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PSMT Pricesmart

Filed: 8 Jul 21, 4:24pm

 

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 May 31, 2021

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:

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 30,783,266 shares of its common stock, par value $0.0001 per share, outstanding at June 30, 2021. 

 


 

PRICESMART, INC.

INDEX TO FORM 10-Q

 

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PriceSmart, Inc.’s (“PriceSmart,” “we” or the “Company”) unaudited consolidated balance sheet as of May 31, 2021 and the consolidated balance sheet as of August 31, 2020, the unaudited consolidated statements of income for the three and nine months ended May 31, 2021 and 2020, the unaudited consolidated statements of comprehensive income (loss) for the three and nine months ended May 31, 2021 and 2020, the unaudited consolidated statements of equity for the three and nine months ended May 31, 2021 and 2020, and the unaudited consolidated statements of cash flows for the nine months ended May 31, 2021 and 2020 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)

May 31,

2021

August 31,

(Unaudited)

2020

ASSETS

Current Assets:

Cash and cash equivalents

$

190,687

$

299,481

Short-term restricted cash

781

185

Short-term investments

67,068

46,509

Receivables, net of allowance for doubtful accounts of $166 as of May 31, 2021 and $147 as of August 31, 2020, respectively

12,221

13,153

Merchandise inventories

336,645

309,509

Prepaid expenses and other current assets

31,812

30,165

Total current assets

639,214

699,002

Long-term restricted cash

6,972

4,105

Property and equipment, net

716,337

692,279

Operating lease right-of-use assets, net

125,998

119,533

Goodwill

45,142

45,206

Other intangibles, net

8,368

10,166

Deferred tax assets

22,872

21,672

Other non-current assets (includes $1,160 and $872 as of May 31, 2021 and August 31, 2020, respectively, for the fair value of derivative instruments)

56,483

54,260

Investment in unconsolidated affiliates

10,569

10,602

Total Assets

$

1,631,955

$

1,656,825

LIABILITIES AND EQUITY

Current Liabilities:

Short-term borrowings

$

$

65,143

Accounts payable

341,007

373,172

Accrued salaries and benefits

37,240

32,946

Deferred income

27,255

23,525

Income taxes payable

9,740

7,727

Other accrued expenses and other current liabilities

27,959

37,731

Operating lease liabilities, current portion

8,486

8,594

Dividends payable

10,755

Long-term debt, current portion

20,554

19,437

Total current liabilities

482,996

568,275

Deferred tax liability

1,759

1,713

Long-term income taxes payable, net of current portion

3,947

5,132

Long-term operating lease liabilities

131,510

124,181

Long-term debt, net of current portion

101,294

112,610

Other long-term liabilities (includes $3,154 and $4,685 for the fair value of derivative instruments and $6,665 and $6,155 for post-employment plans as of May 31, 2021 and August 31, 2020, respectively)

10,665

12,182

Total Liabilities

732,171

824,093

 

Stockholders' Equity:

Common stock $0.0001 par value, 45,000,000 shares authorized; 31,456,121 and 31,417,576 shares issued and 30,777,829 and 30,670,712 shares outstanding (net of treasury shares) as of May 31, 2021 and August 31, 2020, respectively

3

3

Additional paid-in capital

459,812

454,455

Accumulated other comprehensive loss

(177,368)

(176,820)

Retained earnings

639,472

582,487

Less: treasury stock at cost, 678,292 shares as of May 31, 2021 and 746,864 shares as of August 31, 2020

(23,116)

(28,406)

Total stockholders' equity attributable to PriceSmart, Inc. stockholders

898,803

831,719

Noncontrolling interest in consolidated subsidiaries

981

1,013

Total Stockholders' Equity

899,784

832,732

Total Liabilities and Equity

$

1,631,955

$

1,656,825

See accompanying notes. 

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

Three Months Ended

Nine Months Ended

May 31,

May 31,

May 31,

May 31,

2021

2020

2021

2020

Revenues:

Net merchandise sales

$

857,478

$

768,368

$

2,594,251

$

2,418,822

Export sales

10,213

8,321

30,800

25,029

Membership income

14,329

13,525

41,427

41,364

Other revenue and income

13,244

9,717

43,787

33,392

Total revenues

895,264

799,931

2,710,265

2,518,607

Operating expenses:

Cost of goods sold:

Net merchandise sales

720,726

661,258

2,179,453

2,067,416

Export sales

9,820

7,995

29,568

24,044

Non-merchandise

5,755

3,503

17,847

12,416

Selling, general and administrative:

Warehouse club and other operations

89,322

78,431

264,603

241,826

General and administrative

33,225

24,408

92,016

77,910

Pre-opening expenses

1

257

651

1,254

Loss on disposal of assets

366

112

568

251

Total operating expenses

859,215

775,964

2,584,706

2,425,117

Operating income

36,049

23,967

125,559

93,490

Other income (expense):

Interest income

518

554

1,454

1,433

Interest expense

(1,596)

(2,564)

(5,857)

(5,116)

Other expense, net

(2,295)

(1,564)

(4,132)

(1,826)

Total other expense

(3,373)

(3,574)

(8,535)

(5,509)

Income before provision for income taxes and
loss of unconsolidated affiliates

32,676

20,393

117,024

87,981

Provision for income taxes

(10,082)

(7,744)

(38,265)

(29,849)

Loss of unconsolidated affiliates

(13)

(16)

(34)

(79)

Net income

22,581

12,633

78,725

58,053

Less: net (income) loss attributable to noncontrolling interest

(52)

72

(223)

(20)

Net income attributable to PriceSmart, Inc.

$

22,529

$

12,705

$

78,502

$

58,033

Net income attributable to PriceSmart, Inc. per share available for distribution:

Basic

$

0.73

$

0.41

$

2.55

$

1.90

Diluted

$

0.73

$

0.41

$

2.55

$

1.90

Shares used in per share computations:

Basic

30,414

30,271

30,396

30,268

Diluted

30,446

30,275

30,423

30,273

See accompanying notes. 

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED—AMOUNTS IN THOUSANDS)

Three Months Ended

Nine Months Ended

May 31,

May 31,

May 31,

May 31,

2021

2020

2021

2020

Net income

$

22,581

$

12,633

$

78,725

$

58,053

Less: net (income) loss attributable to noncontrolling interest

(52)

72

(223)

(20)

Net income attributable to PriceSmart, Inc.

$

22,529

$

12,705

$

78,502

$

58,033

Other Comprehensive Income, net of tax:

Foreign currency translation adjustments (1)

(3,007)

(12,874)

(2,577)

(19,981)

Defined benefit pension plan:

Net gain/(loss) arising during period

3

(16)

65

(3)

Amortization of prior service cost and actuarial gains included in net periodic pensions cost

33

19

99

56

Total defined benefit pension plan

36

3

164

53

Derivative instruments: (2)

Unrealized gains/(losses) on change in derivative

obligations

(667)

(1,471)

488

(208)

Unrealized gains/(losses) on change in
fair value of interest rate swaps

1,048

(1,104)

1,377

(6,295)

Amounts reclassified from accumulated other comprehensive income to other expense, net for settlement of derivatives

2,751

Total derivative instruments

381

(2,575)

1,865

(3,752)

Other comprehensive loss

(2,590)

(15,446)

(548)

(23,680)

Comprehensive income/(loss)

19,939

(2,741)

77,954

34,353

Less: comprehensive income attributable to noncontrolling interest

33

35

91

90

Comprehensive income/(loss) attributable to PriceSmart, Inc.

$

19,906

$

(2,776)

$

77,863

$

34,263

(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

Total

Accumulated

Stockholders'

Additional

Other

Equity

Common Stock

Paid-in

Comprehensive

Retained

Treasury Stock

Attributable to

Noncontrolling

Total

Shares

Amount

Capital

Loss

Earnings

Shares

Amount

PriceSmart, Inc.

Interest

Equity

Balance at February 29, 2020

31,451 

$

$

452,858 

$

(152,573)

$

549,703 

852 

$

(32,098)

$

817,893 

$

974 

$

818,867 

Purchase of treasury stock

(204)

(204)

(204)

Issuance of treasury stock

(80)

(687)

(80)

687 

Issuance of restricted stock award

57 

Forfeiture of restricted stock awards

(3)

Stock-based compensation

3,718 

3,718 

3,718 

Net income (loss)

12,705 

12,705 

(72)

12,633 

Other comprehensive income (loss)

(15,446)

(15,446)

35 

(15,411)

Balance at May 31, 2020

31,425 

$

$

455,889 

$

(168,019)

$

562,408 

776 

$

(31,615)

$

818,666 

$

937 

$

819,603 

Balance at February 28, 2021

31,452 

$

$

454,881 

$

(174,778)

$

616,943 

675 

$

(22,781)

$

874,268 

$

983 

$

875,251 

Purchase of treasury stock

(335)

(335)

(335)

Issuance of restricted stock award

Stock-based compensation

4,931 

4,931 

4,931 

Dividend paid to stockholders

(87)

(87)

Net income

22,529 

22,529 

52 

22,581 

Other comprehensive income (loss)

(2,590)

(2,590)

33 

(2,557)

Balance at May 31, 2021

31,456 

$

$

459,812 

$

(177,368)

$

639,472 

678 

$

(23,116)

$

898,803 

$

981 

$

899,784 

See accompanying notes.


PRICESMART, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED—AMOUNTS IN THOUSANDS)

Nine Months Ended

Total

Accumulated

Stockholders'

Additional

Other

Equity

Common Stock

Paid-in

Comprehensive

Retained

Treasury Stock

Attributable to

Noncontrolling

Total

Shares

Amount

Capital

Loss

Earnings

Shares

Amount

PriceSmart, Inc.

