | 1.2 | % | $ | 437,602 | 58.0 | % | ||||||||||||
Caribbean | 231,151 | 29.7 | 9,656 | 4.4 | 221,495 | 29.6 | 246,461 | 32.1 | 21,555 | 9.6 | 224,906 | 29.8 | ||||||||||||||||||||||||
Colombia | 90,826 | 11.7 | (4,738) | (5.0) | 95,564 | 12.8 | 79,103 | 10.3 | (13,398) | (14.5) | 92,501 | 12.2 | ||||||||||||||||||||||||
Net merchandise sales | $ | 778,728 | 100.0 | % | $ | 31,285 | 4.2 | % | $ | 747,443 | 100.0 | % | $ | 768,368 | 100.0 | % | $ | 13,359 | 1.8 | % | $ | 755,009 | 100.0 | % | ||||||||||||
Nine Months Ended | ||||||||||||||||||
May 31, 2020 | May 31, 2019 | |||||||||||||||||
Amount | % of net | Increase/ | Change | Amount | % of net | |||||||||||||
Central America | $ | 1,412,007 | 58.4 | % | $ | 70,860 | 5.3 | % | $ | 1,341,147 | 57.7 | % | ||||||
Caribbean | 735,299 | 30.4 | 43,170 | 6.2 | 692,129 | 29.8 | ||||||||||||
Colombia | 271,516 | 11.2 | (17,950) | (6.2) | 289,466 | 12.5 | ||||||||||||
Net merchandise sales | $ | 2,418,822 | 100.0 | % | $ | 96,080 | 4.1 | % | $ | 2,322,742 | 100.0 | % | ||||||
Comparison of Three and Nine Months Ended November 30,May 31, 2020 and 2019 and 2018
Overall, total net merchandise sales grew 4.2%1.8% for the firstthird quarter and 4.1% for the nine-month period ended November 30, 2019.May 31, 2020, respectively, when compared to the same periods last year. The firstthird quarter increase resulted from a 3.8% increase in transactions and a 0.4%21.7% increase in average ticket.ticket and a 16.4% decrease in transactions. For the nine-month period, the increase resulted from a 6.4% increase in average ticket and a 2.1% decrease in transactions. 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.
During the third quarter and the nine-month period, net merchandise sales were positively impacted by increases in average ticket, which were offset by decreases in transactions due to capacity restrictions and other government restrictions as a result of the COVID-19 pandemic. In addition, we had 45the third quarter, governments in our markets imposed restrictions of varying degrees on nearly all businesses, including essential businesses such as ours. These governments have mandated various protocols resulting in limitations on the number of people in our clubs, reduced hours of operation, restrictions on or closure of dining and other services areas, and, in operation assome cases, closure of November 30, 2019 comparedour clubs intermittently or on certain days of the week. These, in combination with consumer trepidation about the spread of COVID-19 and government restrictions limiting times when consumers can leave their homes, have caused reduced traffic in our clubs and led to 41 clubs as of November 30, 2018.the significant decline in transactions for the third quarter and nine-month period ended May 31, 2020.
Net merchandise sales in our Central America segment increased 6.1%1.2% and 5.3% for the firstthird quarter and the nine-months ended November 30, 2019,May 31, 2020, respectively, when compared to the same periodperiods last year. These increases had a 35070 basis point (3.5%(0.7%) and 310 basis point (3.1%) positive impact on total net merchandise sales growth.growth, respectively. All markets within this segment, with the exception of Honduras, showed increased net merchandise sales year-on-year. We added threetwo new clubs to the segment when compared to the period ended November 30, 2018.May 31, 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 Caribbean segment grew 4.4%9.6% and 6.2% for the firstthird quarter and the nine-months ended November 30, 2019,May 31, 2020, respectively, when compared to the same periodperiods last year. These increases had a 130290 basis point (1.3%(2.9%) and 190 basis point (1.9%) positive impact on total net merchandise sales growth.growth, respectively. Our Dominican Republic, Trinidad, and Jamaica markets led the way in this segment with 14.6%21.4%, 16.4%, and 12.3%11.8% growth for the third quarter ended May 31, 2020, and 17.9%, 6.8%, and 11.5% growth for the nine-months ended May 31, 2020, respectively. In the Dominican Republic, we launchedopened our fifth club in June 2019, while in Jamaica investments we made contributed toand Trinidad, strong comparable sales growth was the primary driver of 12.3%.growth for the third quarter and the nine-months ended May 31, 2020.
Net merchandise sales in our Colombia segment decreased 5.0%14.5% and 6.2% for the firstthird quarter and the nine-months ended November 30, 2019,May 31, 2020, respectively, when compared to the same period last year. The decrease for the three-month periodThese decreases had a 60180 basis point (0.6%(1.8%) and 90 basis point (0.9%) negative impact on total net merchandise sales growth.growth, respectively. The declinedeclines for the firstthird quarter isand the nine-months ended May 31, 2020, are primarily due to significant unfavorable foreign currency devaluation during the current period.period
Comparison of Three Months Ended November 30, 2019 and 2018government restrictions in Constant Currencyresponse to the coronavirus outbreak.
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 resultsexchange rate fluctuations 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-month periodthree and nine-month periods ended November 30, 2019.May 31, 2020.
Currency exchange rate fluctuations for the | Currency exchange rate fluctuations for the | |||||||||||
Three Months Ended | three months ended | |||||||||||
November 30, 2019 | May 31, 2020 | |||||||||||
Amount | % change | Amount | % change | |||||||||
Central America | $ | 1,595 | 0.3 | % | $ | 5,556 | 1.2 | % | ||||
Caribbean | (4,760) | (2.1) | (7,616) | (3.4) | ||||||||
Colombia | (9,029) | (9.9) | (17,260) | (18.7) | ||||||||
Net merchandise sales | $ | (12,194) | (1.6) | % | $ | (19,320) | (2.5) | % | ||||
Currency exchange rate fluctuations for the | ||||||
nine months ended | ||||||
May 31, 2020 | ||||||
Amount | % change | |||||
Central America | $ | 15,549 | 1.1 | % | ||
Caribbean | (17,426) | (2.5) | ||||
Colombia | (32,504) | (11.2) | ||||
Net merchandise sales | $ | (34,381) | (1.5) | % | ||
Overall, the effects of currency fluctuations within our markets had an approximate $12.2approximately $19.3 million and $34.4 million, or 160250 basis point (1.6%(2.5%) and 150 basis point (1.5%), negative constant currency impact on net merchandise sales for the first quarter and nine-months ended November 30, 2019.May 31, 2020, respectively.
Currency fluctuations had a $1.6$5.6 million and $15.6 million, or 30120 basis point (0.3%(1.2%) and 110 basis point (1.1%), positive constant currency impact on net merchandise sales in our Central America segment for the threequarter and nine months ended November 30, 2019.May 31, 2020, respectively. The currency fluctuations contributed approximately 2070 basis points (0.2%(0.7%) and 60 basis points (0.6%) of the total positive impact on total net merchandise sales. This is reflective ofsales, respectively. The Costa Rica Colón appreciated significantly against the mix of currency movements within the markets in this segment whendollar as compared to the same three and nine-month period a year ago.ago and was a significant factor in the contribution to the favorably of currency exchange rate fluctuations in this segment.
Currency devaluations had a $4.7$7.6 million and $17.4 million, or 210340 basis point (2.1%(3.4%), and 250 basis point (2.5%) negative constant currency impact on reported net merchandise sales in our Caribbean segment for the threequarter and nine months ended November 30, 2019.May 31, 2020, respectively. The currency devaluations contributed approximately 70100 basis points (0.7%(1.0%) and 80 basis points (0.8%) of the total negative impact on total net merchandise sales for the quarter.quarter and nine months ended May 31, 2020, respectively. Our Jamaica and the Dominican Republic markets both experienced currency devaluation when compared to the same periodperiods last year.
Currency devaluations had a $9.0$17.3 million and $32.5 million, or 9901,870 basis point (9.9%(18.7%) and 1,120 basis point (11.2%), negative constant currency impact on net merchandise sales in our Colombia segment for the three monthsquarter and nine-months ended November 30, 2019.May 31, 2020, respectively. The currency devaluations contributed approximately 110220 basis points (1.1%(2.2%) toand 130 basis points (1.3%) of the total negative impact on total net merchandise sales.sales, respectively.
