UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K





For the fiscal year ended August 31, 20172019 

OR





For the transition period from               to 



COMMISSION FILE NUMBER 000-22793

PriceSmart, Inc.

(Exact name of registrant as specified in its charter)



9740 Scranton Road, San Diego, CA 



Registrant’s telephone number, including area code: (858) 404-8800

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $0.0001 Par Value

Securities registered pursuant to Section 12(g) of the Act: None



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ☑    No ☐



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.             Yes ☐    No ☑



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes ☑    No ☐



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes  ☑   No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐



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.



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         Yes ☐    No ☑



The aggregate market value of the Registrant’s voting and non-voting common equity held by non-affiliates of the Registrant as of the last day of the Registrant's most recently completed second fiscal quarter was $1,925,567,077$1,488,649,592 based on the last reported sale price of $88.40$64.66 per share on the NASDAQ Global Select Market on February 28, 2017.2019.



As of October 18, 2017,  30,400,67417, 2019, 30,536,665 shares of Common Stock were outstanding.



DOCUMENTS INCORPORATED BY REFERENCE





Portions of the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 24, 2018February 6, 2020 are incorporated by reference into Part III of this Form 10-K. 



PRICESMART, INC.



ANNUAL REPORT ON FORM 10-K FOR

THE FISCAL YEAR ENDED August 31, 20172019



TABLE OF CONTENTS





PARTI

Item 1. Business



General

This Form 10-K contains forward-looking statements concerning PriceSmart, Inc.'s (“PriceSmart,” "we," “us,” or the “Company”) anticipated future revenues and earnings, adequacy of future cash flow, projected warehouse club openings, the Company's performance relative to competitors and related matters. These forward-looking statements include, but are not limited to, statements containing the words “expect,” “believe,” “will,” “may,” “should,”��� “project,” “estimate,” “anticipated,” “scheduled” and like expressions, and the negative thereof. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements, including foreign exchange risks, political or economic instability of host countries, and competition, as well as those risks described in the Company's U.S. Securities and Exchange Commission reports, including the risk factors referenced in this Form 10-K. See Part I, Item 1A “Risk Factors.” Forward-looking statements speak only as of the date they are made, and we do not undertake to update these statements, except as required by law.



Our Company



PriceSmart ownsbegan operations in 1996 in San Diego, California. We own and operates U.S.-styleoperate U.S. style membership shopping warehouse clubs in LatinCentral America, and the Caribbean that offerand Colombia.  These regions have a population of approximately 109 million people and a combined gross domestic product of approximately $1.4 trillion. We also function as a wholesale supplier to a retailer in the Philippines.  We sell high quality brand name and private label consumer goodsproducts at low prices to individuals and businesses.  OurHistorically, our typical no-frills standard warehouse club-type buildings rangehave ranged in sales floor size from 48,000approximately 40,000 to 100,00060,000 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. DuringHowever, during fiscal year 2017,2019, we opened two new smaller sales floor warehouse clubs, one in Santo Domingo, Dominican Republic, and the other in Santiago de Veraguas, Panama. We design our smaller format clubs to serve markets whose population is likely to support a smaller club or that are in locations, such as urban areas, where it is challenging to secure sufficient real estate at a reasonable cost for a larger club.  We believe the smaller format can expand our geographic reach in existing markets and provide more convenience for our members. These smaller warehouse club formats have sales floor square footage ranging from 30,000 to 40,000 square feet.

As warehouse club operators, we believe that our business success depends on our ability to be the lowest cost operators in our markets and, in turn, to offer the lowest prices on high quality products and services in our markets.  We believe that lower prices on products and services 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 membership investment that our customers make.  In fiscal year 2019, our average net merchandise sales per warehouse club were approximately $74.6 million. By offering our members high quality merchandise at competitive prices, we seek to reinforce the value$1,400 per square foot of a PriceSmart membership. We also seek to provide above market and fair wages and benefits to all of our employees as well as a fair return to our stockholders.sales floor space.



Our warehouse clubs operate in developingemerging 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, andconvenience stores, traditional wholesale distribution.distribution and growing online sales.



The numbers of warehouse clubs in operation as of August 31, 2017 for each country or territory were as follows:

 We opened a new warehouse club in Chia, Colombia, in September 2016 (fiscal year 2017) that we constructed on land we acquired in May 2015, bringing the total of warehouse clubs operating in Colombia to seven. In April 2015, we acquired land in Managua, Nicaragua. We constructed and then opened a warehouse club on this site in November 2015 of fiscal year 2016, bringing the total number of warehouse clubs operating in Nicaragua to two. 

On February 1, 2017, we acquired land in Santa Ana, Costa Rica, upon which we built a new warehouse club. We opened this new warehouse club on October 5, 2017, fiscal year 2018.  This new warehouse club brings the number of PriceSmart warehouse clubs operating in Costa Rica to seven. In June 2017, we acquired land in Santo Domingo, Dominican Republic, upon which we are currently building a new warehouse club. We expect to open this new warehouse club in the spring of 2018. This

will bring the numberThe numbers of PriceSmart warehouse clubs operating in Dominican Republic to four. We continue to explore other potential sites for future warehouse clubs in Central America, the Caribbean and Colombia.operation as of August 31, 2019 for each country or territory were as follows:



Our warehouse clubs and local distribution centers are located in Latin America and the Caribbean, and our corporate headquarters, U.S. buying operations and regional distribution centers are located primarily in the United States.  Our operating segments are the United States, Central America, the Caribbean and Colombia.



The table below shows when the newest clubs will open. Once these six clubs are open, the Company will operate 49 warehouse clubs.

We are investing in digital transformation, including omni-channel capabilities that enable e-commerce, by integrating technology, talent, supply chain, and operations to enhance the membership shopping experience, drive efficiencies and fuel sales growth. 

We also operate a legacy (casillero and marketplace) Aeropost business in 38 countries in Latin America and the Caribbean, many of which overlap with markets where we operate our warehouse clubs.

Competitive Strengths



Low Operating Costs.  Our format is designed to move merchandise from our suppliers to our members at a lower expense ratio than our competitors. We focus on achievingstrive to achieve efficiencies in product distribution, minimizing the labor required to stock and display merchandise, limiting non-payroll operating expenses and maintaining low occupancy costs. For example, we offer a limited number of stock keeping units (SKUs) (approximately 2,500 per warehouse club) with large pack sizes, which allows us to keep shelves stocked with less labor cost than competitors that offer a greater number of SKUs. WeMore recently, we also have opened distribution centers in certain of our high volume markets to improve efficiency and in-stock rates and reduce lead times on high volume products. Our focus on driving down operating costs relative to net warehouse club sales allows us to offer better value and lower prices to our members, which we believe helps generate member loyalty and renewals, which in turn leads to increased sales. 



Worldwide Sourcing.Approximately 52.0% of our sales come from merchandise sourced in the U.S., Asia and Europe.  One of the primary advantages we have compared to most of our competitors is our United States-based buying team that sources merchandise from suppliers in the U.S. and around the world.  Our U.S.-based buyers identify and purchase new and exciting products, including our own Member’s Selection private label products.  Many of these products are available only at PriceSmart in the markets in which we operate.

Membership. Membership has been a basic operating characteristic in the warehouse club industry beginning over 4043 years ago at Price Club, the first warehouse club. Membership fees enableare an additional component that enables us to operate our business on lower margins than conventional retail and wholesalers and represent approximately 1.6%1.7% of net warehouse clubmerchandise sales.  In addition, membership servesallows us to connect more closely with our members and to promote customer loyalty.

Our membership represents a desirable demographic concentration with strong purchasing power in our markets. During 2019, we continued our expansion of our Platinum Membership rewards program into additional countries in our Central America and Caribbean segments. Similarly, we continue to expand our product and service offerings to members, including discounted travel through our PriceSmart Travel website, co-branded credit card benefits, optical departments and white goods direct delivery programs. We believe that untapped opportunities exist to further enhance the value of our membership in various areas.  We continue to explore opportunities to provide our members with products and services that are particularly attractive to our unique membership base.



Business Members. Our product selection, marketing and general business focus are directed to both business and retail consumers. Our business members include a broad cross section of businesses such as restaurants, institutions including schools, and other businesses that purchase products for resale or use in their businesses. These business members represent a significant source of sales and profit and provide purchasing volume that gives us better prices from our suppliers.



