UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31,November 30, 2021
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to
COMMISSION FILE NUMBER 0-22793000-22793
PriceSmart, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 33-0628530 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
9740 Scranton Road, San Diego, CA | 92121 | |
(Address of principal executive offices) | (Zip Code) |
(858) 404-8800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $0.0001 par value | PSMT | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.
Yes x | No ¨ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x | No ¨ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer ¨ | |
Non-accelerated filer ¨ | Smaller Reporting Company ¨ | |
Emerging growth company ¨ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ | No x |
The registrant had 30,783,26630,862,391 shares of its common stock, par value $0.0001 per share, outstanding at June 30,December 31, 2021.
PRICESMART, INC.
INDEX TO FORM 10-Q
Page | ||
1 | ||
CONSOLIDATED BALANCE SHEETS AS OF | 2 | |
4 | ||
5 | ||
6 | ||
| ||
| ||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| |
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PriceSmart, Inc.’s (“PriceSmart,” “we” or the “Company”) unaudited consolidated balance sheet as of May 31,November 30, 2021 and the consolidated balance sheet as of August 31, 2020,2021, the unaudited consolidated statements of income for the three and nine months ended May 31,November 30, 2021 and 2020, the unaudited consolidated statements of comprehensive income (loss) for the three and nine months ended May 31,November 30, 2021 and 2020, the unaudited consolidated statements of equity for the three and nine months ended May 31,November 30, 2021 and 2020, and the unaudited consolidated statements of cash flows for the ninethree months ended May 31,November 30, 2021 and 2020 are included herein. Also included herein are the notes to the unaudited consolidated financial statements.
PRICESMART, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
May 31, | November 30, | |||||||||||
2021 | August 31, | 2021 | August 31, | |||||||||
(Unaudited) | 2020 | (Unaudited) | 2021 | |||||||||
ASSETS | ||||||||||||
Current Assets: | ||||||||||||
Cash and cash equivalents | $ | 190,687 | $ | 299,481 | $ | 176,072 | $ | 202,060 | ||||
Short-term restricted cash | 781 | 185 | 4,165 | 3,647 | ||||||||
Short-term investments | 67,068 | 46,509 | 39,201 | 50,233 | ||||||||
Receivables, net of allowance for doubtful accounts of $166 as of May 31, 2021 and $147 as of August 31, 2020, respectively | 12,221 | 13,153 | ||||||||||
Receivables, net of allowance for doubtful accounts of $42 as of November 30, 2021 and $94 as of August 31, 2021, respectively | 15,572 | 12,359 | ||||||||||
Merchandise inventories | 336,645 | 309,509 | 500,767 | 389,711 | ||||||||
Prepaid expenses and other current assets | 31,812 | 30,165 | ||||||||||
Prepaid expenses and other current assets (includes $1,717 and $0 as of November 30, 2021 and August 31, 2021, respectively, for the fair value of derivative instruments) | 46,639 | 39,194 | ||||||||||
Total current assets | 639,214 | 699,002 | 782,416 | 697,204 | ||||||||
Long-term restricted cash | 6,972 | 4,105 | 12,363 | 9,772 | ||||||||
Property and equipment, net | 716,337 | 692,279 | 733,219 | 730,204 | ||||||||
Operating lease right-of-use assets, net | 125,998 | 119,533 | 117,754 | 123,655 | ||||||||
Goodwill | 45,142 | 45,206 | 43,332 | 45,095 | ||||||||
Other intangibles, net | 8,368 | 10,166 | 1,922 | 7,762 | ||||||||
Deferred tax assets | 22,872 | 21,672 | 23,922 | 24,225 | ||||||||
Other non-current assets (includes $1,160 and $872 as of May 31, 2021 and August 31, 2020, respectively, for the fair value of derivative instruments) | 56,483 | 54,260 | ||||||||||
Other non-current assets (includes $4,412 and $2,464 as of November 30, 2021 and August 31, 2021, respectively, for the fair value of derivative instruments) | 63,851 | 57,329 | ||||||||||
Investment in unconsolidated affiliates | 10,569 | 10,602 | 10,534 | 10,544 | ||||||||
Total Assets | $ | 1,631,955 | $ | 1,656,825 | $ | 1,789,313 | $ | 1,705,790 | ||||
LIABILITIES AND EQUITY | ||||||||||||
Current Liabilities: | ||||||||||||
Short-term borrowings | $ | — | $ | 65,143 | $ | 4,986 | $ | — | ||||
Accounts payable | 341,007 | 373,172 | 461,046 | 388,791 | ||||||||
Accrued salaries and benefits | 37,240 | 32,946 | 30,221 | 41,896 | ||||||||
Deferred income | 27,255 | 23,525 | 28,128 | 26,898 | ||||||||
Income taxes payable | 9,740 | 7,727 | 6,955 | 8,310 | ||||||||
Other accrued expenses and other current liabilities | 27,959 | 37,731 | 39,204 | 39,736 | ||||||||