Comparable Merchandise Sales
We report comparable net merchandise sales on a “same week” basis with 13 weeks in each quarter beginning on a Monday and ending on a Sunday. The periods are established at the beginning of the fiscal year to provide as close of a match as possible to the calendar month and quarter that is used for financial reporting purposes. This approach equalizes the number of weekend days and weekdays in each period for improved sales comparison, as we experience higher merchandise club sales on the weekends. Each of the warehouse clubs used in the calculations was open for at least 13 ½ calendar months before its results for the current period were compared with its results for the prior period. As a result, sales related to our four warehouse clubs opened during calendar year 2019 will not be used in the calculation of comparable sales until they have been open for at least the 13 ½ months. Therefore, comparable net merchandise sales includesinclude only 41 warehouse clubs for the thirteen and thirty-nine week periodperiods ended December 1, 2019.
May 31, 2020.
The following table indicatestables indicate the comparable net merchandise sales in the reportable segments in which we operate and the percentage growthchanges in net merchandise sales by segment during the thirteen weeksweek and thirty-nine week periods ended December 1, 2019May 31, 2020 and DecemberJune 2, 2018.2019.
Thirteen Weeks Ended | Thirteen Weeks Ended | |||||||||||
December 1, 2019 | December 2, 2018 | May 31, 2020 | June 2, 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 | % | (4.5) | % | (6.4) | % | (1.8) | % | ||||
Caribbean | 2.1 | (0.2) | 6.4 | 2.9 | ||||||||
Colombia | (5.2) | 5.4 | (14.8) | (4.5) | ||||||||
Consolidated segments | 1.0 | % | (2.1) | % | ||||||||
Consolidated comparable net merchandise sales | (3.6) | % | (0.8) | % | ||||||||
Thirty-Nine Weeks Ended | ||||||
May 31, 2020 | June 2, 2019 | |||||
% Increase/(decrease) in comparable net merchandise sales | % Increase/(decrease) in comparable net merchandise sales | |||||
Central America | (1.4) | % | (2.9) | % | ||
Caribbean | 3.2 | 1.4 | ||||
Colombia | (6.6) | 0.6 | ||||
Consolidated comparable net merchandise sales | (0.7) | % | (1.3) | % | ||
Comparison of Thirteen and Thirty-Nine Week Periods Ended December 1,May 31, 2020 and June 2, 2019 and December 2, 2018
Comparable net merchandise sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the thirteen week period ended December 1, 2019 increased 1.0%May 31, 2020 decreased 3.6%. Comparable net merchandise sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the thirty-nine week period ended on May 31, 2020 decreased 0.7%.
Comparable net merchandise sales in our Central America segment increased 1.8%decreased 6.4% and 1.4% for the thirteen week periodand thirty-nine week periods ended December 1, 2019. This increaseMay 31, 2020. These decreases contributed approximately 110370 basis points (1.1%(3.7%) and 80 basis points (0.8%) of the increasedecrease in total comparable merchandise sales.sales, respectively.
For the thirteen weeks ended December 1, 2019,May 31, 2020, decreases in comparable net merchandise sales in Guatemala, Honduras and Panama contributed approximately 540 basis points (5.4%) of the decrease, which was partially offset by a 170 basis point (1.7%) increase in Costa Rica, El Salvador, and Nicaragua. The decreases in Guatemala, Honduras, and Panama are primarily related to periodic club closures and other government-mandated restrictions in response to the coronavirus outbreak, which also include travel restrictions, “shelter in place” advisories, curfews, and social distancing measures. Many of these government policies and restrictions in response to the coronavirus outbreak have resulted in limiting access for our members and impacted our club operations. These include 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. We believe comparable net merchandise sales in the segment were also adversely affected by transfers of sales from existing clubs included in the calculation of comparable net merchandise sales to newly opened clubs not included in the calculation, with two in Panama and one in Guatemala. These decreases were partially offset by significant foreign currency appreciation within our Costa Rica market as well as strong performance in our Guatemala, Honduras, El Salvador and Nicaragua markets,markets.
For the thirty-nine week period ended May 31, 2020, comparable net merchandise sales experienced a decline of 11.6% in Panama, 5.6% in Guatemala, and 4.0% in Honduras. These declines contributed approximately 190250 basis points (1.9%(2.5%) of the increase, which wasdecrease, primarily due to coronavirus restrictions and transfers of sales from existing to newly opened clubs. These declines were offset by a 80170 basis point (0.8%(1.7%) decreaseincrease in Panama primarilyCosta Rica, El Salvador, and Nicaragua due to cannibalization by the Company’s two recent club openingsforeign currency appreciation in that country.Costa Rica and strong performance in El Salvador and Nicaragua.
Comparable net merchandise sales in our Caribbean segment increased 2.1%6.4% for the thirteen week period ended December 1, 2019.May 31, 2020. This increase contributed approximately 60190 basis points (0.6%(1.9%) of positive impact inon total comparable net merchandise sales. For the thirty-nine week period ended May 31, 2020, comparable net merchandise sales in our Caribbean segment increased 3.2%, which contributed approximately 90 basis points (0.9%) of positive impact on total comparable net merchandise sales.
For the thirteen weeksand thirty-nine week periods ended December 1, 2019,May 31, 2020, all markets in our Caribbean segment, with the exception of the U.S. Virgin Islands, Aruba and Barbados, showed strong growth compared to the same period in the prior year. Notably,Strong performance in our Trinidad market resulted in 17.0% and 6.6% growth in comparable net merchandise sales and investments we made in our Jamaica market contributed toresulted in 12.3% and 11.2% growth of 11.8% in comparable net merchandise sales for the thirteen and thirty-nine week periodperiods ended December 1, 2019.May 31, 2020. In our U.S. Virgin Islands market, comparable net merchandise sales experienced a slight declinedeclined when compared to the same period in the prior year. Hurricanes Irma and Maria had a severe impact on the infrastructure of the islands in September 2017 and Octoberthe fall of calendar year 2017. DuringFrom that time until the end the first quarter of fiscal year 2018 and 2019,2020, 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 5.2%14.8% and 6.6% for the thirteen and thirty-nine week periodperiods ended December 1, 2019. The decreaseMay 31, 2020. These decreases contributed approximately 70180 basis points (0.7%(1.8%) and 80 basis points (0.8%) of negative impact inon total comparable sales for the respective period. The decline wasThese declines were largely due to the significantly unfavorable devaluation of the Colombian peso relative to the U.S. dollar.dollar and government restrictions imposed in response to the coronavirus outbreak.
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 and thirty-nine week periodperiods ended December 1, 2019.May 31, 2020.
Currency Exchange Rate Fluctuations for the | Currency Exchange Rate Fluctuations for the | |||||||||||
Thirteen Weeks Ended | Thirteen Weeks Ended | |||||||||||
December 1, 2019 | May 31, 2020 | |||||||||||
Amount | % change | Amount | % change | |||||||||
Central America | $ | 1,815 | 0.4 | % | $ | 5,096 | 1.2 | % | ||||
Caribbean | (4,367) | (1.9) | (6,905) | (3.1) | ||||||||
Colombia | (8,763) | (9.7) | (16,630) | (18.3) | ||||||||
Comparable merchandise sales | $ | (11,315) | (1.5) | % | ||||||||
Consolidated comparable net merchandise sales | $ | (18,439) | (2.5) | % | ||||||||
Overall, the mix of currency fluctuations within our markets had an approximate $11.3$18.4 million and $33.0 million, or 150250 basis point (1.5%points (2.5%) and 140 basis points (1.4%), of negative constant currency impact on comparable net merchandise sales for the thirteen and thirty-nine week periodperiods ended December 1, 2019.May 31, 2020.
Currency fluctuations within our Central America segment accounted for approximately 2070 basis points (0.2%(0.7%) and 60 basis points (0.6%) of positive impact in total comparable net merchandise sales for the thirteen and thirty-nine week period.periods. This is reflectiveprimarily the result of significant appreciation in the offsetting devaluation and appreciation ofCosta Rica Colón against the mix of currencies withinU.S. dollar during the markets in this segment whencurrent periods compared to the same periodperiods a year ago.
