UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 30, 20172020
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to
COMMISSION FILE NUMBER 0-22793
PriceSmart, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 33-0628530 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
9740 Scranton Road, San Diego, CA
9740 Scranton Road, San Diego, CA | 92121 | |
(Address of principal executive offices) | (Zip Code) |
(Address of principal executive offices)
(858) 404-8800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: | ||
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $0.0001 par value | PSMT | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.
Yes | No |
Indicate by check mark whether the registrant has submitted electronically 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | |
Non-accelerated filer ¨ | Smaller Reporting Company | |
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes | No |
The registrant had 30,403,54230,738,334 shares of its common stock, par value $0.0001 per share, outstanding at December 31, 2017.2020.
INDEX TO FORM 10-Q
Page | ||
1 | ||
CONSOLIDATED BALANCE SHEETS AS OF NOVEMBER 30, | 2 | |
4 | ||
5 | ||
6 | ||
7 | ||
8 | ||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 30 | |
49 | ||
50 | ||
51 | ||
51 | ||
51 | ||
52 | ||
52 | ||
52 | ||
53 | ||
PriceSmart, Inc.’s (“PriceSmart,” “we” or the “Company”) unaudited consolidated balance sheet as of November 30, 20172020 and the consolidated balance sheet as of August 31, 2017,2020, the unaudited consolidated statements of income for the three months ended November 30, 20172020 and 2016,2019 and, the unaudited consolidated statements of comprehensive income for the three months ended November 30, 20172020 and 2016,2019, the unaudited consolidated statements of equity for the three months ended November 30, 20172020 and 2016,2019, and the unaudited consolidated statements of cash flows for the three months ended November 30, 20172020 and 2016,2019 are included herein. Also included herein are the notes to the unaudited consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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| November 30, |
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| November 30, | |||||||
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| 2017 |
| August 31, | 2020 | August 31, | ||||||
|
| (Unaudited) |
| 2017 | (Unaudited) | 2020 | ||||||
ASSETS |
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Current Assets: |
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Cash and cash equivalents |
| $ | 129,183 |
| $ | 162,434 | $ | 207,955 | $ | 299,481 | ||
Short-term restricted cash |
| 373 |
| 460 | 185 | 185 | ||||||
Receivables, net of allowance for doubtful accounts of $6 as of November 30, 2017 and $7 as of August 31, 2017, respectively. |
| 6,602 |
| 6,460 | ||||||||
Short-term investments | 73,980 | 46,509 | ||||||||||
Receivables, net of allowance for doubtful accounts of $157 as of November 30, 2020 and $147 as of August 31, 2020, respectively | 15,150 | 13,153 | ||||||||||
Merchandise inventories |
|
| 372,413 |
|
| 310,946 | 373,178 | 309,509 | ||||
Prepaid expenses and other current assets (includes $71 and $0 as of November 30, 2017 and August 31, 2017, respectively, for the fair value of foreign currency forward contracts) |
|
| 36,168 |
|
| 30,070 | ||||||
Prepaid expenses and other current assets | 40,103 | 30,165 | ||||||||||
Total current assets |
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| 544,739 |
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| 510,370 | 710,551 | 699,002 | ||||
Long-term restricted cash |
| 2,986 |
| 2,818 | 4,255 | 4,105 | ||||||
Property and equipment, net |
| 567,038 |
| 557,829 | 700,837 | 692,279 | ||||||
Operating lease right-of-use assets, net | 119,316 | 119,533 | ||||||||||
Goodwill |
| 35,578 |
| 35,642 | 45,123 | 45,206 | ||||||
Other intangibles, net | 9,566 | 10,166 | ||||||||||
Deferred tax assets |
| 15,200 |
| 15,412 | 20,246 | 21,672 | ||||||
Other non-current assets (includes $3,278 and $2,547 as of November 30, 2017 and August 31, 2017, respectively, for the fair value of derivative instruments) |
|
| 46,506 |
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| 44,678 | ||||||
Other non-current assets (includes $144 and $872 as of November 30, 2020 and August 31, 2020, respectively, for the fair value of derivative instruments) | 57,508 | 54,260 | ||||||||||
Investment in unconsolidated affiliates |
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| 10,781 |
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| 10,765 | 10,593 | 10,602 | ||||
Total Assets |
| $ | 1,222,828 |
| $ | 1,177,514 | $ | 1,677,995 | $ | 1,656,825 | ||
LIABILITIES AND EQUITY |
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Current Liabilities: |
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Short-term borrowings |
| $ | 2,483 |
| $ | — | $ | 47,349 | $ | 65,143 | ||
Accounts payable |
| 297,371 |
| 272,248 | 384,086 | 373,172 | ||||||
Accrued salaries and benefits |
| 19,250 |
| 19,151 | 28,630 | 32,946 | ||||||
Deferred membership income |
| 22,234 |
| 22,100 | ||||||||
Deferred income | 25,125 | 23,525 | ||||||||||
Income taxes payable |
| 5,217 |
| 5,044 | 9,559 | 7,727 | ||||||
Other accrued expenses |
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| 28,253 |
|
| 26,483 | ||||||
Other accrued expenses and other current liabilities | 35,228 | 37,731 | ||||||||||
Operating lease liabilities, current portion | 8,649 | 8,594 | ||||||||||
Long-term debt, current portion |
|
| 18,257 |
|
| 18,358 | 19,771 | 19,437 | ||||
Total current liabilities |
|
| 393,065 |
|
| 363,384 | 558,397 | 568,275 | ||||
Deferred tax liability |
| 1,647 |
| 1,812 | 1,401 | 1,713 | ||||||
Long-term portion of deferred rent |
| 8,838 |
| 8,914 | ||||||||
Long-term income taxes payable, net of current portion |
| 898 |
| 909 | 5,243 | 5,132 | ||||||
Long-term operating lease liabilities | 124,383 | 124,181 | ||||||||||
Long-term debt, net of current portion |
|
| 80,340 |
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| 87,939 | 108,104 | 112,610 | ||||
Other long-term liabilities (includes $346 and $682 for the fair value of derivative instruments and $5,335 and $5,051 for post employment plans as of November 30, 2017 and August 31, 2017, respectively) |
|
| 5,731 |
|
| 5,789 | ||||||
Other long-term liabilities (includes $5,321 and $4,685 for the fair value of derivative instruments and $6,313 and $6,155 for post-employment plans as of November 30, 2020 and August 31, 2020, respectively) | 13,176 | 12,182 | ||||||||||
Total Liabilities |
|
| 490,519 |
|
| 468,747 | 810,704 | 824,093 | ||||
Stockholders' Equity: | ||||||
Common stock $0.0001 par value, 45,000,000 shares authorized; 31,395,847 and 31,417,576 shares issued and 30,738,334 and 30,670,712 shares outstanding (net of treasury shares) as of November 30, 2020 and August 31, 2020, respectively | 3 | 3 | ||||
Additional paid-in capital | 450,666 | 454,455 | ||||
Accumulated other comprehensive loss | (173,658) | (176,820) | ||||
Retained earnings | 610,224 | 582,487 | ||||
Less: treasury stock at cost, 657,513 shares as of November 30, 2020 and 746,864 shares as of August 31, 2020 | (21,068) | (28,406) | ||||
Total stockholders' equity attributable to PriceSmart, Inc. stockholders | 866,167 | 831,719 | ||||
Noncontrolling interest in consolidated subsidiaries | 1,124 | 1,013 | ||||
Total stockholders' equity | 867,291 | 832,732 | ||||
Total Liabilities and Equity | $ | 1,677,995 | $ | 1,656,825 |
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Equity: |
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Common stock $0.0001 par value, 45,000,000 shares authorized; 31,278,595 and 31,275,727 shares issued and 30,403,610 and 30,400,742 shares outstanding (net of treasury shares) as of November 30, 2017 and August 31, 2017, respectively |
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| 3 |
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| 3 |
Additional paid-in capital |
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| 424,856 |
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| 422,395 |
Tax benefit from stock-based compensation |
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| 11,486 |
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| 11,486 |
Accumulated other comprehensive loss |
|
| (111,468) |
|
| (110,059) |
Retained earnings |
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| 443,356 |
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| 420,866 |
Less: treasury stock at cost, 874,985 shares as of both November 30, 2017 and August 31, 2017 |
|
| (35,924) |
|
| (35,924) |
Total Equity |
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| 732,309 |
|
| 708,767 |
Total Liabilities and Equity |
| $ | 1,222,828 |
| $ | 1,177,514 |
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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| Three Months Ended | Three Months Ended | |||||||||
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| November 30, |
| November 30, | November 30, | November 30, | ||||||
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| 2017 |
| 2016 | 2020 | 2019 | ||||||
Revenues: |
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Net warehouse club sales |
| $ | 745,401 |
| $ | 716,079 | ||||||
Net merchandise sales | $ | 838,369 | $ | 778,728 | ||||||||
Export sales |
| 8,147 |
| 10,734 | 10,881 | 8,274 | ||||||
Membership income |
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| 12,375 |
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| 11,710 | 13,299 | 13,746 | ||||
Other income |
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| 1,149 |
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| 1,049 | ||||||
Other revenue and income | 14,883 | 11,193 | ||||||||||
Total revenues |
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| 767,072 |
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| 739,572 | 877,432 | 811,941 | ||||
Operating expenses: |
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Cost of goods sold: |
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Net warehouse club |
| 637,236 |
| 608,490 | ||||||||
Export |
| 7,749 |
| 10,181 | ||||||||
Net merchandise sales | 703,619 | 662,724 | ||||||||||
Export sales | 10,433 | 7,971 | ||||||||||
Non-merchandise | 5,824 | 4,251 | ||||||||||
Selling, general and administrative: |
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Warehouse club operations |
| 69,502 |
| 65,426 | ||||||||
Warehouse club and other operations | 84,832 | 79,373 | ||||||||||
General and administrative |
| 18,830 |
| 16,802 | 27,521 | 25,884 | ||||||
Pre-opening expenses |
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| 430 |
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| (113) | 602 | 953 | ||||
Loss/(gain) on disposal of assets |
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| 159 |
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| 407 | ||||||
Loss on disposal of assets | 70 | 71 | ||||||||||
Total operating expenses |
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| 733,906 |
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| 701,193 | 832,901 | 781,227 | ||||
Operating income |
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| 33,166 |
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| 38,379 | 44,531 | 30,714 | ||||
Other income (expense): |
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Interest income |
| 400 |
| 502 | 491 | 293 | ||||||
Interest expense |
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| (1,255) |
|
| (1,654) | (2,033) | (862) | ||||
Other income (expense), net |
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| 278 |
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| (928) | ||||||
Total other income (expense) |
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| (577) |
|
| (2,080) | ||||||
Income before provision for income taxes and |
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| 32,589 |
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| 36,299 | ||||||
Other expense, net | (1,545) | (985) | ||||||||||
Total other expense | (3,087) | (1,554) | ||||||||||
Income before provision for income taxes and | 41,444 | 29,160 | ||||||||||
Provision for income taxes |
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| (10,115) |
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| (11,437) | (13,618) | (9,403) | ||||
Income (loss) of unconsolidated affiliates |
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| 16 |
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| 7 | ||||||
Loss of unconsolidated affiliates | (9) | (48) | ||||||||||
Net income |
| $ | 22,490 |
| $ | 24,869 | 27,817 | 19,709 | ||||
Net income per share available for distribution: |
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Basic net income per share |
| $ | 0.74 |
| $ | 0.82 | ||||||
Diluted net income per share |
| $ | 0.74 |
| $ | 0.82 | ||||||
Less: net (income) loss attributable to noncontrolling interest | (80) | 19 | ||||||||||
Net income attributable to PriceSmart, Inc. | $ | 27,737 | $ | 19,728 | ||||||||
Net income attributable to PriceSmart, Inc. per share available for distribution: | ||||||||||||
Basic | $ | 0.90 | $ | 0.64 | ||||||||
Diluted | $ | 0.90 | $ | 0.64 | ||||||||
Shares used in per share computations: |
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Basic |
|
| 30,078 |
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| 29,982 | 30,398 | 30,277 | ||||
Diluted |
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| 30,079 |
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| 29,987 | 30,420 | 30,284 | ||||
Dividends per share |
| $ | — |
| $ | — | $ | — | $ | — | ||
See accompanying notes.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED—AMOUNTS IN THOUSANDS)
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| Three Months Ended | Three Months Ended | |||||||||
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| November 30, |
| November 30, | November 30, | November 30, | ||||||
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| 2017 |
| 2016 | 2020 | 2019 | ||||||
Net income |
| $ | 22,490 |
| $ | 24,869 | $ | 27,817 | $ | 19,709 | ||
Less: net (income) loss attributable to noncontrolling interest | (80) | 19 | ||||||||||
Net income attributable to PriceSmart, Inc. | $ | 27,737 | $ | 19,728 | ||||||||
Other Comprehensive Income, net of tax: |
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Foreign currency translation adjustments (1) |
| $ | (2,026) |
| $ | (10,866) | 2,761 | (3,724) | ||||
Defined benefit pension plan: |
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Net gain arising during period | 60 | 7 | ||||||||||
Amortization of prior service cost and actuarial gains included in net periodic pensions cost |
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| 30 |
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| (7) | 33 | 19 | ||||
Total defined benefit pension plan |
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| 30 |
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| (7) | 93 | 26 | ||||
Derivative instruments: (2) |
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Unrealized gains/(losses) on change in derivative obligations | 1,230 | (432) | ||||||||||
Unrealized gains/(losses) on change in |
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| 587 |
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| 492 | (922) | 941 | ||||
Amounts reclassified from accumulated other comprehensive income to other expense, net for settlement of derivatives | — | 4 | ||||||||||
Total derivative instruments |
|
| 587 |
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| 492 | 308 | 513 | ||||
Other comprehensive income (loss) |
|
| (1,409) |
|
| (10,381) | 3,162 | (3,185) | ||||
Comprehensive income |
| $ | 21,081 |
| $ | 14,488 | 30,899 | 16,543 | ||||
Less: comprehensive income attributable to noncontrolling interest | 31 | 34 | ||||||||||
Comprehensive income attributable to PriceSmart, Inc. to stockholders | $ | 30,868 | $ | 16,509 | ||||||||
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(1)Translation adjustments arising in translating the financial statements of a foreign entity have no effect on the income taxes of that foreign entity. They may, however, affect: (a) the amount, measured in the parent entity's reporting currency, of withholding taxes assessed on dividends paid to the parent entity and (b) the amount of taxes assessed on the parent entity by the government of its country. The Company has determined that the reinvestment of earnings of its foreign subsidiaries are indefinite because of the long-term nature of the Company's foreign investment plans. Therefore, deferred taxes are not provided for on translation adjustments related to non-remitted earnings of the Company's foreign subsidiaries.
(2)See Note 8 - Derivative Instruments and Hedging Activities.
See accompanying notes.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)
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| Three Months Ended | |||||||||||||||||||||||||||
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| Tax Benefit |
| Accumulated |
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| Total | |||||||||||||||||||||||||||||
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| Additional |
| From |
| Other |
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| Accumulated | Stockholders' | |||||||||||||||||||||||||||||
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| Common Stock |
| Paid-in |
| Stock Based |
| Comprehensive |
| Retained |
| Treasury Stock |
| Total | Additional | Other | Equity | ||||||||||||||||||||||||||||||||||||
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| Shares |
| Amount |
| Capital |
| Compensation |
| Income(Loss) |
| Earnings |
| Shares |
| Amount |
| Equity | Common Stock | Paid-in | Comprehensive | Retained | Treasury Stock | Attributable to | Noncontrolling | Total | |||||||||||||||||||||||||||
Balance at August 31, 2016 |
| 31,238 |
| $ | 3 |
| $ | 412,369 |
| $ | 11,321 |
| $ | (103,951) |
| $ | 351,060 |
| 836 |
| $ | (32,731) |
| $ | 638,071 | ||||||||||||||||||||||||||||
Shares | Amount | Capital | Income (Loss) | Earnings | Shares | Amount | PriceSmart, Inc. | Interest | Equity | ||||||||||||||||||||||||||||||||||||||||||||
Balance at August 31, 2019 | 31,461 | $ | 3 | $ | 454,570 | $ | (144,339) | $ | 525,804 | 924 | $ | (38,687) | $ | 797,351 | $ | 928 | $ | 798,279 | |||||||||||||||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | 7 | (461) | (461) | — | (461) | |||||||||||||||||||||||||||||||||||||||||||
Issuance of treasury stock | (69) | — | (5,724) | — | — | (69) | 5,724 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock award |
| 5 |
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| — |
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| — |
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| — |
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| — |
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| — |
| — |
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| — |
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| — | 85 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||
Forfeiture of restricted stock awards | (2) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 3,396 | — | — | — | — | 3,396 | — | 3,396 | |||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | 19,728 | — | — | 19,728 | (19) | 19,709 | |||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | (3,185) | — | — | — | (3,185) | 34 | (3,151) | |||||||||||||||||||||||||||||||||||||||||||
Balance at November 30, 2019 | 31,475 | $ | 3 | $ | 452,242 | $ | (147,524) | $ | 545,532 | 862 | $ | (33,424) | $ | 816,829 | $ | 943 | $ | 817,772 | |||||||||||||||||||||||||||||||||||
Balance at August 31, 2020 | 31,418 | $ | 3 | $ | 454,455 | $ | (176,820) | $ | 582,487 | 747 | $ | (28,406) | $ | 831,719 | $ | 1,013 | $ | 832,732 | |||||||||||||||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | 7 | (526) | (526) | — | (526) | |||||||||||||||||||||||||||||||||||||||||||
Issuance of treasury stock | (96) | — | (7,864) | — | — | (96) | 7,864 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock award | 77 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Forfeiture of restricted stock awards | (3) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
| — |
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| — |
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| 2,442 |
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| — |
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| — |
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| — |
| — |
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| — |
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| 2,442 | — | — | 4,075 | — | — | — | — | 4,075 | — | 4,075 | ||||||||||||||||||
Net income |
| — |
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| — |
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| — |
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| — |
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| — |
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| 24,869 |
| — |
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| — |
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| 24,869 | — | — | — | — | 27,737 | — | — | 27,737 | 80 | 27,817 | ||||||||||||||||||
Other comprehensive income (loss) |
| — |
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| — |
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| — |
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| — |
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| (10,381) |
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| — |
| — |
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| — |
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| (10,381) | ||||||||||||||||||||||||||||
Balance at November 30, 2016 |
| 31,243 |
| $ | 3 |
| $ | 414,811 |
| $ | 11,321 |
| $ | (114,332) |
| $ | 375,929 |
| 836 |
| $ | (32,731) |
| $ | 655,001 | ||||||||||||||||||||||||||||
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Balance at August 31, 2017 |
| 31,276 |
| $ | 3 |
| $ | 422,395 |
| $ | 11,486 |
| $ | (110,059) |
| $ | 420,866 |
| 875 |
| $ | (35,924) |
| $ | 708,767 | ||||||||||||||||||||||||||||
Issuance of restricted stock award |
| 3 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — | ||||||||||||||||||||||||||||
Stock-based compensation |
| — |
|
| — |
|
| 2,461 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 2,461 | ||||||||||||||||||||||||||||
Net income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 22,490 |
| — |
|
| — |
|
| 22,490 | ||||||||||||||||||||||||||||
Other comprehensive income (loss) |
| — |
|
| — |
|
| — |
|
| — |
|
| (1,409) |
|
| — |
| — |
|
| — |
|
| (1,409) | ||||||||||||||||||||||||||||
Balance at November 30, 2017 |
| 31,279 |
| $ | 3 |
| $ | 424,856 |
| $ | 11,486 |
| $ | (111,468) |
| $ | 443,356 |
| 875 |
| $ | (35,924) |
| $ | 732,309 | ||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | 3,162 | — | — | — | 3,162 | 31 | 3,193 | |||||||||||||||||||||||||||||||||||||||||||
Balance at November 30, 2020 | 31,396 | $ | 3 | $ | 450,666 | $ | (173,658) | $ | 610,224 | 658 | $ | (21,068) | $ | 866,167 | $ | 1,124 | $ | 867,291 | |||||||||||||||||||||||||||||||||||
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED—AMOUNTS IN THOUSANDS)
|
|
|
|
| ||||||||
|
|
|
|
| ||||||||
|
| Three Months Ended | Three Months Ended | |||||||||
|
| November 30, |
| November 30, | November 30, | November 30, | ||||||
|
| 2017 |
| 2016 | 2020 | 2019 | ||||||
Operating Activities: |
|
|
|
|
|
| ||||||
Net income |
| $ | 22,490 |
| $ | 24,869 | $ | 27,817 | $ | 19,709 | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
| ||||||||
Depreciation and amortization |
| 12,237 |
| 11,117 | 15,485 | 14,814 | ||||||
Allowance for doubtful accounts |
| (1) |
| 7 | 10 | (19) | ||||||
(Gain)/loss on sale of property and equipment |
| 159 |
| 407 | ||||||||
Loss on sale of property and equipment | 70 | 71 | ||||||||||
Deferred income taxes |
| (349) |
| 984 | 798 | (1,234) | ||||||
Equity in (gains) losses of unconsolidated affiliates |
| (16) |
| (7) | ||||||||
Equity in losses of unconsolidated affiliates | 9 | 48 | ||||||||||
Stock-based compensation |
| 2,461 |
| 2,442 | 4,075 | 3,396 | ||||||
Change in operating assets and liabilities: |
|
|
|
| ||||||||
Receivables, prepaid expenses and other current assets, non-current assets, accrued salaries and benefits, deferred membership income and other accruals |
| (7,049) |
| (6,516) | (8,907) | (9,762) | ||||||
Merchandise inventories |
|
| (61,467) |
|
| (44,082) | (63,669) | (56,799) | ||||
Accounts payable |
|
| 21,372 |
|
| 12,894 | 6,539 | 45,880 | ||||
Net cash provided by (used in) operating activities |
|
| (10,163) |
|
| 2,115 | (17,773) | 16,104 | ||||
Investing Activities: |
|
|
|
| ||||||||
Additions to property and equipment |
| (19,752) |
| (16,973) | (21,171) | (37,582) | ||||||
Deposits for land purchase option agreements |
|
| — |
|
| (500) | ||||||
Purchases of short-term investments | (32,121) | (10,184) | ||||||||||
Proceeds from settlements of short-term investments | 4,433 | 2,066 | ||||||||||
Purchases of long-term investments | (1,478) | — | ||||||||||
Proceeds from disposal of property and equipment |
|
| 20 |
|
| 108 | 27 | 13 | ||||
Net cash provided by (used in) investing activities |
|
| (19,732) |
|
| (17,365) | ||||||
Net cash used in investing activities | (50,310) | (45,687) | ||||||||||
Financing Activities: |
|
|
|
| ||||||||
Proceeds from long-term bank borrowings | — | 25,000 | ||||||||||
Repayment of long-term bank borrowings |
| (7,554) |
| (3,688) | (3,897) | (2,836) | ||||||
Proceeds from short-term bank borrowings |
|
| 16,954 |
|
| 681 | — | 81,202 | ||||
Repayment of short-term bank borrowings |
|
| (14,696) |
|
| (4,155) | (17,695) | (65,581) | ||||
Purchase of treasury stock | (526) | (461) | ||||||||||
Other financing activities | (80) | 19 | ||||||||||
Net cash provided by (used in) financing activities |
|
| (5,296) |
|
| (7,162) | (22,198) | 37,343 | ||||
Effect of exchange rate changes on cash and cash equivalents and restricted cash |
|
| 2,021 |
|
| (1,650) | (1,095) | 1,117 | ||||
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
| (33,170) |
|
| (24,062) | ||||||
Net increase (decrease) in cash, cash equivalents | (91,376) | 8,877 | ||||||||||
Cash, cash equivalents and restricted cash at beginning of period |
|
| 165,712 |
|
| 202,716 | 303,771 | 106,236 | ||||
Cash, cash equivalents and restricted cash at end of period |
| $ | 132,542 |
| $ | 178,654 | $ | 212,395 | $ | 115,113 | ||
Supplemental disclosure of noncash investing activities: | ||||||||||||
Capital expenditures accrued, but not yet paid | $ | 9,150 | $ | 10,282 | ||||||||
The following table provides a breakdown of cash and cash equivalents, and restricted cash reported within the statement of cash flows:
|
|
|
|
| ||||||||
|
| Three Months Ended | Three Months Ended | |||||||||
|
| November 30, |
| November 30, | November 30, | November 30, | ||||||
|
| 2017 |
| 2016 | 2020 | 2019 | ||||||
Cash and cash equivalents |
| $ | 129,183 |
| $ | 175,402 | $ | 207,955 | $ | 111,359 | ||
Short-term restricted cash |
|
| 373 |
|
| 517 | 185 | 65 | ||||
Long-term restricted cash |
|
| 2,986 |
|
| 2,735 | $ | 4,255 | $ | 3,689 | ||
Total cash and cash equivalents, and restricted cash shown in the statement of cash flows |
| $ | 132,542 |
| $ | 178,654 | ||||||
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 212,395 | $ | 115,113 | ||||||||
See accompanying notes.
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 20172020
NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION
PriceSmart, Inc.’s (“PriceSmart”PriceSmart,” the “Company,” or the “Company”"we") business consists primarily of international membership shopping warehouse clubs similar to, but typically smaller in size than, warehouse clubs in the United States. As of November 30, 2017,2020, the Company had 40 consolidated46 warehouse clubs in operation in 12 countries and one1 U.S. territory (seven(8 in Costa Rica; 7 each in Colombia and Costa Rica; fivePanama; 5 in Panama; four in Trinidad; three each in Guatemala, the Dominican Republic, 4 in Trinidad and Guatemala; 3 in Honduras; two2 each in El Salvador and Nicaragua; and one1 each in Aruba, Barbados, Jamaica and the United States Virgin Islands), of which the Company owns 100% of the corresponding legal entities (see Note 2 - Summary of Significant Accounting Policies). The Company opened a newheld the grand opening for its 47th warehouse club, on December 4, 2020 in Bogotá, Colombia. This is the Company’s third warehouse club in Santa Ana, Costa Ricathe greater metropolitan area of Bogotá and the 8h in October 2017, bringing the totalColombia. The Company also plans to open new warehouse clubs operating in Costa Rica to seven. In June 2017,Guatemala City, Guatemala and Portmore, Jamaica in the Company acquired land in Santo Domingo, Dominican Republic. The Company is currently building a warehouse club on this sitefall of 2021 and expects to open in the spring of calendar year 2018. This2022, respectively. Once these 2 new clubs are open, the Company will bring the number of PriceSmartoperate 49 warehouse clubs operating in Dominican Republic to four.clubs.
The CompanyPriceSmart continues to explore other potential sitesinvest in technology to increase operational efficiencies that lead to greater value to the member, to gain insights about our members and to enhance overall member experience by offering additional services and time-saving features. Technology developments are driving omni-channel capabilities, including online shopping and services. As of November 30, 2020, the Company offered the Click & Go™ curbside pickup and delivery service in all 13 of its markets. These services provide an alternative and convenient way for future warehouse clubsmembers to shop, while reducing physical contact. PriceSmart also operates a package forwarding (casillero) and marketplace business under the “Aeropost” banner in Central38 countries in Latin America and the Caribbean, and Colombia.many of which overlap with markets where it operates warehouse clubs.
Basis of Presentation – The interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interimannual financial reporting pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The novel coronavirus (COVID-19) pandemic has severely impacted the economies of the U.S. and the countries where the Company operates. The Company has assessed the impact that COVID-19 has had on our estimates, assumptions and accounting policies and made additional disclosures, if and as necessary.
These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 20172020 (the “2017“2020 Form 10-K”). The interim consolidated financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries. Inter-company transactions between the Company and its subsidiaries have been eliminated in consolidation.