Operating lease liabilities, current portion | 8,486 | 8,594 | 6,771 | 8,526 | ||||||||
Dividends payable | 10,755 | — | ||||||||||
Long-term debt, current portion | 20,554 | 19,437 | 16,843 | 19,395 | ||||||||
Total current liabilities | 482,996 | 568,275 | 594,154 | 533,552 | ||||||||
Deferred tax liability | 1,759 | 1,713 | 1,631 | 1,568 | ||||||||
Long-term income taxes payable, net of current portion | 3,947 | 5,132 | 6,039 | 4,160 | ||||||||
Long-term operating lease liabilities | 131,510 | 124,181 | 125,046 | 129,256 | ||||||||
Long-term debt, net of current portion | 101,294 | 112,610 | 110,601 | 110,110 | ||||||||
Other long-term liabilities (includes $3,154 and $4,685 for the fair value of derivative instruments and $6,665 and $6,155 for post-employment plans as of May 31, 2021 and August 31, 2020, respectively) | 10,665 | 12,182 | ||||||||||
Other long-term liabilities (includes $2,097 and $3,010 for the fair value of derivative instruments and $7,599 and $7,380 for post-employment plans as of November 30, 2021 and August 31, 2021, respectively) | 9,696 | 10,930 | ||||||||||
Total Liabilities | 732,171 | 824,093 | 847,167 | 789,576 | ||||||||
Stockholders' Equity: | ||||||||||||
Common stock $0.0001 par value, 45,000,000 shares authorized; 31,456,121 and 31,417,576 shares issued and 30,777,829 and 30,670,712 shares outstanding (net of treasury shares) as of May 31, 2021 and August 31, 2020, respectively | 3 | 3 | ||||||||||
Common stock $0.0001 par value, 45,000,000 shares authorized; 31,598,389 and 31,467,971 shares issued and 30,862,489 and 30,755,308 shares outstanding (net of treasury shares) as of November 30, 2021 and August 31, 2021, respectively | 3 | 3 | ||||||||||
Additional paid-in capital | 459,812 | 454,455 | 469,170 | 465,015 | ||||||||
Accumulated other comprehensive loss | (177,368) | (176,820) | (188,639) | (182,508) | ||||||||
Retained earnings | 639,472 | 582,487 | 689,430 | 658,919 | ||||||||
Less: treasury stock at cost, 678,292 shares as of May 31, 2021 and 746,864 shares as of August 31, 2020 | (23,116) | (28,406) | ||||||||||
Less: treasury stock at cost, 735,900 shares as of November 30, 2021 and 712,663 shares as of August 31, 2021 | (27,818) | (26,084) | ||||||||||
Total stockholders' equity attributable to PriceSmart, Inc. stockholders | 898,803 | 831,719 | 942,146 | 915,345 | ||||||||
Noncontrolling interest in consolidated subsidiaries | 981 | 1,013 | — | 869 | ||||||||
Total Stockholders' Equity | 899,784 | 832,732 | 942,146 | 916,214 | ||||||||
Total Liabilities and Equity | $ | 1,631,955 | $ | 1,656,825 | $ | 1,789,313 | $ | 1,705,790 | ||||
See accompanying notes.
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||
May 31, | May 31, | May 31, | May 31, | November 30, | November 30, | |||||||||||||
2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||
Revenues: | ||||||||||||||||||
Net merchandise sales | $ | 857,478 | $ | 768,368 | $ | 2,594,251 | $ | 2,418,822 | $ | 944,043 | $ | 838,369 | ||||||
Export sales | 10,213 | 8,321 | 30,800 | 25,029 | 10,534 | 10,881 | ||||||||||||
Membership income | 14,329 | 13,525 | 41,427 | 41,364 | 14,791 | 13,299 | ||||||||||||
Other revenue and income | 13,244 | 9,717 | 43,787 | 33,392 | 5,988 | 14,883 | ||||||||||||
Total revenues | 895,264 | 799,931 | 2,710,265 | 2,518,607 | 975,356 | 877,432 | ||||||||||||
Operating expenses: | ||||||||||||||||||
Cost of goods sold: | ||||||||||||||||||
Net merchandise sales | 720,726 | 661,258 | 2,179,453 | 2,067,416 | 793,193 | 703,619 | ||||||||||||
Export sales | 9,820 | 7,995 | 29,568 | 24,044 | 10,067 | 10,433 | ||||||||||||
Non-merchandise | 5,755 | 3,503 | 17,847 | 12,416 | 1,809 | 5,824 | ||||||||||||
Selling, general and administrative: | ||||||||||||||||||
Warehouse club and other operations | 89,322 | 78,431 | 264,603 | 241,826 | 91,196 | 84,832 | ||||||||||||
General and administrative | 33,225 | 24,408 | 92,016 | 77,910 | 31,693 | 27,521 | ||||||||||||
Pre-opening expenses | 1 | 257 | 651 | 1,254 | 970 | 602 | ||||||||||||
Loss on disposal of assets | 366 | 112 | 568 | 251 | 411 | 70 | ||||||||||||
Total operating expenses | 859,215 | 775,964 | 2,584,706 | 2,425,117 | 929,339 | 832,901 | ||||||||||||
Operating income | 36,049 | 23,967 | 125,559 | 93,490 | 46,017 | 44,531 | ||||||||||||
Other income (expense): | ||||||||||||||||||
Interest income | 518 | 554 | 1,454 | 1,433 | 518 | 491 | ||||||||||||
Interest expense | (1,596) | (2,564) | (5,857) | (5,116) | (1,590) | (2,033) | ||||||||||||
Other expense, net | (2,295) | (1,564) | (4,132) | (1,826) | ||||||||||||||