Interest

Equity

Balance at August 31, 2019

31,461 

$

$

454,570 

$

(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 

$

$

455,889 

$

(168,019)

$

562,408 

776 

$

(31,615)

$

818,666 

$

937 

$

819,603 

Balance at August 31,2020

31,418 

$

$

454,455 

$

(176,820)

$

582,487 

747 

$

(28,406)

$

831,719 

$

1,013 

$

832,732 

Purchase of treasury stock

27 

(2,574)

(2,574)

(2,574)

Issuance of treasury stock

(96)

(7,864)

(96)

7,864 

Issuance of restricted stock award

137 

Forfeiture of restricted stock awards

(3)

Stock-based compensation

13,221 

13,221 

13,221 

Dividend paid to stockholders

(10,762)

(10,762)

(346)

(11,108)

Dividend payable to stockholders

(10,755)

(10,755)

(10,755)

Net income

78,502

78,502

223 

78,725

Other comprehensive income (loss)

(548)

(548)

91 

(457)

Balance at May 31, 2021

31,456 

$

$

459,812 

$

(177,368)

$

639,472

678 

$

(23,116)

$

898,803

$

981 

$

899,784

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED—AMOUNTS IN THOUSANDS)

Nine Months Ended

May 31,

May 31,

2021

2020

Operating Activities:

Net income

$

78,725

$

58,053

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

48,350

44,867

Allowance for doubtful accounts

19

(18)

Loss on sale of property and equipment

568

251

Deferred income taxes

(2,748)

(4,079)

Equity in losses of unconsolidated affiliates

34

79

Stock-based compensation

13,221

9,976

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

6,147

(157)

Merchandise inventories

(27,136)

62,511

Accounts payable

(37,213)

2,647

Net cash provided by operating activities

79,967

174,130

Investing Activities:

Additions to property and equipment

(73,350)

(89,713)

Purchases of short-term investments

(58,355)

(31,711)

Proceeds from settlements of short-term investments

37,605

8,891

Purchases of long-term investments

(1,479)

(1,489)

Proceeds from settlements of long-term investments

1,479

Proceeds from disposal of property and equipment

109

44

Net cash used in investing activities

(93,991)

(113,978)

Financing Activities:

Proceeds from long-term bank borrowings

3,000

57,820

Repayment of long-term bank borrowings

(13,135)

(7,542)

Proceeds from short-term bank borrowings

271,014

Repayment of short-term bank borrowings

(64,916)

(207,368)

Cash dividend payments

(11,108)

(10,811)

Purchase of treasury stock

(2,574)

(1,585)

Other financing activities

(223)

(20)

Net cash provided by (used in) financing activities

(88,956)

101,508

Effect of exchange rate changes on cash and cash equivalents and restricted cash

(2,351)

(1,872)

Net increase (decrease) in cash, cash equivalents

(105,331)

159,788

Cash, cash equivalents and restricted cash at beginning of period

303,771

106,236

Cash, cash equivalents and restricted cash at end of period

$

198,440

$

266,024

Supplemental disclosure of noncash investing activities:

Capital expenditures accrued, but not yet paid

$

8,763

$

7,975

Dividends declared but not yet paid

10,755

10,719


8


Table of Contents

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

(UNAUDITED—AMOUNTS IN THOUSANDS)

The following table provides a breakdown of cash and cash equivalents, and restricted cash reported within the statement of cash flows:

Nine Months Ended

May 31,

May 31,

2021

2020

Cash and cash equivalents

$

190,687

$

261,788

Short-term restricted cash

781

240

Long-term restricted cash

$

6,972

$

3,996

Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows

$

198,440

$

266,024

See accompanying notes. 

 

9


 

   

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 PRICESMART, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

May 31, 2021

 

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 May 31, 2021, the Company had 47 warehouse clubs in operation in 12 countries and 1 U.S. territory (8 in Costa Rica and Colombia; 7 in Panama; 5 in the Dominican Republic, 4 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). The Company also plans to open new warehouse clubs in Guatemala City, Guatemala and Bucaramanga, Colombia in the fall of 2021, and in Portmore, Jamaica in the spring of 2022. Once these 3 new clubs are open, the Company will operate 50 warehouse clubs. 

PriceSmart continues to invest in technology to increase operational efficiencies that are expected to lead to greater value to the Member, to gain greater insights into the shopping preferences of our Members and to enhance the overall Member experience. Technology developments are driving omni-channel initiatives and capabilities, including online shopping and services. As of May 31, 2021, the Company offered the Click & Go™ curbside pickup and delivery service in all 13 of its markets. These services provide an alternative and convenient way for Members to shop, while reducing physical contact. The Company also has launched digital membership, which helps it gather higher quality data it can use to make better informed decisions in all areas of the business and facilitates a more seamless auto-renewal process, increasing predictability of membership income. We believe digital membership also provides more convenience to the Members with digital cards and online payment. PriceSmart also operates a package forwarding (casillero) and marketplace business under the “Aeropost” banner in 38 countries in Latin America and the Caribbean, many of which overlap with markets where it operates 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 continues to significantly impact the economies of the countries where the Company operates due to elevated infection rates and government restrictions. 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.

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, 2020 (the “2020 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.

 

 

10


 

   

  Table of Contents

 PRICESMART, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 

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 interim consolidated financial statements also include the Company's investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method. All significant inter-company accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC and reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows for the periods presented. The results for interim periods are not necessarily indicative of the results for the year.

The Company determines whether any of the joint ventures in which it has made investments is a Variable Interest Entity (“VIE”) at the start of each new venture and if a reconsideration event has occurred. At this time, the Company also considers whether it must consolidate a VIE and/or disclose information about its involvement in a VIE. A reporting entity must consolidate a VIE if that reporting entity has a variable interest (or combination of variable interests) and is determined to be the primary beneficiary. If the Company determines that it is not the primary beneficiary of the VIE, then the Company records its investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method. Due to the nature of the joint ventures that the Company participates in and the continued commitments for additional financing, the Company determined these joint ventures are VIEs.

In the case of the Company's ownership interest in real estate development joint ventures, both parties to each joint venture share all rights, obligations and the power to direct the activities of the VIE that most significantly impact the VIE's economic performance. As a result, the Company has determined that it is not the primary beneficiary of the VIEs and, therefore, has accounted for these entities under the equity method. Under the equity method, the Company's investments in unconsolidated affiliates are initially recorded as an investment in the stock of an investee at cost and are adjusted for the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee after the date of the initial investment. The Company's ownership interest in real estate development joint ventures the Company has recorded under the equity method as of May 31, 2021 are listed below:

Real Estate Development Joint Ventures

Countries

Ownership

Basis of
Presentation

GolfPark Plaza, S.A.

Panama

50.0

%

Equity(1)

Price Plaza Alajuela PPA, S.A.

Costa Rica

50.0

%

Equity(1)

(1)Joint venture interests are recorded as investment in unconsolidated affiliates on the consolidated balance sheets.

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, 2021 are listed below:

Marketplace and Casillero Store-front Joint Ventures

Countries

Ownership

Basis of
Presentation

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.

 

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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 following table summarizes the restricted cash reported by the Company (in thousands):

May 31,

August 31,

2021

2020

Short-term restricted cash

$

781

$

185

Long-term restricted cash

6,972

4,105

Total restricted cash(1)

$

7,753

$

4,290

(1)Restricted cash consists of cash deposits held within banking institutions to comply with federal regulatory requirements in Costa Rica and Panama. In addition, the Company is required to maintain a certificate of deposit of Trinidad dollars, as measured in U.S. dollars, of approximately $3.0 million with one of its lenders as a compensating balance for a $3.0 million U.S. dollar denominated loan payable over several years. The certificate of deposit will be reduced annually commensurate with the loan balance.

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 $53.5 million as of May 31, 2021 and $55.4 million as of August 31, 2020.  The Company reviews reported goodwill and other intangibles at the reporting unit level for impairment. The Company tests goodwill for impairment at least annually or when events or changes in circumstances indicate that it is more likely than not that the asset is impaired.

Receivables Receivables consist primarily of credit card receivables and receivables from vendors and are stated net of allowances for credit losses. The determination of the allowance for credit losses is based on the Company’s assessment of collectability along with the consideration of current and expected market conditions that could impact collectability.

Tax Receivables The Company pays Value Added Tax (“VAT”) or similar taxes, income taxes, and other taxes within the normal course of business in most of the countries in which it operates related to the procurement of merchandise and/or services the Company acquires and/or on sales and taxable income. VAT is a form of indirect tax applied to the value added at each stage of production (primary, manufacturing, wholesale and retail). This tax is similar to, but operates somewhat differently than, sales tax paid in the United States. The Company generally collects VAT from its Members upon sale of goods and services and pays VAT to its vendors upon purchase of goods and services. Periodically, the Company submits VAT reports to governmental agencies and reconciles the VAT paid and VAT received. The net overpaid VAT may be refunded or applied to subsequent returns, and the net underpaid VAT must be remitted to the government. With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due, this creates an income tax receivable. In most countries where the Company operates, the governments have implemented additional collection procedures, such as requiring credit card processors to remit a portion of sales processed via credit and debit cards directly to the government as advance payments of VAT and/or income tax. This collection mechanism generally leaves the Company with net VAT and/or income tax receivables, forcing the Company to process significant refund claims on a recurring basis. These refund or offset processes can take anywhere from several months to several years to complete.