Reclassifications to consolidated statement of cash flows recorded during fiscal year 2018 for fiscal year 2017 – Accounting Standards Update (ASU) 2016-18 - The amendments in ASU 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Thus, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and the end-of-period total amounts set forth on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years and will be applied using a retrospective transition method to each period presented. The Company early adopted this ASU as of August 31, 2017. The adoption of this ASU impacted the presentation of cash flows with inclusion of restricted cash flows for each of the presented periods.
|
|
|
|
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation – The interim consolidated financial statements of the Company included herein include the assets, liabilities and results of operations of the Company’s wholly owned subsidiaries, subsidiaries in which it has a controlling interest, and the Company’s joint ventures for which the Company has determined that it is the primary beneficiary. The Company’s net income excludes income attributable to noncontrolling interests. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. The interim consolidated financial statements also include the Company's investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method. All significant inter-company accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC and reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows for the periods presented. The results for interim periods are not necessarily indicative of the results for the full year. As of November 30, 2017, all of the Company's subsidiaries were wholly owned. Additionally, the Company's ownership interest in real estate development joint ventures as of November 30, 2017 is listed below:
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|
The Company determines whether any of the joint ventures in which it has made investments is a Variable Interest Entity (“VIE”) at the start of each new venture and if a reconsideration event has occurred. At this time, the Company also considers whether it must consolidate a VIE and/or disclose information about its involvement in a VIE. A reporting entity must consolidate a VIE if that reporting entity has a variable interest (or combination of variable interests) and is determined to be the primary beneficiary. If the Company determines that will absorb a majority of the VIE's expected losses, receive a majority of the VIE's expected residual returns, or both. A reporting entity must consider the rights and obligations conveyed by its variable interests and the relationship of its variable interests with variable interests held by other parties to determine whether its variable interests will absorb a majority of a VIE's expected losses, receive a majority of the VIE's expected residual returns, or both. The reporting entity that consolidates a VIEit is callednot the primary beneficiary of that VIE.
the VIE, then the Company records its investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method. Due to the initial nature of the joint ventures that the Company participates in and the continued commitments for additional financing, the Company determined these joint ventures are VIEs. Since
In the case of the Company's ownership interest in real estate development joint ventures, both parties to each joint venture share all rights, obligations and the power to direct the activities of athe VIE that most significantly impact the VIE's economic performance is shared equally by both parties within each joint venture,performance. As a result, the Company has determined that it is not the primary beneficiary of the VIEs and, therefore, has accounted for these entities under the equity method. Under the equity method, the Company's investments in unconsolidated affiliates are initially recorded as an investment in the stock of an investee at cost and are adjusted for the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee after the date of the initial investment. The Company's ownership interest in real estate development joint ventures the Company has recorded under the equity method as of November 30, 2020 are listed below:
Real Estate Development Joint Ventures | Countries | Ownership | Basis of | ||||
GolfPark Plaza, S.A. | Panama | 50.0 | % | Equity(1) | |||
Price Plaza Alajuela PPA, S.A. | Costa Rica | 50.0 | % | Equity(1) | |||
(1)Joint venture interests are recorded as investment in unconsolidated affiliates on the consolidated balance sheets.
The Company has determined that for its ownership interest in store-front joint ventures within its marketplace and casillero business, the Company has the power to direct the activities that most significantly impact the economic performance of these VIEs. Therefore, the Company has determined that it is the primary beneficiary of these VIEs and has consolidated these entities within its consolidated financial statements. The Company's ownership interest in store-front joint ventures for which the Company has consolidated their financial statements as of November 30, 2020 are listed below:
Marketplace and Casillero Store-front Joint Ventures | Countries | Ownership | Basis of | ||||
Guatemala | Guatemala | 60.0 | % | Consolidated | |||
Tortola | British Virgin Islands | 50.0 | % | Consolidated | |||
Trinidad | Trinidad | 50.0 | % | Consolidated | |||
Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the interim consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents – The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase and proceeds due from credit and debit card transactions in the process of settlement.
Restricted Cash – The changes in restricted cash are disclosed within the consolidated statement of cash flows based on the nature of the restriction. The following table summarizes the restricted cash reported by the Company (in thousands):
November 30, | August 31, | ||||||
2020 | 2020 | ||||||
Short-term restricted cash | $ | 185 | $ | 185 | |||
Long-term restricted cash (1) | 4,255 | 4,105 | |||||
Total restricted cash | $ | 4,440 | $ | 4,290 | |||
(1)Long-term restricted cash consists mainly of cash deposits held within banking institutions in compliance with federal regulatory requirements in Costa Rica and Panama.
Short-Term Investments – The Company considers as short-term investments certificates of deposit and similar time-based deposits with financial institutions with maturities over three months and up to one year.
Long-Term Investments – The Company considers as long-term investments certificates of deposit and similar time-based deposits with financial institutions with maturities over one year.
Goodwill and Other Intangibles, net – Goodwill and other intangibles totaled $54.7 million as of November 30, 2020 and $55.4 million as of August 31, 2020. The Company reviews reported goodwill and other intangibles at the cash-generating unit level for impairment. The Company tests goodwill for impairment at least annually or when events or changes in circumstances indicate that it is more likely than not that the asset is impaired.
Receivables –Receivables consist primarily of credit card receivables and receivables from vendors and are stated net of allowances for credit losses. The determination of the allowance for credit losses is based on the Company’s assessment of collectability along with the consideration of current and expected market conditions that could impact collectability.
Tax Receivables –The Company pays Value Added Tax (“VAT”) or similar taxes, (“input VAT”), income taxes, and other taxes within the normal course of its business in most of the countries in which it operates related to the procurement of merchandise and/or services itthe Company acquires and/or on sales and taxable income. VAT is a form of indirect tax applied to the value added at each stage of production (primary, manufacturing, wholesale and retail). This tax is similar to, but operates somewhat differently than, sales tax paid in the United States. The Company alsogenerally collects VAT from its members upon sale of goods and services and pays VAT to its vendors upon purchase of goods and services. Periodically, the Company submits VAT reports to governmental agencies and reconciles the VAT paid and VAT received. The net overpaid VAT may be refunded or similar taxes on
9
behalf ofapplied to subsequent returns, and the government (“output VAT”) for merchandise and/or services it sells. If the outputnet underpaid VAT exceeds the input VAT, then the difference ismust be remitted to the government, usually on a monthly basis. If the input VAT exceeds the output VAT, this creates a VAT receivable. In most countries where the Company operates, the governments have implemented additional collection procedures, such as requiring credit and debit card processors to remit a portion of sales processed via credit and debit card directly to the government as advance payments of VAT and/or income tax. In the case of VAT, these procedures alter the natural offset of input and output VAT and generally leave the Company with a net VAT receivable, forcing the Company to process significant refund claims on a recurring basis.government. With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due this creates an income tax receivable. TheIn most countries where the Company either requestsoperates, the governments have implemented additional collection procedures, such as requiring credit card processors to remit a refundportion of thesesales processed via credit and debit cards directly to the government as advance payments of VAT and/or income tax. This collection mechanism generally leaves the Company with net VAT and/or income tax receivables, or appliesforcing the balanceCompany to expected future tax payments. process significant refund claims on a recurring basis.These refund or offset processes can take anywhere from several months to several years to complete.
In most countries where the Company operates, the tax refund process isthere are defined and structured with regularprocesses to recover VAT receivables via refunds or offsets. However, as of November 30, 2017, in one country the government has alleged there is not a clearly defined process to allow the tax authorities to refund VAT receivables. As of August 31, 2016, there were three countries that lacked a clearly defined process; however, during the third and fourth quarters of fiscal year 2017, two of these countries clarified the refund mechanism, which we are currently pursuing. The Company, together with its tax and legal advisers, is currently seeking clarification in court in the remaining country without a clearly defined refund process, and expectsthe Company is actively engaged with the local government to prevail. The balance of therecover VAT receivable in the country with undefined refund mechanisms was approximately $2.2receivables totaling $8.4 million and $1.2$7.0 million as of November 30, 20172020 and August 31, 2017,2020, respectively. In another countrytwo other countries, there have been changes in the method of computing minimum tax payments, under which the Company operates warehouse clubs, a new minimum income tax mechanism took effect in fiscal year 2015, which requiresgovernments have sought to require the Company to pay taxes based on a percentage of sales rather than taxable income. As a result, the Company is makinghas made and may continue to make income tax payments substantially in excess of those it would expect to pay based on taxable income. The current rules (which the Company has challenged in court) do not clearly allow the Company to obtain a refund or to offset this excesshad income tax against other taxes. Asreceivables of November 30, 2017$10.9 million and August 31, 2017, the Company had $10.4 million and
deferred tax assets of approximately $2.0 million in this country. Also, the Company had an income tax receivable balance of $5.3$2.9 million and $4.3$2.8 million as of November 30, 20172020 and August 31, 2017,2020, respectively, in these countries. While the rules related to excess payments from fiscal years 2015 to 2017. Therefunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets, because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests,requests. Similarly, we have not placed any recoverability allowances on tax receivables that arise from payments we are required to make originating from tax assessments that we are appealing, as we believe it is more likely than not that we will ultimately prevail in the related appeals and/or court challenge on this matter.appeals.
The Company'sCompany’s policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:
|
|
|
|
Short-term VAT and Income tax receivables, recorded as Prepaid expenses and other current assets: This classification is used for any countries where the Company’s subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. The Company also classifies as short-term any approved refunds or credit notes to the extent that the Company expects to receive the refund or use the credit notes within one year.
Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where the Company’s subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when the Company does not expect to eventually prevail in its recovery. The Company does not currently have any allowances provided against VAT and income tax receivables.
The following table summarizes the VAT receivables reported by the Company (in thousands):
|
|
|
|
| ||||||||
|
|
|
|
| ||||||||
|
| November 30, |
| August 31, | November 30, | August 31, | ||||||
|
| 2017 |
| 2017 | 2020 | 2020 | ||||||
Prepaid expenses and other current assets |
| $ | 9,998 |
| $ | 6,650 | $ | 3,313 | $ | 1,749 | ||
Other non-current assets |
|
| 22,954 |
|
| 24,904 | 26,828 | 25,851 | ||||
Total amount of VAT receivables reported |
| $ | 32,952 |
| $ | 31,554 | $ | 30,141 | $ | 27,600 | ||
10
The following table summarizes the Income tax receivables reported by the Company (in thousands):
|
|
|
|
| ||||||||
|
|
|
|
| ||||||||
|
| November 30, |
| August 31, | November 30, | August 31, | ||||||
|
| 2017 |
| 2017 | 2020 | 2020 | ||||||
Prepaid expenses and other current assets |
| $ | 6,910 |
| $ | 6,403 | $ | 12,363 | $ | 10,944 | ||
Other non-current assets |
|
| 13,494 |
|
| 10,492 | 21,863 | 20,116 | ||||
Total amount of Income tax receivables reported |
| $ | 20,404 |
| $ | 16,895 | ||||||
Total amount of income tax receivables reported | $ | 34,226 | $ | 31,060 | ||||||||
Lease Accounting – The Company’s leases are operating leases for warehouse clubs and non-warehouse club facilities such as corporate headquarters, regional offices, and regional distribution centers. The Company determines if an arrangement is a lease and classifies it as either a finance or operating lease at lease inception. Operating leases are included in Operating lease right-of-use assets, net; Operating lease liabilities, current portion; and Long-term operating lease liabilities on the consolidated balance sheets. The Company does not have finance leases.
Operating lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. The Company’s leases generally do not have a readily determinable implicit rate; therefore, the Company uses a collateralized incremental borrowing rate at the commencement date in determining the present value of future payments. The incremental borrowing rate is based on a yield curve derived from publicly traded bond offerings for companies with credit characteristics that approximate the Company's market risk profile. In addition, we adjust the incremental borrowing rate for jurisdictional risk derived from quoted interest rates from financial institutions to reflect the cost of borrowing in the Company’s local markets. The Company’s lease terms may include options to purchase, extend or terminate the lease, which are
recognized when it is reasonably certain that the Company will exercise that option. The Company does not combine lease and non-lease components.
The Company measures Right-of-use (“ROU”) assets based on the corresponding lease liabilities, adjusted for any initial direct costs and prepaid lease payments made to the lessor before or at the commencement date (net of lease incentives). The lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are not included in the calculation of the ROU asset and the related lease liability and are recognized as this lease expense is incurred. The Company’s variable lease payments generally relate to amounts the Company pays for additional contingent rent based on a contractually stipulated percentage of sales.
Merchandise Inventories – Merchandise inventories, which include merchandise for resale, are valued at the lower of cost (average cost) or net realizable value. The Company provides for estimated inventory losses and obsolescence between physical inventory countsbased on the basis of a percentage of sales. The provision is adjusted periodicallyevery reporting period to reflect the trend of actual physical inventory and cycle count results, with physical inventories occurring primarily in the second and fourth fiscal quarters.results. In addition, the Company may be required to take markdowns below the carrying cost of certain inventory to expedite the sale of such merchandise.
Stock Based Compensation– The Company utilizes three3 types of equity awards: stock options (“options”), restricted stock awards (“RSAs”) and, restricted stock units (“RSUs”). The Company adopted ASU 2016-09 – Compensation - Stock Compensation (Topic 718) on September 1, 2017, see Note 1 – Company Overview and Basis of Presentation for more information on the implementation. Compensation related to options is accounted for by applying the valuation technique based on the Black-Scholes model.performance-based restricted stock units (“PSUs”). Compensation related to RSAs, RSUs and RSUsPSUs is based on the fair market value at the time of grant. The Company recognizes the compensation cost related to these awardsRSAs and RSUs over the requisite service period as determined by the grant, amortized ratably or on a straight linestraight-line basis over the life of the grant. As a resultThe Company also recognizes compensation cost for PSUs over the performance period of adoption of ASU 2016-09,each tranche, adjusting this cost based on the probability that performance metrics will be achieved. If the Company currentlydetermines that an award is unlikely to vest, any previously recorded expense is then reversed.
The Company accounts for actual forfeitures as they occur. The Company records the tax savings resulting from tax deductions in excess of expense for stock-based compensation and the tax deficiency resulting from stock-based compensation in excess of the related tax deduction as income tax expense or benefit, based on ASU 2016-09.benefit. In addition, the Company reflects the tax savings (deficiency) resulting from the taxation of stock-based compensation as an operating cash flow in its consolidated statement of cash flows.
RSAs are outstanding shares of common stock and have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding shares of common stock. Shares of common stock subject to RSUs are not issued nor outstanding until vested, and RSUs do not have the same dividend and voting rights as common stock. However, all outstanding RSUs have accompanying dividend equivalents, requiring payment to the employees and directors with unvested RSUs of amounts equal to the dividend they would have received had the shares of common stock underlying the RSUs been actually issued and outstanding. Payments of dividend equivalents to employees are recorded as compensation expense.
Exit or Disposal Cost Obligations PSUs, similar to RSUs, are awarded with dividend equivalents, provided that such amounts become payable only if the performance metric is achieved. At the time the Compensation Committee confirms the performance metric has been achieved, the accrued dividend equivalents are paid on the PSUs.
Treasury Stock– In January 2017,Shares of common stock repurchased by the Company purchased a distribution centerare recorded at cost as treasury stock and result in Medley, Miami-Dade County, Florida.the reduction of stockholders’ equity in the Company’s consolidated balance sheets. The Company transferred its Miami dry distribution center activities that were previously in a leased facility to the new facility during the third quarter of fiscal year 2017. Asmay reissue these treasury shares as part of this transaction,its stock-based compensation programs. When treasury shares are reissued, the Company has recorded an exit obligation related touses the leasefirst in/first out (“FIFO”) cost method for determining cost of the previous distribution center. The obligation consistsreissued shares. If the issuance price is higher than the cost, the excess of the costs associated with the exit or disposal activity measured initially at its fair value as of May 1, 2017, the date on which the obligation was incurred. These costs are primarily comprised of the costs to terminate the operating lease and other associated costs, including costs to consolidate or close facilities, net of any potential sub-lease income the Company could receive during the remaining lease term. In periods subsequent to initial measurement, changes to the exit obligation, including any changes resulting from a revision to either the timing or the amount of estimated cash flowsissuance price over the remaining lease period,cost is measured usingcredited to additional paid-in capital (“APIC”). If the credit-adjusted risk-free rate that was usedissuance price is lower than the cost, the difference is first charged against any credit balance in APIC from treasury stock and the balance is charged to measure the initial obligation.retained earnings. During the third quarter of fiscal year 2017, the Company initially recorded an obligation related to this exit activity for approximately $496,000 within other long-term liabilities. The Company’s exit obligation recorded as of August 31, 2017 was approximately $57,000. The Company’s exit obligation recorded as of November 30, 2017 was approximately $50,000. Exit costs of approximately $1.4 million were recorded to net warehouse club cost of goods sold for the twelve months ended August 31, 2017. Exit costs of approximately $338,000 were recorded to net warehouse club cost of goods sold for the three months ended November 30, 2017.2020, the Company reissued approximately 96,400 treasury shares.
Fair Value Measurements – The Company measures the fair value for all financial and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring or nonrecurring basis. The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.
The Company has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring and revaluing fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company was not required to revalue any assets or liabilities utilizing Level 1 or Level 3 inputs at the balance sheet dates. The Company's Level 2 assets and liabilities revalued at the balance sheet dates, on a recurring basis, consisted of cash flow hedges (interest rate swaps and cross-currency interest rate swaps) and forward foreign exchange contracts. In addition, the Company utilizes Level 2 inputs in determining the fair value of long-term debt. The Company did not make any significant transfers in and out of Level 1 and Level 2 fair value tiers during the periods reported on herein.
Non-financial assets and liabilities are revalued and recognized at fair value subsequent to initial recognition when there is evidence of impairment. For the periods reported, no0 impairment of such non-financial assets was recorded.
The Company’s current and long-term financial assets and liabilities have fair values that approximate their carrying values. The Company’s long-term financial liabilities consist of long-term debt, which is recorded on the balance sheet at issuance price and adjusted for any applicable unamortized discounts or premiums and debt issuance costs. There have been no significant changes in fair market value of the Company’s current and long-term financial assets, and there have been no material changes to the valuation techniques utilized in the fair value measurement of assets and liabilities as disclosed in the Company’s 20172020 Annual Report on Form 10-K.
Derivatives Instruments and Hedging Activities – The Company uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to changes in interest and currency exchange rates. In using derivative financial instruments for the purpose of hedging the Company’s exposure to interest and currency exchange rate risks, the contractual terms of a hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria (effective hedge) are recorded using hedge accounting. If a derivative financial instrument is an effective hedge, changes in the fair value of the instrument will be offsetreported in accumulated other comprehensive income (loss)loss until the hedged item completes its contractual term. If any portion of the hedge is deemed ineffective, the change in fair value of the hedged assets or liabilities will be immediately recognized in earnings during the period. Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. The Company did not change valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s consolidated balance sheets from previous practice during the reporting period. The Company seeks to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which the Company has an established banking relationship. There can be no assurance, however, that this practice effectively mitigates counterparty risk.
Cash Flow Instruments. The Company is a party to receive floating interest rate, pay fixed-rate interest rate swaps to hedge the interest rate risk of certain U.S. dollar denominated debt within its international subsidiaries. The swaps are designated as cash flow hedges of interest expense risk. These instruments are considered effective hedges and are recorded using hedge accounting. The Company is also a party to receive variable interest rate, pay fixed interest rate cross-currency interest rate swaps to hedge the interest rate and currency exposure associated with the expected payments of principal and interest of U.S. denominated debt within its international subsidiaries whose functional currency is other than the U.S. dollar. The swaps are designated as cash flow hedges of the currency risk and interest-rate risk related to payments on the U.S. denominated debt. These instruments are also considered to be effective hedges and are recorded using hedge accounting. Under cash flow hedging, the effective portion of the fair valueentire gain or loss of the derivative, calculated as the net present value of the future cash flows, is deferredreported on the consolidated balance sheets in accumulated other comprehensive loss. If any portion of an interest rate swap is determined to be an ineffective hedge, the gains or losses from changes in fair value would be recorded directly in the consolidated statements of income. Amounts recorded in accumulated other comprehensive loss are released to earnings in the same period that the hedged transaction impacts consolidated earnings. See Note 7Refer to “Note 8 - Derivative Instruments and Hedging ActivitiesActivities” for information on the fair value of interest rate swaps and cross-currency interest rate swaps as of November 30, 20172020 and August 31, 2017.2020.
Fair Value Instruments. The Company is exposed to foreign-currencyforeign currency exchange rate fluctuations in the normal course of business. This includes exposure to foreign-currencyforeign currency exchange rate fluctuations on U.S. dollar denominated liabilities within the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts that are intended to offset changes in cash flows attributable to currency exchange movements. The contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts are treated for accounting purposes as fair value instruments and do not qualify for derivative hedge accounting, and as such the Company does not apply derivative hedge accounting to record these transactions. As a result, these contracts are valued at fair value with unrealized gains or losses reported in earnings during the
period of the change. The Company seeks to mitigate foreign-currencyforeign currency exchange-rate risk with the use of these contracts and
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does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features and are limited to less than one year in duration. See Note 7 - Derivative Instruments and Hedging Activities for information on
Other Instruments. Other derivatives not designated as hedging instruments consist primarily of written call options in which the Company receives a premium that it uses to reduce the costs associated with its hedging activities. For derivative instruments not designated as hedging instruments, the Company recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of open, unsettled forward foreign-exchange contractsthe hedged item, in Other expense, net in the consolidated statements of income in the period of change.
Revenue Recognition – The accounting policies and other disclosures such as the disclosure of November 30, 2017 and August 31, 2017.disaggregated revenues are described in “Note 3 – Revenue Recognition”.
Insurance Reimbursements –Receipts from insurance reimbursements up to the amount of the losses recognized are considered recoveries. These recoveries are accounted for when they are probable of receipt. Insurance recoveries are not recognized prior to the recognition of the related cost. Anticipated proceeds in excess of the amount of loss recognized are considered gains and are subject to gain contingency guidance. Anticipated proceeds in excess of a loss recognized in the financial statements are not recognized until all contingencies related to the insurance claim are resolved.
Self-InsuranceCost of Goods Sold –As The Company includes the cost of October 1, 2017, PriceSmart, Inc. became self-insuredmerchandise, food service and bakery raw materials in cost of goods sold, net merchandise sales. The Company also includes in cost of goods sold: net merchandise sales the external and internal distribution and handling costs for its employee medical health benefitssupplying merchandise, raw materials and in doing sosupplies to the warehouse clubs, and, when applicable, costs of shipping to members. External costs include inbound freight, duties, drayage, fees, insurance, and non-recoverable value-added tax related to inventory shrink, spoilage and damage. Internal costs include payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense and building and equipment depreciation at the Company's distribution facilities and payroll and other direct costs for in-club demonstrations.
For export sales, the Company has assumedincludes the financial riskcost of merchandise and external and internal distribution and handling costs for providing health care benefitssupplying merchandise in cost of goods sold, exports.
For the marketplace and casillero operations, the Company includes the costs of external and internal shipping, handling and other direct costs incurred to its employees.provide delivery, insurance and customs processing services in cost of goods sold, non-merchandise.
Vendor consideration consists primarily of volume rebates, time-limited product promotions, cooperative marketing efforts, digital advertising, slotting fees, demonstration reimbursements and prompt payment discounts. Volume rebates that are not threshold based are incorporated into the unit cost of merchandise reducing the inventory cost and cost of goods sold. Volume rebates that are threshold based are recorded as a reduction to cost of goods sold when the Company achieves established purchase levels that are confirmed by the vendor in writing or upon receipt of funds. On a quarterly basis, the Company calculates the amount of rebates recorded in cost of goods sold that relates to inventory on hand and this amount is reclassified as a reduction to inventory, if significant. Cooperative marketing efforts and digital advertising are related to consideration received by the Company from vendors for non-distinct online advertising services on the Company’s website and social media platforms. Slotting fees are related to consideration received by the Company from vendors for preferential "end cap" placement of the vendor's products within the warehouse club. Demonstration reimbursements are related to consideration received by the Company from vendors for the in-club promotion of the vendors' products. The Company contractedrecords the reduction in cost of goods sold on a transactional basis for these programs. Prompt payment discounts are taken in substantially all cases and therefore are applied directly to reduce the acquisition cost of the related inventory, with Cigna Healththe resulting effect recorded to cost of goods sold when the inventory is sold.
Selling, General and Life Insurance Company (“CHLIC”), a third party administrator, to process claims on its behalf under an Administrative Services Only (ASO) agreement. – Selling, general and administrative costs are comprised primarily of expenses associated with operating warehouse clubs and freight forwarding operations. These costs include payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense, building and equipment depreciation, bank, credit card processing fees, and amortization of intangibles. Also included in selling, general and administrative expenses are the payroll and related costs for the Company’s U.S. and regional management and purchasing centers.
Pre-Opening Costs – The Company has elected to purchase “Stop Loss Insurance” to cover the risk in excessexpenses pre-opening costs (the costs of certain dollar limits.start-up activities, including organization costs and rent) for new warehouse clubs as incurred.
Contingencies and Litigation – The Company establishesrecords and reserves for loss contingencies if (a) information available prior to issuance of the consolidated financial statements indicates that it is probable that an estimatedasset had been impaired or a liability had been incurred at the date of the consolidated financial statements and (b) the amount of loss can be reasonably estimated. If one or both criteria for accrual for its insurance program based on available comparable claims data, trends and projected ultimate costs of claims. This accrualare not met, but there is based on estimates prepared with the assistance of outside actuaries and the ultimate cost of these claims may vary from initial estimates and established accrual. The actuaries periodically update their estimates andat least a reasonable possibility that a material loss will occur, the Company records such adjustments indoes not record and reserve for a loss contingency but describes the period in which such determinationcontingency within a note and provides detail, when possible, of the estimated potential loss or range of loss. If an estimate cannot be made, a statement to that effect is made. The accrued obligation for this self-insurance program is included in “Accrued salaries and benefits” in the consolidated balance sheets and is $574,000 as of November 30, 2017.
Foreign Currency Translation – The assets and liabilities of the Company’s foreign operations are translated to U.S. dollars when the functional currency in the Company’s international subsidiaries is the local currency and not U.S. dollars. Assets and liabilities of these foreign subsidiaries are translated to U.S. dollars at the exchange rate on the balance sheet date, and revenue, costs and expenses are translated at average rates of exchange in effect during the period. The corresponding translation gains and losses are recorded as a component of accumulated other comprehensive income or loss. These adjustments will affect net income upon the sale or liquidation of the underlying investment.
The following table discloses the net effect of translation into the reporting currency on other comprehensive loss for these local currency denominated accounts for the three months ended November 30, 2020 and 2019 (in thousands):
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November 30, | November 30, | |||||
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Effect on other comprehensive income/(loss) due to foreign currency translation | $ | 2,761 | $ | (3,724) | ||
Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses), including transactions recorded involving these monetary assets and liabilities, are recorded as Other income (expense) in the consolidated statements of income.
The following table summarizes the amounts recorded for the three months ended November 30, 2017 and 2016income (in thousands):
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Currency loss | $ | (1,492) | $ | (1,657) | ||
Recent Accounting Pronouncements – Not Yet Adopted
FASB ASC 815848 ASU 2017-12 Derivatives2020-04—Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU No. 2020-04 provides optional expedients and Hedging - Targeted Improvementsexceptions for a limited period of time to ease the potential burden in accounting for contracts, hedging relationships, and other transactions affected by reference rate reform. The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating the impact adoption of this guidance may have on the Company’s consolidated financial statements.
FASB ASC 740 ASU 2019-12—Income Taxes (Topic 740): Simplifying the Accounting for Hedging ActivitiesIncome Taxes
TheIn December 2019, the FASB has issued Accounting Standards Update (ASU)ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to2019-12, Simplifying the Accounting for Hedging Activities, which aimsIncome Taxes. ASU No. 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The ASU is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. The Company expects to adopt ASU No. 2019-12 on September 1, 2021, the financial reportingfirst quarter of hedging relationships to better portrayfiscal year 2022. The Company is currently evaluating the economic resultsimpact adoption of an entity’s risk management activities in itsthis guidance may have on the Company’s consolidated financial statements.
FASB ASC 715 ASU 2018-14 – Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement benefits (Topic 715-20). The standard amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other post-retirement plans. This ASU is effective for fiscal years ending after December 15, 2020 and must be applied on a retrospective basis. The Company expects to adopt ASU No. 2018-14 on September 1, 2021, the first quarter of fiscal year 2022. The Company is currently evaluating the impact adoption of this guidance may have on the Company’s consolidated financial statements.
Recent Accounting Pronouncements Adopted
FASB ASC 810 ASU 2018-15 – Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). As such, the amendment in this ASU requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in subtopic 350-40 in order to determine which implementation costs to capitalize as an asset and which costs to expense.
Additionally, the amendments in this ASU are intendedrequire the entity to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to bothexpense the designation and measurement guidance for qualifying hedging relationships andcapitalized implementation costs of a hosting arrangement that is a service contract over the presentation of hedge results. To satisfy that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components, and align the recognition and presentationterm of the effects of the hedging instrument and the hedged item in the financial statements.