Total other expense | (3,373) | (3,574) | (8,535) | (5,509) | ||||||||||||||
Other income (expense), net | 1,409 | (1,545) | ||||||||||||||||
Total other income (expense) | 337 | (3,087) | ||||||||||||||||
Income before provision for income taxes and | 32,676 | 20,393 | 117,024 | 87,981 | 46,354 | 41,444 | ||||||||||||
Provision for income taxes | (10,082) | (7,744) | (38,265) | (29,849) | (15,814) | (13,618) | ||||||||||||
Loss of unconsolidated affiliates | (13) | (16) | (34) | (79) | (10) | (9) | ||||||||||||
Net income | 22,581 | 12,633 | 78,725 | 58,053 | 30,530 | 27,817 | ||||||||||||
Less: net (income) loss attributable to noncontrolling interest | (52) | 72 | (223) | (20) | ||||||||||||||
Less: net income attributable to noncontrolling interest | (19) | (80) | ||||||||||||||||
Net income attributable to PriceSmart, Inc. | $ | 22,529 | $ | 12,705 | $ | 78,502 | $ | 58,033 | $ | 30,511 | $ | 27,737 | ||||||
Net income attributable to PriceSmart, Inc. per share available for distribution: | ||||||||||||||||||
Basic | $ | 0.73 | $ | 0.41 | $ | 2.55 | $ | 1.90 | $ | 0.98 | $ | 0.90 | ||||||
Diluted | $ | 0.73 | $ | 0.41 | $ | 2.55 | $ | 1.90 | $ | 0.98 | $ | 0.90 | ||||||
Shares used in per share computations: | ||||||||||||||||||
Basic | 30,414 | 30,271 | 30,396 | 30,268 | 30,551 | 30,398 | ||||||||||||
Diluted | 30,446 | 30,275 | 30,423 | 30,273 | 30,603 | 30,420 | ||||||||||||
See accompanying notes.
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED—AMOUNTS IN THOUSANDS)
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||
May 31, | May 31, | May 31, | May 31, | November 30, | November 30, | |||||||||||||
2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||
Net income | $ | 22,581 | $ | 12,633 | $ | 78,725 | $ | 58,053 | $ | 30,530 | $ | 27,817 | ||||||
Less: net (income) loss attributable to noncontrolling interest | (52) | 72 | (223) | (20) | ||||||||||||||
Less: net income attributable to noncontrolling interest | (19) | (80) | ||||||||||||||||
Net income attributable to PriceSmart, Inc. | $ | 22,529 | $ | 12,705 | $ | 78,502 | $ | 58,033 | $ | 30,511 | $ | 27,737 | ||||||
Other Comprehensive Income, net of tax: | ||||||||||||||||||
Foreign currency translation adjustments (1) | (3,007) | (12,874) | (2,577) | (19,981) | (8,131) | 2,761 | ||||||||||||
Defined benefit pension plan: | ||||||||||||||||||
Net gain/(loss) arising during period | 3 | (16) | 65 | (3) | ||||||||||||||
Net gain arising during period | 17 | 60 | ||||||||||||||||
Amortization of prior service cost and actuarial gains included in net periodic pensions cost | 33 | 19 | 99 | 56 | 34 | 33 | ||||||||||||
Total defined benefit pension plan | 36 | 3 | 164 | 53 | 51 | 93 | ||||||||||||
Derivative instruments: (2) | ||||||||||||||||||
Unrealized gains/(losses) on change in derivative obligations | (667) | (1,471) | 488 | (208) | (1,301) | 1,230 | ||||||||||||
Unrealized gains/(losses) on change in | 1,048 | (1,104) | 1,377 | (6,295) | 3,250 | (922) | ||||||||||||
Amounts reclassified from accumulated other comprehensive income to other expense, net for settlement of derivatives | — | — | — | 2,751 | ||||||||||||||
Total derivative instruments | 381 | (2,575) | 1,865 | (3,752) | 1,949 | 308 | ||||||||||||
Other comprehensive loss | (2,590) | (15,446) | (548) | (23,680) | ||||||||||||||
Comprehensive income/(loss) | 19,939 | (2,741) | 77,954 | 34,353 | ||||||||||||||
Other comprehensive income (loss) | (6,131) | 3,162 | ||||||||||||||||
Comprehensive income | 24,380 | 30,899 | ||||||||||||||||
Less: comprehensive income attributable to noncontrolling interest | 33 | 35 | 91 | 90 | 3 | 31 | ||||||||||||
Comprehensive income/(loss) attributable to PriceSmart, Inc. | $ | 19,906 | $ | (2,776) | $ | 77,863 | $ | 34,263 | ||||||||||
Comprehensive income attributable to PriceSmart, Inc. | $ | 24,377 | $ | 30,868 | ||||||||||||||
(1)Translation adjustments arising in translating the financial statements of a foreign entity have no effect on the income taxes of that foreign entity. They may, however, affect: (a) the amount, measured in the parent entity's reporting currency, of withholding taxes assessed on dividends paid to the parent entity and (b) the amount of taxes assessed on the parent entity by the government of its country. The Company has determined that the reinvestment of earnings of its foreign subsidiaries are indefinite because of the long-term nature of the Company's foreign investment plans. Therefore, deferred taxes are not provided for on translation adjustments related to non-remitted earnings of the Company's foreign subsidiaries.
(2)See Note 8 - Derivative Instruments and Hedging Activities.
See accompanying notes.