Currency devaluations within our Caribbean segment accounted for approximately 6090 basis points (0.6%(0.9%) and 70 basis points (0.7%) of the negative impact of currency devaluations on total comparable net merchandise sales for the thirteen and thirty-nine week period ended December 1, 2019. Ourperiods, respectively. The Dominican Republic peso and Jamaica markets experienced currency devaluationJamaican dollar devalued against the U.S. dollar when compared to the same periodperiods last year.
Currency devaluations within our Colombia segment accounted for approximately 110230 basis points (1.1%(2.3%) and 130 basis points (1.3%) of the negative impact of currency devaluations onin total comparable net merchandise sales for the thirteen and thirty-nine week periodperiods ended December 1, 2019.May 31, 2020. This reflects the devaluation of the Colombian peso against the U.S. dollar when compared to the same period a year ago.
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 | Three Months Ended | |||||||||||||||||||||||||||||
November 30, | November 30, | May 31, | May 31, | |||||||||||||||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||||
Amount | Increase | % Change | Membership income % to net merchandise club sales | Amount | Amount | Increase (decrease) | % Change | Membership | Amount | |||||||||||||||||||||
Membership income - Central America | $ | 8,296 | $ | 627 | 8.2 | % | 1.8 | % | $ | 7,669 | $ | 8,194 | $ | 286 | 3.6 | % | 1.9 | % | $ | 7,908 | ||||||||||
Membership income - Caribbean | 3,677 | 345 | 10.4 | 1.6 | 3,332 | 3,730 | 255 | 7.3 | 1.5 | 3,475 | ||||||||||||||||||||
Membership income - Colombia | 1,773 | 34 | 2.0 | 2.0 | 1,739 | 1,601 | (148) | (8.5) | 2.0 | 1,749 | ||||||||||||||||||||
Membership income - Total | $ | 13,746 | $ | 1,006 | 7.9 | % | 1.8 | % | $ | 12,740 | $ | 13,525 | $ | 393 | 3.0 | % | 1.8 | % | $ | 13,132 | ||||||||||
Number of accounts - Central America | 869,673 | 29,389 | 3.5 | % | 840,284 | |||||||||||||||||||||||||
Number of accounts - Caribbean | 436,093 | 16,143 | 3.8 | 419,950 | ||||||||||||||||||||||||||
Number of accounts - Colombia | 338,023 | 1,052 | 0.3 | 336,971 | ||||||||||||||||||||||||||
Number of accounts - Total | 1,643,789 | 46,584 | 2.9 | % | 1,597,205 | |||||||||||||||||||||||||
Nine Months Ended | |||||||||||||||
May 31, | May 31, | ||||||||||||||
2020 | 2019 | ||||||||||||||
Amount | Increase (decrease) | % Change | Membership | Amount | |||||||||||
Membership income - Central America | $ | 24,938 | $ | 1,657 | 7.1 | % | 1.8 | % | $ | 23,281 | |||||
Membership income - Caribbean | 11,176 | 941 | 9.2 | 1.5 | 10,235 | ||||||||||
Membership income - Colombia | 5,250 | 49 | 0.9 | 1.9 | 5,201 | ||||||||||
Membership income - Total | $ | 41,364 | $ | 2,647 | 6.8 | % | 1.7 | % | $ | 38,717 | |||||
Number of accounts - Central America | 840,240 | (11,773) | (1.4) | % | 852,013 | ||||||||||
Number of accounts - Caribbean | 428,822 | 4,835 | 1.1 | 423,987 | |||||||||||
Number of accounts - Colombia | 313,629 | (28,387) | (8.3) | 342,016 | |||||||||||
Number of accounts - Total | 1,582,691 | (35,325) | (2.2) | % | 1,618,016 | ||||||||||
Comparison of Three and Nine Months Ended November 30,May 31, 2020 and 2019 and 2018
The number of member accounts during the first threenine months of fiscal year 20192020 was 2.9% higher2.2% lower than the prior year before.period. Membership income increased 7.9%3.0% and 6.8% over the same period.three and nine-month periods ended May 31, 2020, respectively, compared to the prior-year periods.
The growth in membership accounts and income during fiscal year 2020 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. The launch of Platinum membership in two Central American markets in calendar year 2019 also contributed to the increase in membership income for the quarter and nine-month period.
In our Caribbean market, membership account and income growth was primarily attributable to the opening of the new Bolivar warehouse club in the Dominican Republic in June 2019. The launch of Platinum membership in three Caribbean markets in calendar year 2019 also contributed to the increase in membership income for the quarter and nine-month period.
In Colombia, we increased the Diamond membership fee was increased from 75,000 (COP) to 90,000 (COP) (including VAT) beginning in April 2019, providing a converted membership price of approximately $26,$24, which has contributed to the increase in membership income as a percentage of merchandise sales duringfor the first quarter of fiscal yearnine months ended May 31, 2020 compared to the same prior year period. Additionally, we continued expandingMembership income in
Colombia declined in the third quarter due to the decline in total Colombia membership accounts for the second consecutive quarter.
We began offering our Platinum membership program. During the first quarter of fiscal yearprogram in Colombia in June 2020 and we began offering Platinum memberships in Guatemala starting in November 2019. We expectintend to expand our Platinum membership program to additional markets this year. markets. The annual fee for a Platinum membership in most markets is approximately $75, which is also contributing$75. The Platinum membership program provides members with a 2% rebate on most items, up to an annual maximum of $500. We record the increase in membership income2% rebate as a percentagereduction on net merchandise sales at the time of merchandise clubthe sales in our Central America segment where our penetration is the greatest.transaction.
Lastly, ourOur trailing twelve-month renewal rate was 86.1%82.5% and 85.0% for the periods ended May 31, 2020 and May 31, 2019, respectively. We believe the renewal rate decline is driven by the overall decrease in membership accounts of 2.2% over the same period because of a significant decline of in-club traffic in some of our markets due to governmental COVID-19 movement restrictions on their respective general populaces. Historically, membership renewals have primarily been transacted in the club at the time of purchase of merchandise or services when a membership has expired. Since COVID-19 and the notable increase of online traffic due to our new online catalogue and Click & GoNovember 30, 2019™ services, sign-ups and November 30, 2018.renewals completed online have been increasing.
Other Revenue
Other revenue consists 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.
Three Months Ended | Three Months Ended | ||||||||||||||||||||||||
November 30, 2019 | November 30, 2018 | May 31, 2020 | May 31, 2019 | ||||||||||||||||||||||
Amount | Increase (decrease) from | % Change | Amount | Amount | Decrease from prior year | % Change | Amount | ||||||||||||||||||
Non-merchandise revenue | $ | 8,845 | $ | (274) | (3.0) | % | $ | 9,119 | $ | 7,221 | $ | (1,670) | (18.8) | % | $ | 8,891 | |||||||||
Miscellaneous income | 1,609 | 246 | 18.0 | 1,363 | 1,861 | (540) | (22.5) | 2,401 | |||||||||||||||||
Rental income | 739 | (44) | (5.6) | 783 | 635 | (207) | (24.6) | 842 | |||||||||||||||||
Other revenue | $ | 11,193 | $ | (72) | (0.6) | % | $ | 11,265 | $ | 9,717 | $ | (2,417) | (19.9) | % | $ | 12,134 | |||||||||
Nine Months Ended | ||||||||||||
May 31, 2020 | May 31, 2019 | |||||||||||
Amount | Decrease from | % Change | Amount | |||||||||
Non-merchandise revenue | $ | 26,167 | $ | (1,743) | (6.2) | % | $ | 27,910 | ||||
Miscellaneous income | 5,089 | (2,376) | (31.8) | 7,465 | ||||||||
Rental income | 2,136 | (334) | (13.5) | 2,470 | ||||||||
Other revenue | $ | 33,392 | $ | (4,453) | (11.8) | % | $ | 37,845 | ||||
Comparison of Three and Nine Months Ended November 30,May 31, 2020 and 2019 and 2018
Non-merchandise revenue and rental income for the three-months ended May 31, 2020 decreased primarily from the effects of COVID-19. Non-merchandise revenue decreased because of a decline in customer orders in our casillero and marketplace businesses as consumer purchasing behavior shifted away from discretionary spending to stockpiling and casillero operationsconsumption of essential goods. Rental income decreased by $274,000 primarily due to an unfavorable decline in traffic attributableconcessions granted to Cyber Monday promotions that occurred in December 2019 this year compared to November in the prior year. The net increase of $246,000 inour lessees. Miscellaneous income was primarily due todecreased because of a $189,000 increase inone-time $666,000 reimbursement from a credit card vendor for underpayment of income earned on theour co-branded credit card program interest-generating portfolios (“IGP”).portfolio during the three-months ended May 31, 2019. Non-merchandise revenue and rental income for the nine-months ended May 31, 2020 decreased primarily because of the activity in the third quarter of 2020 as explained above. Miscellaneous income declined primarily from a prior year $2.9 million reimbursement we received during the nine-months ended May 31, 2019 from the underpayment of income earned on our co-branded credit card interest-generating portfolio over several years.