Innovation. The warehouse club industry surpassed its fortieth anniversary in 2016, sincehas been operating for over forty years, following the founding of Price Club in 1976. The world of merchandising has changed greatly in those 40 years,over this period, particularly related to technology, the worldwide sourcing of products, a growing middle class in developing and emerging countries and ever changing consumer preferences. We have developeddeveloped know-how to operate effectively in multiple markets, many of which are relatively small, each with different legal requirements, local buying opportunities, cultural norms, unique distribution and logistical challenges and member preferences that require a studiedour unique ability to source the correct mix of local versus imported merchandise. We believe that fundamental to our future success is our capacity to continue to adapt and innovate to meet the needs of our current and future members. We have therefore established an innovation teamWhile not yet as prevalent as in the U.S., online sales penetration is increasing in the markets where we operate. In fiscal year 2019, we instituted the Digital Transformation Committee. This committee is a standing committee reporting to a committeeour Board of Directors.  The Digital Transformation Committee is charged with oversight of the Board of Directors that is dedicatedCompany’s omni-channel development and digital transformation to the evaluationenhance membership and development of technologies with the objective of offering our members a seamless multi-channel experience, including on-line shopping.shareholder value. 



Experienced Management Team. Our ChairmanIn January 2019, Sherry Bahrambeygui was named PriceSmart’s Chief Executive Officer after having been an instrumental component of the evolution of the Company’s governance and other strategic initiatives for over 16 years, including as a member of the Board Chief Executive Officer and manyof Directors for the past eight years. In addition, the other members of our senior executives and managersmanagement team have workedextensive career experience in the warehouse club business.  Many of our executives learned the warehouse club business most, if not all,at Price Club or Sam’s Club (a division of their careers. Their experienceWalmart).  The executive team acquired through Aeropost is experienced in developing online technology and knowledge represent a key strengthmarketing for e-commerce and competitive advantage for our company.logistics in the Latin America marketplace.



Growth Strategy



Our Board of Directors has approved a growth strategy that includes the following elements:



Increasing Sales in Current PriceSmart Locations.same “store” sales.  Our approach forWe are committed to increasing same store sales at current PriceSmartby increasing the number of member transactions and by increasing the average order size.  We believe that there are a number of ways to increase same store sales.  In some of our highest volume locations, focuses primarily on expanding or reconfiguringwe have enlarged our buildings to add selling spaceexpand sales floors, remodeled aging stores, and additional parkingadded more parking. These projects have taken place at properties in Panama City, Panama; San Pedro Sula, Honduras; Santo Domingo, Dominican Republic; and Kingston, Jamaica.  We are planning to invest in a number of our higher volume locations; identifyinglocations in fiscal year 2020 to improve the shopping experience for our members that we believe will drive sales. Additionally, we plan to continue our development and purchasingexpansion of our omni-channel member experience such as a comprehensive digital catalog of merchandise available to be ordered online and made available for pickup, direct delivery to home from one of our regional distribution centers or vendors, and enhanced analytics to help us better understand our members and improve the right products atPriceSmart experience.  Another way to increase same store sales is to operate more efficiently and improve the lowest possible prices to provide valuetracking and flow of merchandise to our members;locations in order to reduce out of stocks.  We believe that the use of technologies to identify member shopping patterns will help us to design targeted marketing campaigns, which will further drive sales. Additionally, we believe that continuing to enhance the member value proposition by modifying our offering to include more prepared foods, offering new services, such as optical and expanding the number of private label products we sell under our Member’s Selection brand.discounts on external services like travel and insurance, helps to drive member loyalty and overall sales. 



Adding New Warehouse Clubs in Existing Markets. We currently operate in 13 countries/territories. All of our country markets are smallterritories, with the largest in terms of population and gross domestic product (“GDP”) exceptbeing Colombia. In our non-Colombia markets, weWe currently have announced two additional clubs to open in Colombia in the fall of 2020. We also plan to addopen four additional warehouse clubs in our other markets. We plan to continue adding more clubs in our existing standard warehouse club format and in our new small warehouse club format where we believe the markets can support additional clubs. We also plan to continue to add warehouse clubs in Colombia, which is a large market that we believe can potentially provide significant expansion opportunities.



Efficient Distribution Center Network.Logistics and distribution efficiencies are an important part of what allows us to deliver high quality merchandise at low prices to our members.  Our warehouse clubs acquire a significant amount of merchandise internationally, primarily processed through our Miami distribution centers. We then ship the merchandise either directly to our warehouse clubs or to regional distribution centers located in some of our larger markets.  Our ability to efficiently receive, handle and distribute merchandise to the point where our members put that merchandise into their shopping carts has a significant impact on our level of operating expenses and ultimately how low we can price our merchandise.  We continue to explore ways to

improve efficiency, reduce costs and ensure a good flow of merchandise to our warehouse clubs.  We have added local and regional distribution centers in several of our markets to improve merchandise flow and in-stock conditions and reduce operating costs, the benefit of which can be passed on to our members in the form of lower merchandise prices.  These locations are generally leased, and the addition of new locations or expansion of current capacity will not require significant investment. Additionally, in January 2017New Markets.    While we purchased a distribution center in Medley, Miami-Dade County, Florida, into which we transferred our Miami dry distribution center activities from a leased facility during the third quarter of fiscal year 2017.  This new distribution facility will increase our ability to efficiently receive, handle and distribute merchandise.  Our distribution centers are currently contributing to efficiencies in buying and product handling, and we expect our in-country distribution centers to continue to expand their range of operations to increase PriceSmart sales and to lower operating expenses.

New Markets.We are focusedfocus on effortsopportunities to expand in Colombia, a market where our membership concept has proven to be well-received and holds significant potential to grow our business, while we continuallycontinue to evaluate potential opportunities for future expansion into new markets in South America.



On-lineOmni-channel Shopping and Other Services. We believeare currently focusing our investment in digital transformation and omni-channel capabilities on the following strategic opportunities:

1. Convenience: Consumers increasingly are requesting home delivery or store pick up for larger items, as well as for their everyday basic shopping needs, such as consumable merchandise.  We are developing solutions, through technology, operational changes and third-party collaborations, to enable our members to order online and have products delivered to their homes or made available for pick up at our clubs.

2. Smaller Club Format:  Supplementing warehouse club sales with online shopping opportunities is essential to the success of our urban and secondary city club formats.  These smaller clubs may have a reduced selection of non-food products, but we plan to enable members to order online any product typically available at our larger format clubs.

3. Direct to Consumers: We are in the process of staging certain large ticket products directly in our distribution centers or with our vendors, initially in a few markets, so that there is significantmembers can order these products online and have them shipped directly to their home or business or picked up at one of our clubs.  We are also exploring the opportunity to increase salesadd products to our in-country selection and profits withfulfilling online orders directly from our currentdistribution centers or vendors.

4. Cross-border shopping:   Using the sourcing expertise and futurebuying power of PriceSmart, we have begun to extend the range of products that our members can purchase online.  For now, these new products are being sourced in the U.S., fulfilled through increasing online shopping opportunities; providing homeour Aeropost distribution center in Miami or forward deployed to regional or domestic distribution centers and business product delivery; and offering additional products and services not currently availableshipped to our members.  TheseMembers are able to receive orders at their homes or businesses, at designated pick-up areas within our clubs or at Aeropost locations in countries where we operate clubs.

5. Additional expansion opportunities: We have begun to test combining PriceSmart’s purchasing power with Aeropost’s wider geographic presence and online capabilities to sell merchandise in markets where PriceSmart does not currently have a presence. 

Distribution Efficiency.  Since our inception, we have consistently believed that distribution efficiency is fundamental for success in selling merchandise in our traditional clubs, and in today’s world, this principle holds true for purchases made online.  Because PriceSmart sources merchandise from all over the world and especially in the United States, and because we are currently under development.doing business in countries where infrastructure—roads and ports—is not as modern as in the United States, distribution efficiency is even more significant for us.  Our ability to move products efficiently and in a timely manner from the suppliers to our members is key to the cost structure of our business and, consequentially, to how low we price our products.

Historically, our international suppliers and especially our U.S. suppliers have generally shipped their products to our Miami distribution facility where they are received and assigned to various containers for direct shipment to our locations.  Regional and in-country suppliers have shipped directly to our locations.  As our location sales volumes have grown, we have begun to route more of our products from both international, regional and local suppliers to major regional distribution centers in order to improve in-stocks, reduce inventory weeks of supply and reduce expense inefficiencies, all with the goal of giving better prices to our members.

In 2018, we opened our first regional distribution center, which is located in Costa Rica within the metropolitan area of San Jose. This 165,000 square foot building is designed to receive, store and ship dry, refrigerated and frozen products to clubs in Central America. This regional distribution center has the capacity to ship products such as major appliances and online products directly to our members or to convenient pick-up locations, including our clubs.  We are considering other strategic locations for distribution centers to drive efficiencies and expand omni-channel offerings.



Our Membership Policy



We offer three types of memberships: Business, Diamond and in Costa Rica and Panama, Platinum memberships. BusinessesPlatinum. Only businesses can qualify for a  Business membership. We promote Business membership through our marketing programs and by offering certain merchandise targeted primarily to businesses such as restaurants, hotels, convenience stores, offices and institutions. Business members pay an annual membership fee of approximately the equivalent of $30 for a primary and secondary membership card and approximately $10 for additional add-on membership cards.