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | Stockholders' | Accumulated | Stockholders' | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Equity | Additional | Other | Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Comprehensive | Retained | Treasury Stock | Attributable to | Noncontrolling | Total | Common Stock | Paid-in | Comprehensive | Retained | Treasury Stock | Attributable to | Noncontrolling | Total | |||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Loss | Earnings | Shares | Amount | PriceSmart, Inc. | Interest | Equity | Shares | Amount | Capital | Loss | Earnings | Shares | Amount | PriceSmart, Inc. | Interest | Equity | |||||||||||||||||||||||||||||||||||||||
Balance at February 29, 2020 | 31,451 | $ | 3 | $ | 452,858 | $ | (152,573) | $ | 549,703 | 852 | $ | (32,098) | $ | 817,893 | $ | 974 | $ | 818,867 | ||||||||||||||||||||||||||||||||||||||||
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 | — | — | — | — | — | 4 | (204) | (204) | — | (204) | — | — | — | — | — | 7 | (526) | (526) | — | (526) | ||||||||||||||||||||||||||||||||||||||
Issuance of treasury stock | (80) | — | (687) | — | — | (80) | 687 | — | — | — | (96) | — | (7,864) | — | — | (96) | 7,864 | — | — | — | ||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock award | 57 | — | — | — | — | — | — | — | — | — | 77 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
Forfeiture of restricted stock awards | (3) | — | — | — | — | — | — | — | — | — | (3) | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 3,718 | — | — | — | — | 3,718 | — | 3,718 | — | — | 4,075 | — | — | — | — | 4,075 | — | 4,075 | ||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | 12,705 | — | — | 12,705 | (72) | 12,633 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | (15,446) | — | — | — | (15,446) | 35 | (15,411) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at May 31, 2020 | 31,425 | $ | 3 | $ | 455,889 | $ | (168,019) | $ | 562,408 | 776 | $ | (31,615) | $ | 818,666 | $ | 937 | $ | 819,603 | ||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | 27,737 | — | — | 27,737 | 80 | 27,817 | ||||||||||||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||
Balance at February 28, 2021 | 31,452 | $ | 3 | $ | 454,881 | $ | (174,778) | $ | 616,943 | 675 | $ | (22,781) | $ | 874,268 | $ | 983 | $ | 875,251 | ||||||||||||||||||||||||||||||||||||||||
Balance at August 31, 2021 | 31,468 | $ | 3 | $ | 465,015 | $ | (182,508) | $ | 658,919 | 713 | $ | (26,084) | $ | 915,345 | $ | 869 | $ | 916,214 | ||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | 3 | (335) | (335) | — | (335) | — | — | — | — | — | 32 | (2,433) | (2,433) | — | (2,433) | ||||||||||||||||||||||||||||||||||||||
Issuance of treasury stock | (9) | — | (699) | — | — | (9) | 699 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock award | 4 | — | — | — | — | — | — | — | — | — | 140 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
Forfeiture of restricted stock awards | (1) | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 4,931 | — | — | — | — | 4,931 | — | 4,931 | — | — | 4,567 | — | — | — | — | 4,567 | — | 4,567 | ||||||||||||||||||||||||||||||||||||||
Dividend paid to stockholders | — | — | — | — | — | — | — | — | (87) | (87) | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | 22,529 | — | — | 22,529 | 52 | 22,581 | — | — | — | — | 30,511 | — | — | 30,511 | 19 | 30,530 | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | (2,590) | — | — | — | (2,590) | 33 | (2,557) | — | — | — | (6,131) | — | — | — | (6,131) | 3 | (6,128) | ||||||||||||||||||||||||||||||||||||||
Balance at May 31, 2021 | 31,456 | $ | 3 | $ | 459,812 | $ | (177,368) | $ | 639,472 | 678 | $ | (23,116) | $ | 898,803 | $ | 981 | $ | 899,784 | ||||||||||||||||||||||||||||||||||||||||
Sale of Aeropost stock | — | — | 287 | — | — | — | — | 287 | (891) | (604) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at November 30, 2021 | 31,598 | $ | 3 | $ | 469,170 | $ | (188,639) | $ | 689,430 | 736 | $ | (27,818) | $ | 942,146 | $ | — | $ | 942,146 | ||||||||||||||||||||||||||||||||||||||||
See accompanying notes.notes
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)
Nine Months Ended | |||||||||||||||||||||||||||||
Total | |||||||||||||||||||||||||||||
Accumulated | Stockholders' | ||||||||||||||||||||||||||||
Additional | Other | Equity | |||||||||||||||||||||||||||
Common Stock | Paid-in | Comprehensive | Retained | Treasury Stock | Attributable to | Noncontrolling | Total | ||||||||||||||||||||||
Shares | Amount | Capital | Loss | Earnings | Shares | Amount | PriceSmart, Inc. | Interest | Equity | ||||||||||||||||||||
Balance at August 31, 2019 | 31,461 | $ | 3 | $ | 454,570 | $ | (144,339) | $ | 525,804 | 924 | $ | (38,687) | $ | 797,351 | $ | 928 | $ | 798,279 | |||||||||||
Purchase of treasury stock | — | — | — | — | — | 26 | (1,585) | (1,585) | — | (1,585) | |||||||||||||||||||
Issuance of treasury stock | (174) | — | (8,657) | — | — | (174) | 8,657 | — | — | — | |||||||||||||||||||
Issuance of restricted stock award | 166 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||
Forfeiture of restricted stock awards | (28) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||
Stock-based compensation | — | — | 9,976 | — | — | — | — | 9,976 | — | 9,976 | |||||||||||||||||||