In 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 $9.1 million and $7.0 million as of May 31, 2021 and August 31, 2020, respectively. In two other countries, there have been changes in the method of computing minimum tax payments, under which the governments have sought to require the Company to pay taxes based on a percentage of sales rather than taxable income. As a result, the Company has made and may continue to make income tax payments substantially in excess of those it would expect to pay based on taxable income. The Company had income tax receivables of $11.0 million and $10.4 million and deferred tax

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 

assets of $3.2 million and $2.8 million as of May 31, 2021 and August 31, 2020, 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. Similarly, we have not placed any recoverability allowances on tax receivables that arise from payments we are required to make originating from tax assessments that we are appealing, as we believe it is more likely than not that we will ultimately prevail in the related appeals. There can be no assurance, however, that the Company will be successful in recovering all tax receivables or deferred tax assets.

The Company’s policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:

Short-term VAT and Income tax receivables, recorded as Prepaid expenses and other current assets: This classification is used for any countries where the Company’s subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. The Company also classifies as short-term any approved refunds or credit notes to the extent that the Company expects to receive the refund or use the credit notes within one year.

Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where the Company’s subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when the Company does not expect to eventually prevail in its recovery. The Company does not currently have any allowances provided against VAT and income tax receivables.

The following table summarizes the VAT receivables reported by the Company (in thousands):

May 31,

August 31,

2021

2020

Prepaid expenses and other current assets

$

1,390

$

1,749

Other non-current assets

28,004

25,851

Total amount of VAT receivables reported

$

29,394

$

27,600

The following table summarizes the Income tax receivables reported by the Company (in thousands):

May 31,

August 31,

2021

2020

Prepaid expenses and other current assets

$

9,775

$

10,944

Other non-current assets

19,872

20,116

Total amount of income tax receivables reported

$

29,647

$

31,060

Lease Accounting – The Company’s leases are operating leases for warehouse clubs and non-warehouse club facilities such as corporate headquarters, regional offices, and regional distribution centers. The Company determines if an arrangement is a lease and classifies it as either a finance or operating lease at lease inception. Operating leases are included in Operating lease right-of-use assets, net; Operating lease liabilities, current portion; and Long-term operating lease liabilities on the consolidated balance sheets. The Company does not have finance leases.

Operating lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. The Company’s leases generally do not have a readily determinable implicit rate; therefore, the Company uses a collateralized incremental borrowing rate at the commencement date in determining the present value of future payments. The incremental borrowing rate is based on a yield curve derived from publicly traded bond offerings for companies with credit characteristics that approximate the Company's market risk profile. In addition, we adjust the incremental borrowing rate for jurisdictional risk derived from quoted interest rates from financial institutions to reflect the cost of borrowing in the Company’s local markets. The Company’s lease terms may include options to purchase, extend or terminate the lease, which are

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 

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.

Merchandise Inventories – Merchandise inventories, which include merchandise for resale, are valued at the lower of cost (average cost) or net realizable value. The Company provides for estimated inventory losses and obsolescence based on a percentage of sales. The provision is adjusted every reporting period to reflect the trend of actual physical inventory and cycle count results. In addition, the Company may be required to take markdowns below the carrying cost of certain inventory to expedite the sale of such merchandise.

Stock Based Compensation The Company utilizes 3 types of equity awards: restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”). Compensation related to RSAs, RSUs and PSUs is based on the fair market value at the time of grant. The Company recognizes the compensation cost related to RSAs and RSUs over the requisite service period as determined by the grant, amortized ratably or on a straight-line basis over the life of the grant. The Company also recognizes compensation cost for PSUs over the performance period of each tranche, adjusting this cost based on the Company’s estimate of the probability that performance metrics will be achieved. If the Company determines that an award is unlikely to vest, any previously recorded expense is then reversed.

The Company accounts for actual forfeitures as they occur. The Company records the tax savings resulting from tax deductions in excess of expense for stock-based compensation and the tax deficiency resulting from stock-based compensation in excess of the related tax deduction as income tax expense or benefit. In addition, the Company reflects the tax savings (deficiency) resulting from the taxation of stock-based compensation as an operating cash flow in its consolidated statement of cash flows.

RSAs are outstanding shares of common stock and have the same cash dividend and voting rights as other shares of common stock. Shares of common stock subject to RSUs are not issued nor outstanding until vested, and RSUs do not have the same dividend and voting rights as common stock. However, all outstanding RSUs have accompanying dividend equivalents, requiring payment to the employees and directors with unvested RSUs of amounts equal to the dividend they would have received had the shares of common stock underlying the RSUs been actually issued and outstanding. Payments of dividend equivalents to employees are recorded as compensation expense.

PSUs, similar to RSUs, are awarded with dividend equivalents, provided that such amounts become payable only if the performance metric is achieved. At the time the Compensation Committee confirms the performance metric has been achieved, the accrued dividend equivalents are paid on the PSUs.

Treasury Stock – Shares of common stock repurchased by the Company are recorded at cost as treasury stock and result in the reduction of stockholders’ equity in the Company’s consolidated balance sheets.  The Company may reissue these treasury shares as part of its stock-based compensation programs.  When treasury shares are reissued, the Company uses the first in/first out (“FIFO”) cost method for determining cost of the reissued shares.  If the issuance price is higher than the cost, the excess of the issuance price over the cost is credited to additional paid-in capital (“APIC”).  If the issuance price is lower than the cost, the difference is first charged against any credit balance in APIC from treasury stock and the balance is charged to retained earnings. During the nine months ended May 31, 2021, the Company reissued approximately 96,400 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.

 

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The Company has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring and revaluing fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company was not required to revalue any assets or liabilities utilizing Level 1 or Level 3 inputs at the balance sheet dates. The Company's Level 2 assets and liabilities revalued at the balance sheet dates, on a recurring basis, consisted of cash flow hedges (interest rate swaps and cross-currency interest rate swaps) and forward foreign exchange contracts. In addition, the Company utilizes Level 2 inputs in determining the fair value of long-term debt.

Non-financial assets and liabilities are revalued and recognized at fair value subsequent to initial recognition when there is evidence of impairment. For the periods reported, 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 disclosed in the Company’s 2020 Annual Report on Form 10-K.

Derivatives Instruments and Hedging Activities – The Company uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to changes in interest and currency exchange rates. In using derivative financial instruments for the purpose of hedging the Company’s exposure to interest and currency exchange rate risks, the contractual terms of a hedged instrument closely mirror those of the hedged item and are intended to provide a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria (effective hedge) are recorded using hedge accounting. If a derivative financial instrument is an effective hedge, changes in the fair value of the instrument will be reported in accumulated other comprehensive loss until the hedged item completes its contractual term. Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. The Company did not change valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s consolidated balance sheets from previous practice during the reporting period. The Company seeks to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which the Company has an established banking relationship. There can be no assurance, however, that this practice effectively mitigates counterparty risk.

Cash Flow Instruments. The Company is a party to receive floating interest rate, pay fixed-rate interest rate swaps to hedge the interest rate risk of certain U.S. dollar denominated debt within its international subsidiaries. The swaps are designated as cash flow hedges of interest expense risk. These instruments are considered effective hedges and are recorded using hedge accounting. The Company is also a party to receive variable interest rate, pay fixed interest rate cross-currency interest rate swaps to hedge the interest rate and currency exposure associated with the expected payments of principal and interest of U.S. denominated debt within its international subsidiaries whose functional currency is other than the U.S. dollar. The swaps are designated as cash flow hedges of the currency risk and interest-rate risk related to payments on the U.S. denominated debt. These instruments are also considered to be effective hedges and are recorded using hedge accounting. Under cash flow hedging, the entire gain or loss of the derivative, calculated as the net present value of the future cash flows, is reported on the consolidated balance sheets in accumulated other comprehensive loss. Amounts recorded in accumulated other comprehensive loss are released to earnings in the same period that the hedged transaction impacts consolidated earnings. Refer to “Note 8 - Derivative Instruments and Hedging Activities” for information on the fair value of interest rate swaps and cross-currency interest rate swaps as of May 31, 2021 and August 31, 2020.

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

 

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period of the change. The Company seeks to mitigate foreign currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features and are limited to less than one year in duration.

Other Instruments. Other derivatives not designated as hedging instruments consist primarily of written call options in which the Company receives a premium that it uses to reduce the costs associated with its hedging activities. For derivative instruments not designated as hedging instruments, the Company recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Other expense, net in the consolidated statements of income in the period of change.

Revenue Recognition – The accounting policies and other disclosures such as the disclosure of disaggregated revenues are described in “Note 3 – Revenue Recognition.”

Insurance Reimbursements – Receipts from insurance reimbursements up to the amount of the losses recognized are considered recoveries. These recoveries are accounted for when they are probable of receipt. Insurance recoveries are not recognized prior to the recognition of the related cost. Anticipated proceeds in excess of the amount of loss recognized are considered gains and are subject to gain contingency guidance. Anticipated proceeds in excess of a loss recognized in the financial statements are not recognized until all contingencies related to the insurance claim are resolved.

Cost of Goods Sold – The Company includes the cost of merchandise and food service and bakery raw materials in cost of goods sold, net merchandise sales. The Company also includes in cost of goods sold: net merchandise sales the external and internal distribution and handling costs for supplying merchandise, raw materials and supplies to the warehouse clubs, and, when applicable, costs of shipping to Members. External costs include inbound freight, duties, drayage, fees, insurance, and non-recoverable value-added tax related to inventory shrink, spoilage and damage. Internal costs include payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense and building and equipment depreciation at the Company's distribution facilities and payroll and other direct costs for in-club demonstrations.

For export sales, the Company includes the cost of merchandise and external and internal distribution and handling costs for supplying merchandise in cost of goods sold, exports.