Additionally, the amendments (1) permit hedge accounting for risk components in hedging relationships involving non-financial risk and interest rate risk; (2) change the guidance for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk; (3) continue to allow an entity to exclude option premiums and forward points from the assessment of hedge effectiveness; and (4) permit an entity to exclude the portion of the change in fair value of a currency swap that is attributable to a cross-currency basis spread from the assessment of hedge effectiveness.hosting arrangement. The amendments in this ASU are effective for annual periods beginning after December 15, 20182019 and interim
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periods within those annual periods. The Company will evaluateadopted ASU No. 2018-15 on a prospective basis on September 1, 2020, the impact adoptionfirst quarter of fiscal year 2021. Adoption of this guidance maydid not have a material impact on the Company’s consolidated financial statements.
FASB ASC 715820 ASU 2017-09 -Compensation—Stock Compensation2018-13 – Fair Value Measurement (Topic 718)—Scope of Modification Accounting
The FASB has issued Accounting Standards Update (ASU) No. 2017-09, Compensation—Stock Compensation (Topic 718)820): Scope of Modification Accounting, which seeks to provide clarity, reduce diversity in practice, and reduce cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, regarding a changeDisclosure Framework—Changes to the terms or conditions of a share-based payment award. This ASU provides guidance concerning which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Specifically, an entity is to accountDisclosure Requirements for the effects of a modification, unless all of the following are satisfied: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.Fair Value Measurement
FASB ASC 715 ASU 2017-07-Compensation—Retirement Benefits (Topic 715) —Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017,August 2018, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits2018-13, Fair Value Measurement (Topic 715) — Improving820). The standard eliminates such disclosures as the Presentationamount of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU is designed to improve guidance related to the presentationreasons for transfers between Level 1 and Level 2 of defined benefit costs in the income statement. In particular, ASU 2017-07 requires that an employer report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements.
FASB ASC 350 ASU 2017-04-Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under the amendments in this ASU, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment chargehierarchy. ASU No. 2018-13 adds new disclosure requirements for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
Additionally, ASU 2017-04 requires any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test.Level 3 measurements. The amendments in this ASU are effective for annual periods beginning after December 15, 2019. The Company will evaluateadopted ASU No. 2018-13 on a prospective basis on September 1, 2020, the impact adoption
first quarter of fiscal year 2021. Adoption of this guidance maydid not have a material impact on the Company’s consolidated financial statements.
FASB ASC 740350 ASU 2016-16-Income Taxes2017-04 – Intangibles—Goodwill and Other (Topic 740)—Intra-Entity Transfers of Assets Other Than Inventory350): Simplifying the Test for Goodwill Impairment
In October 2016,January 2017, the FASB issued ASU No. 2016-16, Income Taxes2017-04, Intangibles—Goodwill and Other (Topic 740)—Intra-Entity Transfers350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU modify the concept of Assets Other Than Inventory. Currently, U.S. GAAP prohibits recognizing current and deferred income tax consequences for an intra-entity asset transfer untilimpairment from the asset has been sold to an outside party. ASU 2016-16 statescondition that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventoryexists when the transfer occurs.
carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this ASU, entities should now perform their goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted.2019. The amendments should be appliedCompany adopted ASU No. 2017-04 on a modified retrospectiveprospective basis through a cumulative-effect adjustment directly to retained earnings ason September 1, 2020, the first quarter of the beginning of the period of adoption. The Company will evaluate the impact adoptionfiscal year 2021. Adoption of this guidance maydid not have a material impact on the Company’s consolidated financial statements.
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FASB ASC 230326 ASU 2016-15-Statement2016-13 – Financial Instruments—Credit Losses (Topic 326): Measurement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force)Credit Losses on Financial Instruments
In AugustJune 2016, the FASB issued ASU No. 2016-15, Statement2016-13, Measurement of Cash FlowsCredit Losses on Financial Instruments (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses stakeholders’ concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified in326), which amends the statement of cash flows under Topic 230, Statement of Cash Flows, and Other Topics. In particular, ASU No. 2016-15 addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle.
The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The amendments in this ASU should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company will evaluate the impact adoption of thisFASB’s guidance may have on the Company's consolidatedimpairment of financial statements.
FASB ASC 842 ASU 2016-02 -Leases (Topic 842): Amendments to the FASB Accounting Standards Codification
instruments. In February 2016,April 2019, the FASB issued guidance codified in ASC 842, Leases, which supersedes the guidance in ASC 840, Leases. ASC 842 will be effective for the Company on September 1, 2019, and the Company expects to apply the transition practical expedients allowed by the standard. Note 11 – “Leases” provides details on the Company’s current lease arrangements. While the Company continues to evaluate the provisions of ASC 842 to determine how it will be affected, the primary effect will be to require recording right-of-use assets and corresponding lease obligations for current operating leases. The Company expects the adoption of this guidance to have a material impact on the Company's consolidated balance sheets, but not on the consolidated statements of income or cash flows.
FASB ASC 606 ASU 2014-09 - Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (FASB) issued new guidance on the recognition of revenue from contracts with customers. The guidance combines the requirements for reporting revenue and requires disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows arising from these contracts. Transition is permitted either retrospectively or as a cumulative effect adjustment as of the date of adoption. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2019. The Company is evaluating the impact of adoption of this guidance on all potentially significant revenue transactions that will be impacted by the new standard on the Company's consolidated financial statements and related disclosures as a result of adopting this standard.
Recent Accounting Pronouncements Adopted
FASB ASC 718 ASU 2016-09 - Compensation—Stock Compensation (Topic 718):No. 2019-04, Codification Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued new guidance on stock compensation intendedTopic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments to simplify accounting for share-based payment transactions. The guidance will change accounting for income taxes, forfeitures,clarify and minimum statutory tax withholding requirements. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. The Company adopted this guidance on September 1, 2017.
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FASB ASC 330 ASU 2015-11 -Inventory (Topic 330): Simplifying the Measurement of Inventory
In July 2015, the FASB issued guidance that will require an entity to measure in-scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This amendment applies to entities, like the Company, that measure inventory value using the average cost method. The amendments in this ASU more closely align2016-13. These amendments require the measurement of inventory in GAAP withall expected credit losses for financial assets held at the measurement of inventory in International Financial Reporting Standards.
reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The amendment in this ASU isamendments are effective on a prospective basis for public entities for fiscal years beginning after December 15, 2016, 2019, including interim periods within those fiscal years. The Company adopted this guidancethe amendments on a prospective basis on September 1, 2017.2020, the first quarter of fiscal year 2021. Adoption of this guidance did not have a material effectimpact on the Company’s consolidated financial statements.
There were no other new accounting standards that had a material impact on the Company’s consolidated financial statements during the three month period ended November 30, 2020, and there were no other new accounting standards or pronouncements that were issued but not yet effective as of November 30, 2020 that the Company expects to have a material impact on its consolidated financial statements.
NOTE 3 – REVENUE RECOGNITION
Performance Obligations
The Company identifies each distinct performance obligation to transfer goods (or bundle of goods) or services. The Company recognizes revenue when (or as) it satisfies a performance obligation by transferring control of the goods or services to the customer.
Net Merchandise Sales. The Company recognizes net merchandise sales revenue, net of sales taxes, on transactions where the Company has determined that it is the principal in the sale of merchandise. These transactions may include shipping commitments and/or shipping revenue if the transaction involves delivery to the customer.
Non-merchandise Sales. The Company recognizes non-merchandise revenue, net of sales taxes, on transactions where the Company has determined that it is the agent in the transaction. These transactions primarily consist of contracts the Company enters into with its customers to provide delivery, insurance and customs processing services for products its customers purchase online in the United States either directly from other vendors utilizing the vendor’s website or through the Company’s marketplace site. Revenue is recognized when the Company’s performance obligations have been completed (that is when delivery of the items have been made to the destination point) and is recorded in “non-merchandise revenue” on the Consolidated Statements of Income. Prepayment for orders for which the Company has not fulfilled its performance obligation are recorded as deferred income. Additionally, the Company records revenue at the net amounts retained, i.e., the amount paid by the customer less
amounts remitted to the respective merchandise vendors, as the Company is acting as an agent and is not the principal in the sale of those goods being purchased from the vendors by the Company’s customers.
Membership Fee Revenue. Membership income represents annual membership fees paid by the Company’s warehouse club members, which are recognized ratably over the 12-month term of the membership. Our membership policy allows members to cancel their membership in the first 60 days and receive a full refund. After the 60-day period, membership refunds are prorated over the remaining term of the membership. The Company has significant experience with membership refund patterns and expects membership refunds will not be material. Therefore, no refund reserve was required for the periods presented. Membership fee revenue is included in membership income in the Company's consolidated financial statements. statements of income. The deferred membership fee is included in deferred income in the Company's consolidated balance sheets.
FASB ASC 230 ASU 2016-18-StatementPlatinum Points Reward Programs. The Company currently offers Platinum memberships in 12 of Cash Flows(Topic 230)—Restricted Cash
In November 2016,its 13 countries. The annual fee for a Platinum membership is approximately $75. The Platinum membership provides members with a 2% rebate on most items, up to an annual maximum of $500. The rebate is issued annually to Platinum members on March 1 and expires August 31. Platinum members can apply this rebate to future purchases at the FASB issued ASU No. 2016-18, Statementwarehouse club during the redemption period. The Company records this 2% rebate as a reduction of Cash Flows (Topic 230)—Restricted Cash. This ASU addressesrevenue at the diversity in practicetime of the sales transaction. Accordingly, the Company has reduced warehouse sales and has accrued a liability within other accrued expenses and other current liabilities, platinum rewards. The Company has determined that exists regardingbreakage revenue is 5% of the classificationawards issued; therefore, it records 95% of the Platinum membership liability at the time of sale. Annually, the Company reviews for expired unused rebates outstanding, and the presentation of changes in restricted cashexpired unused rebates are recognized as “Other revenue and income” on the statementconsolidated statements of cash flows.income.
Co-branded Credit Card Points Reward Programs. Most of the Company’s subsidiaries have points reward programs related to co-branded Credit Cards. These points reward programs provide incremental points that can be used at a future time to acquire merchandise within the Company’s warehouse clubs. This results in two performance obligations, the first performance obligation being the initial sale of the merchandise or services purchased with the co-branded credit card and the second performance obligation being the future use of the points rewards to purchase merchandise or services. As a result, upon the initial sale, the Company allocates the transaction price to each performance obligation with the amount allocated to the future use points rewards recorded as a contract liability within other accrued expenses and other current liabilities on the consolidated balance sheet. The amendmentsportion of the selling price allocated to the reward points is recognized as Net merchandise sales when the points are used or when the points expire. The Company reviews on an annual basis expired points rewards outstanding, and the expired rewards are recognized as Net merchandise sales on the consolidated statements of income within markets where the co-branded credit card agreement allows for such treatment.
Gift Cards. Members’ purchases of gift cards to be utilized at the Company's warehouse clubs are not recognized as sales until the card is redeemed and the customer purchases merchandise using the gift card. The outstanding gift cards are reflected as other accrued expenses and other current liabilities in ASU No. 2016-18 requirethe consolidated balance sheets. These gift cards generally have a one-year stated expiration date from the date of issuance and are generally redeemed prior to expiration. However, the absence of a large volume of transactions for gift cards impairs the Company's ability to make a reasonable estimate of the redemption levels for gift certificates; therefore, the Company assumes a 100% redemption rate prior to expiration of the gift certificate. The Company periodically reviews unredeemed outstanding gift certificates, and the gift certificates that have expired are recognized as “Other revenue and income” on the consolidated statements of income.
Co-branded Credit Card Revenue Sharing Agreements. As part of the co-branded credit card agreements that the Company has entered into with financial institutions within its markets, the Company often enters into revenue sharing agreements. As part of these agreements, in some countries, the Company receives a statementportion of cash flows explain the changeinterest income generated from the average outstanding balances on the co-branded credit cards from these financial institutions (“interest generating portfolio” or “IGP”). The Company recognizes its portion of interest received as revenue during the period it is earned. The Company has determined that this revenue should be recognized as “Other revenue and income” on the consolidated statements of income.
Contract Performance Liabilities
Contract performance liabilities as a result of transactions with customers primarily consist of deferred membership income, other deferred income, deferred gift card revenue, Platinum points programs, and liabilities related to co-branded credit card points rewards programs which are included in deferred income and other accrued expenses and other current liabilities in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Thus, amounts generally described as restricted cash and restricted cash equivalents should be includedCompany’s consolidated balance sheets. The following table provides these contract balances from transactions with cash and cash equivalents when reconciling the beginning-of-period and the end-of-period total amounts set forth on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years and will be applied using a retrospective transition method to each period presented. The Company early adopted this ASUcustomers as of August 31, 2017. The adoption of this ASU impacted the presentation of cash flows with inclusion of restricted cash flows for each ofdates listed (in thousands):
Contract Liabilities | |||||
November 30, 2020 | August 31, 2020 | ||||
Deferred membership income | $ | 24,522 | $ | 23,051 | |
Other contract performance liabilities | $ | 8,104 | $ | 5,190 | |
Disaggregated Revenues
In the presented periods.following table, net merchandise sales are disaggregated by merchandise category (in thousands):
Three Months Ended | |||||
November 30, 2020 | November 30, | ||||
Foods & Sundries | $ | 418,374 | $ | 392,805 | |
Fresh Foods | 235,289 | 215,238 | |||
Hardlines | 112,785 | 90,804 | |||
Softlines | 40,329 | 40,324 | |||
Other Business | 31,592 | 39,557 | |||
Net Merchandise Sales | $ | 838,369 | $ | 778,728 | |
NOTE 34 – EARNINGS PER SHARE
The Company presents basic net income per share using the two-class method. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders and that determines basic net income per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings that would have been available to common stockholders. A participating security is defined as a security that may participate in undistributed earnings with common stock. The Company’s capital structure includes securities that participate with common stock on a one-for-one basis for distribution of dividends. These are the restricted stock awards and restricted stock units issued pursuant to the 2013 Equity Incentive Award Plan. The Company does not include performance stock units as participating securities until they vest. The Company determines the diluted net income per share by using the more dilutive of the two class-method or the treasury stock method and by including the basic weighted average of outstanding performance stock optionsunits in the calculation of diluted net income per share under the two-class method and including all potential common shares assumed issued in the calculation of diluted net income per share under the treasury stock method.
The following table sets forth the computation of net income per share for the three months ended November 30, 20172020 and 20162019 (in thousands, except per share amounts):
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| Three Months Ended | Three Months Ended | |||||||||
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| November 30, |
| November 30, | November 30, | November 30, | ||||||
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| 2017 |
| 2016 | 2020 | 2019 | ||||||
Net income |
| $ | 22,490 |
| $ | 24,869 | ||||||
Net income attributable to PriceSmart, Inc. | $ | 27,737 | $ | 19,728 | ||||||||
Less: Allocation of income to unvested stockholders |
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| (300) |
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| (420) | (459) | (258) | ||||
Net earnings available to common stockholders |
| $ | 22,190 |
| $ | 24,449 | ||||||
Net income attributable to PriceSmart, Inc. per share available for distribution | $ | 27,278 | $ | 19,470 | ||||||||
Basic weighted average shares outstanding |
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| 30,078 |
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| 29,982 | 30,398 | 30,277 | ||||
Add dilutive effect of stock options (two-class method) |
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| 1 |
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| 5 | ||||||
Add dilutive effect of performance stock units (two-class method) | 22 | 7 | ||||||||||
Diluted average shares outstanding |
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| 30,079 |
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| 29,987 | 30,420 | 30,284 | ||||
Basic net income per share |
| $ | 0.74 |
| $ | 0.82 | $ | 0.90 | $ | 0.64 | ||
Diluted net income per share |
| $ | 0.74 |
| $ | 0.82 | $ | 0.90 | $ | 0.64 | ||
NOTE 45 – STOCKHOLDERS’ EQUITY
Dividends
NoNaN dividends were declared by the Company’s Board of Directors during the first three months of fiscal year 2018.2021. The following table summarizes the dividends declared and paid during fiscal year 2017.2020.
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| Second Payment | First Payment | Second Payment | |||||||||||||||||||||||||||||
Declared |
| Amount |
| Record |
| Date |
| Date |
| Amount |
| Record |
| Date |
| Date |
| Amount | Amount | Record | Date | Amount | Record | Date | Amount | |||||||||||||
2/1/2017 |
| $ | 0.70 |
| 2/15/2017 |
| 2/28/2017 |
| N/A |
| $ | 0.35 |
| 8/15/2017 |
| N/A |
| 8/31/2017 |
| $ | 0.35 | |||||||||||||||||
2/6/2020 |
| $ | 0.70 |
| 2/15/2020 |
| 2/28/2020 |
| $ | 0.35 |
| 8/15/2020 |
| 8/31/2020 |
| $ | 0.35 | |||||||||||||||||||||
The Company anticipates the ongoing payment of semi-annual dividends in subsequent periods, although the actual declaration of future dividends, the amount of such dividends, and the establishment of record and payment dates is subject to final determination by the Board of Directors at its discretion after its review of the Company’s financial performance and anticipated capital requirements.requirements, taking into account the uncertainty surrounding the ongoing effects of the COVID-19 pandemic on our results of operations and cash flows.
Comprehensive Income and Accumulated Other Comprehensive Loss
The following tables disclose the effects of each component of other comprehensive income (loss), net of tax (in thousands):
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| Three Months Ended November 30, 2017 | ||||||||||
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| Foreign |
| Defined |
| Derivative |
| Total | ||||
Beginning balance, September 1, 2017 |
| $ | (108,539) |
| $ | (442) |
| $ | (1,078) |
| $ | (110,059) |
Other comprehensive income (loss) |
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| (2,026) |
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| 30 |
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| 587 | (1) |
| (1,409) |
Ending balance, November 30, 2017 |
| $ | (110,565) |
| $ | (412) |
| $ | (491) |
| $ | (111,468) |
Attributable to | Noncontrolling | |||||||
PriceSmart | Interests | Total | ||||||
Beginning balance, September 1, 2020 | $ | (176,820) | $ | 134 | $ | (176,686) | ||
Foreign currency translation adjustments | 2,761 | 31 | 2,792 | |||||
Defined benefit pension plans (1) | 93 | — | 93 | |||||
Derivative instruments (2) | 308 | — | 308 | |||||
Ending balance, November 30, 2020 | $ | (173,658) | $ | 165 | $ | (173,493) | ||
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| Twelve Months Ended August 31, 2017 | ||||||||||
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| Foreign |
| Defined |
| Derivative |
| Total | ||||
Beginning balance, September 1, 2016 |
| $ | (102,242) |
| $ | (315) |
| $ | (1,394) |
| $ | (103,951) |
Other comprehensive income (loss) |
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| (6,297) |
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| (166) |
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| 316 | (1) |
| (6,147) |
Amounts reclassified from accumulated other comprehensive income (loss) |
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| — |
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| 39 | (2) |
| — |
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| 39 |
Ending balance, August 31, 2017 |
| $ | (108,539) |
| $ | (442) |
| $ | (1,078) |
| $ | (110,059) |
Attributable to | Noncontrolling | |||||||
PriceSmart | Interests | Total | ||||||
Beginning balance, September 1, 2019 | $ | (144,339) | $ | 20 | $ | (144,319) | ||
Foreign currency translation adjustments | (3,724) | 34 | (3,690) | |||||
Defined benefit pension plans (1) | 26 | — | 26 | |||||
Derivative Instruments (2) | 513 | — | 513 | |||||
Ending balance, November 30, 2019 | $ | (147,524) | $ | 54 | $ | (147,470) | ||
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Attributable to | Noncontrolling | |||||||
PriceSmart | Interests | Total | ||||||
Beginning balance, September 1, 2019 | $ | (144,339) | $ | 20 | $ | (144,319) | ||
Foreign currency translation adjustments | (29,413) | 114 | (29,299) | |||||
Defined benefit pension plans (1) | (79) | — | (79) | |||||
Derivative Instruments (2) | (5,803) | — | (5,803) | |||||
Amounts reclassified from accumulated other comprehensive income (loss) | 2,814 | — | 2,814 | |||||
Ending balance, August 31, 2020 | $ | (176,820) | $ | 134 | $ | (176,686) | ||
(1)Amounts reclassified from accumulated other comprehensive loss related to the minimum pension liability are included in warehouse club and other operations in the Company's consolidated statements of income.
(2)Refer to Note 8 - Derivative Instruments and Hedging Activities.
Retained Earnings Not Available for Distribution
The following table summarizes retained earnings designated as legal reserves of various subsidiaries which cannot be distributed as dividends to PriceSmart, Inc. according to applicable statutory regulations (in thousands):
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| November 30, |
| August 31, | ||
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| 2017 |
| 2017 | ||
Retained earnings not available for distribution |
| $ | 6,557 |
| $ | 6,459 |
November 30, | August 31, | |||||
2020 | 2020 | |||||
Retained earnings not available for distribution | $ | 8,800 | $ | 8,726 | ||
NOTE 56 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, the Company and its subsidiaries are subject to legal proceedings, claims and litigation arising in the ordinary course of business related to the Company’s operations and property ownership. The Company evaluates such matters on a case by case basis, and vigorously contests any such legal proceedings or claims which the Company believes are without merit. The Company believes that the final disposition of these matters will not have a material adverse effect on its financial position, results of operations or liquidity. It is possible, however, that the Company's results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to such matters.
The Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss and the accrued amount, if any, thereof, and adjusts the amount as appropriate. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. If it is at least a reasonable possibility that a material loss will occur, the Company will provide disclosure regarding the contingency.
On May 22, 2019, a class action complaint was filed against PriceSmart, Inc., as well as certain former and current officers in the United States District Court for the Southern District of California. On October 7, 2019, the Court granted Public Employees Retirement Association of New Mexico’s (PERA’s) Motion for Appointment as Lead Plaintiff. On January 3, 2020,
PERA filed a consolidated class action complaint, which alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Company intends to vigorously defend itself against any obligations or liability to the plaintiffs with respect to such claims. The Company believes that the final dispositionclaims are without merit. During the third quarter of fiscal 2020, the pending legal proceedings, claimsCompany filed a Motion to Dismiss the Plaintiff’s Consolidated Amended Complaint and litigation will not havethe Plaintiff filed an Opposition to the Motion to Dismiss. During the fourth quarter of fiscal 2020, the Company filed a material adverse effect on its financial position, results of operations or liquidity. It is possible, however, thatReply to the Company's results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to such matters.Opposition. The Court has taken the matter under advisement.
Taxes
Income Taxes –The For interim reporting, the Company accounts foruses an estimated annual effective tax rate (AETR), pursuant to ASC 740-270, to calculate income taxes using the asset and liability method. Under the asset and liability method,tax expense. Income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are recognized forrequired in the futuredetermination of the consolidated income tax consequences attributed toexpense. Deferred income taxes arise from temporary differences between the financial statement carrying amountstax basis of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable incomereported amounts in the yearsfinancial statements, which will result in which those temporary differences and carry-forwards are expectedtaxable or deductible amounts in the future. In evaluating its ability to be recovered or settled. The effect onrecover deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includesjurisdictions from which they arise, the enactment date. A valuation allowance is established when necessary to reduceCompany considers all available positive and negative evidence, including scheduled reversals of deferred tax assetsliabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, the Company begins with historical results adjusted for the results of discontinued operations and incorporates assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to amounts expected to be realized.manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating income (loss).
The Company is required to file federal and state tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which the Company files its returns.
18
As part of these reviews, a taxing authority may disagree with respect to the interpretations the Company used to calculate its tax liability and therefore require the Company to pay additional taxes.
The Company accrues an amount for its estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. There were no materialsignificant changes in the Company's uncertain income tax positions as of November 30, 2017 andsince August 31, 2017.2020.
In evaluating the exposure associated with various non-income tax filing positions, the Company accrues for probable and estimable exposures for non-income tax related tax contingencies. As of November 30, 20172020 and August 31, 2017,2020, the Company has recorded within other accrued expenses and other current liabilities a total of $3.2$2.3 million and $3.4$2.5 million, respectively, for various non-income tax related tax contingencies.
While the Company believes the recorded liabilities are adequate, there are inherent limitations in projecting the outcome of litigation, in estimating probable additional income tax liability taking into account uncertain tax positions and in evaluating the probable additional tax associated with various non-income tax filing positions. As such, the Company is unable to make a reasonable estimate of the sensitivity to change of estimates affecting its recorded liabilities. As additional information becomes available, the Company assesses the potential liability and revises its estimates as appropriate.
The Company has various appeals pending before tax courts in its subsidiaries' jurisdictions. Any possible settlement could increase or decrease earnings but is not expected to be significant. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. One of the Company’s subsidiaries received assessments claiming $2.7 million of taxes, penalties and interest related to withholding taxes on certain charges for services rendered by the Company. In addition, this subsidiary received assessments totaling $5.5 million for lack of deductibility of the underlying service charges due to the lack of withholding. Based on a review of the Company's tax advisers' interpretation of local law, rulings and jurisprudence (including Supreme Court precedents with respect to the deductibility assessment),two other countries where the Company expects to prevail in both instances and has not recorded a provision for these assessments. However, the Company had to submit these amounts as advance payments to the government while it appeals.
In another country in which the Company has warehouse clubs, beginning in fiscal year 2015, a newoperates, minimum income tax mechanism took effect, which requiresrules require the Company to pay taxes based on a percentage of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those it would expect to pay based on taxable income. The current rules (which the Company has challenged in court) do not clearly allow the Company to obtain a refund or to offset this excesshad income tax against other taxes. Asreceivables of November 30, 2017$10.9 million and August 31, 2017, the Company had$10.4 million and deferred tax assets of approximately $2.0 million in this country. Also, the Company had an income tax receivable balance of $5.3$2.9 million and $4.3$2.8 million as of November 30, 20172020 and August 31, 2017,2020, respectively, in these countries. While the rules related to excess payments from fiscal years 2015 and 2017. Therefunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets, because the Company believes that it is more likely than not that it will ultimately succeed in its refund request and/or court challenge on this matter.requests.
Other Commitments
The Company is committed under non-cancelable operating leases for the rental of facilities and land. Future minimum lease commitments for facilities under these leases with an initial term in excess of one year are as follows (in thousands):
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| Open |
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Years ended November 30, |
| Locations(1) |
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2018 |
| $ | 12,113 |
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2019 |
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| 11,715 |
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2020 |
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| 10,795 |
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2021 |
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| 9,339 |
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2022 |
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| 9,027 |
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Thereafter |
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| 113,822 |
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Total |
| $ | 166,811 | (2) |
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In January 2017, the Company purchased a distribution center in Medley, Miami-Dade County, Florida. The Company transferred its Miami dry distribution center activities that were previously in the leased facility to the new facility during the third quarter of fiscal year 2017. Some portions of the vacated previously leased space were subleased (and subsequently returned to the landlord) while the remainder remains available for sublease. As part of the subleases the Company was required to execute and deliver to the landlord of the leased facility a letter of credit (“LOC”) in the amount of $500,000 which entitles the landlord to draw on the LOC based on a decreasing scale over four years, if certain conditions occur related to nonpayment by the new tenant. Although this agreement is considered a guarantee, in measuring the fair value, the Company considers the risk and probability of default by the third party tenant as not likely nor probable, based on the Company’s review of the third party tenant’s financial position as well as the third party’s considerable capital investment into the leased facility. Therefore, the Company has not recorded a liability for this guarantee.
The Company is also committed to non-cancelable construction servicesservice obligations for various warehouse club developments and expansions. As of November 30, 20172020 and August 31, 2017,2020, the Company had approximately $3.2$8.2 million and $7.9$5.1 million, respectively, in contractual obligations for construction services not yet rendered.
TheFrom time to time, the Company has entered into general land purchase and land purchase option agreements. The Company’s land purchase agreements that haveare typically subject to various conditions, including, but not been recorded as commitments, for whichlimited to, the ability to obtain necessary governmental permits or approvals. A deposit under an agreement is typically returned to the Company if all permits or approvals are not obtained. Generally, the Company has recorded within restricted cash andthe right to cancel any of its agreements to purchase land without cause by forfeiture of some or all of the deposits asit has made pursuant to the agreement. As of November 30, 2017 and August 31, 2017 approximately $600,000. The2020, the Company did 0t have any pending land purchase option agreements can be canceled at the sole option of the Company, with the deposits being fully refundable until all permits are issued. The Company does not have a timetable of when or if it will exercise these land purchase options, due to the uncertainty related to the completion of the Company's due diligence reviews. The Company's due diligence reviews include evaluations of the legal status of each property, the zoning and permitting issues related to acquiring approval for the construction and operation of a warehouse club and any other issues related to the property itself that could render the property unsuitable or limit the property's economic viability as a warehouse club site. If the purchase option agreements are exercised, the cash use would be approximately $20.8 million.agreements.