Dividend paid to stockholders | — | — | — | — | (10,710) | — | — | (10,710) | (101) | (10,811) | |||||||||||||||||||
Dividend payable to stockholders | — | — | — | — | (10,719) | — | — | (10,719) | — | (10,719) | |||||||||||||||||||
Net income | — | — | — | — | 58,033 | — | — | 58,033 | 20 | 58,053 | |||||||||||||||||||
Other comprehensive income (loss) | — | — | — | (23,680) | — | — | — | (23,680) | 90 | (23,590) | |||||||||||||||||||
Balance at May 31, 2020 | 31,425 | $ | 3 | $ | 455,889 | $ | (168,019) | $ | 562,408 | 776 | $ | (31,615) | $ | 818,666 | $ | 937 | $ | 819,603 | |||||||||||
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 | — | — | — | — | — | 27 | (2,574) | (2,574) | — | (2,574) | |||||||||||||||||||
Issuance of treasury stock | (96) | — | (7,864) | — | — | (96) | 7,864 | — | — | — | |||||||||||||||||||
Issuance of restricted stock award | 137 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||
Forfeiture of restricted stock awards | (3) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||
Stock-based compensation | — | — | 13,221 | — | — | — | — | 13,221 | — | 13,221 | |||||||||||||||||||
Dividend paid to stockholders | — | — | — | — | (10,762) | — | — | (10,762) | (346) | (11,108) | |||||||||||||||||||
Dividend payable to stockholders | — | — | — | — | (10,755) | — | — | (10,755) | — | (10,755) | |||||||||||||||||||
Net income | — | — | — | — | 78,502 | — | — | 78,502 | 223 | 78,725 | |||||||||||||||||||
Other comprehensive income (loss) | — | — | — | (548) | — | — | — | (548) | 91 | (457) | |||||||||||||||||||
Balance at May 31, 2021 | 31,456 | $ | 3 | $ | 459,812 | $ | (177,368) | $ | 639,472 | 678 | $ | (23,116) | $ | 898,803 | $ | 981 | $ | 899,784 | |||||||||||
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED—AMOUNTS IN THOUSANDS)
Nine Months Ended | Three Months Ended | |||||||||||
May 31, | May 31, | November 30, | November 30, | |||||||||
2021 | 2020 | 2021 | 2020 | |||||||||
Operating Activities: | ||||||||||||
Net income | $ | 78,725 | $ | 58,053 | $ | 30,530 | 27,817 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 48,350 | 44,867 | 15,603 | 15,485 | ||||||||
Allowance for doubtful accounts | 19 | (18) | 2 | 10 | ||||||||
Loss on sale of property and equipment | 568 | 251 | 411 | 70 | ||||||||
Deferred income taxes | (2,748) | (4,079) | 654 | 798 | ||||||||
Equity in losses of unconsolidated affiliates | 34 | 79 | 10 | 9 | ||||||||
Stock-based compensation | 13,221 | 9,976 | 4,567 | 4,075 | ||||||||
Change in operating assets and liabilities: | ||||||||||||
Receivables, prepaid expenses and other current assets, non-current assets, accrued salaries and benefits, deferred membership income and other accruals | 6,147 | (157) | (27,108) | (8,907) | ||||||||
Merchandise inventories | (27,136) | 62,511 | (111,062) | (63,669) | ||||||||
Accounts payable | (37,213) | 2,647 | 73,054 | 6,539 | ||||||||
Net cash provided by operating activities | 79,967 | 174,130 | ||||||||||
Net cash used in operating activities | (13,339) | (17,773) | ||||||||||
Investing Activities: | ||||||||||||
Proceeds from the disposal of Aeropost, net of divested cash | 4,959 | — | ||||||||||
Additions to property and equipment | (73,350) | (89,713) | (29,729) | (21,171) | ||||||||
Purchases of short-term investments | (58,355) | (31,711) | (4,310) | (32,121) | ||||||||
Proceeds from settlements of short-term investments | 37,605 | 8,891 | 15,488 | 4,433 | ||||||||
Purchases of long-term investments | (1,479) | (1,489) | — | (1,478) | ||||||||
Proceeds from settlements of long-term investments | 1,479 | — | 1,486 | — | ||||||||
Proceeds from disposal of property and equipment | 109 | 44 | 56 | 27 | ||||||||
Net cash used in investing activities | (93,991) | (113,978) | (12,050) | (50,310) | ||||||||
Financing Activities: | ||||||||||||
Proceeds from long-term bank borrowings | 3,000 | 57,820 | 4,204 | — | ||||||||
Repayment of long-term bank borrowings | (13,135) | (7,542) | (6,126) | (3,897) | ||||||||
Proceeds from short-term bank borrowings | — | 271,014 | 10,041 | — | ||||||||
Repayment of short-term bank borrowings | (64,916) | (207,368) | (4,488) | (17,695) | ||||||||
Cash dividend payments | (11,108) | (10,811) | ||||||||||
Purchase of treasury stock | (2,574) | (1,585) | (2,433) | (526) | ||||||||
Other financing activities | (223) | (20) | — | (80) | ||||||||
Net cash provided by (used in) financing activities | (88,956) | 101,508 | 1,198 | (22,198) | ||||||||
Effect of exchange rate changes on cash and cash equivalents and restricted cash | (2,351) | (1,872) | 1,312 | (1,095) | ||||||||
Net increase (decrease) in cash, cash equivalents | (105,331) | 159,788 | ||||||||||
Net decrease in cash, cash equivalents | (22,879) | (91,376) | ||||||||||
Cash, cash equivalents and restricted cash at beginning of period | 303,771 | 106,236 | 215,479 | 303,771 | ||||||||
Cash, cash equivalents and restricted cash at end of period | $ | 198,440 | $ | 266,024 | $ | 192,600 | $ | 212,395 | ||||
Supplemental disclosure of noncash investing activities: | ||||||||||||
Capital expenditures accrued, but not yet paid | $ | 8,763 | $ | 7,975 | $ | 5,772 | 9,150 | |||||
Dividends declared but not yet paid | 10,755 | 10,719 | ||||||||||
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