The Diamond membership is targeted at individuals and families. The annual fee for a Diamond membership in most markets is approximately $35 (entitling members to two cards). We increased the fee in June 2012 from approximately $30.    In Colombia, the Diamond membership fee has been 65,00090,000 (COP) (including VAT) since our initial entrance into the Colombian market.  The Colombian peso (COP) was trading at approximately 2,000 COP to $1.00 US dollar at that time.  More recently, the Colombian peso has been trading at approximately 3,000 COP to $1.00 US dollar, so that theApril 2019, providing a converted membership price in U.S. dollars decreased fromof approximately U.S. $30 to approximately U.S. $20.  In February 2017, we raised the membership fee in Colombia to 75,000 COP, moving the converted membership price to approximately U.S. $25.$26. 



The Company began offeringcurrently offers the Platinum membershipsmembership program in Costa Rica during fiscal year 2013, whichnine of its thirteen markets. The annual fee for a Platinum membership in most markets is approximately $75. The Platinum membership provides members with a 2% rebate on most items, up to an annual maximum of $500.00.500.  Platinum members can apply this rebate to future purchases at the warehouse club at the end of the annual membership 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.  The rebate is issued annually to Platinum members on March 1 and expires August 31.  Any rebate amount not redeemed by August 31 is recognized as breakage revenue.  In September of fiscal year 2018, we expanded this membership offeringWe expect to our Panama market and plan on adding the Platinum membership level in the Dominican Republic over the next few months. We are consideringcontinue expanding Platinum membership to otheradditional PriceSmart markets and may do so during fiscal year 2018.markets. 

We recognize membership income over the 12-month term of the membership.  Deferred membership income is presented separately on the consolidated balance sheet and totaled $22.124.9 million and $20.923.0 million as of August 31, 20172019 and August 31, 20162018, respectively.  Our membership agreements provide that our members may cancel their membership and may receive a refund of the prorated share of their remaining membership fee if they so request.  



Our Intellectual Property Rights



It is our policy to obtain appropriate proprietary rights protection for trademarks by filing applications for registration of eligible trademarks with the U.S. Patent and Trademark Office and in certain foreign countries. We rely on copyright and trade secret laws to protect our proprietary rights. We attempt to protect our trade secrets and other proprietary information through agreements with our employees, consultants and suppliers and other similar measures. There can be no assurance, however, that we will be successful in protecting our proprietary rights. While management believes that our trademarks, copyrights and other proprietary know-how have significant value, changing technology and the competitive marketplace make our future success dependent principally upon our employees’ technical competence and creative skills for continuing innovation.



Our Competition



Our international merchandising business competes with a wide range of international, regional, national and local retailers, and traditional wholesale distributors.  Our industry is highly competitive, based on factors such as price,We compete in a variety of ways, including the prices at which we sell our merchandise, qualitymerchandise selection and selection, warehouseavailability, services offered to customers, location, store hours and member service.the shopping convenience and overall shopping experience we offer.  Some of our competitors may have greater resources, buying power and name recognition.  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, convenience stores, cash and carry, home improvement centers, electronic retailers and specialty stores, including those within Latin America that are owned and operated by large U.S. and international retailers, including Wal-Mart Stores,Walmart, Inc. in Central America and Grupo Éxito and Cencosud in Colombia.  We have competed effectively in theseour markets in the past and expect to continue to do so in the future due to the unique nature of the membership warehouse club format.  We have noted that certain retailers within our markets are making investments in upgrading their locations within our markets.and/or experimenting with different formats.  These actions may result in increased competition within our markets.  Further, it is possible that additional U.S. warehouse club operators may decide to enter our markets and compete more directly with us in a similar warehouse club format. We also face competition from online retailers and last-mile delivery services that serve our markets, and we expect that this type of competition will grow and intensify in the future.



Our Employees



As of August 31, 2017,2019, we had a total of 7,903approximately 9,000 employees. Approximately 95%93% of our employees were employed outside of the United States, and unions represent approximately 1,105 employees are represented by unions.1,800 employees. Our policy is to provide employees with good wages relative to the competition in the markets in which they work and to provide a safe working environment and good benefits which often exceed the legal requirements for countries in which we do business.  We believe that investing in our employees, treating them as partners in our business and providing opportunities for career advancement lead to long-serving, loyal employees, which in turn creates efficiencies in operations and results in better service to our members.  We consider our employee relations to be very good.



Seasonality and Quarterly Fluctuations



Historically, our merchandising businesses have experienced holiday retail seasonality in ourtheir markets.  In addition to seasonal fluctuations, in our comparable store net sales, operating income and net income occurresults fluctuate quarter-to-quarter as a result of a varietyeconomic and political events in markets that we serve, the timing of factorsholidays, weather, the timing of shipments, product mix and currency effects on the cost of U.S.-sourced products which may make these products more or less expensive in our markets.  These factors, include but are not limited to:

local currencies and therefore more or less affordable.  Because of such fluctuations, the results of operations of any quarter are not indicative of the results that may be achieved for a full fiscal year or any future quarter.  In addition, there can be no assurance that our future results will be consistent with past results or the projections of securities analysts.



Working Capital Practices



Information about our working capital practices is disclosed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations--LiquidityOperations-Liquidity and Capital Resources.”



Financial Information about Segments and Geographic Areas



Financial information about segments and geographic areas is incorporated herein within Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations--Net Warehouse ClubOperations-Net Merchandise Sales by Segments” and Part II, Item 8 “Financial Statements and Supplementary Data Segment: Notes to Financial Statements, Note 15-Segments.17-Segments.”



Other Information



PriceSmart, Inc. was incorporated in the State of Delaware in 1994.  Our principal executive offices are located at 9740 Scranton Road, San Diego, California 92121.  Our telephone number is (858) 404-8800.  Our website home page on the Internet is www.pricesmart.com.  We make our website content available for information purposes only.  It should not be relied upon for investment purposes, nor is it incorporated by reference into this Form 10-K.



Available Information



The PriceSmart, Inc. website or internet address is www.pricesmart.com. On this website we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, and the annual report to the stockholders as soon as reasonably practicable after electronically filing such material with or furnishing it to the U.S. Securities and Exchange Commission (SEC). Our SEC reports can be accessed through the investor relations section of our website under “SEC Filings.” All of our filings with the SEC may also be obtained at the SEC’s Public Reference Room at Room 1580, 100 F Street NE, Washington, DC 20549. For information regarding the operation of the SEC’s Public Reference Room, please contact the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.  We will make available our annual report on Form 10-K and our annual Proxy Statement for the fiscal year 20172019 at the internet address http://materials.proxyvote.com/741511 as soon as reasonably practicable after electronically filing such material with or furnishing it to the SEC.

Item 1A. Risk Factors

In evaluating the Company’s business, you should consider the following discussion of risk factors, in addition to other information contained in this report and in the Company’s other public filings with the U.S. Securities and Exchange Commission.  Any such risks could materially and adversely affect our business, financial condition, results of operations, cash flow and prospects. However, the risks described below or incorporated by reference herein are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition, results of operations, cash flow and prospects.



Risks Associated with Our financial performance is dependent on international operations, which exposes us to various risks.Business Strategy and Operations



Our international operations account for nearly all of our total revenues. Our financial performance is subject to risks inherent in operating and expanding our international membership warehouse club business, which include:

Circumstances relating to these risks may arise, which may then result in disruption to our sales, banking transactions, operations, merchandise shipments, and currency exchange rates, any of which could have a material adverse effect on our business and results of operations.

Any failure by us to manage our widely dispersed operations could adversely affect our business.business.



As of August 31, 2017,2019, the Company had 3943 warehouse clubs in operation, located in 12 countries and one U.S. territory (seven each in Colombia; six inColombia and Costa Rica; fivesix in Panama; four in Trinidad; three each in Guatemala, Honduras, andfive in the Dominican Republic; four in Trinidad; three each in Guatemala and Honduras, two each in El Salvador and Nicaragua; and one each in Aruba, Barbados, Jamaica, and the United States Virgin Islands)., and expects to open six new clubs in these countries in the next two years. We will need to continually evaluate the adequacy of our existing infrastructure, systems and procedures, financial controls, inventory controls and safety controls and make upgrades from time to time. Moreover, we will be required to continually analyze the sufficiency of our inventory distribution channels and systems and may require additional or expanded facilities in order to support our operations. We may not adequately anticipate all the changing demands that will be imposed on these systems. Any inability to effectively update our internal systems or procedures as required could have a material adverse effect on our business, financial condition and results of operations.



We might not identify in a timely manner or effectively respond to changes in consumer preferences for merchandise, which could adversely affect our relationship with members, demand for our products and market share.  

Our success depends, in part, on our ability to identify and respond to trends in demographics and changes in consumer preferences for merchandise. It is difficult to consistently and successfully predict the products and services our members will demand. Failure to timely identify or respond effectively to changing consumer tastes, preferences or spending patterns could adversely affect our relationship with our members, the demand for our products and our market share. If we are not successful at predicting sales trends and adjusting purchases accordingly, we might have too much or too little inventory of certain products.