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, cooperative marketing efforts, digital advertising, slotting fees, demonstration reimbursements and prompt payment discounts. Volume rebates and time-limited promotions are recognized on a systematic and rational allocation of the cash consideration as the Company progresses toward earning the rebate, provided the amounts to be earned are probable and reasonably estimable. Cooperative marketing efforts and digital advertising are related to consideration received by the Company from vendors for non-distinct online advertising services on the Company’s website and social media platforms. Slotting fees are related to consideration received by the Company from vendors for preferential "end cap" placement of the vendor's products within the warehouse club. Demonstration reimbursements are related to consideration received by the Company from vendors for the in-club promotion of the vendors' products. The Company records the reduction in cost of goods sold on a transactional basis for these programs. On a quarterly basis, the Company calculates the amount of rebates recorded in cost of goods sold that relates to inventory on hand and this amount is reclassified as a reduction to inventory, if significant. Prompt payment discounts are taken in substantially all cases and therefore are applied directly to reduce the acquisition cost of the related inventory, with the resulting effect recorded to cost of goods sold when the inventory is sold.

 

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Selling, General and Administrative – Selling, general and administrative costs consist primarily of expenses associated with operating warehouse clubs and freight forwarding operations. These costs include payroll and related costs, 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 May 31, 2021 and 2020 (in thousands):

Three Months Ended

Nine Months Ended

May 31,

May 31,

May 31,

May 31,

2021

2020

2021

2020

Effect on other comprehensive loss due to foreign currency translation

$

(3,007)

$

(12,874)

$

(2,577)

$

(19,981)

Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses), including transactions recorded involving these monetary assets and liabilities, are recorded as Other income (expense) in the consolidated statements of income (in thousands):

Three Months Ended

Nine Months Ended

May 31,

May 31,

May 31,

May 31,

2021

2020

2021

2020

Currency loss

$

(2,240)

$

(1,529)

$

(3,970)

$

(2,431)

Recent Accounting Pronouncements – Not Yet Adopted

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 does not expect this guidance to have a material impact on the Company’s consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 

Recent Accounting Pronouncements 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, if certain criteria are met, 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. This accounting standards update is intended to ease the process of migrating away from LIBOR to new reference rates. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). The amendments in this ASU refine the scope of ASC 848 and clarifies some of its guidance as it relates to recent rate reform activities.

A substantial number of the Company’s debt agreements and hedging relationships bear interest at variable interest rates, primarily based on USD-LIBOR. To preserve the presentation of the Company’s debt and derivatives, the Company adopted ASU 2020-04 and ASU 2021-01 effective December 1, 2020, on a prospective basis. The Company has elected to apply the contract modification expedient and the hedge accounting expedients related to critical terms, probability of forecasted transactions, and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. The adoption of, and future elections under ASU 2020-04 and ASU 2021-01, did not and are not expected to have a material impact on the Company’s accounting policies or consolidated financial statements. We will continue to monitor the impact the discontinuance of LIBOR will have on the Company’s contracts, hedging relationships and other transactions.

FASB ASC 350 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. The Company adopted ASU No. 2018-15 on a prospective basis on September 1, 2020, the first quarter of fiscal year 2021. Adoption of this guidance did not have a material impact 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. The Company adopted ASU No. 2018-13 on a prospective basis on September 1, 2020, the first quarter of fiscal year 2021. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

FASB ASC 350 ASU 2017-04 – Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU modify the concept of impairment from the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if

 

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that reporting unit had been acquired in a business combination. Under this ASU, entities should now calculate any goodwill impairment by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge to the goodwill for the amount by which the carrying amount exceeds the reporting unit's fair value. The amendments in this ASU are effective for annual periods beginning after December 15, 2019. The Company adopted ASU No. 2017-04 on a prospective basis on September 1, 2020, the first quarter of fiscal year 2021. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

FASB ASC 326 ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), which amends the FASB’s guidance on the impairment of financial instruments. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments to clarify and address certain items related to the amendments in ASU 2016-13. These amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the amendments on a prospective basis on September 1, 2020, the first quarter of fiscal year 2021. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

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, 2021, and there were no other new accounting standards or pronouncements that were issued but not yet effective as of May 31, 2021 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.



Net Merchandise Sales.  The Company recognizes net merchandise sales revenue, net of sales taxes, on transactions where the Company has determined that it is the principal in the sale of merchandise. These transactions may include shipping commitments and/or shipping revenue if the transaction involves delivery to the customer. 



Non-merchandise Sales. 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 for orders for which the Company has not fulfilled its performance obligation are recorded as 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. Our membership policy allows Members to cancel their membership in the first 60 days and receive a full refund. After the 60-day period, membership refunds are prorated over the remaining term of the membership. The Company has significant experience with membership refund patterns and expects membership refunds will not be material. Therefore, no refund reserve was required for the periods presented. Membership fee revenue is included in membership income in the Company's consolidated statements of income. The deferred membership fee is included in deferred income in the Company's consolidated balance sheets.

 

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 PRICESMART, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 



Platinum Points Reward Programs. The Company currently offers Platinum memberships in all of its 13 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 during the period it is earned. The Company has determined that this revenue should be recognized as “Other revenue and income” on the consolidated statements of income.

Contract Performance Liabilities

Contract performance liabilities as a result of transactions with customers primarily consist of deferred membership income, other deferred income, deferred gift card revenue, Platinum points programs, and liabilities related to co-branded credit card points rewards programs which are included in deferred income and other accrued expenses and other current liabilities in the Company’s consolidated balance sheets. The following table provides these contract balances from transactions with customers as of the dates listed (in thousands):

Contract Liabilities

May 31,

2021

August 31,

2020

Deferred membership income

$

26,457

$

23,051

Other contract performance liabilities

$

5,895

$

5,190

 

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 PRICESMART, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 

Disaggregated Revenues

In the following table, net merchandise sales are disaggregated by merchandise category (in thousands):

Three Months Ended

Nine Months Ended

May 31,

2021

May 31,

2020

May 31,

2021

May 31,

2020

Foods & Sundries

$

431,007

$

419,579

$

1,298,134

$

1,250,728

Fresh Foods

252,365

228,858

745,158

685,413

Hardlines

94,732

70,374

318,229

261,796

Softlines

43,468

25,597

130,732

115,860

Other Business

35,906

23,960

101,998

105,025

Net Merchandise Sales

$

857,478

$

768,368

$

2,594,251

$

2,418,822

 

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 May 31, 2021 and 2020 (in thousands, except per share amounts):

Three Months Ended

Nine Months Ended

May 31,

May 31,

May 31,

May 31,

2021

2020

2021

2020

Net income attributable to PriceSmart, Inc.

$

22,529

$

12,705

$

78,502

$

58,033

Less: Allocation of income to unvested stockholders

(372)

(188)

(952)

(527)

Net income attributable to PriceSmart, Inc. per share available for distribution

$

22,157

$

12,517

$

77,550

$

57,506

Basic weighted average shares outstanding

30,414

30,271

30,396

30,268

Add dilutive effect of performance stock units (two-class method)

32

4

27

5

Diluted average shares outstanding

30,446

30,275

30,423

30,273

Basic net income per share

$

0.73

$

0.41

$

2.55

$

1.90

Diluted net income per share

$

0.73

$

0.41

$

2.55

$

1.90

 

 

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 PRICESMART, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 

NOTE 5 – STOCKHOLDERS’ EQUITY

Dividends

The following table summarizes the dividends declared and paid during fiscal year 2021 and 2020 (amounts are per share).

First Payment

Second Payment

Declared

Amount

Record
Date

Date
Paid

Date
Payable

Amount

Record
Date

Date
Paid

Date
Payable

Amount

2/4/2021

  

$

0.70

  

2/15/2021

  

2/26/2021

  

N/A

  

$

0.35

  

8/15/2021

  

N/A

  

8/31/2021

  

$

0.35

2/6/2020

  

$

0.70

  

2/15/2020

  

2/28/2020

  

N/A

  

$

0.35

  

8/15/2020

  

8/31/2020

  

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, taking into account the uncertainty surrounding the ongoing effects of the COVID-19 pandemic on our results of operations and cash flows.

Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss

The following tables disclose the effects on accumulated other comprehensive loss of each component of other comprehensive income (loss), net of tax (in thousands):

Attributable to

Noncontrolling

PriceSmart

Interests

Total

Beginning balance, September 1, 2020

$

(176,820)

$

134

$

(176,686)

Foreign currency translation adjustments

(2,577)

91

(2,486)

Defined benefit pension plans (1)

164

164

Derivative instruments (2)

1,865

1,865

Ending balance, May 31, 2021

$

(177,368)

$

225

$

(177,143)

Attributable to

Noncontrolling

PriceSmart

Interests

Total

Beginning balance, September 1, 2019

$

(144,339)

$

20

$

(144,319)

Foreign currency translation adjustments

(19,981)

90

(19,891)

Defined benefit pension plans (1)

53

53

Derivative Instruments (2)

(3,752)

(3,752)

Ending balance, May 31, 2020

$

(168,019)

$

110

$

(167,909)

Attributable to

Noncontrolling

PriceSmart

Interests

Total

Beginning balance, September 1, 2019

$

(144,339)

$

20

$

(144,319)

Foreign currency translation adjustments

(29,413)

114

(29,299)

Defined benefit pension plans (1)

(79)

(79)

Derivative Instruments (2)

(5,803)

(5,803)

Amounts reclassified from accumulated other comprehensive loss

2,814

2,814

Ending balance, August 31, 2020

$

(176,820)

$

134

$

(176,686)

(1)Amounts reclassified from accumulated other comprehensive income (loss) related to the minimum pension liability are included in warehouse club and other operations in the Company's consolidated statements of income.

(2)Refer to Note 8 - Derivative Instruments and Hedging Activities.