(UNAUDITED—AMOUNTS IN THOUSANDS)
The following table provides a breakdown of cash and cash equivalents, and restricted cash reported within the statement of cash flows:
Nine Months Ended | Three Months Ended | |||||||||||
May 31, | May 31, | November 30, | November 30, | |||||||||
2021 | 2020 | 2021 | 2020 | |||||||||
Cash and cash equivalents | $ | 190,687 | $ | 261,788 | $ | 176,072 | $ | 207,955 | ||||
Short-term restricted cash | 781 | 240 | 4,165 | 185 | ||||||||
Long-term restricted cash | $ | 6,972 | $ | 3,996 | $ | 12,363 | $ | 4,255 | ||||
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 198,440 | $ | 266,024 | $ | 192,600 | $ | 212,395 | ||||
See accompanying notes.
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
May 31,November 30, 2021
NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION
PriceSmart, Inc.’s (“PriceSmart,” the “Company,” or "we") business consists primarily of international membership shopping warehouse clubs similar to, but typically smaller in size than, warehouse clubs in the United States. As of May 31,November 30, 2021, the Company had 4749 warehouse clubs in operation in 12 countries and 1 U.S. territory (8(9 in Colombia; 8 in Costa Rica and Colombia;Rica; 7 in Panama; 5 in the Dominican Republic and Guatemala, 4 in Trinidad and Guatemala;Trinidad; 3 in Honduras; 2 each in El Salvador and Nicaragua; and 1 each in Aruba, Barbados, Jamaica and the United States Virgin Islands), of which the Company owns 100% of the corresponding legal entities (see Note 2 - Summary of Significant Accounting Policies). TheIn addition, the Company also plans to open new warehouse clubs in Guatemala City, Guatemala and Bucaramanga, Colombia in the fall of 2021, andits 50th club in Portmore, Jamaica in April 2022. Our operating segments are the spring of 2022. Once these 3 new clubs are open,United States, Central America, the Company will operate 50 warehouse clubs. Caribbean and Colombia.
PriceSmart continues to invest in technology to increase operational efficiencies that are expected to lead toand related talent for two main purposes:
To drive growth by:
oIncreasing membership benefits and creating greater value to the Member, to gain greater insights into the shopping preferencesand connectivity with our Members, by optimizing use of our Membersmembership data;
oInforming and to enhance the overall Member experience. Technology developments are driving omni-channel initiativesguiding our plans for physical and capabilities, including online shoppinggeographic expansion; and services. As of May 31, 2021, the Company offered the Click & Go™ curbside pickup
oDriving incremental sales through PriceSmart.com.
To increase our efficiencies and delivery service in all 13 of its markets. These services provide an alternative and convenient way for Members to shop, while reducing physical contact. The Company also has launched digital membership, which helps it gather higher quality data it can use to makevaluable tools that will support better informed decisions in all areas of the business and facilitates a more seamless auto-renewal process, increasing predictability of membership income. We believe digital membership also provides more convenience to the Members with digital cards and online payment. PriceSmart also operates a package forwarding (casillero) and marketplace business under the “Aeropost” banner in 38 countries in Latin America and the Caribbean, many of which overlap with markets where it operates warehouse clubs.decision-making.
Basis of Presentation – The interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The novel coronavirus (COVID-19) pandemic continues to significantly impact the economies of the countries where the Company operates due to elevated infection rates and government restrictions. The Company has assessed the impact that COVID-19 has had on our estimates, assumptions and accounting policies and made additional disclosures, if and as necessary.
These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 20202021 (the “2020“2021 Form 10-K”). The interim consolidated financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries. Inter-companyIntercompany transactions between the Company and its subsidiaries have been eliminated in consolidation.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation – The interim consolidated financial statements of the Company included herein include the assets, liabilities and results of operations of the Company’s wholly owned subsidiaries, subsidiaries in which it has a controlling interest, and the Company’s joint ventures for which the Company has determined that it is the primary beneficiary. The Company’s net income excludes income attributable to noncontrolling interests. The Company reports noncontrolling interests in consolidated entities as a component of equity separate from the Company’s equity. The interim consolidated financial statements also include the Company's investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method. All significant inter-company accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC and reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows for the periods presented. The results for interim periods are not necessarily indicative of the results for the year.