Results of Operations
Three Months Ended | ||||||||||||
Results of Operations Consolidated | November 30, 2019 | November 30, 2018 | Increase/(Decrease) | |||||||||
(Amounts in thousands, except percentages and number of warehouse clubs) | ||||||||||||
Net merchandise sales | ||||||||||||
Net merchandise sales | $ | 778,728 | $ | 747,443 | $ | 31,285 | ||||||
Merchandise sales gross margin | $ | 116,004 | $ | 106,288 | $ | 9,716 | ||||||
Merchandise sales gross margin percentage | 14.9 | % | 14.2 | % | 0.7 | % | ||||||
Revenues | ||||||||||||
Total revenues | $ | 811,941 | $ | 779,637 | $ | 32,304 | ||||||
Percentage change from comparable period | 4.1 | % | ||||||||||
Comparable merchandise sales | ||||||||||||
Total calendar comparable merchandise sales increase (decrease) | 1.0 | % | (2.1) | % | 3.1 | % | ||||||
Gross margin | ||||||||||||
Total gross margin | $ | 136,995 | $ | 126,457 | $ | 10,538 | ||||||
Gross margin percentage to total revenues | 16.9 | % | 16.2 | % | 0.7 | % | ||||||
Selling, general and administrative | ||||||||||||
Selling, general and administrative | $ | 106,281 | $ | 101,787 | $ | 4,494 | ||||||
Selling, general and administrative percentage of total revenues | 13.1 | % | 13.1 | % | 0.0 | % | ||||||
Results of Operations
Three Months Ended | ||||||||||||
Results of Operations Consolidated | May 31, 2020 | May 31, 2019 | Increase/(Decrease) | |||||||||
(Amounts in thousands, except percentages and number of warehouse clubs) | ||||||||||||
Net merchandise sales | ||||||||||||
Net merchandise sales | $ | 768,368 | $ | 755,009 | $ | 13,359 | ||||||
Total gross margin | $ | 107,110 | $ | 105,115 | $ | 1,995 | ||||||
Total gross margin percentage | 13.9 | % | 13.9 | % | - | % | ||||||
Revenues | ||||||||||||
Total revenues | $ | 799,931 | $ | 788,556 | $ | 11,375 | ||||||
Percentage change from prior period | 1.4 | % | ||||||||||
Comparable net merchandise sales | ||||||||||||
Total comparable net merchandise sales decrease | (3.6) | % | (0.8) | % | (2.8) | % | ||||||
Total revenue margin | ||||||||||||
Total revenue margin | $ | 127,175 | $ | 126,669 | $ | 506 | ||||||
Total revenue margin percentage | 15.9 | % | 16.1 | % | (0.2) | % | ||||||
Selling, general and administrative | ||||||||||||
Selling, general and administrative | $ | 103,208 | $ | 104,672 | $ | (1,464) | ||||||
Selling, general and administrative percentage of total revenues | 12.9 | % | 13.3 | % | (0.4) | % | ||||||
Three Months Ended | ||||||||||||
May 31, | % of | May 31, | % of | |||||||||
Results of Operations Consolidated | 2020 | Total Revenue | 2019 | Total Revenue | ||||||||
Operating income- by segment | ||||||||||||
Central America | $ | 27,606 | 3.4 | % | $ | 26,314 | 3.4 | % | ||||
Caribbean | 13,547 | 1.7 | 10,295 | 1.3 | ||||||||
Colombia | 3,487 | 0.4 | 3,294 | 0.4 | ||||||||
United States | (1,115) | (0.1) | 1,139 | 0.1 | ||||||||
Reconciling Items (1) | (19,558) | (2.4) | (19,045) | (2.4) | ||||||||
Operating income - Total | $ | 23,967 | 3.0 | % | $ | 21,997 | 2.8 | % | ||||
(1)The reconciling items reflect the amount eliminated upon consolidation of intersegment transactions.
Three Months Ended | ||||||||||||
November 30, | % of | November 30, | % of | |||||||||
Results of Operations Consolidated | 2019 | Total Revenue | 2018 | Total Revenue | ||||||||
Operating income- by segment | ||||||||||||
Central America | $ | 31,700 | 3.9 | % | $ | 28,792 | 3.7 | % | ||||
Caribbean | 11,810 | 1.5 | 12,027 | 1.5 | ||||||||
Colombia | 4,524 | 0.6 | 3,416 | 0.5 | ||||||||
United States | 2,587 | 0.3 | (1,050) | (0.1) | ||||||||
Reconciling Items (1) | (19,907) | (2.5) | (18,515) | (2.4) | ||||||||
Operating income - Total | $ | 30,714 | 3.8 | % | $ | 24,670 | 3.2 | % | ||||
Nine Months Ended | ||||||||||||
Results of Operations Consolidated | May 31, 2020 | May 31, 2019 | Increase | |||||||||
(Amounts in thousands, except percentages and number of warehouse clubs) | ||||||||||||
Net merchandise sales | ||||||||||||
Net merchandise sales | $ | 2,418,822 | $ | 2,322,742 | $ | 96,080 | ||||||
Total gross margin | $ | 351,406 | $ | 326,147 | $ | 25,259 | ||||||
Total gross margin percentage | 14.5 | % | 14.0 | % | 0.5 | % | ||||||
Revenues | ||||||||||||
Total revenues | $ | 2,518,607 | $ | 2,422,618 | $ | 95,989 | ||||||
Percentage change from comparable period | 4.0 | % | ||||||||||
Comparable net merchandise sales | ||||||||||||
Total comparable net merchandise sales decrease | (0.7) | % | (1.3) | % | 0.6 | % | ||||||
Total revenue margin | ||||||||||||
Total revenue margin | $ | 414,731 | $ | 390,693 | $ | 24,038 | ||||||
Total revenue margin percentage | 16.5 | % | 16.1 | % | 0.4 | % | ||||||
Selling, general and administrative | ||||||||||||
Selling, general and administrative | $ | 321,241 | $ | 307,490 | $ | 13,751 | ||||||
Selling, general and administrative percentage of total revenues | 12.8 | % | 12.7 | % | 0.1 | % | ||||||
Warehouse clubs | |||||||||||
Warehouse clubs at period end | 45 | 41 | 4 | ||||||||
Warehouse club sales square feet at period end | 2,244 | 2,087 | 157 |
Nine Months Ended | ||||||||||||
May 31, | % of | May 31, | % of | |||||||||
Results of Operations Consolidated | 2020 | Total Revenue | 2019 | Total Revenue | ||||||||
Operating income- by segment | ||||||||||||
Central America | $ | 96,972 | 3.9 | % | $ | 90,681 | 3.7 | % | ||||
Caribbean | 40,436 | 1.6 | 37,346 | 1.5 | ||||||||
Colombia | 13,411 | 0.5 | 10,327 | 0.4 | ||||||||
United States | 3,401 | 0.1 | 4,565 | 0.2 | ||||||||
Reconciling Items (1) | (60,730) | (2.4) | (59,716) | (2.5) | ||||||||
Operating income - Total | $ | 93,490 | 3.7 | % | $ | 83,203 | 3.4 | % | ||||
Warehouse clubs | |||||||||||
Warehouse clubs at period end | 45 | 42 | 3 | ||||||||
Warehouse club sales square feet at period end | 2,232 | 2,123 | 109 |
(1)The reconciling items reflect the amount eliminated on consolidation of intersegment transactions.