 

 

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 PRICESMART, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 

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):

May 31,

August 31,

2021

2020

Retained earnings not available for distribution

$

7,921

$

7,375

 

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.

Income Taxes – For interim reporting, the Company uses an estimated annual effective tax rate (AETR), pursuant to ASC 740-270, 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

 

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 PRICESMART, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 

than 50% likelihood of being sustained. As of May 31, 2021, the Company's uncertain income tax position balance has been reduced by $1.2 million since August 31, 2020, due to the expiration of statutes of limitation and other current year adjustments.

In evaluating the exposure associated with various non-income tax filing positions, the Company accrues for probable and estimable exposures for non-income tax related tax contingencies.  As of May 31, 2021 and August 31, 2020, the Company has recorded within other accrued expenses and other current liabilities a total of $1.7 million and $2.5 million, respectively, for various non-income tax related tax contingencies.

While the Company believes the recorded liabilities are adequate, there are inherent limitations in projecting the outcome of litigation, in estimating probable additional income tax liability taking into account uncertain tax positions and in evaluating the probable additional tax associated with various non-income tax filing positions. As such, the Company is unable to make a reasonable estimate of the sensitivity to change of estimates affecting its recorded liabilities. As additional information becomes available, the Company assesses the potential liability and revises its estimates as appropriate.

In two countries where the Company operates, minimum income tax rules require the Company to pay taxes based on a percentage of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those it would expect to pay based on taxable income. The Company had income tax receivables of $11.0 million and $10.4 million and deferred tax assets of $3.2 million and $2.8 million as of May 31, 2021 and August 31, 2020, respectively, in these countries. While the rules related to refunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets, because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests.

Other Commitments

The Company is also committed to non-cancelable construction service obligations for various warehouse club developments and expansions. As of May 31, 2021 and August 31, 2020, the Company had approximately $16.3 million and $5.1 million, respectively, in contractual obligations for construction services not yet rendered.

From time to time, the Company has entered into general land purchase and land purchase option agreements. The Company’s land purchase agreements are typically subject to various conditions, including, but not limited to, the ability to obtain necessary governmental permits or approvals. A deposit under an agreement is typically returned to the Company if all permits or approvals are not obtained. Generally, the Company has the right to cancel any of its agreements to purchase land without cause by forfeiture of some or all of the deposits it has made pursuant to the agreement. As of May 31, 2021, the Company had entered into a land purchase option agreement that, if completed, would result in the use of approximately $7.4 million in cash.

The table below summarizes the Company’s interest in real estate joint ventures, commitments to additional future investments and the Company’s maximum exposure to loss as a result of its involvement in these joint venture as of May 31, 2021 (in thousands):

Entity

%
Ownership

Initial
Investment

Additional
Investments

Net Income

Inception to

Date

Company’s
Variable
Interest
in Entity

Commitment
to Future
Additional
Investments(1)

Company's
Maximum
Exposure
to Loss in
Entity(2)

GolfPark Plaza, S.A.

50

%

$

4,616

$

2,402

$

22

$

7,040

$

99

$

7,139

Price Plaza Alajuela PPA, S.A.

50

%

2,193

1,236

100

3,529

785

4,314

Total

$

6,809

$

3,638

$

122

$

10,569

$

884

$

11,453

(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.

 

 

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 PRICESMART, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 

NOTE 7 – DEBT

Short-term borrowings consist of unsecured lines of credit. The following table summarizes the balances of total facilities, facilities used and facilities available (in thousands):

Facilities Used

Total Amount

Short-term

Letters of

Facilities

Weighted average

of Facilities

Borrowings

Credit

Available

interest rate

May 31, 2021

$

131,000

$

$

125

$

130,875

%

August 31, 2020

$

81,210

$

65,143

$

388

$

15,679

3.7

%

As of May 31, 2021 and August 31, 2020, the Company was in compliance with all covenants or amended covenants for each of its short-term facility agreements. These facilities generally expire annually or bi-annually and are normally renewed.

The following table provides the changes in long-term debt for the nine-months ended May 31, 2021:

(Amounts in thousands)

Current
portion of
long-term debt

Long-term
debt (net of current portion)

Total

Balances as of August 31, 2020

$

19,437

$

112,610

$

132,047

(1)

Proceeds from long-term debt incurred during the period:

Trinidad subsidiary

547

2,453

3,000

Regularly scheduled loan payments

(1,164)

(11,971)

(13,135)

Reclassifications of long-term debt due in the next 12 months

1,706

(1,706)

Translation adjustments on foreign currency debt of subsidiaries whose functional currency is not the U.S. dollar (2)

28

(92)

(64)

Balances as of May 31, 2021

$

20,554

$

101,294

$

121,848

(3)

(1)The carrying amount of non-cash assets assigned as collateral for these loans was $158.6 million. NaN cash assets were assigned as collateral for these loans.

(2)These foreign currency translation adjustments are recorded within Other comprehensive loss.

(3)The carrying amount of cash and non-cash assets assigned as collateral for these loans was $2.8 million and $143.7 million, respectively.

 

As of May 31, 2021 and August 31, 2020, the Company had approximately $96.0 million and $107.4 million, respectively, 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. The Company was in compliance with all covenants or amended covenants for both periods.

Annual maturities of long-term debt are as follows (in thousands):

Twelve Months Ended May 31,

Amount

2022

$

20,554

2023

26,381

2024

9,174

2025

25,608

2026

4,310

Thereafter

35,821

Total

$

121,848

 

 

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 PRICESMART, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 

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 two of its wholly owned subsidiaries. To manage this foreign currency and interest rate cash flow exposure, the Company’s subsidiaries entered into cross-currency interest rate swaps that convert their U.S. dollar denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument.  As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedges are intended to offset changes in cash flows attributable to interest rate and foreign exchange movements.

These derivative instruments (cash flow hedging instruments) are designated and qualify as cash flow hedges, with the entire gain or loss on the derivative reported as a component of other comprehensive loss. Amounts are deferred in other comprehensive loss and reclassified into earnings in the same income statement line item that is used to present the earnings effect of the hedged item when the hedged item affects earnings.

The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business, including foreign-currency exchange-rate fluctuations on U.S. dollar denominated liabilities within its international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts (NDFs) that are intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate foreign-currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features.

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.

 

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 PRICESMART, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 

Cash Flow Hedges

As of May 31, 2021, all of the Company’s interest rate swap and cross-currency interest rate swap derivative financial instruments are designated and qualify as cash flow hedges. The Company formally documents the hedging relationships for its derivative instruments that qualify for hedge accounting.

The following table summarizes agreements for which the Company has recorded cash flow hedge accounting for the nine months ended May 31, 2021:

Subsidiary

Date
Entered
into

Derivative
Financial
Counter-
party

Derivative
Financial
Instruments

Initial
US$
Notional
Amount

Bank
US$
loan 
Held
with

Floating Leg
(swap
counter-party)

Fixed Rate
for PSMT
Subsidiary

Settlement
Dates

Effective
Period of swap

Colombia

3-Dec-19

Citibank, N.A. ("Citi")

Cross currency interest rate swap

$

7,875,000

Citibank, N.A.

Variable rate 3-month Libor plus 2.45%

7.87

%

3rd day of each December, March, June, and September, beginning on March 3, 2020

December 3, 2019 -
December 3, 2024

Colombia

27-Nov-19

Citibank, N.A. ("Citi")

Cross currency interest rate swap

$

25,000,000

Citibank, N.A.

Variable rate 3-month Libor plus 2.45%

7.93

%

27th day of each November, February, May and August beginning February 27, 2020

November 27, 2019 -
November 27, 2024

Colombia

24-Sep-19

Citibank, N.A. ("Citi")

Cross currency interest rate swap

$

12,500,000

PriceSmart, Inc.

Variable rate 3-month Libor plus 2.50%

7.09

%

24th day of each December, March, June and September beginning December 24, 2019

September 24, 2019 -
September 26, 2022

Panama

25-Jun-18

Bank of Nova Scotia ("Scotiabank")

Interest rate swap

$

14,625,000

Bank of Nova Scotia

Variable rate 3-month Libor plus 3.0%

5.99

%

23rd day of each month beginning on July 23, 2018

June 25, 2018 -
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 -
February 24, 2024

PriceSmart, Inc

7-Nov-16

MUFG Union Bank, N.A. ("Union Bank")

Interest rate swap

$

35,700,000

Union Bank

Variable rate 1-month Libor plus 1.7%

3.65

%

1st day of each month beginning on April 1, 2017

March 1, 2017 - March 1, 2027

For the three and nine months ended May 31, 2021 and May 31, 2020, the Company included the gain or loss on the hedged items (that is, variable-rate borrowings) in the same line item—interest expense—as the offsetting gain or loss on the related interest rate swaps as follows (in thousands):

Income Statement Classification

Interest
expense on
borrowings(1)

Cost of
swaps (2)

Total

Interest expense for the three months ended May 31, 2021

$

656

$

907

$

1,563

Interest expense for the three months ended May 31, 2020

$

1,067

$

620

$

1,687

Interest expense for the nine months ended May 31, 2021

$

2,015

$

2,785

$

4,800

Interest expense for the nine months ended May 31, 2020

$

3,287

$

1,477

$

4,764

(1)This amount is representative of the interest expense recognized on the underlying hedged transactions.

(2)This amount is representative of the interest expense recognized on the interest rate swaps and cross-currency swaps designated as cash flow hedging instruments.

 

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 PRICESMART, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 

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

May 31,

August 31,

 Floating Rate Payer (Swap Counterparty)

2021

2020

Union Bank

$

32,938

$

33,894

Citibank N.A.