The Company determines whether any of the joint ventures in which it has made investments is a Variable Interest Entity (“VIE”) at the start of each new venture and if a reconsideration event has occurred. At this time, the Company also considers whether it must consolidate a VIE and/or disclose information about its involvement in a VIE. A reporting entity must consolidate a VIE if that reporting entity has a variable interest (or combination of variable interests) and is determined to be the primary beneficiary. If the Company determines that it is not the primary beneficiary of the VIE, then the Company records its investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method. Due to the nature of the joint ventures that the Company participates in and the continued commitments for additional financing, the Company determined these joint ventures are VIEs.
In the case of the Company's ownership interest in real estate development joint ventures, both parties to each joint venture share all rights, obligations and the power to direct the activities of the VIE that most significantly impact the VIE's economic performance. As a result, the Company has determined that it is not the primary beneficiary of the VIEs and, therefore, has accounted for these entities under the equity method. Under the equity method, the Company's investments in unconsolidated affiliates are initially recorded as an investment in the stock of an investee at cost and are adjusted for the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee after the date of the initial investment. The Company's ownership interest in real estate development joint ventures the Company has recorded under the equity method as of May 31,November 30, 2021 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 thatDisposals, Acquisitions and Related Items – From March 2018 through September 2021, we operated a cross border package forwarding (casillero) and online marketplace business under the “Aeropost” banner in 38 countries in Latin America and the Caribbean. PriceSmart acquired Aeropost in 2018 to leverage Aeropost’s technology and its management’s experience in developing software and systems for e-commerce and logistics to advance PriceSmart’s development of an omni-channel shopping experience for its ownership interestMembers. In October 2021, PriceSmart sold the legacy casillero and marketplace operations, which were not core to our main objectives. PriceSmart retained key Aeropost personnel and technology in store-front joint ventures within its marketplacethe transaction, with which we believe we can continue to grow our omni-channel business. This technology and casillero business,talent have helped us combine our brick-and-mortar operations with online capabilities, supported by a more sophisticated distribution system. These online capabilities and the Company hasenhanced distribution system provide us with the powerpotential 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 VIEsexpand our geographic coverage, reach more Members in more ways, increase efficiencies, reduce costs and has consolidated these entities within its consolidated financial statements. The Company's ownership interest in store-front joint ventures for which the Company has consolidated their financial statements as of May 31, 2021 are listed below:provide Members with greater value.
The Company disposed of its entire ownership in Aeropost to an unrelated third party. However, as part of the consideration of the sale, Aeropost will provide $2.0 million of logistical services as needed for 36 months. The Company recorded a pre-tax gain from the sale of Aeropost of $2.7 million in the first quarter of fiscal 2022 in Other income (expense), net in the consolidated statements of income.
|
|
|
| ||||
|
|
|
|
| |||
|
|
|
|
| |||
|
|
|
|
| |||
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.
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)
the countries where the Company operates due to elevated infection rates and government restrictions. The Company has assessed the impact that COVID-19 has had on our estimates, assumptions and accounting policies and made additional disclosures, if and as necessary.
Cash and Cash Equivalents – The Company considers as cash and cash equivalents all cash on deposit, highly liquid investments with a maturity of three months or less at the date of purchase and proceeds due from credit and debit card transactions in the process of settlement.
Restricted Cash – The following table summarizes the restricted cash reported by the Company (in thousands):
May 31, | August 31, | November 30, | August 31, | |||||||||||
2021 | 2020 | 2021 | 2021 | |||||||||||
Short-term restricted cash | $ | 781 | $ | 185 | $ | 4,165 | $ | 3,647 | ||||||
Long-term restricted cash | 6,972 | 4,105 | 12,363 | 9,772 | ||||||||||
Total restricted cash(1) | $ | 7,753 | $ | 4,290 | $ | 16,528 | $ | 13,419 | ||||||
(1)Restricted cash consists mainly of cash deposits held within banking institutions to complyin compliance with federal regulatory requirements in Costa Rica and Panama. In addition, the Company is required to maintain a certificate of deposit and/or security deposits of Trinidad dollars, as measured in U.S. dollars, of approximately $3.0$11.7 million with onea few of its lenders as a compensating balancebalances for a $3.0 millionseveral U.S. dollar denominated loanloans payable over several years. The certificatecertificates of deposit will be reduced annually commensurate with the loan balance.balances.
Short-Term Investments – The Company considers as short-term investments certificates of deposit and similar time-based deposits with financial institutions with maturities over three months and up to one year.
Long-Term Investments – The Company considers as long-term investments certificates of deposit and similar time-based deposits with financial institutions with maturities over one year.
Goodwill and Other Intangibles, net – Goodwill and other intangibles totaled $53.5$45.3 million as of NovemberMay 31, 30, 2021 and $55.452.9 million as of August 31, 20202021. The Company reviews reported goodwill and other intangibles at the reporting unit level for impairment. The Company tests goodwill for impairment at least annually or when events or changes in circumstances indicate that it is more likely than not that the asset is impaired. In connection with the Aeropost disposal, we retained the intellectual property associated with our PriceSmart.com business. However, we wrote off $1.7 million of goodwill, $4.4 million of other intangibles related to the Aeropost trademark, and $1.0 million of other intangibles related to the developed technology of Aeropost directly associated with Aeropost’s legacy marketplace and casillero business. These write-offs are included as part of the $2.7 million pre-tax gain recorded for the sale of Aeropost.