20
The table below summarizes the Company’s interest in real estate joint ventures, commitments to additional future investments and the Company’s maximum exposure to loss as a result of its involvement in these joint venture as of November 30, 20172020 (in thousands):
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Entity |
| % |
| Initial |
| Additional |
| Net |
| Company’s |
| Commitment |
| Company's | % | Initial | Additional | Net Income Inception to Date | Company’s | Commitment | Company's | |||||||||||||||||||||
GolfPark Plaza, S.A. |
| 50 | % |
| $ | 4,616 |
| $ | 2,402 |
| $ | 301 |
| $ | 7,319 |
| $ | 99 |
| $ | 7,418 | 50 | % | $ | 4,616 | $ | 2,402 | $ | 57 | $ | 7,075 | $ | 99 | $ | 7,174 | |||||||
Price Plaza Alajuela, S.A. |
| 50 | % |
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| 2,193 |
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| 1,236 |
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| 33 |
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| 3,462 |
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| 785 |
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| 4,247 | |||||||||||||||||||||
Price Plaza Alajuela PPA, S.A. | 50 | % | 2,193 | 1,236 | 89 | 3,518 | 785 | 4,303 | ||||||||||||||||||||||||||||||||||
Total |
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| $ | 6,809 |
| $ | 3,638 |
| $ | 334 |
| $ | 10,781 |
| $ | 884 |
| $ | 11,665 | $ | 6,809 | $ | 3,638 | $ | 146 | $ | 10,593 | $ | 884 | $ | 11,477 | |||||||||
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(1)The parties intend to seek alternate financing for the project, which could reduce the amount of investments each party would be required to provide. The parties may mutually agree on changes to the project, which could increase or decrease the amount of contributions each party is required to provide.
(2)The maximum exposure is determined by adding the Company’s variable interest in the entity and any explicit or implicit arrangements that could require the Company contracts for distribution center services in Mexico. The contract for this distribution center's services expires on August 31, 2020, with the applicable fees and rates to be reviewed at the beginning of each calendar year. Future minimum service commitments related to this contract through the end of the contract term are approximately $442,000.provide additional financial support.
The Company contracts for off-site data recovery services as part of its disaster recovery plan. The contract for these data recovery services expires on November 30, 2019. Future minimum service commitments related to this contract are approximately $372,000 for each of the 12-month periods ending November 30, 2018 and 2019.
NOTE 67 – DEBT
Short-term borrowings consist of unsecured lines of credit that are secured by certain assets of the Company and its subsidiaries, which, in some cases, are guaranteed by the Company.credit. The following table summarizes the balances of total facilities, facilities used and facilities available (in thousands):
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| Facilities Used |
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| Total Amount |
| Short-term |
| Letters of |
| Facilities |
| Weighted average |
| ||||
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| of Facilities |
| Borrowings |
| Credit |
| Available |
| interest rate |
| ||||
November 30, 2017 |
| $ | 69,000 |
| $ | 2,483 |
| $ | 562 |
| $ | 65,955 |
| 4.3 | % |
August 31, 2017 |
| $ | 69,000 |
| $ | — |
| $ | 966 |
| $ | 68,034 |
| — | % |
Facilities Used | |||||||||||||||
Total Amount | Short-term | Letters of | Facilities | Weighted average | |||||||||||
of Facilities | Borrowings | Credit | Available | interest rate | |||||||||||
November 30, 2020 | $ | 121,000 | $ | 47,349 | $ | 125 | $ | 73,526 | 2.9 | % | |||||
August 31, 2020 | $ | 81,210 | $ | 65,143 | $ | 388 | $ | 15,679 | 3.7 | % | |||||
As of November 30, 20172020 and August 31, 2017,2020, the Company had approximately $40.0 million of short-term facilities in the U.S. that require compliance with certain quarterly financial covenants. As of November 30, 20172020 and August 31, 2017,2020, the Company was in compliance with respect to these covenants.all covenants or amended covenants for each of its short-term facility agreements. Each of the facilities expires annually and isexcept for the U.S. facility, which expires bi-annually. The facilities are normally renewed.
The following table provides the changes in long-term debt for the three monthsthree-months ended November 30, 2017:2020:
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(Amounts in thousands) |
| Current |
| Long-term |
| Total |
| |||
Balances as of August 31, 2017 |
| $ | 18,358 |
| $ | 87,939 |
| $ | 106,297 | (1) |
Repayments of long-term debt |
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| — |
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| (3,000) |
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| (3,000) |
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Regularly scheduled loan payments |
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| (225) |
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| (4,554) |
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| (4,779) |
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Translation adjustments on foreign-currency debt of subsidiaries whose functional currency is not the U.S. dollar (2) |
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| 124 |
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| (45) |
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| 79 |
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Balances as of November 30, 2017 |
| $ | 18,257 |
| $ | 80,340 |
| $ | 98,597 | (3) |
(Amounts in thousands) | Current | Long-term | Total | |||||||
Balances as of August 31, 2020 | $ | 19,437 | $ | 112,610 | $ | 132,047 | (1) | |||
Regularly scheduled loan payments | (287) | (3,610) | (3,897) | |||||||
Reclassifications of long-term debt due in the next 12 months | 625 | (625) | — | |||||||
Translation adjustments on foreign currency debt of subsidiaries whose functional currency is not the U.S. dollar (2) | (4) | (271) | (275) | |||||||
Balances as of November 30, 2020 | $ | 19,771 | $ | 108,104 | $ | 127,875 | (3) | |||
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(1)The carrying amount of non-cash assets assigned as collateral for these loans was $158.6 million. NaN cash assets were assigned as collateral for these loans.
In August 2017, the Company’s Panama subsidiary paid off the outstanding principal balance(2)These foreign currency translation adjustments are recorded within Other comprehensive income.
(3)The carrying amount of U.S. $13.3 million on a loan agreement entered into with Scotiabank. The Company’s subsidiary also settled the interest rate swap that it had entered into with Scotiabank related to this loan.non-cash assets assigned as collateral for these loans was $154.1 million. NaN cash assets were assigned as collateral for these loans.
On March 31, 2017, the Company's Trinidad subsidiary entered into a loan agreement with Citibank, N.A. The agreement provides for a $12.0 million loan to be repaid in eight quarterly principal payments plus interest. The interest rate is set at the 90 day LIBOR rate plus 3%. The loan was funded on March 31, 2017.
In January 2017, the Company finalized its acquisition of a distribution center in Medley, Miami-Dade County, Florida for a total purchase price of approximately $46.0 million. The Company transferred its Miami distribution center activities previously located in leased facilities to the new distribution center during the third quarter of fiscal year 2017. To finance the acquisition of this property, the Company entered into a 10-year real estate secured loan with MUFG Union Bank, N.A. (“Union Bank”) for $35.7 million in January 2017. This loan has a variable interest rate of 30-day LIBOR plus 1.7%, with monthly principal and interest payments maturing in 2027. The monthly principal and interest payments begin in April 2019. The Company also entered into an interest rate hedge with Union Bank for $35.7 million, the notional amount. Under the hedge, the Company will receive variable interest equal to 30-day LIBOR plus 1.7% and pay fixed interest at a rate of 3.65%, with an effective date of March 1, 2017 and maturity date of March 1, 2027.
As of November 30, 2017,2020, the Company had approximately $82.8$104.0 million of long-term loans in the U.S., Trinidad, Panama, El Salvador, Honduras, Costa Rica, Barbados and Colombiaseveral foreign subsidiaries that require these subsidiaries to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of November 30, 2017,2020, the Company was in compliance with all covenants or amended covenants.
As of August 31, 2017,2020, the Company had approximately $85.6$107.4 million of long-term loans in Trinidad, Panama, El Salvador, Honduras, Costa Rica, Barbados, and Colombiaseveral foreign subsidiaries that require these subsidiaries to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of August 31, 2017, the Company was in compliance with all covenants or amended covenants.
Annual maturities of long-term debt are as follows (in thousands):
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Twelve Months Ended November 30, |
| Amount | Amount | |||
2018 |
| $ | 18,257 | |||
2019 |
| 19,437 | ||||
2020 |
| 21,438 | ||||
2021 |
| 5,805 | $ | 19,771 | ||
2022 |
|
| 2,634 | 15,455 | ||
2023 | 23,906 | |||||
2024 | 23,335 | |||||
2025 | 7,777 | |||||
Thereafter |
|
| 31,026 | 37,631 | ||
Total |
| $ | 98,597 | $ | 127,875 | |
NOTE 78 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to interest rate risk relating to its ongoing business operations. To manage interest rate exposure, the Company enters into hedge transactions (interest rate swaps) using derivative financial instruments. The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the LIBOR interest payments associated with variable-rate loans over the life of the loans. As changes in interest rates impact the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements.
In addition, the Company is exposed to foreign currency and interest rate cash flow exposure related to non-functional currency long-term debt of three of its wholly owned subsidiaries. To manage this foreign currency and interest rate cash flow exposure, the Company’s subsidiaries entered into cross-currency interest rate swaps that convert their U.S. dollar denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument. As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedges are intended to offset changes in cash flows attributable to interest rate and foreign exchange movements.
These derivative instruments (cash flow hedging instruments) are designated and qualify as cash flow hedges, with the effective portion of theentire gain or loss on the derivative reported as a component of other comprehensive income (loss)loss. Amounts are deferred in other comprehensive loss and reclassified into earnings in the same period or periods during whichincome statement line item that is used to present earnings effect of the hedged transaction is determined to be ineffective. There were no such amounts recorded for ineffectiveness foritem when the periods reported herein related to the interest rate or cross-currency interest rate swaps of long-term debt.hedged item affects earnings.
The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business, including foreign-currency exchange-rate fluctuations on U.S. dollar denominated liabilities within its international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts (NDFs) that are intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate foreign-currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features.
The Company uses other derivatives not designated as hedging instruments that consist primarily of written call options in which the Company receives a premium from the holder. This premium lowers the cost of the Company’s hedging activities. The Company recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Other expense, net in the consolidated statements of income in the period of change.
Cash Flow Hedges
As of November 30, 2017,2020, all of the Company’s interest rate swap and cross-currency interest rate swap derivative financial instruments are designated and qualify as cash flow hedges. The Company formally documents the hedging relationships for its derivative instruments that qualify for hedge accounting.
23
The following table summarizes agreements for which the Company has recorded cash flow hedge accounting for the three months ended November 30, 2017:2020:
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Subsidiary |
| Date |
| Derivative |
| Derivative |
| Initial |
| Bank |
| Floating Leg |
| Fixed Rate |
| Settlement |
| Effective | Date | Derivative | Derivative | Initial | Bank | Floating Leg | Fixed Rate | Settlement | Effective | |||||||||||||
PriceSmart, Inc (1) |
| 7-Nov-16 |
| MUFG Union Bank, N.A. ("Union Bank") |
| Interest rate swap |
| $ | 35,700,000 |
| Union Bank |
| Variable rate 1-month Libor plus 1.7% |
| 3.65 | % |
| 1st day of each month beginning on April 1, 2017 |
| March 1, 2017 - | ||||||||||||||||||||
Costa Rica |
| 28-Aug-15 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 7,500,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 2.50% |
| 7.65 | % |
| 28th day of August, November, February, and May beginning on November 30, 2015 |
| August 28, 2015 - | ||||||||||||||||||||
Honduras |
| 24-Mar-15 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 8,500,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 3.25% |
| 10.75 | % |
| 24th day of March, June, September, and December beginning on June 24, 2015 |
| March 24,2015 - | ||||||||||||||||||||
El Salvador |
| 16-Dec-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 4,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.78 | % |
| 29th day of each month beginning on December 29, 2014 |
| December 1, 2014 - | ||||||||||||||||||||
Colombia | 3-Dec-19 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | 7,875,000 | Citibank, N.A. | Variable rate 3-month Libor plus 2.45% | 7.87 | % | 3rd day of each December, March, June, and September, beginning on March 3, 2020 | December 3, 2019 - | |||||||||||||||||||||||||||||
Colombia | 27-Nov-19 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | 25,000,000 | Citibank, N.A. | Variable rate 3-month Libor plus 2.45% | 7.93 | % | 27th day of each November, February, May and August beginning February 27, 2020 | November 27, 2019 - | |||||||||||||||||||||||||||||
Colombia |
| 10-Dec-14 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 15,000,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 2.8% |
| 8.25 | % |
| 4th day of March, June, Sept, Dec. beginning on March 4, 2015 |
| December 4, 2014 - | 24-Sep-19 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | 12,500,000 | PriceSmart, Inc. | Variable rate 3-month Libor plus 2.50% | 7.09 | % | 24th day of each December, March, June and September beginning December 24, 2019 | September 24, 2019 - | |||||||||
Panama |
| 9-Dec-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 10,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 5.16 | % |
| 28th day of each month beginning December 29, 2014 |
| November 28, 2014 - | 25-Jun-18 | Bank of Nova Scotia ("Scotiabank") | Interest rate swap | $ | 14,625,000 | Bank of Nova Scotia | Variable rate 3-month Libor plus 3.0% | 5.99 | % | 23rd day of each month beginning on July 23, 2018 | June 25, 2018 - | |||||||||
Honduras |
| 23-Oct-14 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 5,000,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 3.5% |
| 11.6 | % |
| 22nd day of January, April, July, and October beginning on January 22, 2015 |
| Settled on | 26-Feb-18 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | 13,500,000 | Citibank, N.A. | Variable rate 3-month Libor plus 3.00% | 9.75 | % | 29th day of May, August, November and February beginning May 29, 2018 | February 26, 2018 - | |||||||||
Panama |
| 1-Aug-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 5,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.89 | % |
| 21st day of each month beginning on September 22, 2014 |
| August 21, 2014 - | ||||||||||||||||||||
Panama |
| 22-May-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 3,970,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.98 | % |
| 4th day of each month beginning on June 4, 2014 |
| May 5, 2014 - | ||||||||||||||||||||
PriceSmart, Inc | 7-Nov-16 | MUFG Union Bank, N.A. ("Union Bank") | Interest rate swap | $ | 35,700,000 | Union Bank | Variable rate 1-month Libor plus 1.7% | 3.65 | % | 1st day of each month beginning on April 1, 2017 | March 1, 2017 - March 1, 2027 | |||||||||||||||||||||||||||||
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For the three months ended November 30, 20172020 and 2016,2019, the Company included the gain or loss on the hedged items (that is, variable-rate borrowings) in the same line item—interest expense—as the offsetting gain or loss on the related interest rate swaps as follows (in thousands):
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Income Statement Classification |
| Interest |
| Cost of |
| Total | |||
Interest expense for the three months ended November 30, 2017 |
| $ | 849 |
| $ | 322 |
| $ | 1,171 |
Interest expense for the three months ended November 30, 2016 |
| $ | 750 |
| $ | 423 |
| $ | 1,173 |
Income Statement Classification | Interest | Cost of | Total | ||||||
Interest expense for the three months ended November 30, 2020 | $ | 642 | $ | 925 | $ | 1,567 | |||
Interest expense for the three months ended November 30, 2019 | $ | 1,014 | $ | 261 | $ | 1,275 | |||
(1)This amount is representative of the interest expense recognized on the underlying hedged transactions. (2)This amount is representative of the interest expense recognized on the interest rate swaps and cross-currency swaps designated as cash flow hedging instruments. |
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The total notional balance of the Company’s pay-fixed/receive-variable interest rate swaps and cross-currency interest rate swaps was as follows (in thousands):
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| Notional Amount as of | Notional Amount as of | |||||||||
|
| November 30, |
| August 31, | November 30, | August 31, | ||||||
Floating Rate Payer (Swap Counterparty) |
| 2017 |
| 2017 | 2020 | 2020 | ||||||
Union Bank |
| $ | 35,700 |
| $ | 35,700 | $ | 33,575 | $ | 33,894 | ||
Citibank N.A. |
|
| 25,063 |
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| 26,088 | 54,541 | 55,086 | ||||
Scotiabank |
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| 12,924 |
|
| 13,724 | 11,250 | 11,625 | ||||
Total |
| $ | 73,687 |
| $ | 75,512 | $ | 99,366 | $ | 100,605 | ||
24
Derivatives listed on the table below were designated as cash flow hedging instruments. The table summarizes the effect of the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting and its associated tax effect on accumulated other comprehensive (income)/loss (in thousands):
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| November 30, 2017 |
| August 31, 2017 | November 30, 2020 | August 31, 2020 | ||||||||||||||||||||||||||||||||
Derivatives designated as cash flow hedging instruments |
| Balance Sheet |
| Fair |
| Net Tax |
| Net |
| Fair |
| Net Tax |
| Net | Balance Sheet | Fair | Net Tax | Net | Fair | Net Tax | Net | |||||||||||||||||||
Cross-currency interest rate swaps |
| Other non-current assets |
| $ | 2,514 |
|
| (938) |
|
| 1,576 |
| $ | 2,547 |
| $ | (950) |
| $ | 1,597 | Other non-current assets | $ | 144 | $ | (43) | $ | 101 | $ | 872 | $ | (265) | $ | 607 | |||||||
Interest rate swaps |
| Other non-current assets |
|
| 764 |
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| (272) |
|
| 492 |
|
| — |
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| — |
|
| — | Other long-term liabilities | (3,531) | 825 | (2,706) | (3,857) | 898 | (2,959) | |||||||||||||
Interest rate swaps |
| Other long-term liabilities |
|
| (4) |
|
| (3) |
|
| (7) |
|
| (231) |
|
| 80 |
|
| (151) | ||||||||||||||||||||
Cross-currency interest rate swaps |
| Other long-term liabilities |
|
| (342) |
|
| 114 |
|
| (228) |
|
| (451) |
|
| 135 |
|
| (316) | Other long-term liabilities | (1,790) | 541 | (1,249) | (828) | 248 | (580) | |||||||||||||
Net fair value of derivatives designated as hedging instruments |
|
|
| $ | 2,932 |
| $ | (1,099) |
| $ | 1,833 |
| $ | 1,865 |
| $ | (735) |
| $ | 1,130 | $ | (5,177) | $ | 1,323 | $ | (3,854) | $ | (3,813) | $ | 881 | $ | (2,932) | ||||||||
Fair Value Instruments
TheFrom time to time the Company has enteredenters into non-deliverable forward foreign-exchange contracts. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting. The use of non-deliverable forward foreign-exchange contracts is intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. The following table summarizes the non-deliverable forward foreign exchange contracts that are open asAs of November 30, 2017:2020, the Company did not have any material non-deliverable forward foreign-exchange contracts.
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Other Instruments
Other derivatives not designated as hedging instruments consist primarily of written call options in which the Company receives a premium that it uses to reduce the costs associated with its hedging activities. As of November 30, 2020, the Company does not have any contracts not designated as hedging instruments.
For the three months ended November 30, 2017,2020 and 2019, the Company included in its consolidated statements of income the forwardloss of its other non-designated derivative gain or (loss) on the non-deliverable forward foreign-exchange contracts as follows (in thousands):
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| Three Months Ended | Three Months Ended | |||||||||
|
| November 30, |
| November 30, | November 30, | November 30, | ||||||
Income Statement Classification |
| 2017 |
| 2016 | 2020 | 2019 | ||||||
Other income (expense), net |
| $ | 93 |
| $ | 219 | ||||||
Other expense, net | $ | — | $ | (1,270) | ||||||||
The following tables summarize by segment certain revenues, operating costs and balance sheet items (in thousands):
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| United |
| Central |
| Caribbean |
| Colombia Operations |
| Reconciling |
| Total | United | Central | Caribbean | Colombia Operations | Reconciling | Total | ||||||||||||||||||
Three Months Ended November 30, 2017 |
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Three Months Ended November 30, 2020 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers |
| $ | 8,147 |
| $ | 452,166 |
| $ | 214,642 |
| $ | 92,117 |
| $ | — |
| $ | 767,072 | $ | 23,617 | $ | 494,692 | $ | 258,516 | $ | 100,607 | $ | — | $ | 877,432 | ||||||
Intersegment revenues |
|
| 340,128 |
|
| — |
|
| 1,207 |
|
| 198 |
|
| (341,533) |
|
| — | 350,103 | 4,736 | 1,146 | 1,129 | (357,114) | — | ||||||||||||
Depreciation and amortization |
|
| 1,744 |
|
| 5,523 |
|
| 2,677 |
|
| 2,293 |
|
| — |
|
| 12,237 | ||||||||||||||||||
Depreciation, Property and equipment | 1,665 | 7,694 | 3,792 | 1,735 | — | 14,886 | ||||||||||||||||||||||||||||||
Amortization, Intangibles | 599 | — | — | — | — | 599 | ||||||||||||||||||||||||||||||
Operating income |
|
| 3,739 |
|
| 31,942 |
|
| 11,470 |
|
| 2,145 |
|
| (16,130) |
|
| 33,166 | 5,742 | 34,445 | 21,594 | 5,565 | (22,815) | 44,531 | ||||||||||||
Net income (loss) |
|
| 82 |
|
| 26,796 |
|
| 10,317 |
|
| 1,425 |
|
| (16,130) |
|
| 22,490 | ||||||||||||||||||
Capital expenditures, net |
|
| 1,004 |
|
| 11,370 |
|
| 10,297 |
|
| 832 |
|
| — |
|
| 23,503 | ||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. | (372) | 29,238 | 17,170 | 4,596 | (22,895) | 27,737 | ||||||||||||||||||||||||||||||
Long-lived assets (other than deferred tax assets) |
|
| 70,352 |
|
| 304,434 |
|
| 130,896 |
|
| 121,629 |
|
| — |
|
| 627,311 | 81,277 | 472,892 | 178,879 | 159,459 | — | 892,507 | ||||||||||||
Intangibles, net | 9,566 | — | — | — | — | 9,566 | ||||||||||||||||||||||||||||||
Goodwill |
|
| — |
|
| 31,014 |
|
| 4,564 |
|
| — |
|
| — |
|
| 35,578 | 10,695 | 24,317 | 10,111 | — | — | 45,123 | ||||||||||||
Total assets |
|
| 121,674 |
|
| 580,523 |
|
| 334,279 |
|
| 186,352 |
|
| — |
|
| 1,222,828 | 212,434 | 771,933 | 436,418 | 257,210 | — | 1,677,995 | ||||||||||||
Capital expenditures, net | 1,218 | 7,544 | 2,458 | 8,539 | — | 19,759 | ||||||||||||||||||||||||||||||
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| ||||||||||||||||||
Three Months Ended November 30, 2016 |
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|
|
| ||||||||||||||||||
Three Months Ended November 30, 2019 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers |
| $ | 10,755 |
| $ | 438,234 |
| $ | 207,022 |
| $ | 83,561 |
| $ | — |
| $ | 739,572 | $ | 17,339 | $ | 466,802 | $ | 235,017 | $ | 92,783 | $ | — | $ | 811,941 | ||||||
Intersegment revenues |
|
| 317,662 |
|
| — |
|
| 1,698 |
|
| 10 |
|
| (319,370) |
|
| — | 349,950 | 4,045 | 1,202 | 536 | (355,733) | — | ||||||||||||
Depreciation and amortization |
|
| 1,574 |
|
| 4,864 |
|
| 2,458 |
|
| 2,221 |
|
| — |
|
| 11,117 | ||||||||||||||||||
Depreciation, Property and equipment | 1,348 | 6,882 | 3,966 | 2,018 | — | 14,214 | ||||||||||||||||||||||||||||||
Amortization, Intangibles | 599 | — | — | — | 599 | |||||||||||||||||||||||||||||||
Operating income |
|
| 7,597 |
|
| 33,504 |
|
| 12,214 |
|
| 913 |
|
| (15,849) |
|
| 38,379 | 2,587 | 31,700 | 11,810 | 4,524 | (19,907) | 30,714 | ||||||||||||
Net income |
|
| 3,658 |
|
| 26,227 |
|
| 10,861 |
|
| (28) |
|
| (15,849) |
|
| 24,869 | ||||||||||||||||||
Capital expenditures, net |
|
| 2,337 |
|
| 10,756 |
|
| 4,438 |
|
| 473 |
|
| — |
|
| 18,004 | ||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. | (724) | 26,751 | 10,318 | 3,271 | (19,888) | 19,728 | ||||||||||||||||||||||||||||||
Long-lived assets (other than deferred tax assets) |
|
| 20,372 |
|
| 278,721 |
|
| 110,939 |
|
| 125,589 |
|
| — |
|
| 535,621 | 84,117 | 471,366 | 177,742 | 143,818 | — | 877,043 | ||||||||||||
Intangibles, net | 11,977 | — | — | — | — | 11,977 | ||||||||||||||||||||||||||||||
Goodwill |
|
| — |
|
| 31,072 |
|
| 4,531 |
|
| — |
|
| — |
|
| 35,603 | 10,695 | 24,532 | 10,198 | — | — | 45,425 | ||||||||||||
Total assets |
|
| 70,283 |
|
| 542,238 |
|
| 321,235 |
|
| 184,114 |
|
| — |
|
| 1,117,870 | 168,375 | 754,364 | 369,575 | 231,797 | — | 1,524,111 | ||||||||||||
Capital expenditures, net | 629 | 15,243 | 4,520 | 20,834 | — | 41,226 | ||||||||||||||||||||||||||||||
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| ||||||||||||||||||
As of August 31, 2017 |
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|
| ||||||||||||||||||
As of August 31, 2020 | ||||||||||||||||||||||||||||||||||||
Long-lived assets (other than deferred tax assets) |
| $ | 70,353 |
| $ | 296,915 |
| $ | 122,616 |
| $ | 126,206 |
| $ | — |
| $ | 616,090 | $ | 81,008 | $ | 475,744 | $ | 177,166 | $ | 146,862 | $ | — | $ | 880,780 | ||||||
Intangibles, net | 10,166 | — | — | — | — | 10,166 | ||||||||||||||||||||||||||||||
Goodwill |
|
| — |
|
| 31,118 |
|
| 4,524 |
|
| — |
|
| — |
|
| 35,642 | 10,696 | 24,418 | 10,092 | — | — | 45,206 | ||||||||||||
Total assets |
|
| 147,650 |
|
| 544,683 |
|
| 303,234 |
|
| 181,947 |
|
| — |
|
| 1,177,514 | 272,190 | 741,523 | 395,244 | 247,868 | — | 1,656,825 | ||||||||||||
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(1)Management considers its club in the U.S. Virgin Islands to be part of its Caribbean operations.
27
Table(2)The reconciling items reflect the amount eliminated on consolidation of Contentsintersegment transactions.
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 910 – SUBSEQUENT EVENTS
The Company has evaluated all events subsequent to the balance sheet date of November 30, 20172020 through the date of issuance of these consolidated financial statements and has determined that except as set forth below, there are no subsequent events that require disclosure.
Non-deliverable forward foreign-exchange contracts
The Company has entered into forward exchange contracts during December 2017 for approximately $5.0 million with settlement dates during January 2018.
New tax legislation
In December 2017, the United States approved new legislation that significantly modifies current tax legislation. The Company is currently assessing the impact of this recent legislation; however, the most significant changes to the Company are:
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PRICESMART, INC.
ITEMITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements concerning PriceSmart, Inc.'s ("PriceSmart", the "Company" or "we") anticipated future revenues and earnings, adequacy of future cash flows,omni-channel initiatives, proposed warehouse club openings, the Company's performance relative to competitors and related matters. These forward-looking statements include, but are not limited to, statements containing the words “expect,” “believe,” “will,” “may,” “should,” “project,” “estimate,” “anticipated,” “scheduled,” and like expressions, and the negative thereof. These statements are subject to risks and uncertainties that could cause actual results to differ materially including, the following risks: our financial performance is dependent on international operations, which exposes us to various risks; any failure by us to manage our widely dispersed operations could adversely affect our business; we face significant competition; future sales growth depends, in part, on our ability to successfully open new warehouse clubs and grow sales in our existing locations; we mightbut not identify in a timely manner or effectively respond tolimited to: adverse changes in economic conditions in the Company’s markets, natural disasters, compliance risks, volatility in currency exchange rates, competition, consumer preferences for merchandise, which could adversely affect our relationshipand small business spending patterns, political instability, increased costs associated with members, demand for our products and market share; 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; failure to grow our e-commerce business through the integration of physicalonline commerce with our traditional business, whether the Company can successfully execute strategic initiatives, cybersecurity breaches that could cause disruptions in our systems or jeopardize the security of member or business information, cost increases from product and digital retailservice providers, interruption of supply chains, COVID-19 related factors and challenges, including among others, the duration of the pandemic, the unknown long-term economic impact, the impact of government policies and restrictions that have limited access for our members, and shifts in demand away from discretionary or otherwise, and the cost of our increasing e-commerce investments, may materially adversely affect our market position, net sales and financial performance; our profitability is vulnerablehigher priced products to cost increases; we face difficulties in the shipment of, and risks inherent in the importation of, merchandise to our warehouse clubs; we are exposed to weather and other natural disaster risks that might not be adequately compensated by insurance; negative economic conditions could adversely impact our business in various respects; our failure to maintain our brand and reputation could adversely affect our results of operations; we face the risk oflower priced products, exposure to product liability claims aand product recall and adverse publicity; we are subject to risks associated with possible changes in our relationships with third parties with which we do business, as well as the performance of such third parties; we could be subject to additional tax liabilities or subject to reserves on therecalls, recoverability of tax receivables; we face the possibility of operational interruptions relatedmoneys owed to union work stoppages; we are subject to volatility in foreign currency exchange rates and limits on our ability to convert foreign currencies into U.S. dollars; we face compliance risks related to our international 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; we may experience difficulties implementing our new global enterprise resource planning system; 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 are subject to payment related risks; failure to attract and retain qualified employees, increases in wage and benefit costs, changes in lawsPriceSmart from governments, and other labor issues could materially adversely affectimportant factors discussed under the captions “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our financial performance; 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; a few of our stockholders own approximately 25.3% of our voting stock as of November 30, 2017, which may make it difficult to complete some corporate transactions without their support and may impede a change in control. The risks described above as well as the other risks detailed in the Company’s U.S. Securities and Exchange Commission (“SEC”) reports, including the Company’s Annual Report on Form 10-K filed for the fiscal year ended August 31, 20172020 filed with the United States Securities and Exchange Commission (“SEC”) on October 26, 2017, pursuant30, 2020. These risk factors may be updated from time to time in our other filings with the Securities Exchange ActSEC, which are accessible on the SEC’s website at www.sec.gov. Forward-looking statements speak only as of 1934, see “Part I - Item 1A - Risk Factors,” could materiallythe date that they are made, and adversely affect our business, financial condition and results of operations. Thesethe Company does not undertake to update them, except as required by law. In addition, these risks are not the only risks that the Company faces. The Company could also be affected by additional factors that apply to all companies operating globally and in the U.S., as well as other risks that are not presently known to the Company or that the Company currently considers to be immaterial.
The following discussion and analysis compares the results of operations for the three months ended November 30, 20172020 and 20162019 and should be read in conjunction with the consolidated financial statements, and the accompanying notes included therein.
Overview
29
Our business consists primarily of operating internationalPriceSmart began operations in 1996 in San Diego, California. We own and operate U.S. style membership shopping warehouse clubs similarin Central America, the Caribbean and Colombia. We also function as a wholesale supplier to buta retailer in the Philippines. We sell high quality brand name and private label consumer products, offer prepared foods through our bakeries and food courts with the option for delivery, and in certain clubs we provide services such as optical and tires at low prices to individuals and businesses. Historically, our typical warehouse buildings have ranged in sales floor size from approximately 40,000 to 60,000 square feet and are located primarily in and around the major cities in our markets to take advantage of dense populations and relatively higher levels of disposable income. Additionally, we operate smaller format clubs, with sales floors ranging from approximately 30,000 to 40,000 square feet. These smaller format clubs are an alternative intended to serve markets where the population is likely to support a smaller club or densely populated urban areas where it is challenging to secure sufficient real estate at a reasonable cost for a larger club. We believe this smaller format has the potential to expand our geographic reach in size than,existing markets and provide more convenience for our members. We continue to invest in technology to increase efficiencies and to enhance the member shopping experience with omni-channel capabilities, including e-commerce online shopping. Most notably, the Company launched its Click & Go™ online order, curbside pickup and delivery service, in fiscal 2020, which provides contactless shopping in all 13 of our markets.
We believe that our business success depends on our ability to be the low-cost, high-quality operators in our markets and, in turn, to offer the best value on attractive products and services in a safe and responsible environment. We believe that lower prices on products and services drive sales volume, which increases the Company’s buying leverage, which in turn leads to better pricing that we can then offer to our members, validating the annual membership investment that they make.
Logistics and distribution efficiencies are fundamental to delivering high quality merchandise at low prices to our members. To reduce the risk of supply chain disruption, we have developed greater supply chain flexibility between our U.S. and regional distribution centers, which provides us increased flexibility amidst this evolving global environment. We continue to
explore ways to deliver value, improve efficiency, reduce costs and ensure a flow of high quality, curated merchandise to our warehouse clubs.
Purchasing land and constructing warehouse clubs is generally our largest ongoing capital investment. Securing land for warehouse club locations is challenging in several of our markets because suitable sites at economically feasible prices are difficult to find. We believe real estate ownership provides a number of advantages as compared to leasing, including lower operating expenses, flexibility to expand or otherwise enhance our buildings, long-term control over the use of the property and the residual value that the real estate may have in future years. While our preference is to own rather than lease real estate, we have entered into real estate leases in certain cases and will likely continue to do so in the United States. Wefuture.
Our warehouse clubs currently operate in 13 countries/territoriesemerging markets that are locatedhistorically have had higher growth rates and lower warehouse club market penetration than the U.S. market. In the countries in Latin Americawhich 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 the Caribbean. Our ownership in all operating subsidiaries as of November 30, 2017 is 100%,carry, home improvement centers, electronic retailers, specialty stores, convenience stores, traditional wholesale distribution and they are presented on a consolidated basis. growing online sales.
The number of warehouse clubs in operation as of November 30, 20172020 for each country or territory arewere as follows:
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| ||||
|
| Number of |
| Number of |
| Anticipated | Number of | Number of | |||||
|
| Warehouse Clubs |
| Warehouse Clubs |
| Warehouse | Warehouse Clubs | Warehouse Clubs | |||||
|
| in Operation as of |
| in Operation as of |
| Club Openings | in Operation as of | in Operation as of | |||||
Country/Territory |
| August 31, 2017 |
| November 30, 2017 |
| In Fiscal Year 2018 | November 30, 2019 | November 30, 2020 | |||||
Costa Rica | 7 | 8 | |||||||||||
Colombia |
|
| 7 |
|
| 7 |
|
| — | 7 | 7 | ||
Costa Rica |
|
| 6 |
|
| 7 |
|
| — | ||||
Panama |
|
| 5 |
|
| 5 |
|
| — | 7 | 7 | ||
Dominican Republic | 5 | 5 | |||||||||||
Trinidad |
|
| 4 |
|
| 4 |
|
| — | 4 | 4 | ||
Dominican Republic |
|
| 3 |
|
| 3 |
|
| 1 | ||||
Guatemala |
|
| 3 |
|
| 3 |
|
| — | 4 | 4 | ||
Honduras |
|
| 3 |
|
| 3 |
|
| — | 3 | 3 | ||
El Salvador |
|
| 2 |
|
| 2 |
|
| — | 2 | 2 | ||
Nicaragua |
|
| 2 |
|
| 2 |
|
| — | 2 | 2 | ||
Aruba |
|
| 1 |
|
| 1 |
|
| — | 1 | 1 | ||
Barbados |
|
| 1 |
|
| 1 |
|
| — | 1 | 1 | ||
U.S. Virgin Islands |
|
| 1 |
|
| 1 |
|
| — | 1 | 1 | ||
Jamaica |
|
| 1 |
|
| 1 |
|
| — | 1 | 1 | ||
Totals |
|
| 39 |
|
| 40 |
|
| 1 | 45 | 46 | ||
Our warehouse clubs and local distribution centers are located in Latin America and the Caribbean, and our corporate headquarters, U.S. buying operations and regional distribution centers are located primarily in the United States. Our operating segments are the United States, Central America, the Caribbean and Colombia.
We opened a newheld the grand opening of our newest warehouse club in Santa Ana, Costa Rica in October 2017,Bogotá, Colombia on December 4, 2020, bringing to 47 the total number of warehouse clubs operating in Costa Ricaoperation. This warehouse club is located within the Usaquén locality on the northern side of Bogotá, Colombia. The Usaquén club is our third warehouse club in the greater metropolitan area of Bogotá and eighth in Colombia.
While we continue to seven. In June 2017,closely monitor developments arising from the outbreak of COVID-19 and recognize that the potential social and economic impacts in the markets where we acquiredoperate and any resulting consequences to our results of operations and cash flow remain unknown, we have decided to proceed with the construction of two standard format warehouse clubs on land in Santo Domingo, Dominican Republic. We are currently buildingwe previously acquired. First, will be a warehouse club on this site that welocated within the Zone 5 locality of Guatemala City, Guatemala, which will be our fifth warehouse club located in Guatemala. We expect to open this warehouse club in the springfirst quarter of calendar year 2018. Thisfiscal 2022. Second, will bringbe a warehouse club located within the city of Portmore, Jamaica. Portmore is a suburb west of the capital city of Kingston. We expect to open this warehouse club, which will be our second warehouse club in Jamaica, in the third quarter of fiscal 2022.
We also operate a package forwarding business (casillero) and marketplace business under the “Aeropost” banner in 38 countries in Latin America and the Caribbean, many of which overlap with markets where we operate warehouse clubs.
Factors Affecting Our Business
The COVID-19 pandemic resulted in significant challenges across our 13 markets in the second half of fiscal 2020. Many markets imposed limitations, varying by market and in frequency, on access to the Company’s clubs and on the Company’s club operations, including in some cases frequent temporary club closures, a reduction in the number of PriceSmartdays during the week and hours per day the Company’s clubs are permitted to be open, restrictions on segments of the population permitted to shop or circulate on particular days, and significant limits on the number of people permitted to be in the club at the same time. We also experienced product mix shifts due to changing consumer habits, decreases in purchases by many business members, particularly restaurants and hotels, and sporadic supply chain challenges, which can impact inventory levels. In response, early in calendar year 2020 we identified four main priorities:
Protect the safety and well-being of our employees and our members.
Take proactive measures to protect our supply chain.
Expand technology-enabled shopping.
Manage cash and capital resources.
Our priorities today remain the same and have become an integral part of our normal, everyday business operations. However, due to the unpredictability of the duration and intensity of the COVID-19 pandemic, we continue to see periodic reinstatements of stay-at-home orders and other restrictions. In addition, we expect continued uncertainty in the economies of our markets as a result of the pandemic and expect volatility in employment trends, industry and consumer confidence; volatility in foreign currency exchange rates and commodity prices; and possible fiscal austerity measures taken by governments in our markets, which will likely impact our results for the foreseeable future. For additional information, refer to the risk factors discussed in Part I. “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended August 31, 2020. Yet, as we have adapted to this continuing crisis, we are focused on opportunities for the future. We have decided to move forward with plans to construct two new warehouse clubs. One in Portmore, Jamaica and the other in Guatemala City, Guatemala. Although we do expect some transfer of sales from the existing warehouse clubs operatingthat are in Dominican Republicclose proximity to four. these new locations, these locations provide opportunity for incremental membership, net merchandise sales growth, and greater convenience for our existing members.
Our Click & Go™ curbside and delivery service contributed approximately 3.1% of total net merchandise sales for the fiscal first quarter ended November 30, 2020. The demand for delivery through our Click &Go™ service has been increasing and represents a growing proportion of total Click & Go™ sales. Developing greater efficiencies remains a priority especially within these new sales channels. We believe that Click & Go™ curbside and delivery services will remain important alternative shopping methods and provide increased value for our members by enabling them to leverage their membership across multiple shopping platforms. We also see value in the insights gained by communicating with our members through a variety of our online channels. Beyond Click & Go™, we continue to explore other potential sitesinvest in technology to increase efficiencies, enhance our member experience by enabling additional omni-channel capabilities, and finding new ways to generate value and benefits for future warehouseour members and the Company.
Increasing “same store” sales is an important element of our growth strategy. We believe that there is a number of ways to increase same store sales. We are committed to increasing same store sales by increasing the number of member transactions and by increasing the average ticket. We have started or recently completed expansions and/or remodels of several clubs in our Central America segment in fiscal 2021 that we believe will contribute to same store sales growth. Also, at the Caribbeanend of fiscal year 2020 we had our first “Membership Appreciation Week” promotion, and Colombia.at end of our first quarter of fiscal 2021, we expanded the duration of our “Smart Week” promotion and held it across all of our markets. We have also increased our digital marketing efforts, which has resulted in enhanced reach and visibility of our promotions, contributing to the success of these programs.
General Market FactorsIn an effort to provide healthy options for our members, we source additional high quality fresh products through our Direct Farm Program. We believe that our Direct Farm Program reduces costs and improves quality on our fresh produce offerings, while simultaneously supporting local farmers and industry. Our produce distribution centers allow us to provide farm-to-table produce quicker and more efficiently. We opened two produce distribution centers in fiscal 2020 and expect to continue to expand this program and build additional produce distribution centers as we expand into more of our markets in fiscal 2021.
Overall economic trends, foreign currency exchange volatility, and other factors impacting the business
Our sales and profits vary from market to market depending on general economic factors, including GDP growth; consumer spending patterns;preferences; foreign currency exchange rates; political policies and social conditions; local demographic characteristics (such as population growth); the number of years PriceSmart haswe have operated in a particular market; and the level of retail and wholesale competition in that market. The economies of many of our markets are dependent on foreign trade, tourism, and foreign direct
investments. Global and local travel restrictions and the general slowdown in global economic activity as a result of COVID-19 have significantly impacted and may continue to impact the economies in our markets, causing significant declines in GDP and employment and devaluations and illiquidity of local currencies against the U.S. dollar. In general, positive conditions in the broader economy promote greater member spending in our warehouse clubs, and economic weakness generally results in a reduction of customer spending.
Currency fluctuations can be one of the largest variablevariables affecting our overall sales and profit performance, as we have experienced in prior fiscal years, 2015 and 2016, because many of our markets are susceptible to foreign currency exchange rate volatility. InDuring the first three months of fiscal year 20182021 and during fiscal year 2017,2020, approximately 77%77.8% and 77.0%, respectively, of our net warehousemerchandise sales were in currencies other than the U.S. dollar. Of those sales, that were currencies other than the U.S. dollar, approximately 52%49.5% and 52.0% were comprised of sales of products we purchased in U.S. dollars.dollars for each period, respectively.
A devaluation of the local currency not only reduces the value of sales and membership income that is generated in that country when translated to U.S. dollars for our consolidated results, but also increasesresults. In addition, when local currency experiences devaluation, we may elect to increase the local currency price of imported merchandise to maintain our target margins, which impactscould impact demand for a significant portionthe merchandise affected by the price increase. We may also modify the mix of the Company’simported versus local merchandise offering. For example, changes inand/or the value of the Colombian peso (“COP”) relative to the U.S. dollar negatively impacted sales and margins in that market during fiscal years 2015 and 2016. A stabilization of the currency during fiscal year 2017 contributed to improving business conditions in Colombia, resulting in good sales growth and a return to operating profitability in our Colombia segment that has continued into the first three months of fiscal year 2018.
Certain of our Central American and Caribbean markets experienced some slowing of overall economic activity during fiscal year 2017, which, to some degree, is continuing into the first three months of fiscal year 2018. In particular, Trinidad, which depends on oil and gas exports as a major source of income, has been experiencing overall difficult economic conditions. These adverse economic conditions, combined with government policies intendedimported merchandise to manage foreignmitigate the impact of currency reserves, have adversely affected consumer spending. Other countries where general market conditions provided a difficult operating environment duringfluctuations. Information about the effect of local currency devaluations is discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Net Merchandise Sales and Comparable Sales.”
30
fiscal year 2017 and continuing into the first three months of fiscal year 2018 include USVI, where Hurricanes Irma and Maria had a severe impact on the infrastructure of the island, and Barbados.
Our capture of total retail and wholesale sales can vary from market to market due to competition and the availability of other shopping options for our members. In larger, more developed countries, such as Costa Rica, Panama and Colombia, customers have many alternatives available to them to satisfy their shopping needs, and therefore, our market share is less than in other smaller countries, such as Jamaica and Nicaragua, where consumers have a limited number of shopping options.
Demographic characteristics within each of our markets can also affect both the overall level of sales and also future sales growth opportunities. Island countriesmarkets such as Aruba, Barbados and the U.S. Virgin Islands offer us limited upside for sales growth given their overall market size. Countries with a smaller upper and middle class consumer population,populations, such as Honduras, El Salvador, Jamaica and Nicaragua, alsooffer growth potential but may have a more limited potentialmarket opportunity for sales growth as compared to more developed countries with larger or growing upper and middle class consumer populations.
Political and other factors in each of our markets may have significant effects on our business. U.S. foreign policy can also have an impact on the social and economic stability in the countries where we operate. For example, when national elections are being held, the political situation can introduce uncertainty about howtransition in the leadership change mayU.S. Government, as a result of the recent presidential election, could result in changes in U.S. foreign policy towards Latin America that could impact the economybusiness environment in the countries we serve.
Our operations are subject to volatile weather conditions and affect near-term consumer spending. As has been the case in recent weeks innatural disasters. In November 2020, Hurricanes Eta and Iota brought severe rainfall, winds, and flooding to a significant portion of Central America, especially Honduras, political turmoil can result in local unrest, resulting in curfews and reduced operating hours and interrupt the normal flowthat caused significant damage to parts of merchandise tothat country’s infrastructure. Although our warehouse clubs. The need for increased tax revenueclubs in certain countries can also cause changesthe region are operating normally and we have been able to manage our supply chain to keep our warehouse clubs stocked with merchandise, the combination of the COVID-19 pandemic and the damage caused by the hurricanes could adversely impact our overall sales and profit performance in tax policies affecting consumer’s personal tax rates and/or added consumption taxes, such as VAT (value-added taxes), effectively raising the prices of various products. future.
From time to timeIn the past, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity)., particularly in Trinidad. This impedescan and has impeded our ability to convert local currencies obtained through warehousemerchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products or to otherwise redeploy these funds in our Company, increasing our foreign exchange exposure to any devaluation of the local currency relative to the U.S. dollar. DuringWe continued to experience significant limitations on our ability to convert Trinidad dollars to U.S. dollars or other tradeable currencies during fiscal year 20172020, with a further deterioration and continuingthe problem becoming more acute in August 2020 and into the first three monthssecond quarter of fiscal year 2018, we experienced this situation in Trinidad (“TT”).2021. We are working with our banks in Trinidad and government officials to source tradabletradeable currencies, (including Euros and Canadian dollars), but until the central bank in Trinidad makes more U.S. dollars or other tradeable securities become available, this illiquidity condition is likely to continue. During part of the first half of fiscal year 2017, we limited shipments of merchandise to Trinidad from our distribution center in Miami to levels that generally aligned with our Trinidad subsidiary’s ability to source U.S. dollars to pay for that merchandise. This resulted in a reduced level of shipments, which negatively affected sales in the second quarter, particularly December 2016, although by less than our initial estimate. These actions did not impact the level of merchandise we obtain locally in Trinidad. Starting in the third quarter of fiscal year 2017, we were able to improve our sourcing of tradeable currencies, which, in addition to other steps we took, allowed for a more normalized flow of imported merchandise during the third and fourth fiscal quarters. Over the past three months, however, we have been unable to source a sufficient level of tradeable currencies in Trinidad consistent with the level of merchandise we are importing for the holiday shopping season. As of November 30, 2017,2020, our Trinidad subsidiary had net U.S.Trinidad dollar denominated liability exposurescash and cash equivalents and short and long-term investments measured in U.S. dollars of approximately $12.1$100.5 million, an increase of $16.1$20.9 million from August 31, 20172020 when these same balances were approximately $79.6 million. The Trinidad central bank manages the exchange rate of the Trinidad dollar with the U.S. dollar. While the recently elected government has publicly stated it has no intention to devalue the Trinidad dollar, the Trinidad government could in the future decide to devalue the currency to improve market liquidity, resulting in a devaluation in the U.S. dollar value of these cash and investments balances. If, for example, a hypothetical 20% devaluation of the Trinidad dollar were to occur, the value of our Trinidad subsidiarydollar cash and investments position, measured in U.S. dollars, would decrease by approximately $20.1 million, with a corresponding increase in Accumulated other comprehensive loss reflected on our consolidated balance sheet. Separate from the Trinidad dollar denominated cash and investments balances described above, as of November 30, 2020, we had neta U.S. dollar denominated assetsmonetary liability position of approximately $4.0 million. $14.4 million in Trinidad (net of U.S. dollar denominated assets) that would produce a loss from a potential devaluation of Trinidad dollars. If, for example, a hypothetical 20% devaluation of the Trinidad dollar occurred, the net effect on
Other income (expense), net on our consolidated statement of operations of revaluing these U.S. dollar denominated net monetary liabilities would be an approximate $2.9 million loss.
We are carefully monitoring the situation which may require usin Trinidad and are taking various steps to limit futuremitigate the risks. For example, as liquidity conditions have tightened, we have methodically raised prices on imported goods and have sought to shift the purchase of certain goods to local sources, where appropriate. Additionally, we are actively seeking to exchange Trinidad dollars for tradeable currencies, in order to manage our exposure to any potential devaluation. Moreover, in the first quarter of fiscal 2021, we began limiting shipments of goods from the U.S. to Trinidad. As a result, beginning in the second quarter of fiscal 2021, our Trinidad subsidiary will not carry its usual mix and quantity of merchandise. We believe this reduction in imported merchandise will negatively impact sales in Trinidad in our second fiscal quarter by an estimated $14.0 million to $18.0 million. We plan to increase or decrease shipments from the U.S. to Trinidad in line with our ability to exchange Trinidad dollars for tradeable currenciesother hard currencies.
Our Barbados subsidiary also recently began facing a U.S. dollar liquidity situation. The Barbados dollar has a conventional fixed-peg currency arrangement, in which the Barbados dollar exchange rate is fixed to managethe U.S. dollar. Thus, although we do not expect a devaluation of this currency, at this time, as of November 30, 2020, our exposureBarbados subsidiary had Barbados dollar denominated cash and cash equivalents measured in U.S. dollars of approximately $12.8 million, which cannot be readily converted to any potential devaluation. U.S. dollars for general use within the Company.
Mission and Business Strategy
Our business strategymission is to operate membership warehouse clubsserve as a model company, which operates profitably and provides a good return to our investors, by serving our members in Latin Americaemerging and developing markets, with safe, clean buildings, equipment and work environment, and by providing good jobs, fair wages and benefits, quality merchandise and services at compelling prices that are made accessible to a broader segment of the population, while treating our suppliers right, empowering them where we can, and conducting ourselves in a socially responsible manner and by respecting the environment and the Caribbean. We selllaws of all the countries in which we operate. To do this, we make available a limited numberwide range of high volume products and services across a broad range of categories to businesses and familiesquality, curated merchandise sourced from around the world at the lowest possible prices. PriceSmart members pay angood value. The annual membership fee and that fee, combined with volume purchasing and operating efficiencies throughout the supply chain, enableenables us to operate our business efficiently with lower margins than traditional retail stores. Through the use of technology and prices than conventional retail storesthe development of an omni-channel platform, we are pursuing opportunities to satisfy our members’ shopping expectations, create additional efficiencies in the supply chain and wholesale suppliers.
Whilebetter understand and serve our traditional membership warehouse club strategy continues to work well in our markets, we recognize that technology is having an increasingly profound impact on shopping habits throughout the world. We believe our business strategymembers’ needs to be broadenedplay greater role in their lives. We strive to respond to changes in shopping habits soestablish a relationship with our members will have thethat enhances their lives with quality goods and services and offers a shopping experience they desire.
Our longer range strategic objective is to combinethat blends the traditional membership warehouse club “brickexcitement and mortar”appeal of our brick and mortar business with the convenience of online shopping to provide the best shopping experience possible for our members.and services.
Growth
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Growth
We measure our growth primarily by the amount of the period-over-period activity in our net warehousemerchandise sales, our comparable warehouse club net merchandise sales, (which include the impact of e-commerce sales)membership income and total revenues. Our investments are geared toward creating greater efficiencies, which enable us to offer lower prices, better services, enhanced convenience and exciting experiences for our members, which we believe will support membership income. At times, we make strategic investments that are focused on the long-termrenewals and sustained growth offor the Company. TheseHowever, these investments can impact near-term results, such as when we invest in technology and talent that are expected to yield long-term benefits or when we incur fixed costs in advance of achieving full projected sales, negatively impacting near-term operating profit and net income, or whenincome. When we open a new warehouse club in an existing market, which canmay reduce reported comparable warehousenet merchandise sales due to the cannibalizationtransfer of sales from existing warehouse clubs.
Current and Future Management Actions
Generally, our operating efficiencies, earnings and cash flow improve as sales increase. Higher sales provide greater purchasing power which often translates into lower cost of merchandise from our suppliers and lower prices for our members. Higher sales, coupled with continuous efforts to improve efficiencies through our distribution network and within our warehouse clubs, also give us the opportunity to leverage our operating costs and reduce prices for our members.
We seek to grow sales by increasing transaction size and shopping frequency of our members by providing high quality, differentiated merchandise at a good value. We also grow sales by attracting new members and improving the capacity of our existing warehouse clubs to serve the growing membership base and level of sales in those locations through physical expansions of the building or adding additional parking or improving the flow of merchandise to and within the warehouse club. Sales growth is also achieved when we add new warehouse clubs with a corresponding increase in members in those markets that can support that growth. Sales during the first three months of fiscal year 2018 were positively impacted by the addition of a new warehouse club that opened in Santa Ana, Costa Rica in October 2017, fiscal year 2018. Although we recognize that opening new warehouse club locations in certain existing markets can have adverse short-term implications for comparable store growth, as the new warehouse club will often attract sales from existing locations, each decision to add a location in an existing market is based on a long-term outlook. Overall, for the first quarter of fiscal year 2018, net warehouse sales increased 4.1% when compared to the same three month period in fiscal year 2017. Finally, we believe that online sales constitute a significant opportunity to grow sales in the future.
One of the distinguishing features of the warehouse club format is the role membership plays, both in terms of pricing and member loyalty. Membership fees are considered a component of overall gross margin and therefore allow us to reduce merchandise prices. In most of our markets, the annual membership fee is the equivalent of U.S. $35 for both business members and non-business “Diamond” members. In Colombia, the membership fee was 65,000 (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 the converted membership price in U.S. dollars decreased from 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. In addition to the standard warehouse club membership, we have offered in Costa Rica what we call Platinum membership since 2012 for $75. A Platinum membership earns a 2% rebate on annual purchases up to a maximum $500 rebate per year. In September, fiscal year 2018, we introduced the Platinum membership in Panama, and in October, fiscal year 2018, we introduced the Platinum membership in the Dominican Republic.
Logistics and distribution efficiencies are an important part of what allows us to deliver high quality merchandise at low prices to our members. We acquire a significant amount of merchandise internationally, a significant portion of which we receive at our Miami distribution centers. In January 2017, 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 has increased our ability to efficiently receive, handle and distribute merchandise. 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. As we continue to refine our logistics and distribution infrastructure, we are investing in regional distribution centers. We recently entered into a long-term lease for a 107,640 square foot distribution center in Costa Rica. We expect to begin operating this distribution center during the fourth quarter of fiscal year 2018. In August of fiscal year 2017, we entered into a long-term lease for a 52,463 square foot distribution center in Panama that we occupied in September 2017. We expect that both these new distribution centers will improve the merchandise flow and in-stock conditions in our warehouse clubs, reduce merchandise costs and facilitate online sales to our members.
Purchasing land and constructing warehouse clubs is generally our largest ongoing capital investment. Securing land for warehouse club locations is challenging within our markets, especially in Colombia, because suitable sites at economically feasible prices are difficult to find. While our preference is to own rather than lease real estate, we have entered into real estate leases in certain cases (most recently our Bogota, Colombia site) and will likely do so into enhance the future. Real estate ownershipmember experience, grow membership and support long-term sales growth and profitability.
provides a number of advantages as compared to leasing, including lower operating expenses, flexibility to expand or otherwise enhance our buildings, long-term control over the use of the property and the residual value that the real estate may have in future years. In order to secure warehouse club locations, we occasionally have purchased more land than is actually needed for the warehouse club facility. To the extent that we acquire property in excess of what is needed for a particular warehouse club, we generally have looked to either sell or develop the excess property. Excess land at Alajuela (Costa Rica) and Brisas (Panama) is being developed by joint ventures formed by us and the sellers of the property. We are employing a similar development strategy for the excess land at the San Fernando, Trinidad and Arroyo Hondo, Dominican Republic locations where the properties are fully owned by us. The profitable sale or development of excess real estate not required to operate a warehouse club is highly dependent on real estate market conditions.
We are currently engaged in the selection of a new global enterprise resource planning system (ERP) and evaluating other technology-related investments with the long-term objective of offering our members a seamless multi-channel experience. To oversee our efforts to identify and adopt new technologies that can help us better serve our members, our Board of Directors has approved a new committee of the Board, the Innovation Committee. The committee members include Board Chairman Robert Price as Chairman of the committee, our CEO Jose Luis Laparte and two other members of our Board. The Board of Directors has designated an incremental $3.0 to $5.0 million of technology-related spending for fiscal year 2018 for evaluation and selection of the ERP vendor and to fund a newly established team to direct our technology investment and preopening spending to develop a new online business that we hope to launch during the summer of 2018. Substantially all of this spending for fiscal year 2018 will be recorded as expenses on the statement of income that will impact earnings during the fiscal year as we pursue these long-term initiatives, which will likely require further investments beyond the current fiscal year.