52,201

55,086

Scotiabank

10,500

11,625

Total

$

95,639

$

100,605

Derivatives listed on the table below were designated as cash flow hedging instruments. The table summarizes the effect of the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting and its associated tax effect on accumulated other comprehensive (income)/loss (in thousands):

May 31, 2021

August 31, 2020

Derivatives designated as cash flow hedging instruments

Balance Sheet
Classification

Fair
Value

Net Tax
Effect

Net
OCI

Fair
Value

Net Tax
Effect

Net
OCI

Cross-currency interest rate swaps

Other non-current assets

$

1,160

$

(353)

$

807

$

872

$

(265)

$

607

Interest rate swaps

Other long-term liabilities

(2,338)

547

(1,791)

(3,857)

898

(2,959)

Cross-currency interest rate swaps

Other long-term liabilities

(816)

245

(571)

(828)

248

(580)

Net fair value of derivatives designated as hedging instruments

$

(1,994)

$

439

$

(1,555)

$

(3,813)

$

881

$

(2,932)

Fair Value Instruments

From time to time the Company enters into non-deliverable forward foreign-exchange contracts. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting. The use of non-deliverable forward foreign-exchange contracts is intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar.

The following table summarizes the non-deliverable forward foreign exchange contracts that are open as of May 31, 2021.

Subsidiary

Dates
entered into

Financial
Derivative
(Counterparty)

Derivative
Financial
Instrument

Notional
Amount
(in thousands)

Settlement
Date

Effective Period
of Forward

Colombia

28-Apr-21

Scotiabank Colpatria, S.A.

Forward foreign
exchange contracts (USD)

$

5,000

28-Dec-21

April 28, 2021 - December 28, 2021

Colombia

28-May-21

Scotiabank Colpatria, S.A.

Forward foreign
exchange contracts (USD)

2,000

29-Dec-21

May 28, 2021 - December 29, 2021

While forward derivative gains and (losses) on non-deliverable forward foreign-exchange contracts were immaterial for the three and nine-months ended May 31, 2021 and May 31, 2020, they are included in Other expense, net in the consolidated statements of income in the period of change.

 

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 PRICESMART, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 

Other Instruments

Other derivatives not designated as hedging instruments consist primarily of written call options in which the Company receives a premium that it uses to reduce the costs associated with its hedging activities. As of May 31, 2021, all of the Company’s contracts are designated as hedging instruments.

For the three and nine months ended May 31, 2021 and 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

Nine Months Ended

May 31,

May 31,

May 31,

May 31,

Income Statement Classification

2021

2020

2021

2020

Other expense, net

$

$

$

$

(912)

 

NOTE 9 – SEGMENTS

The Company and its subsidiaries are principally engaged in the international operation of membership shopping in 47 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, which are 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.

 

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 PRICESMART, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 

The following tables summarize by segment certain revenues, operating costs and balance sheet items (in thousands):

United
States
Operations

Central
American
Operations

Caribbean
Operations(1)

Colombia Operations

Reconciling
Items(2)

Total

Three Months Ended May 31, 2021

Revenue from external customers

$

21,237 

$

531,595 

$

243,468 

$

98,964 

$

$

895,264 

Intersegment revenues

309,261 

4,305 

1,228 

434 

(315,228)

Depreciation, Property and equipment

1,666 

7,990 

3,920 

2,403 

15,979 

Amortization, Intangibles

606 

606 

Operating income (loss)

545 

38,313 

17,240 

5,135 

(25,184)

36,049 

Net income (loss) attributable to PriceSmart, Inc.

(2,388)

32,700 

13,524 

3,929 

(25,236)

22,529 

Capital expenditures, net

3,334 

8,724 

6,486 

4,870 

23,414 

Nine Months Ended May 31, 2021

Revenue from external customers

$

67,622 

$

1,567,287 

$

762,153 

$

313,203 

$

$

2,710,265 

Intersegment revenues

955,619 

12,842 

3,498 

2,413 

(974,372)

Depreciation, Property and equipment

5,115 

23,367 

11,570 

6,500 

46,552 

Amortization, Intangibles

1,798 

1,798 

Operating income (loss)

8,315 

113,120 

59,600 

17,139 

(72,615)

125,559 

Net income (loss) attributable to PriceSmart, Inc.

(4,306)

94,247 

48,175 

13,224 

(72,838)

78,502 

Long-lived assets (other than deferred tax assets)

79,178 

484,039 

189,873 

163,266 

916,356 

Intangibles, net

8,368 

8,368 

Goodwill

10,695 

24,359 

10,088 

45,142 

Total assets

202,770 

777,703 

427,078 

224,404 

1,631,955 

Capital expenditures, net

6,052 

30,334 

14,748 

20,416 

71,550 

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

$

52,039 

$

1,442,336 

$

747,004 

$

277,228 

$

$

2,518,607 

Intersegment revenues

868,137 

12,745 

3,627 

1,870 

(886,379)

Depreciation, Property and equipment

3,981 

22,027 

11,602 

5,452 

43,062 

Amortization, Intangibles

1,805 

1,805 

Operating income (loss)

3,401 

96,972 

40,436 

13,411 

(60,730)

93,490 

Net income (loss) attributable to PriceSmart, Inc.

(5,350)

79,815 

34,978 

9,340 

(60,750)

58,033 

Long-lived assets (other than deferred tax assets)

83,813 

481,942 

181,578 

143,437 

890,770 

Intangibles, net

10,772 

10,772 

Goodwill

10,695 

24,484 

10,137 

45,316 

Total assets

224,682 

727,527 

384,168 

238,112 

1,574,489 

Capital expenditures, net

5,564 

42,766 

13,913 

28,807 

91,050 

As of August 31, 2020

Long-lived assets (other than deferred tax assets)

$

81,008 

$

475,744 

$

177,166 

$

146,862 

$

$

880,780 

Intangibles, net

10,166 

10,166 

Goodwill

10,696 

24,418 

10,092 

45,206 

Total assets

272,190 

741,523 

395,244 

247,868 

1,656,825 

(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.

 

 

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 PRICESMART, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

 

NOTE 10 – SUBSEQUENT EVENTS

The Company has evaluated all events subsequent to the balance sheet date as of May 31, 2021 through the date of issuance of these consolidated financial statements and has determined that there are no subsequent events that require disclosure.

 

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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, omni-channel initiatives, proposed warehouse club openings, the Company's performance relative to competitors and related matters. These forward-looking statements include, but are not limited to, statements containing the words “expect,” “believe,” “will,” “may,” “should,” “project,” “estimate,” “anticipated,” “scheduled,” “intend,” and like expressions, and the negative thereof. These statements are subject to risks and uncertainties that could cause actual results to differ materially including, but not limited to: adverse changes in economic conditions in our markets, natural disasters, compliance risks, volatility in currency exchange rates and illiquidity of certain local currencies in our markets, 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, cybersecurity breaches that could cause disruptions in our systems or jeopardize the security of Member or business information, cost increases from product and service providers, interruption of supply chains, novel coronavirus (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 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2020 filed with the United States Securities and Exchange Commission (“SEC”) on October 30, 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. In addition, these risks are not the only risks that the Company faces. The Company could also be affected by additional factors that apply to all companies operating globally and in the U.S., as well as other risks that are not presently known to the Company or that the Company currently considers to be immaterial.

 

Overview

PriceSmart exists to improve the lives and businesses of our Members, our employees and our communities through the ethical delivery of the best quality goods and services at the lowest possible prices. 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 sell high quality brand name and private label consumer products, offer prepared foods through our bakeries and food courts with the option for delivery, and in certain clubs we provide services such as optical and tires at low prices to individuals and businesses. Historically, our typical 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. Additionally, we operate smaller format clubs, with sales floors ranging from approximately 30,000 to 40,000 square feet. These smaller format clubs are an alternative intended to serve markets where the population is likely to support a smaller club or densely populated urban areas where it is challenging to secure sufficient real estate at a reasonable cost for a larger club. This smaller format, coupled with our omni-channel initiatives, has the potential to expand our geographic reach in existing markets and provide greater value and more convenience for our Members. We continue to invest in technology to increase efficiencies and to enhance the Member shopping experience with omni-channel capabilities, including e-commerce online shopping. Most notably, the Company launched its Click & Go™ online order, curbside pickup and delivery service, in fiscal 2020, which provides contactless shopping in all 13 of our markets. We also have launched digital membership, which helps us gather higher quality data we can use to make better informed decisions in all areas of the business and facilitates a more seamless auto-renewal process, increasing predictability of membership income. We believe digital membership also provides more convenience to Members with digital cards and online payment. We also provide wholesale supply services to a retailer in the Philippines.

We believe that our business success depends on strengthening the trust of our Members by providing curated high-quality items and valuable services at a low cost in our markets and by offering the best value on attractive products and services in a safe and responsible environment. We believe that lower prices on products and services drive sales volume, which increases the Company’s buying leverage, which in turn leads to better pricing that we can then offer to our Members, validating the value of the annual membership fee.

 

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Logistics and distribution efficiencies are fundamental to delivering high quality merchandise at low prices to our Members. We utilize regional distribution centers in the U.S. and Costa Rica as well as several smaller local distribution centers, which enables us to more efficiently distribute our merchandise while also giving us increased flexibility and alternatives to source and transport goods. 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. We own and lease our real estate, depending upon the best available opportunities.