The following table summarizes the selling, general and administrative expense for the periods disclosed.
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
November 30, | % of | November | % of | May 31, | % of | May 31, | % of | |||||||||||||||||
2019 | Total Revenue | 2018 | Total Revenue | 2020 | Total Revenue | 2019 | Total Revenue | |||||||||||||||||
Warehouse club and other operations | $ | 79,373 | 9.8 | % | $ | 74,222 | 9.5 | % | $ | 78,431 | 9.8 | % | $ | 78,231 | 9.9 | % | ||||||||
General and administrative | 25,884 | 3.2 | 27,335 | 3.5 | 24,408 | 3.1 | 24,532 | 3.1 | ||||||||||||||||
Pre-opening expenses | 953 | 0.1 | 15 | — | 257 | — | 1,647 | 0.3 | ||||||||||||||||
Loss on disposal of assets | 71 | — | 215 | — | 112 | — | 262 | — | ||||||||||||||||
Total Selling, general and administrative | $ | 106,281 | 13.1 | % | $ | 101,787 | 13.1 | % | ||||||||||||||||
Total Selling, General and Administrative | $ | 103,208 | 12.9 | % | $ | 104,672 | 13.3 | % | ||||||||||||||||
Nine Months Ended | ||||||||||||
May 31, | % of | May 31, | % of | |||||||||
2020 | Total Revenue | 2019 | Total Revenue | |||||||||
Warehouse club and other operations | $ | 241,826 | 9.6 | % | $ | 228,161 | 9.4 | % | ||||
General and administrative | 77,910 | 3.1 | 76,835 | 3.2 | ||||||||
Pre-opening expenses | 1,254 | 0.1 | 1,759 | 0.1 | ||||||||
Loss on disposal of assets | 251 | — | 735 | — | ||||||||
Total Selling, general and administrative | $ | 321,241 | 12.8 | % | $ | 307,490 | 12.7 | % | ||||
Comparison of Three and Nine Months Ended November 30,May 31, 2020 and 2019 and 2018
Total gross margin is derived from our Revenue – Net merchandise sales less our Cost of goods sold – Net merchandise sales and represents our sales and cost of sales generated from the business activities of our warehouse clubs. We express our Total gross margin percentage as a percentage of our Net merchandise sales.
On a consolidated basis, net merchandise salestotal gross margin for the firstthird quarter of fiscal year 2020 as a percentage of total net merchandise sales was 14.9%13.9%, 70 basis points (0.7%) higher than the firstsame as the third quarter of fiscal year 2019.
For the nine-month period, consolidated total gross margin as a percentage of total net merchandise sales was 14.5%, 50 basis points (0.5%) higher than the comparable period of fiscal year 2019. This improvement is attributable to more focused merchandising strategies and inventory management. Net merchandise margins increased across all segments with the Central America segment contributing 4030 basis points (0.4%(0.3%), the Caribbean segment contributing 2010 basis points (0.2%(0.1%), and the Colombia segment contributing 10 basis points (0.1%) to the overall increase.
Total grossrevenue margin to totalis derived from Total revenues, increased 70which includes our Net merchandise sales, Membership income, Export sales, and Other revenue and income less our Cost of goods sold for net merchandise sales, Export sales, and Non-merchandise revenues. We express our Total revenue margin as percentage of Total revenues.
Total revenue margin decreased 20 basis points (0.7%(0.2%) for the three-month period presented, which is the result of the increaselower revenue margins from our casillero and marketplace business in total net merchandise sales grossthe quarter of 10 basis points (0.1%). The other 10 basis point (0.1%) shortfall was the result of the non-recurring reimbursement payment from one of our credit card vendors in the prior year. Total revenue margin explained previously. Grossincreased 40 basis points (0.4%) for the nine-month period. Total revenue margin during the three monthsnine-months ended November 30, 2019May 31, 2020 increased by 50 basis points (0.5%) primarily due to improved product margins, attributable to more focused merchandising strategies and inventory management.total gross margins. These total revenue margin improvements were offset by the non-recurring reimbursement payment from one of our credit card vendors in the prior year, which resulted in a 10 basis point (0.1%) decline in total revenue margins.
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 $4.5decreased $1.5 million for the three-month period ended November 30, 2019to 12.9% of total revenues compared to 13.3% of total revenues in the same priorthird quarter of fiscal year period. Both periods had 13.1% selling, general, and administrative expenses to total revenues.2019.
Warehouse club and other operations expense increasedexpenses decreased to 9.8% of total revenues compared to 9.5%9.9% for the firstthird quarter of fiscal year 2020.2019. This increasedecrease of 10 basis points (0.1%) was primarily attributable to savings in salaries and utilities because of reduced hours at our warehouse clubs resulting from COVID 19-related restrictions and cost-saving initiatives in our Aeropost subsidiary.
General and administrative expenses remained flat at 3.1% of total revenues for the third quarter of fiscal year 2020 due to employee furloughs and reduced compensation in our U.S. corporate headquarters and distribution centers.
Pre-opening expenses declined 30 basis points (0.3%) in the third quarter ended May 31, 2020 compared to the same prior year period. This is due to club openings occurring in the prior-year period.
Selling, general and administrative expenses increased to 12.8% of total revenues for the nine-month period ended May 31, 2020, compared to 12.7% of total revenues in the same prior year period.
Warehouse club and other operations expenses increased to 9.6% of total revenues compared to 9.4% for the nine-month period ended fiscal year 2019. The increase is due to operating an additional four warehouse clubs compared to the prior year period. These four new clubs hadhave not reached sales maturity as of November 30, 2019,May 31, 2020, thus increasing operational expenses by 20 basis points (0.2%) as a percentage of total revenues.
General and administrative expenses decreased to 3.2%3.1% of total revenues compared to 3.5%3.2% of total revenues for the comparablenine-months ended May 31, 2020 when compared to the same prior year period. This decrease is mainly driven by approximatelyIn the prior nine-months ended May 31, 2019, two non-recurring transactions increased general and administrative expenses. First, was the $3.8 million, or 50a 20 basis points (0.5%(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 threenine months ended November 30, 2018,May 31, 2019, by $0.13 per share. ThisAn additional decrease of approximately $2.3 million, or 10 basis points (0.10%), was due to the expiration of the amortization of post-combination compensation expense related to the separation costs of our former Chief Executive Officer was partiallyAeropost business we acquired in March 2018. These decreases were offset by an increasenet increases of $1.7$8.8 million, or 2040 basis points (0.2%(0.4%), in general and administrative expenses primarily due to net labor-related investments.additions to headcount to support technology development and implementation and other administrative functions made during the nine-month period ended May 31, 2020.
Pre-opening expense increased to $953,000 or 0.1%For the nine-months ended May 31, 2020, pre-opening expenses remained flat, as a percentage of total revenuesrevenue, compared to the prior yearprior-year period. This increase is attributable to costs incurred to open our 44th and 45th warehouse clubs and for four additional warehouse clubs in our real estate pipeline.
Operating income forin the three months ended November 30, 2019third quarter of fiscal year 2020 increased to $30.7$24.0 million (3.8%(3.0% of total revenue) compared to $24.7$22.0 million (3.2%(2.8% of total revenue) for the same period last year. As described above, higherThis reflects the increase in total revenue margin dollars from net merchandise sales, and lower selling, general and administrative expenses over the comparable prior-year period principally because of the decrease in pre-opening expenses as we had temporarily halted some our previously announced warehouse club projects. These were the primary factors for the overall 20 basis point (0.2%), as percentage of total revenue, increase in operating income.
Operating income for the nine months ended May 31, 2020 increased to $93.5 million (3.7% of total revenue) compared to $83.2 million (3.4% of total revenue) for the same period last year. Higher total gross margins as a percent of sales,total revenue and margin dollars were partially offset by incrementally higher general and administrative expenses and were the primary factors for the overall 30 basis point (0.3%) increase in operating income.
Interest Expense
Three Months Ended | |||||||||
November 30, | November 30, | ||||||||
2019 | 2018 | ||||||||
Amount | Increase/ | Amount | |||||||
Interest expense on loans | $ | 1,265 | $ | (139) | $ | 1,404 | |||
Interest expense related to hedging activity | 261 | 94 | 167 | ||||||
Less: Capitalized interest | (664) | (126) | (538) | ||||||
Net interest expense | $ | 862 | $ | (171) | $ | 1,033 | |||
Comparison of Three Months Ended November 30, 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.