Financial highlights for the first quarter of fiscal year 20182021 included:
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Total revenues increased 8.1% over the comparable prior year period.
Net merchandise sales increased 7.7% over the comparable prior year period. We ended the quarter with 46 warehouse clubs compared to 45 warehouse clubs at the end of the first quarter of fiscal 2020. Foreign currency exchange rate fluctuations impacted net merchandise sales negatively by 3.5% versus the comparable three-month period.
Comparable net merchandise sales (that is, sales in the 43 warehouse clubs that have been open for greater than 13 ½
calendar months) for the 13 weeks ended November 29, 2020 increased 3.6%. Foreign currency exchange rate fluctuations impacted comparable net merchandise sales negatively by 3.5%.
Membership income for the first quarter of fiscal 2021 decreased 3.3% to $13.3 million primarily due to a decline in the overall account base because of a decrease in in-club traffic from COVID-19.
Total gross margins (net merchandise sales less associated cost of goods sold) increased 16.2% over the prior-year period, and merchandise gross profits as a percent of net merchandise sales were 16.1%, an increase of 120 basis points (1.2%) from the same period in the prior year. The increase is attributable to more focused merchandising strategies, inventory management, and pricing actions to offset foreign currency exchange costs.
Operating income for the first quarter of fiscal 2021 was $44.5 million, an increase of 45.0%, or $13.8 million, compared to the first quarter of fiscal 2020.
We recorded a $1.5 million net currency loss from currency transactions in the first quarter of fiscal 2021 compared to a $1.7 net currency loss in the same period last year.
Our effective tax rate increased in the first quarter of fiscal 2021 to 32.9% from 32.2% in the first quarter of fiscal 2020 primarily from the unfavorable impact in the current period from the effect of changes in foreign currency value and related adjustments.
Net income attributable to PriceSmart for the first quarter of fiscal 2021 was $27.7 million, or $0.90 per diluted share, compared to $19.7 million, or $0.64 per diluted share, in the first quarter of fiscal 2020.
COMPARISON OF THE THREE MONTHS ENDED NOVEMBERthree months ended November 30, 2017 AND 20162020 and 2019
The following discussion and analysis compares the results of operations for the three-month period ended on November 30, 20172020 with the three-month period ended on November 30, 20162019 and should be read in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this report. Unless otherwise noted, all tables on the following pages present U.S. dollar amounts in thousands. Certain percentages presented are calculated using actual results prior to rounding.
Net Merchandise Sales
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Net Warehouse Club Sales
The following tables indicate the net warehousemerchandise club sales in the segments in which we operate and the percentage growth in net warehouse clubmerchandise sales by segment during the three months ended November 30, 20172020 and 2016.2019.
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| % of net |
| Increase/ |
| Change |
| Amount |
| % of net | Amount | % of net | Increase | Change | Amount | % of net | ||||||||||||||||||
Central America |
| $ | 443,667 |
| 59.5 | % |
| $ | 13,495 |
| 3.1 | % |
| $ | 430,172 |
| 60.1 | % | $ | 485,040 | 57.8 | % | $ | 28,289 | 6.2 | % | $ | 456,751 | 58.6 | % | ||||||
Caribbean |
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| 211,439 |
| 28.4 | % |
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| 7,534 |
| 3.7 | % |
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| 203,905 |
| 28.5 | % | 254,606 | 30.4 | 23,455 | 10.1 | 231,151 | 29.7 | ||||||||||||
Colombia |
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| 90,295 |
| 12.1 | % |
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| 8,293 |
| 10.1 | % |
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| 82,002 |
| 11.4 | % | 98,723 | 11.8 | 7,897 | 8.7 | 90,826 | 11.7 | ||||||||||||
Net warehouse club sales |
| $ | 745,401 |
| 100.0 | % |
| $ | 29,322 |
| 4.1 | % |
| $ | 716,079 |
| 100.0 | % | ||||||||||||||||||
Net merchandise sales | $ | 838,369 | 100.0 | % | $ | 59,641 | 7.7 | % | $ | 778,728 | 100.0 | % | ||||||||||||||||||||||||
Comparison of Three Months Ended November 30, 20172020 and 20162019
Overall, total net warehousemerchandise sales growth of 4.1%grew 7.7% for the first quarter ended November 30, 2020 compared to the same quarter in the prior year. The increase resulted from a 4.6%15.9% increase in transactions andaverage ticket, partially offset by a 0.5%7.1% decrease in transactions. Transactions represent the total number of visits our members make to our warehouse clubs and Click & Go™ curbside pickup and delivery service transactions. Average ticket represents the amount our members spend on each visit or Click & Go™ order.
During the first quarter of fiscal year 2021, net merchandise sales were positively impacted by a higher average ticket.ticket for the period, but the number of transactions decreased in comparison to the three-month period ended November 30, 2019, as the COVID-19 pandemic has reduced the number of visits our members make due to governmental restrictions and/or health concerns regarding the virus. In addition, during the last week of November 2020, we held our Smart Week promotion across all of our markets for an entire week, compared to the Smart Weekend promotion we held only in the Caribbean segment for one weekend the previous year. Lastly, we had 46 clubs in operation as of November 30, 2020 compared to 45 clubs as of November 30, 2019. Two of our warehouse clubs opened in late October and mid-November of 2019 and therefore, had sales activity for an entire quarter in the current fiscal year compared to only a partial quarter in the comparable prior year period.
Net warehousemerchandise sales in our Central America segment increased 3.1%6.2% for the first quarter ended November 30, 2020 compared to the same period last year. This increase had a 370 basis point (3.7%) positive impact on total net merchandise sales growth. All of the growth in this market is attributable to the three new clubs in this segment that were not open for the entire quarter in the comparable prior year period.
Net merchandise sales in our Caribbean segment grew 10.1% for the first quarter ended November 30, 2020 compared to the same period last year. This increase had a 300 basis point (3.0%) positive impact on total net merchandise sales growth. Our Dominican Republic and Trinidad markets led the way in this segment with 18.4% and 11.9% growth, respectively. Both markets have continued to perform well in the current COVID-19 pandemic, despite our Dominican Republic market experiencing significant foreign currency devaluation compared to the prior year period.
Net merchandise sales in our Colombia segment increased 8.7% for the first quarter ended November 30, 2020 compared to the same period last year. The increase for the three-month period had a 100 basis point (1.0%) positive impact on total net merchandise sales growth. Although the traffic decreased during the first quarter of fiscal year 2018, with2021 compared to the additionsame three-month period of the Santa Anaprior year, average ticket increased considerably. Relative to some of our other large markets, Colombia had a much smaller decrease in traffic during the first three months of fiscal 2021 as the COVID-19 related restrictions eased during the period and members returned to more normalized shopping patterns in our warehouse club which openedclubs.
The following table indicates the impact that currency exchange rates had on our net merchandise sales in October contributingdollars and the percentage change from the three-month period ended November 30, 2020. The term “currency exchange rates” refers to the currency exchange rates we use to convert net merchandise and comparable net merchandise sales for all countries where the functional currency is not the U.S. dollar into U.S. dollars. We calculate the effect of changes in currency exchange rates as the difference between current period activities translated using the current period’s currency exchange rates and the comparable prior year period’s currency exchange rates. We believe the disclosure of the effects of currency exchange rate fluctuations on our results permits investors to understand better the Company’s underlying performance.
Currency exchange rate fluctuations for the | ||||||
Three months ended | ||||||
November 30, 2020 | ||||||
Amount | % change | |||||
Central America | $ | (7,463) | (1.7) | % | ||
Caribbean | (10,264) | (4.4) | ||||
Colombia | (9,701) | (10.7) | ||||
Net merchandise sales | $ | (27,428) | (3.5) | % | ||
Overall, the effects of currency fluctuations within our markets had an overall positiveapproximate $27.4 million, or 350 basis point (3.5%), negative impact on net merchandise sales growthfor quarter ended November 30, 2020.
Currency fluctuations had a $7.5 million, or 170 basis point (1.7%), negative impact on net merchandise sales in our Central America segment for the three months ended November 30, 2020. The currency fluctuations contributed approximately 100 basis points (1.0%) of the total negative impact on total net merchandise sales. This is primarily due to the Costa Rica. PanamaRica market currency devaluation when compared to the same period a year ago.
Currency devaluations had a $10.3 million, or 440 basis point (4.4%), negative impact on net merchandise sales were essentially flat, but all other Central American countries recorded positive growth in warehouseour Caribbean segment for the three months ended November 30, 2020. The currency devaluations contributed approximately 130 basis points (1.3%) of the total negative impact on total net merchandise sales for the three-month period.
Our Caribbean segment showed improvement in sales growth fromquarter. Jamaica and the past few quarters. While Trinidad, our largest market in the segment, was essentially flat, this was an improvement from negative sales growthDominican Republic markets both experienced in each of the prior four quarters. All other countries in the segment recorded positive sales growth, including Barbados which, like Trinidad, had negative sales growth in each of the previous four quarters. Sales in the Company’s USVI warehouse club grew 15.3% for the quarter. Despite significant business interruption in September duecurrency devaluation when compared to the hurricanes that hit the island, the return to normal operations in October and November resulted in strong sales as some other retailers in the market have not recovered.same period last year.
Currency devaluations had a $9.7 million, or 1,070 basis point (10.7%), negative impact on net merchandise sales in our Colombia segment experienced growth of 10.1% for the three-month period comparedthree months ended November 30, 2020. The currency devaluations contributed approximately 120 basis points (1.2%) to a year ago. With the stabilization of the exchange rate between the Colombian peso and the U.S. dollar over the past 15 months, we have seen continued sales growth in all of our warehouse clubs in Colombia. Transaction growth of 11.7% accounted for all of the sales increase. Year on year currency changes did not have any materialtotal negative impact on the U.S. dollar reported growth.total net merchandise sales.
Comparable Merchandise Sales
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Comparable Sales
We report comparable warehouse clubnet merchandise sales on a “same week” basis with 13 weeks in each quarter beginning on a Monday and ending on a Sunday. The periods are established at the beginning of the fiscal year to provide as close of a match as possible to the calendar month and quarter that is used for financial reporting purposes. This approach equalizes the number of weekend days and weekdays in each period for improved sales comparison, as we experience higher warehousemerchandise club sales on the weekends. Further, eachEach of the warehouse clubs used in the calculations was open for at least 13 ½ calendar months before its results for the current period were compared with its results for the prior period. For example,As a result, sales related to two of our four warehouse clubs opened during calendar year 2019 and the warehouseone club opened in Colombia in September 2016 were not used in the calculation of comparable sales until November 2017. Sales related to the warehouse opened in Costa Rica in October 2017during calendar year 2020, will not be used in the calculation of comparable sales until December 2018.they have been open for at least 13 ½ months. Therefore, comparable net merchandise sales include 43 warehouse clubs for the thirteen week period ended November 29, 2020.
The following tables indicate the comparable net warehouse clubmerchandise sales in the reportable segments in which we operate and the percentage growthchanges in net warehouse clubmerchandise sales by segment during fiscal years 2017the thirteen-week period ended November 29, 2020 and 2016.December 1, 2019.
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| November 30, 2016 |
| November 29, 2020 | December 1, 2019 | ||||||
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| % Increase/(decrease) |
| % Increase/(decrease) |
| % Increase/(decrease) in comparable net merchandise sales | % Increase/(decrease) in comparable net merchandise sales | ||||||
Central America |
| (0.1) | % |
| 0.7 | % |
| (0.7) | % | 1.8 | % | ||
Caribbean |
| 3.3 | % |
| (2.8) | % |
| 9.9 | 2.1 | ||||
Colombia |
| 11.3 | % |
| 4.3 | % |
| 8.6 | (5.2) | ||||
Consolidated segments |
| 2.2 | % |
| — | % |
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Consolidated comparable net merchandise sales | 3.6 | % | 1.0 | % | |||||||||
Comparison of Three MonthsThirteen-Week Periods Ended November 30, 201729, 2020 and 2016December 1, 2019
Comparable warehouse clubnet merchandise sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the 13-weekthirteen-week period ended December 3, 2017 grew 2.2%November 29, 2020 increased 3.6%.
Comparable net merchandise sales in our Central America segment decreased 0.7% for the thirteen-week period ended November 29, 2020. This decrease contributed approximately 40 basis points (0.4%) of negative impact in total comparable warehouse clubmerchandise sales.
For the thirteen weeks ended November 29, 2020, strong performance in our Honduras, El Salvador and Nicaragua markets, contributed approximately 150 basis points (1.5%) of positive impact on the segments comparable net merchandise sales, were impactedwhich was offset by the opening of the Company’s seventh warehouse cluba 190 basis point (1.9%) decrease in Panama, Costa Rica, in an area called Santa Ana. Often times, new warehouse clubs that we open are not farand Guatemala. During the quarter, Panama and Guatemala experienced sales transfers from existing warehouse clubs that are included in the calculation for comparable warehouse clubnet merchandise sales resulting in a transfer of some sales from an existing club (in this case Escazu) to the new club. This transfer of sales from existing warehouse clubs that are included in the calculation of comparable warehouse club sales to new warehouse clubs that are not included in the calculation, can have an adverseand Costa Rica experienced foreign exchange headwinds, with the Costa Rica Colón devaluing versus the comparable prior year period.
Comparable net merchandise sales in our Caribbean segment increased 9.9% for the thirteen-week period ended November 29, 2020. This increase contributed approximately 300 basis points (3.0%) of positive impact in total comparable merchandise sales.
For the thirteen weeks ended November 29, 2020, most of the markets in our Caribbean segment showed double-digit comparable sales growth compared to the same period in the prior year. Trinidad and the Dominican Republic contributed 270 basis points (2.7%) of positive impact on reportedthe segment. Up through this quarter, both markets performed well in the current COVID-19 pandemic, despite a significant foreign currency exchange devaluation compared to the prior year period in the Dominican Republic.
Comparable net merchandise sales in our Colombia segment increased 8.6% for the thirteen-week period ended November 29, 2020. This increase contributed approximately 100 basis points (1.0%) of positive impact in total comparable
merchandise sales. Average ticket grew compared to the prior year three-month period and is the primary driver of the increase as COVID-19 restrictions eased during the period and members were more easily able to shop in our warehouse club sales. We estimateclubs.
The following tables illustrate the impact that changes in foreign currency exchange rates had on our comparable merchandise sales in dollars and the transferpercentage change from the thirteen-week period ended November 29, 2020.
Currency Exchange Rate Fluctuations for the | ||||||
Thirteen Weeks Ended | ||||||
November 29, 2020 | ||||||
Amount | % change | |||||
Central America | $ | (7,206) | (1.6) | % | ||
Caribbean | (10,253) | (4.4) | ||||
Colombia | (9,533) | (10.5) | ||||
Consolidated comparable net merchandise sales | $ | (26,992) | (3.5) | % | ||
Overall, the mix of sales associated with the Santa Ana opening negatively impacted thecurrency fluctuations within our markets had an approximate $27.0 million, or 350 basis point (3.5%), negative impact on comparable warehouse clubnet merchandise sales for the thirteen-week period ended November 29, 2020.
Currency fluctuations within our Central America segment by 150accounted for approximately 90 basis points (1.50%(0.9%) of negative impact in total comparable merchandise sales for the thirteen-week period. New warehouse clubs attract new members from areas not previously served by us and also create the opportunity for some existing members, particularly those who now find the new clubs closer to their homes, to shop more frequently.
The Caribbean segmentOur Costa Rica market experienced positive comparable warehouse sales on improving conditions in all marketscurrency devaluation when compared to the past few quarters, aided by strong growth in USVI.same period last year.
The calculationCurrency devaluations within our Caribbean segment accounted for approximately 130 basis points (1.3%) of the negative impact on total comparable warehouse clubmerchandise sales infor the thirteen-week period ended November 29, 2020. Our Dominican Republic and Jamaica markets experienced currency devaluation when compared to the same period last year.
Currency devaluations within our Colombia includedsegment accounted for approximately 130 basis points (1.3%) of the Chia warehouse clubnegative impact on total comparable merchandise sales for five weeks in the 13-weekthirteen-week period ending December 3, 2017. ended November 29, 2020. This reflects the devaluation of the Colombian peso when compared to the same period a year ago.
35
Membership Income
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| Three Months Ended | |||||||||||||
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| November 30, |
| November 30, | |||||||||||
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| 2017 |
| 2016 | |||||||||||
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| Amount |
| Increase/ |
| % Change |
| Membership income % to net warehouse club sales |
| Amount | |||||
Membership income - Central America |
| $ | 7,694 |
| $ | 381 |
| 5.2 | % |
| 1.7 | % |
| $ | 7,313 |
Membership income - Caribbean |
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| 3,018 |
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| 65 |
| 2.2 |
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| 1.4 |
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|
| 2,953 |
Membership income - Colombia |
|
| 1,663 |
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| 219 |
| 15.2 |
|
| 1.8 |
|
|
| 1,444 |
Membership income - Total |
| $ | 12,375 |
| $ | 665 |
| 5.7 | % |
| 1.7 | % |
| $ | 11,710 |
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Number of accounts - Central America |
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| 831,906 |
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| 24,572 |
| 3.0 | % |
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| 807,334 |
Number of accounts - Caribbean |
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| 393,397 |
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| 1,338 |
| 0.3 |
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| 392,059 |
Number of accounts - Colombia |
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| 318,680 |
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| 18,395 |
| 6.1 |
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| 300,285 |
Number of accounts - Total |
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| 1,543,983 |
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| 44,305 |
| 3.0 | % |
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| 1,499,678 |
Comparison of Three Months Ended November 30, 2017 and 2016
Membership income is recognized ratably over the one-year life of the membership. The increase in membership income primarily reflects a growth in membership accounts for which income is recognized during the last twelve months. The average number of member accounts during the first quarter of fiscal year 2018 was 2.7% higher than during the same period a year ago. The income recognized per average member account increased 2.9%. In February 2017, we increased the annual membership fee in Colombia by 15.4% to COP 75,000, which had the effect of increasing the membership income per average membership account in Colombia by 9.0% in the quarter compared to the first quarter of last year.
Three Months Ended | |||||||||||||||
November 30, | November 30, | ||||||||||||||
2020 | 2019 | ||||||||||||||
Amount | Increase (decrease) from prior year | % Change | Membership | Amount | |||||||||||
Membership income - Central America | $ | 7,875 | $ | (421) | (5.1) | % | 1.6 | % | $ | 8,296 | |||||
Membership income - Caribbean | 3,711 | 34 | 0.9 | 1.5 | 3,677 | ||||||||||
Membership income - Colombia | 1,713 | (60) | (3.4) | 1.7 | 1,773 | ||||||||||
Membership income - Total | $ | 13,299 | $ | (447) | (3.3) | % | 1.6 | % | $ | 13,746 | |||||
Number of accounts - Central America | 839,387 | (30,286) | (3.5) | % | 869,673 | ||||||||||
Number of accounts - Caribbean | 427,871 | (8,222) | (1.9) | 436,093 | |||||||||||
Number of accounts - Colombia | 314,160 | (23,863) | (7.1) | 338,023 | |||||||||||
Number of accounts - Total | 1,581,418 | (62,371) | (3.8) | % | 1,643,789 | ||||||||||
Results of Operations
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| Three Months Ended | ||||||||||
Results of Operations Consolidated |
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| November 30, 2017 |
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| November 30, 2016 |
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| Increase/(Decrease) |
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(Amounts in thousands, except percentages and |
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Net warehouse club sales |
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Net warehouse club sales |
| $ | 745,401 |
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| $ | 716,079 |
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| $ | 29,322 |
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Warehouse club sales gross margin |
| $ | 108,165 |
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| $ | 107,589 |
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| $ | 576 |
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Warehouse club gross margin percentage |
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| 14.5 | % |
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| 15.0 | % |
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| (0.5) | % |
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Revenues |
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Total revenues |
| $ | 767,072 |
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| $ | 739,572 |
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| $ | 27,500 |
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Percentage change from comparable period |
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| 3.7 | % |
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Comparable warehouse club sales |
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Total comparable warehouse club sales increase (decrease) |
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| 2.2 | % |
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| — | % |
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| 2.2 | % |
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Gross margin |
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Total gross margin |
| $ | 122,087 |
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| $ | 120,901 |
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| $ | 1,186 |
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Gross margin percentage to total revenues |
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| 15.9 | % |
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| 16.3 | % |
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| (0.4) | % |
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Selling, general and administrative |
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Selling, general and administrative |
| $ | 88,921 |
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| $ | 82,522 |
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| $ | 6,399 |
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Selling, general and administrative percentage of total revenues |
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| 11.6 | % |
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| 11.2 | % |
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| 0.4 | % |
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Operating income- by segment |
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Operating income - Central America |
| $ | 31,942 |
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| $ | 33,504 |
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| $ | (1,562) |
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Operating income - Caribbean |
| $ | 11,470 |
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| $ | 12,214 |
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| $ | (744) |
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Operating income - Colombia |
| $ | 2,145 |
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| $ | 913 |
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| $ | 1,232 |
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Operating Income - United States |
| $ | 3,739 |
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| $ | 7,597 |
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| $ | (3,858) |
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Reconciling Items (1) |
| $ | (16,130) |
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| $ | (15,849) |
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| $ | (281) |
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Operating income - Total |
| $ | 33,166 |
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| $ | 38,379 |
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| $ | (5,213) |
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Operating income as a percentage of total revenues |
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| 4.3 | % |
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| 5.2 | % |
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| (0.9) | % |
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Warehouse clubs |
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Warehouse clubs at period end |
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| 40 |
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| 39 |
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| 1 |
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Warehouse club square feet at period end (2) |
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| 1,998 |
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| 1,940 |
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| 58 |
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Comparison of Three Months Ended November 30, 20172020 and 20162019
The number of member accounts as of November 30, 2020 was 3.8% lower than the prior year period. Membership income decreased 3.3% over the three month period ended November 30, 2020, compared to the prior-year period.
Membership income declined in Central America and Colombia while staying flat in our Caribbean segment due to a declining membership base in the second half of fiscal year 2020 as a result of lower member traffic in our clubs during the COVID-19 pandemic. Although the membership base is down compared to the comparable prior-year period, we have seen incremental increases in our membership base since the end of our last fiscal year. Since August 31, 2020, all segments have increased their membership base. Colombia had the largest increase in membership base in the first quarter with 3.7% growth, followed by Central America with a 1.3% increase and the Caribbean with a 0.3% increase.
We began offering our Platinum membership program in Nicaragua in October 2020 and we intend to expand our Platinum membership program to our one remaining market this fiscal year. The annual fee for a Platinum membership in most markets is approximately $75. The Platinum membership program provides members with a 2% rebate on most items, up to an annual maximum of $500. We record the 2% rebate as a reduction on net merchandise sales at the time of the sales transaction.
Our trailing twelve-month renewal rate was 81.9% and 86.1% for the periods ended November 30, 2020 and November 30, 2019, respectively. Historically, membership renewals have been transacted primarily at the registers in the club at the time of purchase of merchandise or services when a membership has expired. The renewal rate decline contributed to the overall decrease in membership accounts of 3.8% over the same period because of a significant decline of in-club traffic in some of our markets due to governmental COVID-19 movement restrictions on their respective general populaces. Reductions in in-club traffic resulting from the COVID-19 pandemic and a notable increase in online traffic due to our launch of a new online catalogue and Click & Go™ services have driven increased sign-ups and renewals completed online. Approximately 11% and 2% of our membership sign-ups were completed using our online platform for the periods ended November 30, 2020 and 2019, respectively. Our online platform facilitates capturing data and provides the opportunity for automatic renewal of memberships.
Other Revenue
Other revenue primarily consists of non-merchandise revenue from freight and handling fees generated from our marketplace and casillero operations, interest-generating portfolio from our co-branded credit cards, and rental income from operating leases where the Company is the lessor.
Three Months Ended | ||||||||||||
November 30, 2020 | November 30, 2019 | |||||||||||
Amount | Increase (decrease) from prior year | % Change | Amount | |||||||||
Non-merchandise revenue | $ | 12,655 | $ | 3,810 | 43.1 | % | $ | 8,845 | ||||
Miscellaneous income | 1,497 | (112) | (7.0) | 1,609 | ||||||||
Rental income | 731 | (8) | (1.1) | 739 | ||||||||
Other revenue | $ | 14,883 | $ | 3,690 | 33.0 | % | $ | 11,193 | ||||
Comparison of Three Months Ended November 30, 2020 and 2019
Other revenue for the three months ended November 30, 2020 includes non-merchandise revenue generated by the marketplace and casillero operations of a company we acquired in March 2018, primarily from freight and handling charges for online orders placed from customers in Latin America to retailers in the United States and delivered to locations throughout Latin America. The primary driver of the $3.7 million increase in other revenue is due to a $3.8 million increase in non-merchandise revenue compared to the prior year from higher package volume in our marketplace and casillero operations during the current quarter compared to the comparable prior year period.
Results of Operations
Three Months Ended | ||||||||||||
Results of Operations Consolidated | November 30, 2020 | November 30, 2019 | Increase/(Decrease) | |||||||||
(Amounts in thousands, except percentages and | ||||||||||||
Net merchandise sales | ||||||||||||
Net merchandise sales | $ | 838,369 | $ | 778,728 | $ | 59,641 | ||||||
Total gross margin | $ | 134,750 | $ | 116,004 | $ | 18,746 | ||||||
Total gross margin percentage | 16.1 | % | 14.9 | % | 1.2 | % | ||||||
Revenues | ||||||||||||
Total revenues | $ | 877,432 | $ | 811,941 | $ | 65,491 | ||||||
Percentage change from prior period | 8.1 | % | ||||||||||
Comparable net merchandise sales | ||||||||||||
Total comparable net merchandise sales increase | 3.6 | % | 1.0 | % | 2.6 | % | ||||||
Total revenue margin | ||||||||||||
Total revenue margin | $ | 157,556 | $ | 136,995 | $ | 20,561 | ||||||
Total revenue margin percentage | 18.0 | % | 16.9 | % | 1.1 | % | ||||||
Selling, general and administrative | ||||||||||||
Selling, general and administrative | $ | 113,025 | $ | 106,281 | $ | 6,744 | ||||||
Selling, general and administrative percentage of total revenues | 12.9 | % | 13.1 | % | (0.2) | % | ||||||
Warehouse clubs | ||||||||||||
Warehouse clubs at period end | 46 | 45 | 1 | |||||||||
Warehouse club sales square feet at period end | $ | 2,267 | $ | 2,244 | $ | 23 | ||||||
Three Months Ended | ||||||||||||
November 30, | % of | November 30, | % of | |||||||||
Results of Operations Consolidated | 2020 | Total Revenue | 2019 | Total Revenue | ||||||||
Operating income - by segment | ||||||||||||
Central America | $ | 34,445 | 3.9 | % | $ | 31,700 | 3.9 | % | ||||
Caribbean | 21,594 | 2.5 | 11,810 | 1.5 | ||||||||
Colombia | 5,565 | 0.6 | 4,524 | 0.6 | ||||||||
United States | 5,742 | 0.7 | 2,587 | 0.3 | ||||||||
Reconciling Items (1) | (22,815) | (2.6) | (19,907) | (2.5) | ||||||||
Operating income - Total | $ | 44,531 | 5.1 | % | $ | 30,714 | 3.8 | % | ||||
(1)The reconciling items reflect the amount eliminated upon consolidation of intersegment transactions.
The following table summarizes the selling, general and administrative expense for the periods disclosed.
Three Months Ended | ||||||||||||
November 30, | % of | November 30, | % of | |||||||||
2020 | Total Revenue | 2019 | Total Revenue | |||||||||
Warehouse club and other operations | $ | 84,832 | 9.7 | % | $ | 79,373 | 9.8 | % | ||||
General and administrative | 27,521 | 3.1 | 25,884 | 3.2 | ||||||||
Pre-opening expenses | 602 | 0.1 | 953 | 0.1 | ||||||||
Loss on disposal of assets | 70 | — | 71 | — | ||||||||
Total Selling, general and administrative | $ | 113,025 | 12.9 | % | $ | 106,281 | 13.1 | % | ||||
Comparison of Three Months Ended November 30, 2020 and 2019
Total gross margin is derived from our Revenue – Net merchandise sales less our Cost of goods sold – Net merchandise sales and represents our sales and cost of sales generated from the business activities of our warehouse clubs. We express our Total gross margin percentage as a percentage of our Net merchandise sales.