We face significant competition.

Our international warehouse club business competes with exporters, importers, wholesalers, local retailersIf we buy too much of a product, we might be required to reduce prices or otherwise liquidate the excess inventory, which could have an adverse effect on margins (net sales less merchandise costs) and trading companies in various international markets. Some of our competitors have greater resources, buying power and name recognition than we have. 

In the countries in which we operate,operating income. If we do not currently face direct competition from U.S. membership warehouse club operators. However,have sufficient quantities of a popular product, we do face competition from various retail formats such as hypermarkets, supermarkets, cashmight lose sales and carry, home improvement centers, electronic retailers and specialty stores, including those within Latin America that are owned and operated by large U.S. and international retailers, including Wal-Mart Stores, Inc. in Central America and Grupo Éxito and Cencosud in Colombia. Weprofits we otherwise could have noted that certain retailers are making investments in upgrading their locations which may result in increased competition. Further, it is possible that current U.S. warehouse club operators may decide to enter our markets and compete more directly with us in a similar warehouse club format.  Our ability to operate profitably in our markets, particularly small markets, may be adversely affected by the existence or entry of competing warehouse clubs or discount retailers.

We also face competition from on-line retailers who serve our markets, and we expect that this type of competition will grow and intensify in the future.made.



We compete in a variety of ways, including the prices at which we sell our merchandise, merchandise selection and availability, services offered to customers, location, store hours and the shopping convenience and overall shopping experience we offer. We may be required to implement price reductions to remain competitive if any of our competitors reduce prices in any of our markets. In response to the increasing threat associated with on-line retailers, we are making technology investments which may result in increases in the use of cash and reduced profitability in the near term.

Future sales growth depends, in part, on our ability to successfully open new warehouse clubs and grow sales in our existing locations.and new markets.



Sales growth at the existing warehouse clubs can be impacted by, among other things, the physical limitations of the warehouse clubs, which restrict the amount of merchandise that can be safely stored and displayed in the warehouse clubs and the number of members that can be accommodated during business hours. As a result, sales growth will depend, in part, upon our acquiring suitable sites for additional warehouse clubs. Land for purchase or lease, or buildings to be leased, in the size and locations in those markets that would be suitable for new PriceSmart warehouse clubs may be limited in number or not be available or financially feasible. In this regard, we compete with other retailers and businesses for suitable locations. Additionally, local land use, environmental and other regulations restricting the construction and operation of our warehouse clubs may impact our ability to find suitable locations, and increase the cost of constructing, leasing and operating our warehouse clubs. We have experienced these limitations in Colombia and in some of our other existing markets, which has negatively affected our growth rates in those markets. Limitations on the availability of appropriate sites for new warehouse clubs in the areas targeted by us could have a material adverse effect on the future growth of PriceSmart.



In some cases, we have more than one warehouse club in a single metropolitan area, and we may open new warehouse clubs in certain areas where we already have warehouse clubs. A new warehouse club in an area already served by existing warehouse clubs may draw members away from existing warehouse clubs and adversely affect comparable warehouse clubstore sales performance. We experienced this adverse effect on comparable sales for existing warehouse clubs recently within our Costa Rica and HondurasDominican Republic markets when we opened one new warehouse club in each of these markets in areas that already had an existing warehouse club.



We operate in comparativelyrelatively small markets. Given the growth of our sales over the past few years, market saturation could impact the rate of future sales growth.



We might open warehouse clubs in new markets in the future. The risks associated with entering a new market include potential difficulties in attracting members due to a lack of familiarity with us and our lack of familiarity with local member preferences. In addition, entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established market presence. As a result, our new warehouse clubs might not be successful in new markets.



We might not identify in a timely manner or effectively respond to changes in consumer preferences for merchandise, which could adversely affect our relationship with members, demand for our products and market share.  

Our success depends, in part, on our ability to identify and respond to trends in demographics and changes in consumer preferences for merchandise. It is difficult to consistently and successfully predict the products and services our members will demand. Failure to timely identify or respond effectively to changing consumer tastes, preferences or spending patterns could adversely affect our relationship with our members, the demand for our products and our market share. If we are not successful at predicting sales trends and adjusting purchases accordingly, we might have too much or too little inventory of certain products.

If we buy too much of a product, we might be required to reduce prices or otherwise liquidate the excess inventory, which could have an adverse effect on margins (net sales less merchandise costs) and operating income. If we do not have sufficient quantities of a popular product, we might lose sales and profits we otherwise could have made.

Although we offer limited online shopping to our members in certain markets, our sales could be adversely affected if one or more major international online retailers were to enter our markets or if other competitors were to offer a superior online experience. 

Online sales currently represent a small fraction of the total sales in our markets of the types of merchandise we offer, but online shopping may become more prevalent in our markets as we and our competitors begin to offer more opportunities for online shopping and as delivery systems in our markets improve.  While major international online retailers have not established a significant penetration in any of our markets, it is possible that they or smaller regional companies will increase the penetration of online shopping in our markets. We continue to invest in our websites and systems with the long-term objective of offering our members a seamless multichannel experience.  If we do not successfully develop and maintain a relevant multichannel experience for our members, our ability to compete and our results of operations could be adversely affected.

Failure to grow our e-commerce business through the integration of physical and digital retail or otherwise, and the cost of our increasing e-commerce investments, may materially adversely affect our market position, net sales and financial performance.



The retail business is quickly evolving and consumers are increasingly embracing shopping online and through mobile commerce applications. As a result, the portion of total consumer expenditures with all retailers and wholesale clubs occurring online and through mobile commerce applications is increasing and the pace of this increase could accelerate. WeAs demonstrated by our recent acquisition of Aeropost and other ongoing investments, we are increasing our investments in e-commerce, technology and other customer initiatives. The success of our ecommercee-commerce initiative will depend in large measure on our ability to build and deliver a seamless shopping experience across the physical and digital retail channels. If we fail to successfully implement our ecommercee-commerce initiative, our market position, net sales and financial performance could be adversely affected. In addition, a greater concentration of e-commerce sales could result in a reduction in the amount of traffic in our warehouse clubs, which would, in turn, reduce the opportunities for cross-store or cross-club sales of merchandise that such traffic creates and could reduce our sales within our clubs and materially adversely affect the financial performance of the physical retail side of our operations. In addition, the cost of certain e-commerce and technology investments will adversely impact our financial performance in the short-term and may adversely impact our financial performance over the longer term.



Our profitability is vulnerable to cost increases.



Future increases in costs such as the cost of merchandise, wage and benefits costs, shipping rates, freight costs, fuel costs, utilities and other store occupancy costs may reduce our profitability. We seek to adjust our product sales pricing, operate more efficiently, and increase our comparable store net sales to offset currency rate changes, changes in tax rates or in the methods used to calculate or collect taxes on our sales or income, inflation and other factors that can increase costs. We might not be able to adjust prices, operate more efficiently or increase our comparable store net sales in the future to a great enough extent to offset increased costs. Please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-K for further discussion of the effect of currency rate changes, inflation and other economic factors on our operations.

We face difficulties in the shipment of, and risks inherent in the importation of, merchandise to our warehouse clubs.

Our warehouse clubs typically import nearly half or more of the merchandise that they sell. This merchandise originates from various countries and is transported over long distances, typically over water, which results in:

Moreover, each country in which we operate has different governmental rules and regulations regarding the importation of foreign products. Changes to the rules and regulations governing the importation ofmerchandise may result in additional delays, costs or barriers in our deliveries of products to our warehouse clubs or may affect the type of products we select to

import. In addition, only a

We are subject to risks associated with our dependence on third-party suppliers and service providers, and we have no assurances of continued supply, pricing or access to new merchandise. 

We have important ongoing relationships with various third-party suppliers of services and merchandise. These include, but are not limited number of transportation companies service our regions. The inability or failure of one or more key transportation companies to, provide transportation services to us, any collusion among the transportation companies regarding shipping prices or terms,local, regional, and international merchandise suppliers, information technology suppliers, equipment suppliers, financial institutions, credit card issuers and processors, and lessors. Significant changes in the regulationsrelationships or the agreements that govern shipping tariffs or the importation of products, or any other disruption to our ability to import our merchandise could have a material adverse effect on ourterms through which business and results of operations.

We are exposed to weather and other natural disaster risks that might not be adequately compensated by insurance.

Our operations are subject to volatile weather conditions and natural disasters, such as earthquakes and hurricanes, which are encountered periodically in the regions in which our warehouse clubs are located. Natural disasters could result in many days of lost sales at our warehouse clubs or adversely affect our distribution chain. For example, operations at our USVI warehouse club have been adversely affected by Hurricanes Irma and Maria.  The warehouse club was closed for nine days, and after re-opening, the warehouse club operated with limited hours for 16 days due to a government-imposed curfew. Damaged and destroyed roads continue to restrict traffic flow, adversely affecting customer access.  Losses from business interruption may not be adequately compensated by insurance andis conducted could have a material adverse effect on our business, financial condition and results of operations.