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 number of warehouse clubs for each country or territory were as follows:

Number of

Number of

Warehouse Clubs

Warehouse Clubs

in Operation as of

in Operation as of

Country/Territory

May 31, 2021

May 31, 2020

Costa Rica

8

7

Colombia

8

7

Panama

7

7

Dominican Republic

5

5

Trinidad

4

4

Guatemala

4

4

Honduras

3

3

El Salvador

2

2

Nicaragua

2

2

Aruba

1

1

Barbados

1

1

U.S. Virgin Islands

1

1

Jamaica

1

1

Totals

47

45

Our warehouse clubs, one regional distribution center and several smaller local distribution centers are located in Latin America and the Caribbean, and our corporate headquarters, U.S. buying operations and our larger regional distribution center are located primarily in the United States. Our operating segments are the United States, Central America, the Caribbean and Colombia. We also operate a package forwarding business (casillero) and marketplace business under the “Aeropost” banner in 38 countries in Latin America and the Caribbean, many of which overlap with markets where we operate warehouse clubs.

While we continue to closely monitor the continuing COVID-19 situations in each of our markets and recognize that the potential social and economic impacts in the markets where we operate and any resulting consequences to our results of operations and cash flow remain unknown, we have decided to proceed with the construction of three warehouse clubs on land we previously acquired. The first will be a standard format warehouse club located within the Zone 5 locality of Guatemala City, Guatemala, which will be our fifth warehouse club located in Guatemala. We expect to open this warehouse club in the first quarter of fiscal 2022. The second will be a smaller format warehouse club located within the city of Bucaramanga, Colombia. We expect to open this warehouse club, which will be our ninth warehouse club in Colombia, in the first quarter of fiscal 2022. The third will be a standard format warehouse club located within the city of Portmore, Jamaica. Portmore is a suburb west of the capital city of Kingston. We expect to open this warehouse club, which will be our second warehouse club in Jamaica, in the third quarter of fiscal 2022. 

 

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Factors Affecting Our Business

The COVID-19 pandemic has resulted in significant challenges across our 13 markets since March 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 were permitted to be open, restrictions on segments of the population permitted to shop or circulate on particular days, and significant limits on the number of people permitted to be in the club at the same time. We also experienced product mix shifts due to changing consumer habits and/or government imposed limitations on many non-food categories, decreases in purchases by many business Members, particularly restaurants and hotels, and sporadic supply chain challenges, which can impact inventory levels.

We are currently focused on these four main priorities:

Protect the safety and well-being of our employees and our Members.

Take proactive measures to protect and expand our supply chain options.

Expand technology-enabled shopping and more effective use of data.

Manage cash and capital resources.

We remain vigilant in adapting to the ever-evolving consumer demands emerging from the COVID experience and the apparent desire of consumers to satisfy their shopping and service needs in one location. The COVID-19 pandemic remains unpredictable in duration and intensity in our markets, and we continue to see periodic reinstatements of stay-at-home orders and other restrictions. In addition, we expect continued uncertainty in the economies of our markets as a result of the pandemic and expect volatility in employment trends, industry and consumer confidence and demand; volatility and liquidity of foreign currency exchange rates; volatility of commodity prices; and possible fiscal austerity measures taken by governments in our markets, which will likely impact our results for the foreseeable future. For additional information, refer to the risk 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, 2020.

We view the continued development and integration of technology to create an omni-channel Member experience as an important component of our value proposition, which can also offset some of the impact of pandemic-related restrictions we continue to see. Our Click & Go™ curbside and delivery service contributed approximately 3.5% of total net merchandise sales for the fiscal third quarter ended May 31, 2021. The demand for delivery through our Click &Go™ service has been increasing and represents a growing proportion of total Click & Go™ sales. Developing greater efficiencies remains a priority especially within these new sales channels. We believe that Click & Go™ curbside and delivery services will remain important alternative shopping methods and provide increased value for our Members by enabling them to leverage their membership across multiple shopping platforms. We also see value in the insights gained by communicating with our Members in real-time through a number of the online channels we have developed. Beyond Click & Go™, we continue to invest in technology to increase efficiencies, enhance our Member experience by enabling additional omni-channel capabilities, and finding new ways to generate value and benefits for our Members and the Company.

Increasing “same store” sales is an important element of our growth strategy, and we believe that there are a number of ways to achieve this goal. We are committed to increasing same store sales by increasing both the number of Member transactions and by increasing the average ticket. We have started or recently completed expansions and/or remodels of several clubs in our Central America segment in fiscal 2021, which we believe will contribute to same store sales growth. We have also increased our digital marketing efforts, which has resulted in enhanced reach and visibility of our products and services, contributing to the success of our recent programs. In particular, we believe that our Wellness programs offered in our clubs, such as Optical, which is now available in eight markets, and Pharmacy, which we are piloting in two Costa Rica clubs, and audiology centers that we will begin piloting later this calendar year, will create value for our Members and help drive overall sales growth.

Additionally, in an effort to provide healthy options for our Members, we source additional high quality fresh products through our Direct Farm Program. We believe that our Direct Farm Program reduces costs and improves quality on our fresh produce offerings, while simultaneously supporting local farmers and industry. Our produce distribution centers allow us to provide farm-to-table produce quicker and more efficiently. We opened two produce distribution centers in fiscal 2020 and expect to open additional produce distribution centers in the future.

Overall economic trends, foreign currency exchange volatility, and other factors impacting the business

Our sales and profits vary from market to market depending on general economic factors, including GDP growth; consumer preferences; foreign currency exchange rates; political policies and social conditions; local demographic characteristics

 

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(such as population growth); the number of years we have operated in a particular market; and the level of retail and wholesale competition in that market. The economies of many of our markets are dependent on foreign trade, tourism, and foreign direct investments. Global and local travel restrictions and the general slowdown in global economic activity as a result of COVID-19 have significantly impacted and may continue to impact the economies in our markets, causing significant declines in GDP and employment and devaluations and illiquidity of local currencies against the U.S. dollar. In general, positive conditions in the broader economy promote greater Member spending in our warehouse clubs, and economic weakness generally results in a reduction of customer spending.

Currency fluctuations can be one of the largest variables affecting our overall sales and profit performance, as we have experienced in prior fiscal years, because many of our markets are susceptible to foreign currency exchange rate volatility. During the first nine months of fiscal year 2021 and 2020, approximately 77.8% and 77.6%, respectively, of our net merchandise sales were in currencies other than the U.S. dollar. Of those sales, 48.1% and 49.1% consisted of sales of products we purchased in U.S. dollars for each period, respectively.

A devaluation of local currency reduces the value of sales and membership income that is generated in that country when translated to U.S. dollars for our consolidated results. In addition, when local currency experiences devaluation, we may elect to increase the local currency price of imported merchandise to maintain our target margins, which could impact demand for the merchandise affected by the price increase. We may also modify the mix of imported versus local merchandise and/or the source of imported merchandise in an effort 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.”

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. Demographic characteristics within each of our markets can affect both the overall level of sales and future sales growth opportunities. Certain island markets, such as Aruba, Barbados and the U.S. Virgin Islands offer us limited upside for sales growth given their overall market size.

Political and other factors in each of our markets may have significant effects on our business. The recent and ongoing civil unrest in Colombia paralyzed significant portions of the country’s infrastructure as roadblocks and riots disrupted normal economic activity during the third quarter of fiscal 2021. Austerity and tax reform measures for Colombia and other Latin American countries with high national debt levels and income disparity pose a risk for political instability. Similar unrest happened in Nicaragua and Honduras in 2018 and 2019, respectively; Costa Rica also had a general strike against tax reform measures that significantly impeded regular economic activity in 2018. Events of this sort have, and may continue to have, an adverse effect on our business.

Our operations are subject to volatile weather conditions and natural disasters. In November 2020, Hurricanes Eta and Iota brought severe rainfall, winds, and flooding to a significant portion of Central America, especially Honduras, that caused significant damage to parts of that country’s infrastructure. Although our warehouse clubs were not significantly affected and we were able to manage our supply chain to keep our warehouse clubs stocked with merchandise, these natural disasters could adversely impact our overall sales, costs and profit performance in the future.

In the past, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity), particularly in Trinidad. This can and has impeded our ability to convert local currencies obtained through merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products and to otherwise redeploy these funds in our Company and, increases our foreign exchange exposure to any devaluation of the local currency relative to the U.S. dollar. We continued to experience significant limitations on our ability to convert Trinidad dollars to U.S. dollars or other tradeable currencies during fiscal 2020, with a further deterioration and the problem becoming more acute in August 2020. This U.S. dollar illiquidity situation has persisted thus far into fiscal 2021 and we anticipate the situation to continue. As liquidity conditions have tightened, we have methodically raised prices on imported goods in Trinidad, due to increased costs of conversion of Trinidad dollars to U.S. dollars and risks associated with continued illiquidity. We have also sought to shift the purchase of certain goods to local sources, where appropriate, and we are actively seeking to exchange Trinidad dollars for tradeable currencies, in order to manage our exposure to any potential devaluation. Moreover, in the first quarter of fiscal 2021, we began limiting shipments of goods from the U.S. to Trinidad, and subsequently, we further limited shipments late in the third quarter of fiscal 2021 due to the government’s general prohibition on sales on most non-food or non-essential items. This prohibition is expected to persist for at least some part of our fiscal fourth quarter, depending on the local COVID-19 situation.

 

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Comparable net merchandise sales declined in Trinidad by 21.8% in the third quarter of fiscal year 2021, due to reductions in the levels of imported merchandise to amounts in-line with our ability to exchange Trinidad dollars for U.S. dollars or other tradeable currencies and the increased COVID-19 restrictions in that market. We also saw a drop in Member accounts of 2.7% during the third quarter and 5.0% since the end of last year, which we believe is also related to the reduction in imports and COVID-19 restrictions on Member traffic and prohibition on sales of non-essential items. At the start of the third quarter of fiscal 2021, we began raising U.S. imports into Trinidad; however, with the aforementioned COVID-19 restrictions, we significantly reduced U.S. shipments into Trinidad at the end of the quarter, temporarily, until the local situation improves. We expect that the combination of these factors will continue to negatively impact our sales in Trinidad in our fourth fiscal quarter.