Three Months Ended | |||||||||
May 31, | May 31, | ||||||||
2020 | 2019 | ||||||||
Amount | Increase | Amount | |||||||
Interest expense on loans | $ | 2,220 | $ | 813 | $ | 1,407 | |||
Interest expense related to hedging activity | 620 | 510 | 110 | ||||||
Less: Capitalized interest | (276) | 326 | (602) | ||||||
Net interest expense | $ | 2,564 | $ | 1,649 | $ | 915 | |||
Nine Months Ended | |||||||||
May 31, | May 31, | ||||||||
2020 | 2019 | ||||||||
Amount | Increase | Amount | |||||||
Interest expense on loans | $ | 5,265 | $ | 1,056 | $ | 4,209 | |||
Interest expense related to hedging activity | 1,477 | 1,097 | 380 | ||||||
Less: Capitalized interest | (1,626) | 14 | (1,640) | ||||||
Net interest expense | $ | 5,116 | $ | 2,167 | $ | 2,949 | |||
Comparison of Three and Nine Months Ended May 31, 2020 and 2019
Net interest expense decreasedincreased for the three-month periodthree and nine-month periods ended November 30, 2019May 31, 2020 primarily due to lowerhigher average long-term loan balances.balances to fund our capital projects and recent drawdowns on short-term lines of credit as part of our COVID-19 related efforts to secure cash. Interest expense related to hedging activity increased due to an 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 portiondecrease in capitalized interest for the three and nine-month periods ended May 31, 2020 is mainly attributable to a temporary halt of some of our total interest was capitalized for the first quarterconstruction projects as part of fiscal year 2020 comparedour efforts to the first quarter of fiscal year 2019 because of higher levels of construction activities during the period.preserve our cash on hand.
Other Expense,income (expense), net
Other expense,income (expense), net consists of currency gains or losses, as well as net benefit costs related to our defined benefit plans and the one time settlement of a business combination escrow account.
Three Months Ended | ||||||||||||
May 31, | May 31, | |||||||||||
2020 | 2019 | |||||||||||
Amount | Decrease from prior year | % Change | Amount | |||||||||
Other income (expense), net | $ | (1,564) | $ | (1,723) | (1,083.6) | % | $ | 159 | ||||
Three Months Ended | ||||||||||||
November 30, | November 30, | |||||||||||
2019 | 2018 | |||||||||||
Amount | Increase | %Change | Amount | |||||||||
Other expense, net | $ | (985) | $ | 834 | 45.8 | % | $ | (1,819) | ||||
Nine Months Ended | ||||||||||||
May 31, | May 31, | |||||||||||
2020 | 2019 | |||||||||||
Amount | Increase | % Change | Amount | |||||||||
Other expense, net | $ | (1,826) | $ | 206 | 10.1 | % | $ | (2,032) | ||||
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.
Comparison of Three and Nine Months Ended November 30,May 31, 2020 and 2019 and 2018
For the three and nine months ended November 30, 2019May 31, 2020 Other expense,income (expense), net consisted primarilyincluded $1.5 million and $2.4 million of $1.7 million net expense, respectively, associated with foreign currency transactions and the revaluation of monetary assets and liabilities. The primary driver for this net expense was the $1.3 million unfavorable impact resultingThese gains and losses resulted from the decrease in the fair valuerevaluation of several of our written call options that we executed during the period to reduce the interest cost associated with hedgingnet U.S. dollar denominated financingassets 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.
transactions in our Colombian subsidiary. Our Jamaican subsidiary recorded $300,000 of net expense due to unfavorable foreign currency exchange rate fluctuations during
For the three-month period, the net loss is attributable primarily to losses recorded on the revaluation of our U.S. dollar denominated liabilities in the Dominican Republic as the peso devalued against the U.S. dollar. For the nine months ended November 30, 2019 compared to a $1.5 millionMay 31, 2020, the primary driver for the net expense due to more significant unfavorable foreign currency exchange rate fluctuations in the comparable prior-year period. The $1.7was $2.4 million of net expense fromassociated with foreign currency transactions and revaluationsrevaluation of monetary assets andU.S. dollar denominated liabilities wasin several of our markets. These net expenses were partially offset by a $705,000 net incomegain resulting from the settlement of outstanding claims related to the acquisition of the business that we purchased in March of 2018.
Provision for Income Taxes
Three Months Ended | Three Months Ended | |||||||||||||||||||||
November 30, | November 30, | May 31, | May 31, | |||||||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Amount | Increase | Amount | Amount | Increase from prior year | Amount | |||||||||||||||||
Provision for income taxes | $ | 9,403 | $ | 1,863 | $ | 7,540 | $ | 7,744 | $ | 266 | $ | 7,478 | ||||||||||
Effective tax rate | 32.3 | % | 33.9 | % | 38.0 | % | 34.7 | % | ||||||||||||||
Nine Months Ended | |||||||||||
May 31, | May 31, | ||||||||||
2020 | 2019 | ||||||||||
Amount | Increase | Amount | |||||||||
Provision for income taxes | $ | 29,849 | $ | 3,128 | $ | 26,721 | |||||
Effective tax rate | 33.9 | % | 33.7 | % | |||||||
Comparison of Three and Nine Months Ended November 30,May 31, 2020 and 2019 and 2018
For the three months ended November 30, 2019,May 31, 2020, the effective tax rate was 32.3%38.0%. The decreaseincrease in the effective tax rate versus the prior year was primarily attributable to the following factors:
A comparably favorable net impact of 6.8% resulting from changes in income tax liabilities for uncertain tax positions;
The comparably unfavorable impact of 4.4% in the current period from the effect of changes in foreign currency value and related adjustments; and
A comparably unfavorable net impact of 4.5%3.9% 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;Reform.
For the nine months ended May 31, 2020, the effective tax rate was 33.9%. The increase in the effective tax rate versus the prior year was primarily attributable to the following factors:
TheA comparably favorable impact of 3.8%2.2% resulting from non-deductible separation costs,changes in the prior period, associated with the departure of our former C.E.O;income tax liabilities for uncertain tax positions; and
The comparatively favorableA comparably unfavorable net impact of 1.2%2.6% in the current period resulting from the effectloss of changes inbenefit of foreign currency value.tax credits, which are no longer recoverable as a result of U.S. Tax Reform.
Other Comprehensive Loss
Three Months Ended | ||||||||||||
November 30, | November 30, | |||||||||||
2019 | 2018 | |||||||||||
Amount | Increase from prior year | % Change | Amount | |||||||||
Other comprehensive loss | $ | (3,185) | $ | 10,061 | (76.0) | % | $ | (13,246) | ||||
Three Months Ended | ||||||||||||
May 31, | May 31, | |||||||||||
2020 | 2019 | |||||||||||
Amount | Decrease from prior year | % Change | Amount | |||||||||
Other comprehensive loss | $ | (15,446) | $ | (4,387) | (39.7) | % | $ | (11,059) | ||||
Nine Months Ended | ||||||||||||
May 31, | May 31, | |||||||||||
2020 | 2019 | |||||||||||
Amount | Decrease from prior year | % Change | Amount | |||||||||
Other comprehensive loss | $ | (23,680) | $ | (3,728) | (18.7) | % | $ | (19,952) | ||||
Comparison of Three and Nine Months Ended November 30,May 31, 2020 and 2019 and 2018
Our other comprehensive loss of approximately $3.2$15.4 million for the firstthird quarter of fiscal year 2020 resulted primarily from the comprehensive loss of approximately $3.7$12.9 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, partially offset by comprehensive incomewith additional losses of approximately $513,000$2.6 million related to unrealized gainslosses on changes in our derivative obligations.