Negative economic conditions We have no assurances of continued supply, pricing or access to new merchandise, and any supplier could adversely impactat any time change the terms upon which it sells to us or discontinue selling to us. One of our significant suppliers operates a warehouse club business in various respects.

A slowdownand may in the economiesfuture seek to compete with us in some of one or more ofour markets. In addition, the countriesmanner in which we operateacquire merchandise, either directly from the supplier’s parent company or adversethrough a local subsidiary or distributor, is subject to change from time to time based on changes initiated by the supplier and for reasons beyond our control. Significant changes or disruptions in economic conditions affecting discretionary consumer spending, such as employment rates, business conditions, inflation, fuel and energy costs, consumer debt levels, availability of credit, interest rates, tax rates and consumer spending patterns in each of our foreign markets,how we acquire merchandise from these suppliers could adversely affect consumer demand for the products we sell, change the mix of products we sell to one with a lower average gross margin, cause a slowdown in discretionary purchases of goods, adverselynegatively affect our net sales and result in slower inventory turnover and greater markdowns of inventory, or otherwise materially adversely affect our operating results.  Factorsaccess to such merchandise, as declining expatriate remittances, reduced tourism and less foreign investment also could negatively impact the economies of Latin America and the Caribbean. A significant decline in the economies of the countries in which our warehouse clubs are located may lead to increased governmental ownership or regulation of the economy, higher interest rates and increased barriers to entry suchwell as higher tariffs and taxes. The economic factors that affect our operations also may adversely affect the operations of our suppliers, which can result in an increase in the cost of merchandise to us and hence our members, which could have a material adverse effect on our business and results of the goods we sell to our customers or, in more extreme cases, in certain suppliers not producing goods in the volume typically available to us for sale.

operations.



Our failure to maintain our brand and reputation could adversely affect our results of operations.



Our success depends on our ability to continue to preserve and enhance our brand and reputation.  Damage to the PriceSmart brand could adversely impact warehousemerchandise club sales, diminish member trust, reduce member renewal rates and impair our ability to add new members.  A failure to maintain and enhance our reputation also could lead to loss of new opportunities or employee retention and recruiting difficulties.  Negative incidents, such as a data breach or product recall, can quickly erode trust and confidence, particularly if they result in adverse mainstream publicity, governmental investigations or litigation. In particular, the propagation of negative publicity on social media, whether merited or not, can have a damaging effect on our business in one or more markets. In addition, we sell many products under our private label Member’s Selection brand. If we do not maintain consistent product quality of our Member’s Selection products, which generally carry higher margins than national brand products carried in our warehouse clubs, our net warehouse sales and gross margin results could be adversely affected and member loyalty could be harmed.



We face the risk of exposure to product liability claims, a product recall and adverse publicity. 



We marketIf our merchandise, such as food and distribute products purchased from third-party suppliers and products prepared by us for resale, including meat, dairy and other food products whichfor human consumption, drugs, children's products, pet products and durable goods, do not meet or are perceived not to meet applicable safety standards or our members’ expectations regarding safety, we could experience lost sales, increased costs, litigation or reputational harm. The sale of these items exposes us to the risk of product liability claims, a product recall and adverse publicity. We may inadvertently redistribute food products or prepare food products that are contaminated, which may result in illness, injury or death if the contaminants are not eliminated by processing at the food service or consumer level. As we begin to package and market fresh produce products within our markets, we may be exposed to additional risk of product liability and adverse publicity if those fresh food products are contaminated, which may result in illness, injury or death if the contaminants are not eliminated by processing at our packaging service centers.

We generally seek contractual indemnification and proof of insurance from our major suppliers and carry product liability insurance for all products soldwe sell to or package for our members by us.members. However, if we do not have adequate insurance or contractual indemnification available, product liability claims relating to products that are contaminated or otherwise harmful could have a material adverse effect on our ability to successfully market our products and on our financial condition and results of operations. In addition, even if a product liability claim is not successful or is not fully pursued, the negative publicity surrounding a product recall or any assertion that our products caused illness or injury could have a material adverse effect on our reputation with existing and potential members and on our business, financial condition and results of operations.



We rely extensively on computer systems to process transactions, summarize results and manage our business. Failure to adequately maintain our systems and disruptions in our systems could harm our business and adversely affect our results of operations. 

Given the high number of individual transactions we have each year, we seek to maintain uninterrupted operation of our business-critical computer systems. Our computer systems, including back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes and hurricanes, and errors by our employees. If our computer systems and back-up systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our operations in the interim. Any material interruption in our computer systems could have a material adverse effect on our business or results of operations.



WeFrom time to time, we make technology investments to improve or replace our information processes and systems that are subjectkey to risksmanaging our business. The risk of system disruption is increased when system changes are undertaken. Targeting the wrong opportunities, failing to make the best investments or making an investment commitment significantly above or below our needs could result in the loss of our competitive position and adversely impact our financial condition and results of operations. Additionally, the potential problems and interruptions associated with possible changesimplementing technology initiatives could disrupt or reduce the efficiency of our operations in the short term. These initiatives might not provide the anticipated benefits or may provide them on a delayed schedule or at a higher cost. 

In 2017, we began evaluating options to replace our relationships with third parties with which we do business,existing Enterprise Resource Planning (ERP) system. However, due to the rapidly evolving retail and technological landscape, as well as our recent acquisition of Aeropost, we have delayed this evaluation project in order to more holistically assess our overall IT landscape and strategy. Subsequent to that assessment, we will reconsider the performanceneed, timing, scope, and approach to our ERP replacement project. Not updating our systems on a timely basis could leave us at a disadvantage with respect to operational capabilities of our competitors. Our current ERP system is not supported by the developer of the software, which could increase the risk of a system disruption. In addition, there are newer versions available from the vendors of some of our other internal systems offering more current technology and functionality, which we have not yet implemented, and other systems which were internally developed a number of years ago which will require migration to more industry-standard technologies  We are in the process of evaluating the state of all such third parties.systems and establishing a transition plan to newer technologies. If we are unable to seamlessly transition these systems, we may cause disruption in operations, member satisfaction, or sales.



Business acquisitions and new business initiatives could adversely impact the Company’s performance.

From time to time we may consider acquisition opportunities and new business initiatives. During fiscal year 2018, we acquired Aeropost, Inc. (“Aeropost”).  Located in Miami, Aeropost is a cross border freight forwarding business that also operates an online marketplace.  Aeropost provides logistics, payment, and e-commerce services in Latin America and the Caribbean and currently serves customers in 38 countries with Costa Rica, Trinidad and Jamaica as its largest markets. We have important ongoing relationshipsare leveraging Aeropost’s technology, its management’s experience in developing software and systems for e-commerce and logistics, and its distribution and logistics systems to advance PriceSmart’s development of an omni-channel shopping experience for our members. Acquisitions and new business initiatives involve certain inherent risks, including the failure to retain key personnel from an acquired business; undisclosed or subsequently arising liabilities or accounting, internal control, regulatory or compliance issues associated with various third-party suppliers of services and merchandise. These include, but are not limited to, local and regional merchandise suppliers, information technology suppliers, warehouse facilities and equipment suppliers, financial institutions, credit card issuers and processors, and lessors. Significant changesan acquired business; challenges in the relationshipssuccessful integration of operations, and alignment of standards, policies and systems; future developments that may impair the value of our purchased goodwill or intangible assets; and the agreements that governpotential diversion of management resources from existing operations to respond to unforeseen issues arising in the terms through whichcontext of the integration of a new business is conductedor initiative.

Failure to attract and retain qualified employees could materially adversely affect our abilityfinancial performance.

Our success depends to purchase merchandisea significant degree on the continued contributions of members of our senior management and other key operations, merchandising and administrative personnel, and the loss of any such persons could have a material adverse effect on our business. We must attract, develop and retain a growing number of qualified employees, while controlling related labor costs and maintaining our core values. We compete with other retail and non-retail businesses for these employees and invest significant resources in sufficient quantitiestraining and at competitive prices,motivating them. There is no assurance that we will be able to adequately attract, develop and retain highly qualified employees in the future, or to replace retiring key executives which could have a material adverse effect on our business, financial condition and results of operation.operations. We have no assurances of continued supply, pricingdo not maintain life or accessdisability insurance for our key executives.

External Factors that Could Adversely Affect Us

Our financial performance is dependent on international operations, which exposes us to new merchandise, and any supplier could at any time change the terms upon which it sells to us or discontinue selling to us. Onevarious risks.