On a consolidated basis, warehouse clubtotal gross margin for the three months ended November 30, 2020 was 16.1%, 120 basis points (1.2%) higher than the comparable prior year period. Approximately half of this increase is due to certain pricing actions we took to offset foreign currency exchange costs. In particular, we substantially increased the liquidity premium we factor into our sales prices in Trinidad on our imported merchandise, as we continue to experience a shortage of available U.S. dollars for exchange in that market. Refer to “Item 2. Management’s Discussion & Analysis – Factors Affecting Our Business” for additional discussion. The rest of this improvement is primarily attributable to more focused merchandising strategies and inventory management that primarily resulted from fewer markdowns. Total gross margins as a percent of net warehouse sales were generally in lineincreased across all segments with the past three fiscal quarters at 14.5%, although 51 basis points (0.51%) below the first quarter of fiscal year 2017 which was unusually high at 15.0%. Exit costs associated with our leased distribution facility in Miami and merchandise labeling activity reduced consolidated margins by 8 basis points compared to a year ago, and warehouse club margins were lower in the Central America and Caribbean segments by 31segment contributing 70 basis points (0.31%(0.7%), the Caribbean segment contributing 40 basis points (0.4%), and the Colombia segment contributing 10 basis points (0.1%) to the overall increase.
Total revenue margin is derived from Total revenues, which includes our Net merchandise sales, Membership income, Export sales, and Other revenue and income less our Cost of goods sold for net merchandise sales, Export sales, and Non-merchandise revenues. We express our Total revenue margin as percentage of Total revenues.
Total revenue margin increased 110 basis points (1.1%) for the three-month period presented, which is the result of the higher total gross margins 120 basis points (1.2%) and 26higher revenue margins from our casillero and marketplace business in the quarter of 20 basis points (0.26%(0.2%), respectively, largely from pricing actions to drive sales. Colombia’s margins increased 62. This increase was offset by 20 basis points (0.62%(0.2%). from lower membership income and 10 basis points (0.1%) from fewer margin dollars as a percentage of total revenue from our export sales business.
Selling, general, and administrative expenses consist of warehouse club and other operations, general and administrative expenses, pre-opening expenses, and loss/(gain)loss on disposal of assets. In total, selling, general and administrative expenses increased $6.4$6.7 million to 11.6% of sales compared to 11.2%the prior year but decreased as a percentage of salestotal revenue, declining 20 basis points (0.2%) to 12.9% of total revenues compared to 13.1% of total revenues in the first quarter of fiscal year 2017. 2020.
Warehouse club and other operations expense was 9.3%expenses decreased to 9.7% of sales compared 9.1% a year ago. The added cost of the new warehouse club in Santa Ana, Costa Rica added
37
approximately 10 basis points, and hurricane-related costs, including support payments made to our employees in our St. Thomas, USVI club added another 5 basis points. Colombia continued to see a positive trend with a 46 basis point (0.46%) improvement in warehouse club operations expense as a percent of salestotal revenues compared to same three months in fiscal year 2017. General and administrative expenses grew 12.1% from9.8% for the first quarter of fiscal year 20172020. Higher comparable sales growth resulted in a lower warehouse club operations expense ratio in Colombia, Trinidad and 4% sequentiallythe Dominican Republic. These savings were offset by the lower comparable sales growth in Panama, Guatemala, Costa Rica, and Honduras, which had increased warehouse expenses as a percent of sales. Panama, Guatemala, and Costa Rica all have new clubs that had not reached sales maturity as of November 30, 2020, thus increasing the operational expense ratios in those markets.
General and administrative expenses decreased to 3.1% of total revenues compared to 3.2% for the first quarter of fiscal year 2020. The 10 basis point (0.1%) decrease as a percentage of total revenue is primarily a result of improved leverage from the prior8.1% consolidated revenue growth quarter over quarter. The Company continuestotal increase in general and administrative expenses of $1.6 million is primarily due to grow our buying staffcontinued investments to support our technology development, talent acquisition, and is now increasingly investing in efforts to evaluate and develop technologies to createemployee development.
Pre-opening expenses, as a seamless omni-channel experience for our members in the future with expected $3.0 million to $5.0 million spendingpercentage of total revenues, remained flat at 0.1% for the current fiscal year,three-month periods ended November 30, 2020 and November 30, 2019.
Operating income in the first quarter. Expenses incurred before a warehouse club is in operation are captured in pre-opening expenses and during the first three monthsquarter of fiscal year 2018 included preopening expenses for Santa Ana, Costa Rica. Preopening expenses for the same three months2021 increased to $44.5 million (5.1% of fiscal year 2017 included the preopening expenses for Chia, Colombia.
Operating income decreased to $33.2 million for the three months ended November 30, 2017total revenue) compared to $38.4$30.7 million (3.8% of total revenue) for the same period last year on loweryear. This reflects the increase in total revenue margin dollars primarily from net merchandise margins assales of 110 basis points (1.1%) and a percent20 basis point (0.2%) increase due to leveraging of sales and higher expenses particularly those related to the addition of a new warehouse club and increased corporate-levelselling, general and administrative expenses. Higher net warehouse sales and membership income and increased warehouse club gross margins resulted in a $1.2 millionexpenses over the comparable prior-year period. These were the primary factors for the overall 130 basis point (1.3%) as percentage of total revenue increase in operating profit in Colombia compared to a year ago, while operating profit decreased in other segments on lower merchandise margins, along with new club expenses (Central America), hurricane related costs (Caribbean) and higher corporate spending (United States). Operating profit was also adversely impacted by exit costs associated with our leased facility in Miami (which were recorded to warehouse club costs of goods sold) and a higher level of merchandise labeling activity due to the volume of shipments flowing through Miami to support the upcoming holiday season. income.
Interest Expense
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| Three Months Ended | |||||||
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| November 30, |
| November 30, | |||||
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| 2017 |
| 2016 | |||||
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| Amount |
| Increase/ |
| Amount | |||
Interest expense on loans |
| $ | 1,191 |
| $ | (228) |
| $ | 1,419 |
Interest expense related to hedging activity |
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| 322 |
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| (101) |
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| 423 |
Less: Capitalized interest |
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| 258 |
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| 70 |
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| 188 |
Net interest expense |
| $ | 1,255 |
| $ | (399) |
| $ | 1,654 |
Comparison of Three Months Ended November 30, 2017 and 2016
InterestNet interest expense reflects borrowings by PriceSmart, Inc. and our wholly owned foreign subsidiaries to finance new land acquisition and construction for new warehouse clubs, warehouse club expansions and distribution centers, warehouse club and distribution center expansions, the capital requirements of warehouse club and other operations and ongoing working capital requirements.
Interest
Three Months Ended | |||||||||
November 30, | November 30, | ||||||||
2020 | 2019 | ||||||||
Amount | Change | Amount | |||||||
Interest expense on loans | $ | 1,725 | $ | 460 | $ | 1,265 | |||
Interest expense related to hedging activity | 925 | 664 | 261 | ||||||
Less: Capitalized interest | (617) | 47 | (664) | ||||||
Net interest expense | $ | 2,033 | $ | 1,171 | $ | 862 | |||
Comparison of Three Months Ended November 30, 2020 and 2019
Net interest expense increased for the three-month period ended November 30, 2020 primarily due to higher average long-term loan balances to fund our capital projects and recent drawdowns on loans decreased year-on-year. An increase year-on-year in long-term debtshort-term lines of approximately $14.1 million, primarily to finance the acquisition of the distribution center in Miami, Florida and an additional loan within our Trinidad subsidiarycredit as part of our COVID-19 related efforts to improve liquidity, were offset by decreasessecure cash. The increase in the payments on various loans held by our subsidiaries. Additionally, interest expense related to hedging activity decreased in the first quarter of fiscal year 2018 compared to the first quarter of fiscal year 2017 due to the pay-offis a result of the variousincremental loans held byand their related cross-currency interest rate hedges for our subsidiaries that were hedged. Additionally, an increase in capitalized interest in the first quarter of fiscal year 2018 compared to the first quarter of fiscal year 2017 resulted from higher levels of construction activities. Colombia subsidiary.
Other expense, net
38
Other Income (Expense),expense, net,
Other income consists of currency gaingains or loss.losses, as well as net benefit costs related to our defined benefit plans and the receipt of a one-time indemnification payment from a business combination escrow account.
Three Months Ended | ||||||||||||
November 30, | November 30, | |||||||||||
2020 | 2019 | |||||||||||
Amount | Increase from prior year | % Change | Amount | |||||||||
Other expense, net | $ | (1,545) | $ | (560) | 56.9 | % | $ | (985) | ||||
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| Three Months Ended | ||||||||||
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| November 30, |
| November 30, | ||||||||
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| 2017 |
| 2016 | ||||||||
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| Amount |
| Increase from prior year |
| %Change |
| Amount | ||||
Other income (expense), net |
| $ | 278 |
| $ | 1,206 |
| 130.0 | % |
| $ | (928) |
Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses), are recorded as currency gains or losses.
Receipts Additionally, gains or losses from insurance reimbursements up totransactions denominated in currencies other that the amountfunctional currency of the losses recognized are considered recoveries. These recoveries are accounted for when they are probable of receipt. Insurance recoveries are not recognized prior to the recognition of the related cost. Anticipated proceeds in excess of the amount of loss recognized are consideredrespective entity also generate currency gains and are subject to gain contingency guidance. Anticipated proceeds in excess of a loss recognized in the financial statements are not recognized until all contingencies related to the insurance claim are resolved.or losses.
Comparison of Three Months Ended November 30, 20172020 and 20162019
For the three-month period we hadended November 30, 2020 the primary driver of Other expense, net included a net gain$1.5 million loss associated with foreign currency transactions. Thesetransactions and the revaluation of monetary assets and liabilities in several of our markets. The foreign currency gains and losses resulted from the revaluation of net U.S. dollar assets and liabilities in markets where the local functional currency revalued or devalued against the U.S. dollar, and from exchange transactions, net of any exchange reserve movements. In particular, in Costa Rica and the Dominican Republic, we experiencedtransactions. The primary impacts were from a strengthening of the local currencies relative to the U.S. Dollar. These benefits were offsetJamaican dollar, which resulted in part bya loss recognized on our net USD asset position in that market and from higher transaction costs we continue to incur associated with converting Trinidad dollars into available tradeable currencies such as Euros or Canadian dollars before converting them to U.S. dollars. For so long as that situation continues in Trinidad, we plan to take that additional cost into consideration in our pricing model and will limit our shipments from the U.S. to Trinidad to levels that generally align with our Trinidad subsidiary’s ability to pay for the merchandise in U.S. dollars.
Provision for Income Taxes
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| 2016 | Amount | Increase from prior year | Amount | |||||||||||||||
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| Amount |
| Increase/ |
| Amount | ||||||||||||||||
Current tax expense |
| $ | 10,464 |
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| $ | 11 |
| $ | 10,453 |
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Net deferred tax provision (benefit) |
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| (349) |
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| (1,333) |
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| 984 |
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Provision for income taxes |
| $ | 10,115 |
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| $ | (1,322) |
| $ | 11,437 |
| $ | 13,618 | $ | 4,215 | $ | 9,403 | |||||
Effective tax rate |
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| 31.0 | % |
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| 31.5 | % | 32.9 | % | 32.2 | % | |||||||
39
Comparison of Three Months Ended November 30, 20172020 and 20162019
For the three months ended November 30, 2017,2020, the effective tax rate was 31.0%32.9%. The decreaseincrease in the effective tax rate versus the prior year was primarily attributable to the following factors:
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A comparably favorable net impact of 1.6% resulting from changes in income tax liabilities for uncertain tax positions;
The comparably unfavorable impact of 3.3% in the current period from the effect of changes in foreign currency value and related adjustments; and
A comparably favorable net impact of 1.1% in the current period resulting from the reduced impact of the loss of benefit of foreign tax credits due to the higher income before the provision for income taxes for the quarter.
Other Comprehensive Income (Loss)
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| November 30, | ||||||||
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| 2017 |
| 2016 | ||||||||
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| Amount |
| Increase from prior year |
| % Change |
| Amount | ||||
Other comprehensive income (loss) |
| $ | (1,409) |
| $ | 8,972 |
| (86.4) | % |
| $ | (10,381) |
Three Months Ended | ||||||||||||
November 30, | November 30, | |||||||||||
2020 | 2019 | |||||||||||
Amount | Increase | % Change | Amount | |||||||||
Other comprehensive income (loss) | $ | 3,162 | $ | 6,347 | 199.3 | % | $ | (3,185) | ||||
Comparison of Three Months Ended November 30, 20172020 and 20162019
Our other comprehensive lossincome of approximately $1.4$3.2 million for the first quarter of fiscal year 2018three-months ended November 30, 2020 resulted primarily from the comprehensive lossincome of approximately $2.2$2.8 million from foreign currency translation adjustments related to assets and liabilities and the translation of revenue, costs and expenses on the statements of income of our subsidiaries whose functional currency is not the U.S. dollar. During the first quarter of fiscal year 2021, the largest translation adjustments were related to the appreciation of the local currencies against the U.S. dollar for our Colombia and Jamaica subsidiaries partially offset by comprehensive incomethe translation adjustment for the depreciation of the local currency against the U.S. dollar of our Guatemala and Costa Rica subsidiaries. Additional gains of approximately $587,000$308,000 were related to unrealized gains on changes in our derivative obligations. When the functional currency in our international subsidiaries is the local currency and not U.S. dollars, the assets and liabilities
LIQUIDITY AND CAPITAL RESOURCES
Financial Position and Cash Flow
We requireOur operations have historically supplied us with a significant source of liquidity. Our cash flows provided by operating activities, supplemented with our long-term debt and short-term borrowings, have generally been sufficient to fund our operating expenses and working capital requirements, including investmentsoperations while allowing us to invest in merchandise inventories, acquisitionactivities that support the long-term growth of land and construction of new warehouse clubs and distribution centers, expansion of existing warehouse clubs and distribution centers, acquisitions of fixtures and equipment, routine upgrades and maintenance of fixtures and equipment within existing warehouse clubs, investments in joint ventures in Panama and Costa Rica to own and operate commercial retail centers located adjacent to the new warehouse clubs, the purchase of treasury stock upon the vesting of restricted stock awards and payment of dividends to stockholders. Our primary sources for funding these requirements are cash and cash equivalents on hand, cash generated fromour operations and bank borrowings.to pay dividends on our common stock. We evaluate our funding requirements on a regular basis whether we may need to borrow additional funds to cover any shortfall in our ability to generate sufficient cash from operations to meet our operating and capital requirements. We may obtain additional loans and/or credit facilitiesconsider funding alternatives to provide additional liquidity whenif necessary.
40
The following table summarizes the cashnovel coronavirus outbreak (COVID-19) on our results of operations and cash equivalents held byflows. As a result, we have taken steps to increase cash available on-hand, including, but not limited to, drawing funds on our foreign subsidiariesshort-term facilities. Refer to “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 7 - Debt” for additional information regarding our drawdown on our short-term facilities and domestically (in thousands). long-term borrowings.
Repatriation of cash and cash equivalents held by foreign subsidiaries may require us to accrue and pay taxes. We have no plans at this time to repatriate cash through the payment of cash dividends by our foreign subsidiaries to our domestic operations and, therefore, have not accrued taxes that would be due from repatriation.
The following table summarizes the cash and cash equivalents, including restricted cash, held by our foreign subsidiaries and domestically (in thousands).
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| November 30, |
| August 31, | ||
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| 2017 |
| 2017 | ||
Cash and cash equivalents held by foreign subsidiaries |
| $ | 130,648 |
| $ | 139,270 |
Cash and cash equivalents held domestically |
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| 1,894 |
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| 26,442 |
Total cash and cash equivalents |
| $ | 132,542 |
| $ | 165,712 |
November 30, | August 31, | |||||
2020 | 2020 | |||||
Amounts held by foreign subsidiaries | $ | 174,134 | $ | 203,598 | ||
Amounts held domestically | 38,261 | 100,173 | ||||
Total cash and cash equivalents, including restricted cash | $ | 212,395 | $ | 303,771 | ||
The following table summarizes the short-term investments held by our foreign subsidiaries and domestically (in thousands).
November 30, | August 31, | |||||
2020 | 2020 | |||||
Amounts held by foreign subsidiaries | $ | 73,980 | $ | 46,509 | ||
Amounts held domestically | — | — | ||||
Total short-term investments | $ | 73,980 | $ | 46,509 | ||
As of November 30, 2020 and August 30, 2020, certificates of deposits with a maturity of over a year held by our foreign subsidiaries and domestically were $3.0 million and $1.5 million, respectively.
From time to time, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through warehousemerchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products, increasing our foreign exchange exposure to any devaluation of local currency relative to the U.S. dollar. Duringproducts. Since fiscal year 2017, and continuing into the first three months of fiscal year 2018, we have experienced this situation in Trinidad. We are working with our banks in Trinidad to source tradable currencies (including Euros and Canadian dollars), but until the central bank in Trinidad makes more U.S. dollars available, this illiquidity condition is likely to continue. During part of the first half of fiscal year 2017, we limited shipments of merchandise to Trinidad from our distribution center in Miami to levels that generally aligned with our Trinidad subsidiary’s ability to source U.S. dollars to pay for that merchandise. This resulted in a reduced level of shipments, which negatively affected sales in the second quarter, particularly December 2016, although by less than our initial estimate. These actions did not impact the level of merchandise we obtain locally in Trinidad. Starting in the third quarter of fiscal year 2017, we were able to improve our sourcing of tradeable currencies, which, in addition to other steps we took, allowed for a more normalized flow of imported merchandise during the third and fourth fiscal quarters. Over the past three months, however, we have been unable to source a sufficient level of tradeable currenciescurrencies. We are working with our banks in Trinidad consistent withand government officials to source tradeable currencies. We expect the level of merchandise we were importing for the holiday shopping season. As of November 30, 2017,illiquid market conditions in Trinidad to continue. In addition, our TrinidadBarbados subsidiary had netrecently began facing a similar U.S. dollar denominated liability exposuresliquidity situation. Refer to “Item 2. Management’s Discussion & Analysis – Factors Affecting Our Business” for our quantitative analysis and discussion.
Our cash flows are summarized as follows (in thousands):
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| Three Months Ended | Three Months Ended | ||||||||||||
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| November 30, |
| November 30, | November 30, | November 30, | |||||||||
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| 2017 |
| 2016 | 2020 | 2019 | Decrease | ||||||||
Net cash provided by (used in) operating activities |
| $ | (10,163) |
| $ | 2,115 | $ | (17,773) | $ | 16,104 | $ | (33,877) | |||
Net cash provided by (used in) investing activities |
| (19,732) |
| (17,365) | |||||||||||
Net cash used in investing activities | (50,310) | (45,687) | (4,623) | ||||||||||||
Net cash provided by (used in) financing activities |
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| (5,296) |
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| (7,162) | (22,198) | 37,343 | (59,541) | ||||||
Effect of exchange rates |
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| 2,021 |
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| (1,650) | (1,095) | 1,117 | (2,212) | ||||||
Net increase (decrease) in cash and cash equivalents |
| $ | (33,170) |
| $ | (24,062) | $ | (91,376) | $ | 8,877 | $ | (100,253) | |||
41
OurNet cash used in operating activities totaled $17.8 million and net cash provided by (used in) operating activities for the three months ended November 30, 2017 and 2016 is summarized below:
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| Three Months Ended |
| Increase/ | |||||
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| November 30, |
| November 30, |
| (Decrease) | |||
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| 2017 |
| 2016 |
| 2017 to 2016 | |||
Net income |
| $ | 22,490 |
| $ | 24,869 |
| $ | (2,379) |
Adjustments to reconcile net income to net cash provided from (used in) operating activities: |
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Depreciation and amortization |
|
| 12,237 |
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| 11,117 |
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| 1,120 |
(Gain) loss on sale of property and equipment |
|
| 159 |
|
| 407 |
|
| (248) |
Deferred income taxes |
|
| (349) |
|
| 984 |
|
| (1,333) |
Stock-based compensation expenses |
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| 2,461 |
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| 2,442 |
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| 19 |
Other non-cash operating activities |
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| (16) |
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| — |
|
| (16) |
Net non-cash related expenses |
| $ | 14,492 |
| $ | 14,950 |
| $ | (458) |
Net income from operating activities reconciled for non-cash operating activities |
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| 36,982 |
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| 39,819 |
|
| (2,837) |
Changes in operating assets and liabilities not including merchandise inventories |
|
| 14,322 |
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| 6,378 |
|
| 7,944 |
Changes in merchandise inventories |
|
| (61,467) |
|
| (44,082) |
|
| (17,385) |
Net cash provided by (used in) operating activities |
| $ | (10,163) |
| $ | 2,115 |
| $ | (12,278) |
Net income from operating activities reconciled for non-cash operating activities decreased approximately $2.8was $16.1 million for the three months ended November 30, 20172020 and 2019, respectively. We generate cash from operations primarily through net merchandise sales and membership fees. Cash used in operations generally consist of payments to our merchandise vendors, warehouse operating costs (including payroll, employee benefits and utilities), as well as payments for income taxes. The $33.9 million shift from net cash provided by to net cash used in operating activities was primarily due to a net decrease of $45.4 million from changes in operating assets and liabilities, offset by a net increase of $11.5 million from changes in non-cash reconciling items.
The $45.4 million decrease from changes in operating assets and liabilities is primarily due to decreases in net working capital of $46.2 million, which resulted from a $6.9 million increase from the change in merchandise inventories and a $39.3 million decrease from the change in accounts payable over the same period lastcomparable three-months ended November 30, 2020 and 2019. The increase in merchandise inventories is primarily the result of having two additional clubs in the current year resulting from a year-on-yearas we build up inventory for the holiday shopping season. The accounts payable decrease is largely the result of expiration of temporary extensions of vendor terms negotiated as part of our response to the COVID-19 pandemic. The $11.5 million change in non-cash reconciling items was primarily due to the increase in net income, of approximately $2.4 million indeferred income taxes, stock compensation, and depreciation for the first quarter of fiscal year 2018three-month period ended November 30, 2020 compared to the first quarter of fiscal year 2017 and a decrease in deferred income taxes of $1.3 million quarter-over quarter, due to the improved financial results in the Company’s Colombia subsidiary for which no tax benefit was recognized. These decreases were offset by an increase in depreciation expense of approximately $1.1 million in the first quarter of fiscal year 2018 compared to the first quarter of fiscal year 2017 due to new warehouse club construction and the continued ongoing capital improvements to existing warehouse clubs. In addition to the decrease in net income from operating activities reconciled for non-cash operating activities there was a netprior year.
Net cash usage of $9.4 million primarily related to a higher growth in merchandise inventories during the current three month period compared to the same period a year ago. The Company partially offset this increased inventory with an increase in accounts payable as of November 30, 2017 compared to November 30, 2016 of approximately $8.5 million.
Our use of cashused in investing activities totaled $50.3 million and $45.7 million for the three months ended November 30, 20172020 and 2016 is summarized below:
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| Three Months Ended |
| Increase/ | |||||
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| November 30, |
| (Decrease) | |||
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| 2017 |
| 2016 |
| 2017 to 2016 | |||
Cash used for additions of property and equipment: |
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Deposits for land purchase option agreements |
| $ | — |
| $ | 500 |
| $ | (500) |
Warehouse club and distribution center expansion, construction and land improvements |
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| 6,283 |
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| 1,189 |
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| 5,094 |
Acquisition of fixtures and equipment |
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| 13,469 |
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| 15,784 |
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| (2,315) |
Proceeds from disposals of property and equipment |
|
| (20) |
|
| (108) |
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| 88 |
Net cash flows used by (provided in) investing activities |
| $ | 19,732 |
| $ | 17,365 |
| $ | 2,367 |
Net2019, respectively. Our cash used in investing activities increasedis primarily for the construction of and improvements to our warehouse clubs and management of our cash investments. The $4.6 million increase in cash used in investing activities is primarily the first three monthsresult of fiscal year 2018a net $21.0 million increase in short-term and long-term certificate of deposit purchases and fewer settlements compared to the first three months of fiscal year 2017 by approximately $2.4 million. This was primarily due to ansame three-month period a year-ago. The increase in cash expenditurespurchases and fewer settlements is the result of additional Trinidad dollars we have on-hand and that we have invested into certificates of deposit to generate interest income while we actively work to convert those Trinidad dollars into U.S. dollars as availability allows. Refer to “Item 2. Management’s Discussion and Analysis – Factors Affecting Our Business” for construction activities for a warehouse clubadditional discussion of the current U.S. dollar illiquidity we are experiencing in Santa Ana, Costa Rica that openedmarket.The net increase in September 2017 and construction activities for a warehouse club in Santo Domingo, Dominican Republic that is anticipated to open in the spring of 2018. Continued investments in warehouse club expansionshort-term and long-term certificate of deposits was offset by a $16.4 million decrease in construction expenditures versus the same three-month period a year ago.
Net cash used in financing activities related to warehouse expansions in Guatemala, Honduras, El Salvador, Trinidad and Jamaica during the first three months of fiscal year 2018 also increased period-over-period investing activities.
As of November 30, 2017, we had commitments for capital expenditures for new warehouse club construction for approximately $7.9 million related to our building of a warehouse club in Santo Domingo, Dominican Republic. We expect to spend between $125.0totaled $22.2 million and $140.0 million in capital expenditures for ongoing replacement of equipment, building/leasehold improvements, expansion projects on existing warehouse clubs and land acquisitions during fiscal year 2018. Future capital expenditures will be dependent on the timing of future land purchases and/or warehouse club construction activity.
42
We have entered into land purchase option agreements within our subsidiaries that have not been recorded as commitments, for which we have recorded deposits of approximately $600,000. The land purchase option agreements can generally be canceled at our sole options with the deposits being fully refundable until all permits are issued. We also entered into a land lease option in one of our markets, for which no deposits have been made. We do not have a timetable of when or if we will exercise these land purchase/lease options due to the uncertainty related to the completion of our due diligence reviews. Our due diligence reviews include evaluations of the legal status of the property, the zoning and permitting issues related to acquiring approval for the construction and operation of a warehouse club and any other issues related to the property itself that could render the property unsuitable or limit the property's economic viability as a warehouse club site. If all of these purchase option agreements are exercised, thenet cash use for the acquisition of land would be approximately $20.8 million. We may enter into additional land purchase option agreements in the future.
In January 2017, we finalized our acquisition of a distribution center in Medley, Miami-Dade County, Florida, for a total purchase price of approximately $46.0 million, and we transferred our Miami dry distribution center activities previously located in our leased facilities to this location. This was completed during the third quarter of fiscal year 2017. The Company has terminated and intends to continue to terminate leases with respect to portions of the existing leased Miami distribution facilities or enter into sublease agreements for portions of the leased facilities.
Net cash (used in) provided by financing activities was $37.3 million for the three months ended November 30, 20172020 and 20162019, respectively. We use cash flows provided by financing primarily to fund our working capital needs and our warehouse club expansions and investments. The $59.5 million shift from cash provided by to cash used in financing activities is summarized below:
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| November 30, |
| (Decrease) | |||
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| 2017 |
| 2016 |
| 2017 to 2016 | |||
New bank loans offset by regularly scheduled payments on existing bank loans (loan activities) |
| $ | (7,554) |
| $ | (3,688) |
| $ | (3,866) |
New short-term bank loans, offset by payments |
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| 2,258 |
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| (3,474) |
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| 5,732 |
Net cash provided by (used in) financing activities |
| $ | (5,296) |
| $ | (7,162) |
| $ | 1,866 |
Net cashprimarily the result of a net decrease of proceeds from long-term borrowings of $26.1 million compared to a year ago and short-term loan activities increased approximately $1.9a net decrease of $33.3 million during the first three months of fiscal year 2018 over the first three months of fiscal year 2017. This increase in cash primarily resulted fromprovided by short-term borrowings, compared to the same three-month period a period-over-period increaseyear-ago. We did not enter into any long-term loans and paid down a larger portion of our short-term borrowings in cash from short-term loans, offset by an increase in loan payments of approximately $3.9 million primarily resulting from an early loan payment of approximately $3.0 million within our Trinidad subsidiary.the current quarter compared to a year ago.
The following table summarizes the dividends declared and paid during fiscal year 2017. No dividends have been declared or paid during the first three months of fiscal year 2018. 2020 (amounts are per share).