The improvement in other Other comprehensive loss infor nine-months ended May 31, 2020, of approximately $23.7 million was primarily the first quarterresult of fiscal year 2020 compared to the first quartercomprehensive loss of fiscal year 2019 is primarily due to lower$20.0 million from foreign currency translation adjustments of $9.7and $3.8 million and gainsrelated to unrealized losses on changes in the fair value of our derivative instruments of $390,000. During first quarter of fiscal year 2020, the largest translation adjustments were related to the translation of the Colombia,obligations. The Colombian and Dominican Republic Jamaica and Nicaragua subsidiaries’ balance sheets and statementspesos foreign currency exchange rate with the U.S. dollar declined significantly during the nine-months ended May 31, 2020 primarily due to COVID-19 related impacts on the economies of income that required us to record additional losses, when compared to the same period in the prior year, to comprehensive net income on translation of approximately $17.7 million. These additional losses recorded were offset by translation adjustments related to the translation of the Costa Rica subsidiary’s balance sheets and statements of income that required us to record additional gains of $8.4 million.those countries.
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 whenif necessary. There is some uncertainty surrounding the continuing potential impact of the novel coronavirus outbreak (COVID-19) on our results of operations and cash flows. As a result, we are proactively taking steps to increase cash available on-hand, including, but not limited to, drawing funds on our short-term facilities and delaying some strategic capital expenditures. Refer to the Notes to Consolidated Financial Statements – Note 7 – Debt for additional information regarding our drawdown on our short-term facilities and long-term borrowings. We have and plan to continue cost savings measures in the U.S. and in the markets where we operate to improve our cash availability.
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.
The following table summarizes the cash and cash equivalents, including restricted cash, held by our foreign subsidiaries and domestically (in thousands).
May 31, | August 31, | |||||
2020 | 2019 | |||||
Amounts held by foreign subsidiaries | $ | 195,479 | $ | 98,964 | ||
Amounts held domestically | 70,545 | 7,272 | ||||
Total cash and cash equivalents, including restricted cash | $ | 266,024 | $ | 106,236 | ||
The following table summarizes the short-term investments held by our foreign subsidiaries and domestically (in thousands).
November 30, | August 31, | May 31, | August 31, | |||||||||
2019 | 2019 | 2020 | 2019 | |||||||||
Amounts held by foreign subsidiaries | $ | 107,493 | $ | 98,964 | $ | 40,042 | $ | 17,045 | ||||
Amounts held domestically | 7,620 | 7,272 | — | — | ||||||||
Total cash and cash equivalents, including restricted cash | $ | 115,113 | $ | 106,236 | ||||||||
Total short-term investments | $ | 40,042 | $ | 17,045 | ||||||||
As of May 31, 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.currencies. 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):
Three Months Ended | Nine Months Ended | |||||||||||||||||
November 30, | November 30, | Increase/ | May 31, | May 31, | Increase/ | |||||||||||||
2019 | 2018 | (Decrease) | 2020 | 2019 | (Decrease) | |||||||||||||
Net cash provided by operating activities | $ | 16,104 | $ | 25,707 | $ | (9,603) | $ | 174,130 | $ | 112,952 | $ | 61,178 | ||||||
Net cash (used in) investing activities | (45,687) | (29,364) | (16,323) | |||||||||||||||
Net cash used in investing activities | (113,978) | (70,971) | (43,007) | |||||||||||||||
Net cash provided by (used in) financing activities | 37,343 | (3,496) | 40,839 | 101,508 | (21,547) | 123,055 | ||||||||||||
Effect of exchange rates | 1,117 | (1,375) | 2,492 | (1,872) | (3,365) | 1,493 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | $ | 8,877 | $ | (8,528) | $ | 17,405 | ||||||||||||
Net increase in cash and cash equivalents | $ | 159,788 | $ | 17,069 | $ | 142,719 | ||||||||||||
Net cash provided by operating activities totaled $16.1$174.1 million and $25.7$113.0 million for the threenine months ended November,May 31, 2020 and 2019, and 2018, respectively. Our cash flow provided by operations is primarily derived from net merchandise sales and membership fees. Cash flows used in operations generally consistsconsist of payments to our merchandise vendors, warehouse operating costs (including payroll, employee benefits and utilities), as well as payments for income taxes. The $9.6$61.2 million decreaseincrease in net cash provided by operating activities was primarily due to ana net increase of accounts payable of $45.9$55.6 million in the first quarteroperating assets and liabilities and a net increase of fiscal year 2020 compared$5.6 million from changes in non-cash reconciling items. The $55.6 million increase in operating assets and liabilities is primarily due to an increasenet working capital improvements of $57.5 million, which resulted from a $68.2 million decrease in merchandise inventories and a $10.7 million decrease in accounts payable over the comparable nine-months ended May 31, 2020 and 2019. The decrease in merchandise inventories is primarily the result of $56.0 millionlower replenishment of certain items within our non-food categories in response to changes in consumer preferences toward purchases of more essential goods during the first quarter of fiscal year 2019, which resulted in a $10.1 million decrease year-over-year. The accounts payable year over year net decrease resulted primarily from a shift in the timing of inventory purchases to earlier in anticipationinitial stages of the holiday season versus a year ago.COVID-19 crisis. The $5.6 million change in non-cash reconciling items was primarily due to the increase in net income of $5.5 million over the comparable nine-month period ended May 31, 2020 and 2019.
Net cash used in investing activities totaled $45.7$114.0 million and $29.4$71.0 million for the threenine months ended November 30,May 31, 2020 and 2019, and 2018, respectively. Our cash used in investing activities is primarily for the construction of and improvements to our warehouse clubs.clubs and management of our cash investments. The $16.3$43.0 million decreaseincrease in cash used in investing activities is primarily the result of a net $14.3$39.6 million increase in short-term and long-term certificate of depositsdeposit purchases and fewer settlements compared to the same nine-month period a year-ago. The increase in purchases and fewer settlements is the result of
additional Trinidad dollars we have on-hand and that we have invested into certificates of deposit to generate interest income while we actively work to convert those Trinidad dollars into U.S. dollars as availability allows. Refer to Item 2 “Management’s Discussion and Analysis – Factors Affecting Our Business” for additional discussion of the current U.S. dollar illiquidity we are experiencing in that market.We also had $1.9$3.3 million of additional construction expenditures made for our expected future warehouse club openings.openings versus the same nine-month period a year ago.
Net cash provided by financing activities totaled $37.3$101.5 million and net cash used in financing activities were $3.5was $21.5 million for the threenine months ended November 30,May 31, 2020 and 2019, and 2018, respectively. Our cash flows provided by or used forin financing activities are used primarily to fund our working capital needs and our warehouse club expansions and investments. The $40.8$123.1 million
increase in cash provided by financing activities is primarily the result of a net increase of proceeds from long-term borrowings of $25.0$59.8 million compared to a year ago as we did notand a net $61.5 million increase in cash provided by additional short-term borrowings, compared to the same nine-month period a year-ago. We have any additional long-term borrowings in fiscal year 2019. We also received $15.6 million of net proceeds fromincreased our short-term borrowings to fund our working capitalincrease available cash on hand to meet current and capital investment needs.any future potential operational cash needs as a result of COVID-19.
The following table summarizes the dividends declared and paid during fiscal year 2019. No dividends have been declared or paid during the first three months of fiscal year 2020.
2020 (amounts are per share).
First Payment | Second Payment | First Payment | Second Payment | |||||||||||||||||||||||||||||||||||
Declared | Amount | Record | Date | Amount | Record | Date | Amount | 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 |
| $ | 0.35 |
| 8/15/2019 |
| 8/30/2019 |
| $ | 0.35 |
| $ | 0.70 |
| 2/15/2019 |
| 2/28/2019 |
| N/A |
| $ | 0.35 |
| 8/15/2019 |
| 8/30/2019 |
| N/A |
| $ | 0.35 |
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
Our financing strategy is to ensure liquidity and access to capital markets while minimizing our borrowing costs. The proceeds of these borrowings were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, acquisitions, and repayment of existing debt. Please see Note 7 – Debt for further discussion.
Derivatives
Please see Note 8 – Derivative Instruments and Hedging Activities for further discussion.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on its financial condition or consolidated financial statements.
Repurchase of Equity Securities and Reissuance of Treasury Shares
At the vesting dates for restricted stock awards to our employees, we repurchase a portion of the shares that have vested at the prior day's closing price per share and apply the proceeds to pay the employees' minimum statutory tax withholding requirements related to the vesting of restricted stock awards. The Company expects to continue this practice going forward. 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 in the future.