Our international operations account for nearly all of our significant suppliers operates atotal revenues. Our financial performance is subject to risks inherent in operating and expanding our international membership warehouse club business, which include:

These risks may result in disruption to our sales, banking transactions, operations and may in the future seek to compete with us in somemerchandise shipments, any of our markets. In addition, the manner in which we acquire merchandise, either directly from the supplier’s parent company or through a local subsidiary or distributor, is subject to change from time to time based on changes initiated by the supplier and for reasons beyond our control. Significant changes or disruptions in how we acquire merchandise from these suppliers could negatively affect our access to such merchandise, as well as the cost of merchandise to us and hence our members, which could have a material adverse effect on our business and results of operations.



In 2018, U.S. legislation was approved to restrict U.S. aid to Nicaragua. Additionally, our suppliers are subjectduring 2019, the U.S. State Department has announced varying strategies regarding if, when and how it would authorize disbursement of foreign aid, that had been previously approved by the U.S. Congress, to risks, including labor disputes, union organizing activities,Guatemala, Honduras and El Salvador.  Changes in U.S. policies regarding financial liquidity, inclement weather, natural disasters, supply constraints, regulatory compliance with local and international agencies and generalassistance could cause political or financial instability in the countries we serve.

Negative economic and political conditions that could limit their ability to timely provide us with acceptable merchandise, which could adversely affectimpact our business. Furthermore,business in various respects.

A slowdown in the economies of one or more of our suppliers might fail to comply with appropriate production, labor, environmental and other practices, as well as quality control, legal or regulatory standards. We might not identify any such deficiencies, which could lead to litigation and recalls, damage our reputation and our brands, increase our costs, and otherwise adversely impact our business.

We could be subject to additional tax liabilities or subject to reserves on the recoverability of tax receivables.

We compute our income tax based on enacted tax rates in the countries in which we operate. As theoperate or adverse changes in economic conditions affecting discretionary consumer spending, such as employment rates, business conditions, inflation, fuel and energy costs, consumer debt levels, availability of credit, foreign currency exchange rates, interest rates and tax rates vary amongin each of our foreign markets, could adversely affect consumer demand for the products we sell, change the mix of products we sell to a mix with a lower average gross margin, cause a slowdown in discretionary purchases of goods, adversely affect our net sales and result in slower inventory turnover and greater markdowns of inventory, or otherwise materially adversely affect our operating results.  Factors such as declining expatriate remittances, reduced tourism and less foreign investment also could negatively impact the economies of Latin America and the Caribbean. A significant decline in the economies of the countries a change in earnings attributablewhich our warehouse clubs are located may lead to increased governmental ownership or regulation of the economy, higher interest rates and increased barriers to entry such as higher tariffs and taxes. The economic factors that affect our operations also may adversely affect the operations of our suppliers, which can result in an increase in the cost to us of the goods we sell to our customers or, in more extreme cases, in certain suppliers not producing goods in the volume typically available for sale to us.

We face significant competition. 

Our international warehouse club business competes with exporters, importers, wholesalers, local retailers and trading companies in various jurisdictionsinternational markets. Some of our competitors have greater resources, buying power and name recognition than we have.  We also face competition from online retailers who serve our markets, and we expect that this type of competition will grow and intensify in the future.

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 and specialty stores, including those within Latin America that are owned and operated by large U.S. and international retailers, including Walmart Inc. in Central America and Grupo Éxito and Cencosud in Colombia. We have noted that certain retailers are making investments in upgrading their locations which may result in increased competition. Further, it is possible that current U.S. warehouse club operators may decide to enter our markets and compete more directly with us in a similar warehouse club format.  Our ability to operate profitably in our markets, particularly small markets, may be adversely affected by the existence or entry of competing warehouse clubs or discount retailers.

Online we compete in a variety of ways, including the prices at which we sell our merchandise, merchandise selection and availability, services offered to customers, location, store hours and the shopping convenience and overall shopping experience we offer. We may be required to implement price reductions to remain competitive if any of our competitors reduce prices in any of our markets. In response to the increasing threat associated with online retailers, we are making technology investments which may result in increases in the use of cash and reduced profitability in the near term.

Our sales could be adversely affected if one or more major international online retailers were to enter our markets or if other competitors were to offer a superior online experience. 

Online sales currently represent a small fraction of the total sales in our markets of the types of merchandise we offer, but online shopping may become more prevalent in our markets as we and our competitors begin to offer more opportunities for online shopping and as delivery systems in our markets improve.  While major international online retailers have not established a significant penetration in any of our markets, it is possible that they or smaller regional companies will increase the penetration of online shopping in our markets. We continue to invest in our websites and systems with the long-term objective of offering our members a seamless multichannel experience.  If we do not successfully develop and maintain a relevant multichannel experience for our members, our ability to compete and our results of operations could be adversely affected.

We are exposed to significant weather events and other natural disaster risks that might not be adequately compensated by insurance. 

Our operations are subject to volatile weather conditions and natural disasters, such as earthquakes, hurricanes and volcanic activity, which are encountered periodically in the regions in which our warehouse clubs are located. Natural disasters could result in an unfavorable changemany days of lost sales at our warehouse clubs or adversely affect our distribution chain. For example, in early fiscal year 2018, operations at our overall taxes.  Changes in tax laws, increases inUSVI warehouse club were adversely affected by Hurricanes Irma and Maria.  The warehouse club was closed for nine days, and after re-opening, the enacted tax rates, adverse outcomes in connectionwarehouse club operated with tax audits in any jurisdiction, including transfer pricing disputes, or any change inlimited hours for 16 days due to a government-imposed curfew. Damaged and destroyed roads restricted traffic flow, adversely affecting customer access for some time after the pronouncements relating to accounting for income taxeshurricane.  Future losses from business interruption may not be adequately compensated by insurance and could have a material adverse effect on our business, financial condition and results of operations.

We face difficulties in the shipment of, and risks inherent in the importation of, merchandise to our warehouse clubs. 

Our warehouse clubs typically import nearly half or more of the merchandise that they sell. This merchandise originates from various countries and is transported over long distances, over water and land, which results in:

Civil unrest in certain countries in which we operate may adversely affect the flow of goods through those countries. For example, in September 2018, protestors in Costa Rica blocked major highways around the country and impeded access to Costa Rica’s main commerce ports and fuel distribution sites. Similarly, recent political and civil unrest in Honduras and Nicaragua have involved roadblocks in many portions of these countries. Any restriction in the movement of goods through Costa Rica’s ports or over Honduras and Nicaragua’s highways could impair our ability to supply warehouse clubs not just in those countries, but in countries throughout the region as well.

Moreover, each country in which we operate has different governmental rules and regulations regarding the importation of foreign products. Changes to the rules and regulations governing the importation ofmerchandise may result in additional delays, costs or barriers in our deliveries of products to our warehouse clubs or may affect the type of products we select to import. In some countries, there have beenaddition, only a limited number of transportation companies service our regions. The inability or failure of one or more key transportation companies to provide transportation services to us, any collusion among the transportation companies regarding shipping prices or terms, changes in the methodregulations that govern shipping tariffs or the importation of computing minimum tax prepaymentsproducts, or any other disruption to our ability to import our merchandise could have a material adverse effect on our business and thereresults of operations.

We are no clearsubject to payment related risks.

We accept payments using a variety of methods, including cash and checks and a select variety of credit and debit cards. We rely on third parties to provide payment transaction processing services, including the processing of credit and debit cards and the processing of payments to vendors. Our business could be disrupted if these companies become unwilling or unable to provide these services to us. Additionally, failures or disruptions in data communication and transfer services could significantly impact our ability to transact payments to vendors and process credit and debit card transactions. We are also subject to payment card association rules that allow the Company to obtain refunds or to offset prepayments that are substantially in excess of the actual computed tax liability.  Additionally, in one country the government alleges that there is not a clearly defined process in the laws and regulations to allow the tax authorities to refund Value Added Tax (“VAT”) receivables.  We, together with our taxnetwork operating rules, including data security rules, certification requirements and legal advisers, are currently appealing these interpretations in court.rules governing electronic funds transfers, which could change over time. If we dofail to comply with these rules or transaction processing requirements, we may not prevail onbe able to accept certain payment methods. In addition, if our appeal,internal systems are breached or compromised, we may be required to establish a valuation reserve against these VAT receivables and take an accompanying charge, which would adversely affect our financial condition and results of operation. 

We 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 us to interpret the applicable tax laws and regulations in effect in such jurisdictions, which affects the amount of tax paid by us. We, in consultation with our tax advisors, base our tax returns on interpretations thatliable for banks’ compromised card re-issuance costs, we believe tomay be reasonable under the prevailing circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which we filefines and higher transaction fees and lose our returns. As part of these reviews, a taxing authority may disagree with respectability to the interpretations we used to calculateaccept credit and/or debit card payments from our tax liabilitymembers, and therefore require us to pay additional taxes.our business and operating results could be adversely affected.



We face the possibility of operational interruptions related to union work stoppages.stoppages.  