Despite these headwinds, we continue to explore and execute several options to increase our ability to generate more reliable sources of U.S. dollars in Trinidad. These options include, but are not limited to, sourcing locally produced goods in Trinidad dollars and exporting these goods to our clubs and/or third parties in other countries in exchange for U.S. dollars. While these initiatives are being developed, we are exploring ways to finance additional imports, even if a higher level of imports exceeds the amount of U.S. dollars we are able to source in Trinidad. Alternatives we are considering include new U.S. dollar denominated loans, foreign currency exchange forwards, investing in financial instruments, and purchase and sales of commodities, which could create immediate U.S. dollar liquidity and/or fix the exchange rate of Trinidad dollars to U.S. dollars. Some of these alternatives may not mitigate the resulting increase in exposure to a potential devaluation of the Trinidad dollar and could result in us being required to take a discount on the amount of U.S. dollars we accept in exchange for Trinidad dollars, relative to what we would receive upon exchange in accordance with the official exchange rate and/or incur additional financing costs.

As of May 31, 2021, our Trinidad subsidiary had Trinidad dollar denominated cash and cash equivalents and short and long-term investments measured in U.S. dollars of approximately $76.7 million, a decrease of $2.9 million from August 31, 2020 when these same balances were approximately $79.6 million. The Trinidad central bank manages the exchange rate of the Trinidad dollar with the U.S. dollar. While the Trinidad government has publicly stated it has no intention to devalue the Trinidad dollar, it could in the future 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 dollar cash and investments position, measured in U.S. dollars, would decrease by approximately $15.3 million, with a corresponding increase in Accumulated other comprehensive loss reflected on our consolidated balance sheet. Separate from the Trinidad dollar denominated cash and investments balances described above, as of May 31, 2021, we had a U.S. dollar denominated monetary asset position of approximately $7.0 million in Trinidad (net of U.S. dollar denominated liabilities), which 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 on our consolidated statement of operations of revaluing these U.S. dollar denominated net monetary assets would be an approximate $1.4 million gain. While we may pay premiums or enter into financial transactions at a discount from the official government rate to convert our Trinidad dollars into U.S. dollars, we use the official exchange rate published by the Central Bank of Trinidad and Tobago to measure the U.S. dollar equivalent of Trinidad dollar-based revenues, expenses, assets and liabilities and the Trinidad dollar equivalent of U.S. dollar-based monetary assets and liabilities for financial reporting purposes, as there are no other reliable references available to translate or remeasure our revenues, expenses, assets and liabilities.

Our Barbados subsidiary also recently began facing a U.S. dollar illiquidity situation. The Barbados dollar has a conventional fixed-peg currency arrangement, in which the Barbados dollar exchange rate is fixed to the U.S. dollar. Thus, we do not expect a devaluation of this currency at this time. However, as of May 31, 2021, our Barbados subsidiary had Barbados dollar denominated cash and cash equivalents measured in U.S. dollars of approximately $15.6 million, which cannot be readily converted to U.S. dollars for general use within the Company.

 

Mission and Business Strategy

PriceSmart exists to improve the lives and businesses of our Members, our employees and our communities through the ethical delivery of the best quality goods and services at the lowest possible prices. Our mission is to serve as a model company, which operates profitably and provides a good return to our investors, by providing Members in emerging and developing markets with exciting, high quality merchandise sourced from around the world and valuable services at compelling prices. We prioritize the well-being and safety of our Members and employees. We provide good jobs, fair wages, and benefits and the opportunity for growth. We strive to treat our suppliers right and empower them when we can. We conduct ourselves in a socially responsible manner and respect the environment and the laws of all the countries in which we operate. The annual membership fee enables us to operate our business with lower margins than traditional retail stores. As we are increasing technological capabilities and expanding our omni-channel shopping experience, we believe we can realize greater efficiencies in the supply chain, enhance our ability to satisfy our Members’ shopping expectations, and play a greater role in their lives. We believe we are well-positioned

 

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to blend the excitement and appeal of our brick and mortar business with the convenience and additional benefits of online shopping and services. 

 

Growth

We measure our growth primarily by the amount of the period-over-period activity in our net merchandise sales, our comparable club net merchandise sales, membership income and total revenues. Our investments are geared toward enhancing Member experience while creating greater efficiencies, which enable us to offer lower prices, more services, and convenience. We believe these efforts will support membership renewals and sustained growth for the Company. However, 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 enhance the Member experience, grow membership and support long-term sales growth and profitability.

Financial highlights for the third quarter of fiscal year 2021 included:

Total revenues increased 11.9% over the comparable prior year period.

Net merchandise sales increased 11.6% over the comparable prior year period. We ended the quarter with 47 warehouse clubs compared to 45 warehouse clubs at the end of the third quarter of fiscal 2020. Foreign currency exchange rate fluctuations impacted net merchandise sales negatively by 1.6% versus the comparable three-month period.

Comparable net merchandise sales (that is, sales in the 45 warehouse clubs that have been open for greater than 13 ½

calendar months) for the 13 weeks ended May 30, 2021 increased 8.8%. Foreign currency exchange rate fluctuations impacted comparable net merchandise sales negatively by 1.5%.

Membership income for the third quarter of fiscal 2021 increased 5.9% to $14.3 million.

Total gross margins (net merchandise sales less associated cost of goods sold) increased 27.7% over the prior-year period, and merchandise gross profits as a percent of net merchandise sales were 15.9%, an increase of 200 basis points (2.0%) from the same period in the prior year. The increase is attributable to more focused merchandising strategies, inventory management, and pricing actions to offset foreign currency exchange costs.

Operating income for the third quarter of fiscal 2021 was $36.0 million, an increase of 50.4%, or $12.0 million, compared to the third quarter of fiscal 2020.

We recorded a $2.2 million net currency loss, primarily from foreign currency transactions, in the third quarter of fiscal 2021 compared to a $1.5 million net currency loss in the same period last year.

Our effective tax rate decreased in the third quarter of fiscal 2021 to 30.9% from 38.0% in the third quarter of fiscal 2020, primarily because we were able to recognize greater benefits from foreign tax credits in the current quarter compared to the prior year period.

Net income attributable to PriceSmart for the third quarter of fiscal 2021 was $22.5 million, or $0.73 per diluted share, compared to $12.7 million, or $0.41 per diluted share, in the third quarter of fiscal 2020.

Financial highlights for the nine months ended May 31, 2021 included:

Total revenues increased 7.6% over the comparable prior year period.

Net merchandise sales increased 7.3% over the comparable prior year period. We ended the quarter with 47 warehouse clubs compared to 45 warehouse clubs at the end of the third quarter of fiscal year 2020. Foreign currency exchange rate fluctuations impacted net merchandise sales negatively by 2.7%.

Comparable net merchandise sales (that is, sales in the 45 warehouse clubs that have been open for greater than 13 ½ calendar months) for the 39 weeks ended May 30, 2021 increased 4.3%. Foreign currency exchange rate fluctuations impacted comparable net merchandise sales negatively by 2.7%.

Membership income increased 0.2% to $41.4 million.

Merchandise gross profits (net merchandise sales less associated cost of goods sold) increased 18.0% over the comparable prior year period and warehouse gross profits as a percent of net merchandise club sales were 16.0%, an increase of 150 basis points (1.5%) from the same period last year.

Operating income was $125.6 million, an increase of 34.3%, or $32.1 million, compared to the same period last year.

We recorded a $4.0 million net currency loss, primarily from foreign currency transactions, in the current nine-month period compared to a $2.4 million net loss in the same period last year.

Our effective tax rate decreased for the first nine months of fiscal 2021 to 32.7% from 33.9% in the first nine months of fiscal year 2020 because we were able to recognize greater benefits from foreign tax credits in the current year nine-month period compared to the prior-year period.

 

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Net income attributable to PriceSmart, Inc. for the first nine months of fiscal year 2021 was $78.5 million, or $2.55 per diluted share, compared to $58.0 million, or $1.90 per diluted share, in the comparable prior year period.

 

COMPARISON OF THE three and nine months ended May 31, 2021 and 2020

The following discussion and analysis compares the results of operations for the three-month and nine-month periods ended on May 31, 2021 with the three-month and nine-month periods ended on May 31, 2020 and should be read in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this report. Unless otherwise noted, all tables on the following pages present U.S. dollar amounts in thousands. Certain percentages presented are calculated using actual results prior to rounding.

 

Net Merchandise Sales

The following tables indicate the net merchandise club sales in the segments in which we operate and the percentage growth in net merchandise sales by segment during the three and nine months ended May 31, 2021 and May 31, 2020.

Three Months Ended

May 31, 2021

May 31, 2020

Amount

% of net
sales

Increase/
(decrease)
from
prior year

Change

Amount

% of net
sales

Central America

$

521,355

60.8

%

$

78,551

17.7

%

$

442,804

57.6

%

Caribbean

239,323

27.9

(7,138)

(2.9)

246,461

32.1

Colombia

96,800

11.3

17,697

22.4

79,103

10.3

Net merchandise sales

$

857,478

100.0

%

$

89,110

11.6

%

$

768,368

100.0

%

Nine Months Ended

May 31, 2021

May 31, 2020

Amount

% of net
sales

Increase
from
prior year

Change

Amount

% of net
sales

Central America

$

1,537,228

59.3

%

$

125,221

8.9

%

$

1,412,007

58.4

%

Caribbean

750,057

28.9

14,758

2.0

735,299

30.4