We have reissued treasury shares as part of our stock-based compensation programs. During the threenine months ended November 30, 2019May 31, 2020, the Company reissued 69,000174,000 treasury shares. We did not reissue any treasury shares during the first three months of fiscal year 2019.
Critical Accounting Estimates
The preparation of our consolidated financial statements requires that management make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require management to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Management continues to review its accounting policies and evaluate its estimates, including those related to business acquisitions, contingencies and litigation, income taxes, value added taxes, and long-lived assets. We base our estimates on historical experience and on other assumptions that management believes to be reasonable under the present circumstances. Using different estimates could have a material impact on our financial condition and results of operations.
Income Taxes
For interim reporting, we estimate an annual effective tax rate (AETR) pursuant to ASC 740-279, to calculate income tax expense. Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of the consolidated income tax expense. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).
We are required to file federal and state income tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires us to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax 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 November 30, 2019May 31, 2020 and August 31, 2019.
Tax 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 the Company operates, there are defined and structured processes to recover VAT receivables via regular refunds or offsets. However, in one country without a clearly defined refund process, the Company is actively engaged with the local government to recover VAT receivables totaling $6.2 million and $5.1 million as of November 30, 2019May 31, 2020 and August 31, 2019, respectively. In two other countries, minimum income tax rules require the Company to pay taxes based on a percentage of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those it would expect to pay based on taxable income. The Company had income tax receivables of $9.7$9.8 million and $7.8 million and deferred tax assets of $2.8 million and $2.7 million as of November 30, 2019May 31, 2020 and August 31, 2019, respectively, in these countries. While the rules related to refunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests.
Our policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:
Short-term VAT and Income tax receivables, recorded as Other current assets: This classification is used for any countries where our subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. We also classify as short-term any approved refunds or credit notes to the extent that we expect to receive the refund or use the credit notes within one year.
Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where our subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when we do not expect to eventually prevail in its recovery of such balances. We do not currently have any allowances provided against VAT and income tax receivables.
Long-lived Assets
We evaluate quarterly our long-lived assets for indicators of impairment. Indicators that an asset may be impaired are:
the asset's inability to continue to generate income from operations and positive cash flow in future periods;
loss of legal ownership or title to the asset;
significant changes in its strategic business objectives and utilization of the asset(s); and
the impact of significant negative industry or economic trends.
Management's judgments are based on market and operational conditions at the time of the evaluation and can include management's best estimate of future business activity, which in turn drives estimates of future cash flows from these assets. These periodic evaluations could cause management to conclude that impairment factors exist, requiring an adjustment of these assets to their then-current fair market value. Loss/(gain) on disposal of assets recorded during the years reported resulted from improvements to operations and normal preventive maintenance.
Goodwill 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 value of a certain asset may be impaired. Generally, this evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is necessary. If we determine, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative impairment test would be performed. The quantitative test for impairment requires management to make judgments relating to future cash flows, growth rates and economic and market conditions. These evaluations are based on determining the fair value of a reporting unit or asset using a valuation method such as discounted cash flow or a relative, market-based approach. Historically, our reporting units and other indefinite-lived acquired intangible assets have generated sufficient returns to recover the cost of goodwill and other indefinite-lived acquired intangible assets. Because of the nature of the factors used in these tests, if different conditions occur in future periods, future operating results could be materially impacted. For approximately $45.4$45.3 million of certain acquired indefinite-lived intangible assets, the fair value approximated the carrying value; any deterioration in the fair value may result in an impairment charge.
Seasonality
Historically, our merchandising businesses have experienced holiday retail seasonality in their markets. In addition to seasonal fluctuations, our operating results fluctuate quarter-to-quarter as a result of economic and political events in markets that we serve, the timing of holidays, weather, the timing of shipments, product mix, and currency effects on the cost of U.S.-sourced products which may make these products more or less expensive in local currencies and therefore more or less affordable. Because of such fluctuations, the results of operations of any quarter are not indicative of the results that may be achieved for a full fiscal year or any future quarter. In addition, there can be no assurance that our future results will be consistent with past results or the projections of securities analysts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in interest rates and changes in currency exchange rates. As 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 a currency that is not the functional currency of the Company’s local subsidiary. The monetary liability for these leases as of November 30, 2019May 31, 2020 was $34.1$33.7 million. Due to the mix of foreign currency exchange rate fluctuations during the firstthird 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 a hypothetical simultaneous currency devaluationrevaluation based on balances as of November 30, 2019May 31, 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) | Losses 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 | Gains based on change in U.S. dollar denominated other asset/liability balances | Net Loss(1) | ||||||||||||||||
5% | $ | 1,235 | $ | (2,356) | $ | (1,844) | $ | (2,965) | $ | (3,279) | $ | (902) | $ | 3,675 | $ | (506) | ||||||||
10% | $ | 2,471 | $ | (4,711) | $ | (3,688) | $ | (5,928) | $ | (6,557) | $ | (1,803) | $ | 7,350 | $ | (1,010) | ||||||||
20% | $ | 4,942 | $ | (9,423) | $ | (7,376) | $ | (11,857) | $ | (13,114) | $ | (3,606) | $ | 14,699 | $ | (2,021) | ||||||||
(1)Amounts are before consideration of income taxes.
Information about the financial impact of foreign currency exchange rate fluctuations for the three monthsand nine-month period ended November 30, 2019May 31, 2020 is disclosed in Item 2 “Management’s Discussion and Analysis – Other Expense, net”.
The following table disclosesFrom 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 net effect on other expense, net, before considerationU.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 income taxes,tradeable currencies. 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 non-designated derivative contracts that do not qualify for hedge accounting relative to hypothetical Colombian peso currency movements (in thousands):
Hypothetical Currency Movement | Gains based on appreciation of foreign currency | Losses based on devaluation of foreign currency | ||||
5% | $ | 514 | $ | (697) | ||
10% | $ | 1,042 | $ | (1,373) | ||
20% | $ | 1,948 | $ | (3,072) |
our quantitative analysis and discussion.
Information about the change in the fair value of our hedges and the financial impact thereof for the three and nine-month period and three months ended November 30, 2019May 31, 2020 is disclosed in the Notes to Consolidated Financial Statements – Note 8 – Derivative Instruments and Hedging Activities.
Information about the movements in currency exchange rates and the related impact on the translation of the balance sheets of our subsidiaries whose functional currency is not the U.S. dollar for the three and nine-month period and three months ended November 30, 2019May 31, 2020 is disclosed in Item 2 “Management’s Discussion and 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 Overover Financial Reporting
During the first quarter of fiscal year 2020, we finished the implementation of a new lease management and accounting system and updated our accounting policies and internal controls to support the adoption of the new lease accounting standard ASU 2016-02, Leases (Topic 842), effective September 1, 2019.
In addition, 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. Other than the changes related to lease management and accounting, thereThere 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.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. On 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. 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.
During the third quarter of fiscal 2020, the Company filed a Motion to Dismiss the Plaintiff’s Consolidated Amended Complaint and the Plaintiff filed an Opposition to the Motion to Dismiss. During the fourth quarter of fiscal 2020, the Company plans to file a Reply to the Opposition. Oral arguments are scheduled for the first quarter of fiscal 2021.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the 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, 2019.2019 and the factors discussed in Part II, “Item 1A. Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2020. 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, 2019.2019 and Part II, “Item 1A. Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.(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, 2020, the Company repurchased 4,210 shares in the indicated months. These were the only repurchases of equity securities made by the Company during the third quarter of fiscal year 2020. The Company does not have a stock repurchase program.
Period | (a) | (b) | (c) | (d) | ||||||||
March 1, 2020 - March 31, 2020 | 3,914 | $ | 48.17 | — | N/A | |||||||
April 1, 2020 - April 30, 2020 | 296 | $ | 53.70 | — | N/A | |||||||
May 1, 2020 - May 31, 2020 | — | $ | — | — | N/A | |||||||
Total | 4,210 | $ | 48.56 | — | — | |||||||
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(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. |
(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 October 29, 2019.April 7, 2020.
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/ MICHAEL L. MCCLEARY | |
Michael L. McCleary | ||||
| ||||
(Principal Financial Officer and Principal Accounting Officer) | ||||