We currently have labor unions at our distribution center in Miami, FL and in three of our subsidiaries (Trinidad, Barbados and Panama). A work stoppage or other limitation on operations from union or other labor-related matters could occur for any number of reasons, including as a result of disputes under existing collective bargaining agreements with labor unions or in connection with negotiation of new collective bargaining agreements. A lengthy work stoppage or significant limitation on operations could have a substantial adverse effect on our financial condition and results of operations. For example, a work stoppage at our Miami distribution facility could affect our ability to supply adequate inventories of U.S. goods to our warehouse clubs, and work stoppages at one or more clubs would adversely affect sales by the affected warehouse club or clubs.

We are subject to volatility in foreign currency exchange rates and limits on our ability to convert foreign currencies into U.S. dollars.

As of August 31, 2017, we had a total of 39 warehouse clubs operating in 12 foreign countries and one U.S. territory, 31 of which operate under currencies other than the U.S. dollar. For fiscal year 2017, approximately 77% of our net warehouse club

sales were in foreign currencies. We may enter into additional foreign countries in the future or open additional locations in existing countries, which may increase the percentage of net warehouse sales denominated in foreign currencies.

Our consolidated financial statements are denominated in U.S. dollars,Legal and to prepare those financial statements we must translate the amounts of the assets, liabilities, net sales, other revenues and expenses of our operations outside of the U.S. from foreign currencies into U.S. dollars using exchange rates for the current period. As a result of such translations, fluctuations in currency exchange rates from period-to-period may result in our consolidated financial statements reflecting significant adverse period-over-period changes in our financial performance or reflecting a period-over-period improvement in our financial performance that is not as robust as it would be without such fluctuations in the currency exchange rates.

In addition, devaluing foreign local currencies compared to the U.S. dollar could negatively impact the purchasing power of our members for imported merchandise in those countries.  Merchandise imported into our markets are generally purchased by the Company in U.S. dollars and priced and sold in the local currency of that country.  If the local currency devalues against the U.S. dollar, the prices for those products in the local currency will increase.  Depending on the severity of the devaluation and corresponding price increase (as experienced in Colombia in 2015) the demand for, and sales of, those products could be negatively impacted.

Finally, the ability of the Company to convert local currency into U.S. dollars to settle U.S, dollar invoices can be impacted in certain markets due to economic factors or government policies creating illiquidity of the local currency.  This was the case in Trinidad at the end of 2016 which led us to reduce shipments from the U.S. to Trinidad to amounts that our Trinidad subsidiary could pay for using the amount of tradeable currency that could be sourced in that market, resulting in lost sales.

Volatility and uncertainty regarding the currencies and economic conditions in the countries where we operate could have a material impact on our operations in future periods.Compliance Risks



We face compliance risks related to our international operations.



In the United States and within the international markets where we operate, there are multiple laws and regulations that relate to our business and operations. These laws and regulations are subject to change, and any failure by us to effectively manage our operations and reporting obligations as required by the various laws and regulations can result in our incurring significant legal costs and fines as well as disruptions to our business and operations. Such failure could also result in investors’ loss of confidence in us, which could have a material adverse effect on our stock price.



In foreign countries in which we have operations, a risk exists that our employees, contractors or agents could, in contravention of our policies, engage in business practices prohibited by U.S. laws and regulations applicable to us, such as the Foreign Corrupt Practices Act and the laws and regulations of other countries. We maintain policies prohibiting such business practices and have in place global anti-corruption compliance programs designed to ensure compliance with these laws and regulations. Nevertheless, we remain subject to the risk that one or more of our employees, contractors or agents, including those based in or from countries where practices that violate such U.S. laws and regulations or the laws and regulations of other countries may be customary, will engage in business practices that are prohibited by our policies or circumvent our compliance programs and, by doing so, violate such laws and regulations. Our Aeropost subsidiary operates as a freight forwarder, dealing with local customs officials in many jurisdictions in which we have not previously operated. In some countries, Aeropost operates through agents. Aeropost has been integrated into our compliance program; however, we have limited control over actions by Aeropost’s agents. Any such violations of anti-corruption laws, even if prohibited by our internal policies, could adversely affect our business or financial performance.



We rely extensivelycould be subject to additional tax liabilities or subject to reserves on computer systemsthe recoverability of tax receivables. 

We compute our income tax based on enacted tax rates in the countries in which we operate. As the tax rates vary among countries, a change in earnings attributable to process transactions, summarize results and manage our business. Failure to adequately maintain our systems and disruptionsthe various jurisdictions in which we operate could result in an unfavorable change in our systems could harm our business and adversely affect our results of operations.

Given the number of individual transactions we have each year, we seek to maintain uninterrupted operation of our business-critical computer systems. Our computer systems, including back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes and hurricanes, and errors by our employees. If our computer systems and back-up systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptionsoverall taxes. Changes in our operationstax laws, increases in the interim. Any material interruptionenacted tax rates, adverse outcomes in our computer systemsconnection with tax audits in any jurisdiction, or any change in the pronouncements relating to accounting for income taxes could have a material adverse effect on our business orfinancial condition and results of operations.

From time  In some countries, there have been changes in the method of computing minimum tax prepayments and there are no clear rules that allow the Company to time, we make technology investmentsobtain refunds or to improve or replace our information processes and systemsoffset prepayments that are key to managing our business. The risksubstantially in excess of system disruptionthe actual computed tax liability.  Additionally, in one country the government alleges that there is increased when system changes are undertaken. Targeting the wrong opportunities, failing to make the best investments or making an investment commitment significantly above or below our needs could resultnot a clearly defined process in the loss oflaws and regulations to allow the tax authorities to refund Value Added Tax (“VAT”) receivables. We, together with our competitive positiontax and legal advisers, are currently appealing these interpretations in court and taking other actions to recover excess taxes paid or withheld.  However, if we do not prevail in these efforts, we may be required to establish a valuation reserve against these tax receivables and take an accompanying charge, which would adversely impactaffect our financial condition and results of operations. Additionally,operation.

We file federal and state tax returns in the potential problemsUnited States and interruptions associatedvarious other tax returns in foreign jurisdictions. The preparation of these tax returns requires us to interpret the applicable tax laws and regulations in effect in such jurisdictions, which affects the amount of tax paid by us. We, in consultation with implementing technology initiatives could disrupt orour tax advisors, base our tax returns on interpretations that we believe to be reasonable under the prevailing circumstances. However, our tax returns are subject to routine reviews by the various taxing authorities in the jurisdictions in which we file our returns. As part of these reviews, a taxing authority may disagree with respect to the interpretations we used to calculate our tax liability and therefore require us to pay additional taxes.

A recent example of the significant impact of taxes is the December 2017 U.S. Tax Reform. The resulting reduction in the tax rate from 35% to 21% may have a beneficial impact on the Company in the future. However, in fiscal year 2018, we incurred charges of $12.5 million due to a one time transitional tax on unremitted foreign earnings and $222,000 to reduce the value of deferred tax assets due to the reduction in U.S. tax rates. Furthermore, while the statutory tax rate decreased in the U.S., we currently do not expect to receive the full benefit of this rate reduction. This is due to the fact that we currently expect that the foreign tax credits that we can apply to our U.S. tax payable (from foreign withholdings), will exceed taxes owed at the 21% U.S. tax rate, for which our U.S. segment recorded a valuation allowance of $6.7 million for the 12 months ended August 31, 2019.

the efficiency of our operations in the short term. These initiatives might not provide the anticipated benefits or may provide them on a delayed schedule or at a higher cost. 

We may experience difficulties implementing our new global enterprise resource planning system.

We are engaged in the selection of a new global enterprise resource planning system (ERP). ERP systems are designed to accurately maintain a company’s books and records and provide information important to the operation of the business to the management team. Implementation of the new ERP, which will take several years, will require significant investment of human and financial resources. In implementing the ERP, we may experience significant delays, increased costs and other difficulties. Any significant disruption or deficiency in the design and implementation of the ERP could adversely affect our ability to operate our business.

Any failure by us to maintain the security of the information that we hold relating to our company, members, employees and vendors, whether as a result of cybersecurity attacks on our information systems, failure of internal controls, employee negligence or malfeasance or otherwise, could damage our reputation with members, employees, vendors and others, could disrupt our operations, could cause us to incur substantial additional costs and to become subject to litigation and could materially adversely affect our operating results.



We receive, retain, and store in our digital information systems certaintransmit personal information about our members and we receive and store personal information concerning our employees and vendors.entrust that information to third-party business associates, including cloud service-providers that perform activities for us. We also utilize third-party service providers for a variety of reasons, including, without limitation, cloud services, back-office support, and other functions. In addition, our online operations and our websites in our Aeropost operations and in certain of our warehouse club foreign markets depend upon the secure transmission of confidential information over public networks, including information permitting cashless payments. Each year, computer hackers, cyber terrorists, and others make numerous attempts to access the information stored in companies’ information systems.