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Declared |
| Amount |
| Record |
| Date |
| Date |
| Amount |
| Record |
| Date |
| Date |
| Amount | Amount | Record | Date | Amount | Record | Date | Amount | |||||||||||||
2/1/2017 |
| $ | 0.70 |
| 2/15/2017 |
| 2/28/2017 |
| N/A |
| $ | 0.35 |
| 8/15/2017 |
| N/A |
| 8/31/2017 |
| $ | 0.35 | |||||||||||||||||
2/6/2020 |
| $ | 0.70 |
| 2/15/2020 |
| 2/28/2020 |
| $ | 0.35 |
| 8/15/2020 |
| 8/31/2020 |
| $ | 0.35 | |||||||||||||||||||||
We anticipate the ongoing payment of semi-annual dividends in subsequent periods, although the actual declaration of future dividends, the amount of such dividends, and the establishment of record and payment dates is subject to final
determination by the Board of Directors at its discretion after its review of the Company’sour financial performance and anticipated capital requirements.
Financing Activities
In August 2017,requirements, taking into account all relevant factors, including, but not limited to, the Company’s Panama subsidiary paid off its outstanding loan balance of U.S. $13.3 million under a loan agreement entered into with Scotiabank. The Company’s subsidiary also settleduncertainty surrounding the interest rate swap that it had entered into with Scotiabank related to this loan.
On March 31, 2017, the Company's Trinidad subsidiary entered into a loan agreement with Citibank, N.A. The agreement provides for a U.S. $12.0 million loan to be repaid in eight quarterly principal payments plus interest. The interest rate is set at the 90 day LIBOR rate plus 3%. The loan was funded on March 31, 2017.
On January 27, 2017, the Company entered into a 10-year real estate secured loan with MUFG Union Bank, N.A. (“Union Bank”). The loan establishes a credit facility of up to 75% LTVongoing effects of the acquired property at a variable interest rateCOVID-19 pandemic on our results of 30-day LIBOR plus 1.7% for a ten-year term, with monthly principaloperations and interest payments, maturing in 2027. The monthly principal and interest payments begin in April 2019. An initial loan amount of $35.7 million was funded on January 27, 2017. Thecash flows.
43
Company entered into an interest rate hedge on November 7, 2016 with Union Bank for $35.7 million, the notional amount. The Company will receive variable 30-day LIBOR plus 1.7% and pay fixed (3.65%), with an effective date of March 1, 2017 and maturity date of March 1, 2027.
Derivatives
We are exposed to certain risks relating to our ongoing business operations. One risk managed by us using derivative instruments is interest rate risk. To manage interest rate exposure, we enter into hedging transactions (interest rate swaps) using derivative financial instruments. The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the interest payments associated with variable-rate LIBOR loans over the life of the loans. As changes in interest rates impact the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements.
In addition, we are exposed to foreign currency and interest rate cash flow exposure related to non-functional currency long-term debt of two of our wholly owned subsidiaries. To manage foreign currency and interest rate cash flow exposure, these subsidiaries enter into cross-currency interest rate swaps that convert their U.S. dollar denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument. As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedges are intended to offset changes in cash lows attributable to interest rate and foreign exchange movements.
We are also exposed to foreign-currency exchange-rate fluctuations on U.S. dollar denominated liabilities within our international subsidiaries whose functional currency is other than the U.S. dollar. We manage these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts that are intended to offset changes in cash flow attributable to currency exchange movements. The contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by our international subsidiaries whose functional currency is other than the U.S. dollar. We seek to mitigate foreign-currency exchange-rate risk with the use of these contracts and do not intend to engage in speculative transactions. Currently, these contracts do not contain any credit-risk-related contingent features. These contracts do not qualify for derivative hedge accounting. The forward currency hedges are not effective cash flow hedges because the notional amount and maturity date of the forward contract does not coincide with the accounts payable balance and due dates. The hedge ineffectiveness is measured by use of the “hypothetical derivative method,” and we record the changes in the fair value of the forward contract related to the re-measurement of the payable at spot exchange rates as exchange rate gains or losses. The implied interest rate included within the forward contract is reflected in earnings as interest expense.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction is determined to be ineffective. There were no such amounts for the periods reported herein.
44
The following table summarizes agreements for which the Company has recorded cash flow hedge accounting transactions during the three months ended November 30, 2017:
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| Date |
| Derivative |
| Derivative |
| Initial |
| Bank |
| Floating Leg |
| Fixed Rate |
| Settlement |
| Effective | ||
PriceSmart, Inc (1) |
| 7-Nov-16 |
| MUFG Union Bank, N.A. ("Union Bank") |
| Interest rate swap |
| $ | 35,700,000 |
| Union Bank |
| Variable rate 1-month Libor plus 1.7% |
| 3.65 | % |
| 1st day of each month beginning on April 1, 2017 |
| March 1, 2017 - March 1, 2027 |
Costa Rica |
| 28-Aug-15 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 7,500,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 2.50% |
| 7.65 | % |
| 28th day of August, November, February, and May beginning on November 30, 2015 |
| August 28, 2015 - |
Honduras |
| 24-Mar-15 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 8,500,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 3.25% |
| 10.75 | % |
| 24th day of March, June, September, and December beginning on June 24, 2015 |
| March 24,2015 - |
El Salvador |
| 16-Dec-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 4,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.78 | % |
| 29th day of each month beginning on December 29, 2014 |
| December 1, 2014 - |
Colombia |
| 10-Dec-14 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 15,000,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 2.8% |
| 8.25 | % |
| 4th day of March, June, Sept, Dec. beginning on March 4, 2015 |
| December 4, 2014 - |
Panama |
| 9-Dec-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 10,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 5.16 | % |
| 28th day of each month beginning December 29, 2014 |
| November 28, 2014 - |
Honduras |
| 23-Oct-14 |
| Citibank, N.A. ("Citi") |
| Cross currency interest rate swap |
| $ | 5,000,000 |
| Citibank, N.A. |
| Variable rate 3-month Libor plus 3.5% |
| 11.6 | % |
| 22nd day of January, April, July, and October beginning on January 22, 2015 |
| Settled on October 22, 2017 |
Panama |
| 1-Aug-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 5,000,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.89 | % |
| 21st day of each month beginning on September 22, 2014 |
| August 21, 2014 - |
Panama |
| 22-May-14 |
| Bank of Nova Scotia ("Scotiabank") |
| Interest rate swap |
| $ | 3,970,000 |
| Bank of Nova Scotia |
| Variable rate 30-day Libor plus 3.5% |
| 4.98 | % |
| 4th day of each month beginning on June 4, 2014 |
| May 5, 2014 - |
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We measure the fair value for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis during the reporting period. We have designated the interest rate swaps and cross-currency interest rate swap agreements as hedging instruments and have accounted for them under hedge accounting rules. Derivatives listed on the table above were designated as cash flow hedging instruments.
The following table summarizes the effect of the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting and its associated tax effect on accumulated other comprehensive (income) / loss (in thousands):
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| November 30, 2017 |
| August 31, 2017 | ||||||||||||||
Derivatives designated as cash flow hedging instruments |
| Balance Sheet |
| Fair |
| Net Tax |
| Net |
| Fair |
| Net Tax |
| Net | ||||||
Cross-currency interest rate swaps |
| Other non-current assets |
| $ | 2,514 |
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| (938) |
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| 1,576 |
| $ | 2,547 |
| $ | (950) |
| $ | 1,597 |
Interest rate swaps |
| Other non-current assets |
|
| 764 |
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| (272) |
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| 492 |
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| — |
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| — |
|
| — |
Interest rate swaps |
| Other long-term liabilities |
|
| (4) |
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| (3) |
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| (7) |
|
| (231) |
|
| 80 |
|
| (151) |
Cross-currency interest rate swaps |
| Other long-term liabilities |
|
| (342) |
|
| 114 |
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| (228) |
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| (451) |
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| 135 |
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| (316) |
Net fair value of derivatives designated as hedging instruments |
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| $ | 2,932 |
| $ | (1,099) |
| $ | 1,833 |
| $ | 1,865 |
| $ | (735) |
| $ | 1,130 |
From time to time, we enter into non-deliverable forward exchange contracts. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting.
45
The following table summarizes these agreements as of November 30, 2017:
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The following table summarizes the fair value of foreign currency forward contracts that do not qualify for derivative hedge accounting (in thousands):
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Short-Term Borrowings and Long-Term Debt
Short-termOur financing strategy is to ensure liquidity and access to capital markets while minimizing our borrowing costs. The proceeds of these borrowings consistwere or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, acquisitions, and repayment of lines of credit that are secured by certain assets of the Companyexisting debt. Please refer to “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 7 – Debt.”
Derivatives
Please refer to “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 8 – Derivative Instruments and its subsidiaries, which, in some cases, are guaranteed by the Company. The following table summarizes the balances of total facilities, facilities used and facilities available (in thousands):Hedging Activities” for further discussion.
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| Facilities Used |
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| Total Amount |
| Short-term |
| Letters of |
| Facilities |
| Weighted average |
| ||||
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| of Facilities |
| Borrowings |
| Credit |
| Available |
| interest rate |
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November 30, 2017 |
| $ | 69,000 |
| $ | 2,483 |
| $ | 562 |
| $ | 65,955 |
| 4.3 | % |
August 31, 2017 |
| $ | 69,000 |
| $ | — |
| $ | 966 |
| $ | 68,034 |
| — | % |
As of November 30, 2017 and August 31, 2017, the Company had approximately $40.0 million of short-term facilities in the U.S. that require compliance with certain quarterly financial covenants. As of November 30, 2017 and August 31, 2017, the Company was in compliance with respect to these covenants. Each of the facilities expires annually and is normally renewed.
46
The following table provides the changes in our long-term debt for the three months ended November 30, 2017:
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(Amounts in thousands) |
| Current |
| Long-term |
| Total |
| |||
Balances as of August 31, 2017 |
| $ | 18,358 |
| $ | 87,939 |
| $ | 106,297 | (1) |
Repayments of long-term debt |
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| — |
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| (3,000) |
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| (3,000) |
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Regularly scheduled loan payments |
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| (225) |
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| (4,554) |
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| (4,779) |
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Translation adjustments on foreign-currency debt of subsidiaries whose functional currency is not the U.S. dollar (2) |
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| 124 |
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| (45) |
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| 79 |
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Balances as of November 30, 2017 |
| $ | 18,257 |
| $ | 80,340 |
| $ | 98,597 | (3) |
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As of November 30, 2017, the Company had approximately $82.8 million of long-term loans in the U.S., Trinidad, Panama, El Salvador, Honduras, Costa Rica, Barbados and Colombia that require compliance with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of November 30, 2017, the Company was in compliance with all covenants or amended covenants.
As of August 31, 2017, the Company had approximately $85.6 million of long-term loans in Trinidad, Panama, El Salvador, Honduras, Costa Rica, Barbados and Colombia that require these subsidiaries to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of August 31, 2017, the Company was in compliance with all covenants or amended covenants.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on its financial condition or consolidated financial statements.
Repurchase of Equity Securities and Reissuance of Treasury Shares
At the vesting dates for restricted stock awards to our employees, we repurchase a portion of the shares that have vested at the prior day's closing price per share withand apply the funds usedproceeds to pay the employees' minimum statutory tax withholding requirements related to the vesting of restricted stock awards. The Company expects to continue this practice going forward. We do not currently have a stock repurchase program.
Shares of common stock repurchased by us are recorded at cost as treasury stock and result in the reduction of stockholders’ equity in our Consolidated Balance Sheets.consolidated balance sheets. We may reissue these treasury shares. When treasury shares are reissued, we usein the first in/first out (“FIFO”) cost method for determining cost of the reissued shares. If the issuance price is higher than the cost, the excess of the issuance price over the cost is credited to additional paid-in capital (“APIC”). If the issuance price is lower than the cost, the difference is first charged against any credit balance in APIC from treasury stock and the balance is charged to retained earnings.future.
We did not repurchase any shares during the first three months of fiscal years 2017 and 2016.
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| Three Months Ended | ||||
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| November 30, |
| November 30, | ||
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| 2017 |
| 2016 | ||
Shares repurchased |
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| — |
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| — |
Cost of repurchase of shares (in thousands) |
| $ | — |
| $ | — |
We have reissued treasury shares as part of our stock-based compensation programs. However, we did not reissue any treasury shares duringDuring the first three months of fiscal years 2018 and 2017.ended November 30, 2020, the Company reissued 96,400 treasury shares.
47
Critical Accounting Estimates
The preparation of our consolidated financial statements requires that management make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require management to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Management continues to review its accounting policies and evaluate its estimates, including those related to business acquisitions, contingencies and litigation, income taxes, value added taxes, and long-lived assets. We base our estimates on historical experience and on other assumptions that management believes to be reasonable under the present circumstances. Using different estimates could have a material impact on our financial condition and results of operations.
Income Taxes: We account forTaxes
For interim reporting, we estimate an annual effective tax rate (AETR) pursuant to ASC 740-270 to calculate income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the futureexpense. Our income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized. As of November 30, 2017, we evaluated ourexpense, deferred tax assets and liabilities, and determined that a valuation allowance was necessaryliabilities for certainunrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of the consolidated income tax expense. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax asset balances, primarily becauseassets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the existenceresults of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of
significant negativejudgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence such as the fact that certain subsidiaries are in a cumulative loss position for the pasthistorical results provide, we consider three years indicating that certain netof cumulative operating loss carry-forward periods are not sufficient to realize the related deferred tax assets.income (loss).
We and our subsidiaries are required to file federal and state income tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires us to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax we pay. InWe, in consultation with our tax advisors, we base our tax returns on interpretations that we believedbelieve to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various federal, state and foreign taxing authorities in the jurisdictions in which we or one offile our subsidiaries file tax returns. As part of these reviews, a taxing authority may disagree with respect to the incomeinterpretations we used to calculate our tax positions we have taken (“uncertain tax positions”)liability and, therefore, require us or one of our subsidiaries to pay additional taxes.
We accrue an amount for our estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as appropriate. There were no material changes in our uncertain income tax positions for the periods ended on November 30, 2017 andsince August 31, 2017. During the first quarter of fiscal year 2015, one of the Company’s subsidiaries received assessments claiming $2.7 million of taxes, penalties and interest related to withholding taxes on certain charges for services rendered by the Company. In addition, this subsidiary received assessments totaling $5.5 million for lack of deductibility of the underlying service charges due to the lack of withholding. Based on the Company's interpretation of local law, rulings and jurisprudence (including Supreme Court precedents with respect to the deductibility assessment), the Company expects to prevail in both instances and has not recorded a provision for these assessments.2020.
We have not provided for U.S. deferred taxes on cumulative non-U.S. undistributed earnings as we deem such earnings to be indefinitely reinvested. It is not practicable to determine the U.S. federal income tax liability that would be associated with the repatriation earnings because of the complexity of the computation.Tax Receivables
Tax Receivables: We pay Value Added Tax (“VAT”) or similar taxes, (“input VAT”), income taxes, and other taxes within the normal course of our business in most of the countries in which we operate related to the procurement of merchandise and/or services we acquiresacquire and/or on sales and taxable income. VAT is a form of indirect tax applied to the value added at each stage of production (primary, manufacturing, wholesale and retail). This tax is similar to, but operates somewhat differently than, sales tax paid in the United States. We alsogenerally collect VAT from our members upon sale of goods and services and pay VAT to our vendors upon purchase of goods and services. Periodically, we submit VAT reports to governmental agencies and reconcile the VAT paid and VAT received. The net overpaid VAT may be refunded or similar taxes on behalf ofapplied to subsequent returns, and the government (“output VAT”) for merchandise and/or services we sell. If the outputnet underpaid VAT exceeds the input VAT, then the difference ismust be remitted to the government, usually on a monthly basis. Ifgovernment. With respect to income taxes paid, if the input VAT exceedsestimated income taxes paid or withheld exceed the output VAT,actual income tax due this creates a VATan income tax receivable. In most countries where we operate, the governments have implemented additional collection procedures, such as requiring credit card processors to remit a portion of sales processed via credit cardand debit cards directly to the government as advance payments of VAT and/or income tax. In the case of VAT, these procedures alter the natural offset of input and output VAT andThis collection mechanism generally leaveleaves us with a net VAT receivable,and/or income tax receivables, forcing us to process significant refund claims on a recurring basis. With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due this creates an income tax receivable. We either request a refund of these tax receivables or apply the balance to expected future tax payments. These refund or offset processes can take anywhere from several months to several years to complete.
48
In most countries where we operate, there are defined and structured processes to recover VAT receivables via refunds or offsets. However, in one country without a clearly defined refund process, the Company is actively engaged with the local government to recover VAT receivables totaling $8.4 million and $7.0 million as of November 30, 2020 and August 31, 2020, respectively. In addition, in two other countries where the Company operates, the tax refund process is defined and structured with regular refunds or offsets. However, as of November 30, 2017, in one country the government has alleged there is not a clearly defined process to allow the tax authorities to refund VAT receivables. As of August 31, 2016, there were three countries that lacked a clearly defined process; however, during the third and fourth quarters of fiscal year 2017, two of these countries clarified the refund mechanism, which we are currently pursuing. The Company, together with its tax and legal advisers, is currently seeking clarification in courthave been changes in the country without a clearly defined process and expects to prevail. The balancemethod of the VAT receivable in the country with undefined refund mechanisms was approximately $1.3 million and $1.2 million as of November 30, 2017 and August 31, 2017, respectively. In another country incomputing minimum tax payments, under which the governments have sought to require the Company has warehouse clubs, beginning in fiscal year 2015, a new minimum income tax mechanism took effect, which requires us to pay taxes based on a percentage of sales rather than taxable income. As a result, we are makinghave made and may continue to make income tax payments substantially in excess of those we would expect to pay based on taxable income. The current rules (which we have challenged in court) do not clearly allow us to obtain a refund or offset this excessCompany had income tax against other taxes. Asreceivables of November 30, 2017$10.9 million and August 31, 2017, the Company had$10.4 million and deferred tax assets of approximately $2.0 million in this country. Also, the Company had an income tax receivable balance of $5.3$2.9 million and $4.3$2.8 million as of November 30, 20172020 and August 31, 2017,2020, respectively, in these countries. While the rules related to excess payments from fiscal years 2015 to 2017. Therefunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets because the Company believes that it is more likely than not that it will ultimately succeed in ourits refund requests,requests. Similarly, we have not placed any recoverability allowances on tax receivables that arise from payments we are required to make originating from tax assessments that we are appealing, as we believe it is more likely than not that we will ultimately prevail in the related appeals and/or court challenge on this matter.appeals.
Our policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:
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Short-term VAT and Income tax receivables, recorded as Other current assets: This classification is used for any countries where our subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. We also classify as short-term any approved refunds or credit notes to the extent that we expect to receive the refund or use the credit notes within one year.
Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where our subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when we do not expect to eventually prevail in our recovery of such balances. We do not currently have any allowances provided against VAT and income tax receivables.
Long-lived Assets:
We periodically evaluate quarterly our long-lived assets for indicators of impairment. Some of the key indicatorsIndicators that an asset may be impaired are:
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the asset's inability to continue to generate income from operations and positive cash flow in future periods;
loss of legal ownership or title to the asset;
significant changes in its strategic business objectives and utilization of the asset(s); and
the impact of significant negative industry or economic trends.
Management's judgments are based on market and operational conditions at the time of the evaluation and can include management's best estimate of future business activity, which in turn drives estimates of future cash flows from these assets. These periodic evaluations could cause management to conclude that impairment factors exist, requiring an adjustment of these assets to their then-current fair market value. Loss/(gain) on disposal of assets recorded during the years reported resulted from improvements to operations and normal preventive maintenance.
SeasonalityGoodwill and Other Indefinite-Lived Intangibles
Goodwill and other indefinite-lived acquired intangible assets are not amortized but are evaluated for impairment annually or whenever events or changes in circumstances indicate that the value of a certain asset may be impaired. Generally, this evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is necessary. If we determine, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative impairment test would be performed. The quantitative test for impairment requires management to make judgments relating to future cash flows, growth rates and economic and market conditions. These evaluations are based on determining the fair value of a reporting unit or asset using a valuation method such as discounted cash flow or a relative, market-based approach. Historically, our reporting units and other indefinite-lived acquired intangible assets have generated sufficient returns to recover the cost of goodwill and other indefinite-lived acquired intangible assets. Because of the nature of the factors used in these tests, if different conditions occur in future periods, future operating results could be materially impacted. For approximately $45.1 million of certain acquired indefinite-lived intangible assets, the fair value approximated the carrying value; any deterioration in the fair value may result in an impairment charge.
Seasonality
Historically, our merchandising businesses have experienced holiday retail seasonality in their markets. In addition to seasonal fluctuations, our operating results fluctuate quarter-to-quarter as a result of economic and political events in markets that we serve, the timing of holidays, weather, the timing of shipments, product mix, and currency effects on the cost of U.S.-sourced products which may make these products more or less expensive in local currencies and therefore more or less affordable. Because of such fluctuations, the results of operations of any quarter are not indicative of the results that may be achieved for a full fiscal year or any future quarter. In addition, there can be no assurance that our future results will be consistent with past results or the projections of securities analysts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in interest rates and changes in currency exchange rates. There have been no material changes in our market risk factors at November 30, 20172020 compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended August 31, 2017. The gross fair value of our derivative financial instruments designated as cash flow hedges has increased by $1.1 million since August 31, 2017, primarily due to the fluctuations in interest rates, fluctuations in exchange rates for the currencies that are being hedged, and changes in the scheduled maturities of the underlying instruments during the three months ended November 30, 2017. Movements in currency exchange rates and the related impact on the translation of the balance sheets of the Company's subsidiaries whose functional currency is not the U.S. dollar were the primary cause of the $2.0 million net loss for the three months ended November 30, 2017 in the foreign currency translation adjustments category of accumulated other comprehensive income (loss).2020.
In addition, the Company's subsidiaries whose functional currency is not the U.S. dollar carry monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses), including transactions recorded involving these monetary assets and liabilities, are recorded as currency gain (loss) within Other income (expense) in the consolidated statements of income.
The following table summarizes the amounts recorded for the three months ending November 30, 2017 and 2016 (in thousands):
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| Three Months Ended | ||||
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| November 30, |
| November 30, | ||
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| 2017 |
| 2016 | ||
Currency gain (loss) |
| $ | 278 |
| $ | (928) |
From time to time, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through warehousemerchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products, increasing our foreign exchange exposure to any devaluation of local currency relative to the U.S. dollar. Duringproducts. Since fiscal year 2017, and continuing into the first three months of fiscal year 2018, we have experienced this situation in Trinidad. We are working with our banks in Trinidad to source tradable currencies (including Euros and Canadian dollars), but until the central bank in Trinidad makes more U.S. dollars available, this illiquidity condition is likely to continue. During part of the first half of fiscal year 2017, we limited shipments of merchandise to Trinidad from our distribution center in Miami to levels that generally aligned with our Trinidad subsidiary’s ability to source U.S. dollars to pay for that merchandise. This resulted in a reduced level of shipments, which negatively affected sales in the second quarter, particularly December 2016, although by less than our initial estimate. These actions did not impact the level of merchandise we obtain locally in Trinidad. Starting in the third quarter of fiscal year 2017, we were able to improve our sourcing of tradeable currencies, which, in addition to other steps we took, allowed for a more normalized flow of imported merchandise during the third and fourth fiscal quarters. Over the past three months, however, we have been unable to source a sufficient level of tradeable currenciescurrencies. We are working with our banks in Trinidad consistent withand Barbados to source tradeable currencies. We expect the levelilliquid market conditions in both markets to continue. Refer to “Item 2. Management’s Discussion & Analysis – Factors Affecting Our Business” and “Item 2. Management’s Discussion & Analysis – Liquidity: Financial Position and Cash Flow” for our quantitative analysis and discussion.
Information about the financial impact of merchandise we were importingforeign currency exchange rate fluctuations for the holiday shopping season. As ofthree month period ended November 30, 2017,2020 is disclosed in “Item 2. Management’s Discussion & Analysis – Other Expense, net”.
Information about the change in the fair value of our Trinidad subsidiary had nethedges and the financial impact thereof for the three month period ended November 30, 2020 is disclosed in “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 8 – Derivative Instruments and Hedging Activities.”
Information about the movements in currency exchange rates and the related impact on the translation of the balance sheets of our subsidiaries whose functional currency is not the U.S. dollar denominated liability exposures of approximately $12.1 million, an increase of $16.1 million from August 31, 2017 when our Trinidad subsidiary had a net U.S. dollar denominated asset position of approximately $4.0 million. We are carefully monitoringfor the situation, which may require us to limit future shipments from the U.S. to Trinidadthree month period ended November 30, 2020 is disclosed in line with our ability to exchange Trinidad dollars for tradeable currencies to manage our exposure to any potential devaluation. “Item 2. Management’s Discussion & Analysis – Other Comprehensive Loss.”
ITEM 4. CONTROLS AND PROCEDURES
Limitations on Effectiveness of Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the timelines specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decision regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, we have investments in certain unconsolidated entities. Because we do not control or manage those entities, our control procedures with respect to those entities were substantially more limited than those we maintain with respect to our consolidated subsidiaries.
Evaluation of Disclosure Controls and Procedures
As required by SEC Rules 13a-15(e) or 15d-15(e), we carried out an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
In the ordinary course of business, we review our system of internal control over financial reporting and make changes to our systems and processes to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems and automating manual processes. There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as Exhibit 31.1 and 31.2 to this report.
None.We are often involved in claims arising in the ordinary course of business seeking monetary damages and other relief. Based upon information currently available to us, none of these claims is expected to have a material adverse effect on our business, financial condition or results of operations.
On May 22, 2019, a class action complaint was filed against PriceSmart, Inc., as well as certain former and current officers in the United States District Court for the Southern District of California. On October 7, 2019, the Court granted Public Employees Retirement Association of New Mexico’s (PERA’s) Motion for Appointment as Lead Plaintiff. On January 3, 2020, PERA filed a consolidated class action complaint, which alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Company intends to vigorously defend itself against any obligations or liability to the plaintiffs with respect to such claims. The Company believes the claims are without merit. During the third quarter of fiscal 2020, the Company filed a Motion to Dismiss the Plaintiff’s Consolidated Amended Complaint and the Plaintiff filed an Opposition to the Motion to Dismiss. During the fourth quarter of fiscal 2020, the Company filed a Reply to the Opposition. The Court has taken the matter under advisement.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Part I,I. “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended August 31, 2017.2020. There have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2017.2020.
Available Information
The PriceSmart, Inc. website or internet address is www.pricesmart.com. On this website the Company makes available, free of charge, its 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 security holders, as soon as reasonably practicable after electronically filing such material with or furnishing it to the U.S. Securities and Exchange Commission (SEC). The Company’s SEC reports can be accessed through the investor relations section of its website under “SEC Filings.” All of the Company’s 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. The Company made available its annual report on Form 10-K and its annual Proxy Statement for the fiscal year 2017 at the internet address http://materials.proxyvote.com/741511.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) None. Purchase of Equity Securities by the Issuer and Affiliated Purchasers.
Upon vesting of restricted stock awarded by the Company to employees, the Company repurchases shares and withholds the amount of the repurchase payment to cover employees’ tax withholding obligations. As set forth in the table below, during the quarter ended November 30, 2020, the Company repurchased 7,132 shares in the indicated months. These were the only repurchases of equity securities made by the Company during the first quarter of fiscal year 2021. The Company does not have a stock repurchase program.
Period | (a) | (b) | (c) | (d) | ||||||||
September 1, 2020 - September 30, 2020 | — | $ | — | — | N/A | |||||||
October 1, 2020 - October 31, 2020 | 6,773 | $ | 73.87 | — | N/A | |||||||
November 1, 2020 - November 30, 2020 | 359 | $ | 69.17 | — | N/A | |||||||
Total | 7,132 | $ | 73.63 | — | — | |||||||
(a) Exhibits:
3.1(1) | Amended and Restated Certificate of Incorporation of the Company. |
3.2(2) | Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company. |
3.3(3) | Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company. |
3.4 | |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of | |
32.1** | |
101.INS | Inline XBRL Instance Document |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* | Identifies management contract or compensatory plan or arrangement. |
** | These certifications are being furnished solely to accompany this Report pursuant to 18 U.S.C. 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of PriceSmart, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
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(1)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 1997 filed with the Commission on November 26, 1997.
(2)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2004 filed with the Commission on April 14, 2004.
(3)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2004 filed with the Commission on November 24, 2004.
(4)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Commission on July 17, 2015.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PRICESMART, INC. | ||||
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Date: January 7, 2021 | By: | /s/ SHERRY S. BAHRAMBEYGUI | ||
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Date: January 7, 2021 | By: | /s/ MICHAEL L. MCCLEARY | ||
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Executive Vice President and Chief Financial Officer | ||||
(Principal Financial Officer and Principal Accounting Officer) | ||||
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