The use of data by our business and our business associates is regulated in all of our operating countries. Privacy and information-security laws and regulations change, and compliance with them may result in cost increases due to, among other things, systems changes and the development of new processes.  If we or those with whom we share information fail to comply with these laws and regulations, we could be subjected to legal risk as a result of non-compliance.



We or our third-party service providers may be unable to anticipate one or more of the rapidly evolving and increasingly sophisticated means by which computer hackers, cyber terrorists and others may attempt to defeat our security measures or those of our third-party service providers and breach our or our third party service providers' information systems. Cyber threats are rapidly evolving and are becoming increasingly sophisticated. As cyber threats evolve and become more difficult to detect and successfully defend against, one or more hackers, cyber threatsterrorists or others might defeat our security measures or those of our third-party service providers in the future and obtain the personal information of members, employees and vendors that we hold or to which our third-party service providers have access, and we or our third-party service providers may not discover any security breach and loss of information for a significant period of time after the security breach occurs. We or one of our third-party service providers also may be subject to a ransomware or cyber-extortion attack, which could significantly disrupt our operations.  In the enterprise context, ransomware attacks involve restricting access to computer systems or vital data until a ransom is paid.  Associate error or malfeasance, faulty password management or other irregularities may result in a defeat of our or our third-party service providers’ security measures and breach our or our third-party service providers’ information systems (whether digital or otherwise).



Any breach of our security measures or those of our third-party service providers and loss of our confidential information, which could be undetected for a period of time, or any failure by us to comply with applicable privacy and information security laws and regulations, could cause us to incur significant costs to protect any members and/or employees whose personal data was compromised and to restore member and employee confidence in us and to make changes to our information systems and administrative processes to address security issues and compliance with applicable laws and regulations.



In addition, such events could materially adversely affecthave a material adverse effect on our reputation with our members, employees, vendors and stockholders, as well as our operations, results of operations, financial condition and liquidity, could result in the release to the public of confidential information about our operations and financial condition and performance and could result in litigation against us or the imposition of penalties or liabilities. Moreover, a security breach could require us to devote significant management resources to address the problems created by the security breach and to expend significant additional resources to upgrade further the security measures that we employ to guard such important personal information against cyberattacks and other attempts to access such information, resulting in a disruption of our operations.



We are subjectA few of our stockholders own approximately 24.2% of our voting stock as of August 31, 2019,  which may make it difficult to payment related risks.complete some corporate transactions without their support and may impede a change in control.



We rely on third partiesRobert E. Price, the Company’s Chairman of the Board, and affiliates of Mr. Price, including Price Charities, Price Philanthropies, The Price Group, LLC, The Robert & Allison Price Charitable Remainder Trust and various other trusts, collectively beneficially own approximately 24.2% of our outstanding shares of common stock. Of this amount, approximately 78.0% (i.e., 18.9% of our total outstanding shares) is held by charitable entities. As a result of their beneficial ownership, these stockholders have the ability to provide payment transaction processing services,significantly affect the outcome of all matters submitted to our stockholders for approval, including the processingelection of creditdirectors. In addition, this ownership could discourage the acquisition of our common stock by potential investors and debit cards andcould have an anti-takeover effect, possibly depressing the processingtrading price of payments to vendors. Our business could be disrupted if these companies become unwilling or unable to provide these services to us. Additionally, failures or disruptions in data communication and transfer services could significantly impact our ability to transact payments to vendors and process credit and debit card transactions. We are also subject to payment card association rules and network operating rules, including data security rules, certification requirements and rulescommon stock. 

governing electronic funds transfers, which could change over time. If we fail to comply with these rules or transaction processing requirements, we may not be able to accept certain payment methods. In addition, if our internal systemsFinancial and Accounting Risks

We are breached or compromised, we may be liable for banks’ compromised card re-issuance costs, we may be subject to finesvolatility in foreign currency exchange rates and higher transaction fees and loselimits on our ability to accept credit and/convert foreign currencies into U.S. dollars. 

As of August 31, 2019, we had a total of 43 warehouse clubs operating in 12 foreign countries and one U.S. territory, 34 of which operate under currencies other than the U.S. dollar. For fiscal year 2019, approximately 77.0% of our net merchandise sales were in foreign currencies. We may enter into additional foreign countries in the future or debit card paymentsopen additional locations in existing countries, which may increase the percentage of net merchandise sales denominated in foreign currencies, such as in the case of five of the six clubs we intend to open in fiscal 2020 and 2021. 

Our consolidated financial statements are denominated in U.S. dollars, and to prepare those financial statements we must translate the amounts of the assets, liabilities, net sales, other revenues and expenses of our operations outside of the U.S. from foreign currencies into U.S. dollars using exchange rates for the current period. As a result of such translations, fluctuations in currency exchange rates from period-to-period may result in our consolidated financial statements reflecting significant adverse period-over-period changes in our financial performance or reflecting a period-over-period improvement in our financial performance that is not as robust as it would be without such fluctuations in the currency exchange rates.

In addition, devaluing foreign local currencies compared to the U.S. dollar could negatively impact the purchasing power of our members for imported merchandise in those countries.  Merchandise imported into our markets is generally purchased by the Company in U.S. dollars and priced and sold in the local currency of that country.  If the local currency devalues against the U.S. dollar, we may elect to increase prices in the local currency to maintain our businesstarget margins, making the products more expensive for our members.  Depending on the severity of the devaluation and operating resultscorresponding price increase (as experienced in Colombia in 2015 and 2019), the demand for, and sales of, those products could be adversely affected.negatively impacted.



FailureFinally, the ability of the Company to attractconvert local currency into U.S. dollars to settle U.S. dollar invoices can be impacted in certain markets due to economic factors or government policies creating illiquidity of the local currency.  This was the case in Trinidad at the end of 2016 which led us to reduce shipments from the U.S. to Trinidad to amounts that our Trinidad subsidiary could pay for using the amount of tradeable currency that could be sourced in that market, resulting in lost sales. Although the Company’s ability to convert Trinidad dollars for U.S. dollars has improved, and retain qualified employees, increasesthe Company is not reducing shipments, the illiquidity of the local currency in wage and benefit costs, changesTrinidad continues to be a risk for the Company’s operations in laws and other labor issues could materially adversely affect our financial performance.that market. 



Our success depends to a significant degree onVolatility and uncertainty regarding the continued contributions of members of our senior managementcurrencies and other key operations, merchandising and administrative personnel, andeconomic conditions in the loss of any such personscountries where we operate could have a material adverse effectimpact on our business. We must develop and retain a growing number of qualified employees, while controlling related labor costs and maintaining our core values. We compete with other retail and non-retail businesses for these employees and invest significant resourcesoperations in training and motivating them. There is no assurance that we will be able to adequately develop, retain and attract highly qualified employees in the future or to replace retiring key executives which could have a material adverse effect on our business, financial condition and results of operations. We do not maintain key man insurance.

periods.



Changes in accounting standards and assumptions, projections, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations.



Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business are highly complex and involve many subjective assumptions, projections, estimates and judgments by our management. These include, but are not limited to assumptions, projections, estimates and judgements related to contingencies and litigation, income taxes, value added taxes, and long-lived assets. Changes in these rules or their interpretation or changes in underlying assumptions, projections, estimates or judgments by our management could significantly change our reported or expected financial performance.

A few For example, because of Accounting Standards Update ASU 2016-02 – Leases (Topic 842), which will be effective for the Company starting September 1, 2019, the Company is required to recognize a “Right-of-Use” (ROU) asset and lease liability for each of the Company’s long-term leases. Accounting Standard Codification (ASC) 842 requires that the ROU asset be designated as a nonmonetary asset and the lease liability as a monetary liability. Therefore, when accounting for a lease that is denominated in a foreign currency, if remeasurement into the lessee’s functional currency is required, the lease liability is remeasured using the current exchange rate. We have leases in several of our stockholders own approximately 25.3%subsidiaries in which the lease payments are denominated in a foreign currency that is not the functional currency of our voting stockthat entity. Therefore, we are subject to additional volatility in foreign currency exchange rates as ofAugust 31, 2017,  which may make it difficult to complete some corporate transactions without their support and may impede a change in control.

Robert E. Price, the Company’s Chairman of the Board, and affiliates of Mr. Price, including Price Charities, Price Philanthropies, The Price Group, LLC, The Robert & Allison Price Charitable Remainder Trust and various other trusts, collectively beneficially own approximately 25.3% of our outstanding shares of common stock. Of this amount, approximately 14.4% is held by charitable entities.  As a result of their beneficial ownership, these stockholders have the ability to significantly affect the outcome of all matters submitted to our stockholders for approval, including the election of directors. In addition, this ownership could discourage the acquisition of our common stock by potential investors and could have an anti-takeover effect, possibly depressing the trading price of our common stock. accounting standard update.





Item 1B. Unresolved Staff Comments

None.



Item 2. Properties



At August 31, 2017, PriceSmart operated 39 membershipBelow is a summary of PriceSmart’s warehouse clubs, as detailed below:club properties:





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