Receivables – Receivables consist primarily of credit card receivables and receivables from vendors and are stated net of allowances for credit losses. The determination of the allowance for credit losses is based on the Company’s assessment of collectability along with the consideration of current and expected market conditions that could impact collectability.
Tax Receivables – The Company pays Value Added Tax (“VAT”) or similar taxes, income taxes, and other taxes within the normal course of business in most of the countries in which it operates related to the procurement of merchandise and/or services the Company acquires and/or on sales and taxable income. VAT is a form of indirect tax applied to the value added at each stage of production (primary, manufacturing, wholesale and retail). This tax is similar to, but operates somewhat differently than, sales tax paid in the United States. The Company generally collects VAT from its Members upon sale of goods and services and pays VAT to its vendors upon purchase of goods and services. Periodically, the Company submits VAT reports to governmental agencies and reconciles the VAT paid and VAT received. The net overpaid VAT may be refunded or applied to subsequent returns, and the net underpaid VAT must be remitted to the government. With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due, this creates an income tax receivable. In most countries where the Company operates, the governments have implemented additional collection procedures, such as requiring credit card processors to remit a portion of sales processed via credit and debit cards directly to the government as advance payments of VAT and/or income tax. This collection mechanism generally leaves the Company with net VAT and/or income tax receivables, forcing the Company to process significant refund claims on a recurring basis. These refund or offset processes can take anywhere from several months to several years to complete.
In most countries where the Company operates, there are defined and structured processes to recover VAT receivables via refunds or offsets. However, in one country without a clearly defined refund process, the Company is actively engaged with the local government to recover VAT receivables totaling $9.1$11.1 million and $7.0$9.7 million as of May 31,November 30, 2021 and August 31, 2020,2021, respectively. In two other countries, there have been changes in the method of computing minimum tax payments, under which the governments have sought to require the Company to pay taxes based on a percentage of sales rather than taxable income. As a result, the Company has made and may continue to make income tax payments substantially in excess of those it would expect to pay based on taxable income. The Company had income tax receivables of $11.0$11.1 million and $10.4$11.0 million and deferred tax
assets of $3.2$3.5 million and $2.8$3.3 million as of May 31,November 30, 2021 and August 31, 2020,2021, respectively, in these countries. While the rules related to refunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets, because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests. Similarly, we have not placed any recoverability allowances on tax receivables that arise from payments we are required to make originating from tax assessments that we are appealing, as we believe it is more likely than not that we will ultimately prevail in the related appeals. There can be no assurance, however, that the Company will be successful in recovering all tax receivables or deferred tax assets.
The Company’s policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:
Short-term VAT and Income tax receivables, recorded as Prepaid expenses and other current assets: This classification is used for any countries where the Company’s subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. The Company also classifies as short-term any approved refunds or credit notes to the extent that the Company expects to receive the refund or use the credit notes within one year.
Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where the Company’s subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when the Company does not expect to eventually prevail in its recovery. The Company does not currently have any allowances provided against VAT and income tax receivables.
The following table summarizes the VAT receivables reported by the Company (in thousands):
May 31, | August 31, | November 30, | August 31, | |||||||||
2021 | 2020 | 2021 | 2021 | |||||||||
Prepaid expenses and other current assets | $ | 1,390 | $ | 1,749 | $ | 4,703 | 3,173 | |||||
Other non-current assets | 28,004 | 25,851 | 32,438 | 28,437 | ||||||||
Total amount of VAT receivables reported | $ | 29,394 | $ | 27,600 | $ | 37,141 | $ | 31,610 | ||||
The following table summarizes the Income tax receivables reported by the Company (in thousands):
May 31, | August 31, | November 30, | August 31, | |||||||||
2021 | 2020 | 2021 | 2021 | |||||||||
Prepaid expenses and other current assets | $ | 9,775 | $ | 10,944 | $ | 12,144 | 11,491 | |||||
Other non-current assets | 19,872 | 20,116 | 19,361 | 18,872 | ||||||||
Total amount of income tax receivables reported | $ | 29,647 | $ | 31,060 | $ | 31,505 | $ | 30,363 | ||||
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 based on a percentage of sales. The provision is adjusted every reporting period to reflect the trend of actual physical inventory and cycle count results. In addition, the Company may be required to take markdowns below the carrying cost of certain inventory to expedite the sale of such merchandise.
Stock Based Compensation – The Company utilizes 3 types of equity awards: restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”). Compensation related to RSAs, RSUs and PSUs is based on the fair market value at the time of grant. The Company recognizes the compensation cost related to RSAs and RSUs over the requisite service period as determined by the grant, amortized ratably or on a straight-line basis over the life of the grant. The Company also recognizes compensation cost for PSUs over the performance period of each tranche, adjusting this cost based on the Company’s estimate of the probability that performance metrics will be achieved. If the Company determines that an award is unlikely to vest, any previously recorded expense is then reversed.
The Company accounts for actual forfeitures as they occur. The Company records the tax savings resulting from tax deductions in excess of expense for stock-based compensation and the tax deficiency resulting from stock-based compensation in excess of the related tax deduction as income tax expense or benefit. In addition, the Company reflects the tax savings (deficiency) resulting from the taxation of stock-based compensation as an operating cash flow in its consolidated statement of cash flows.
RSAs are outstanding shares of common stock and have the same cash dividend and voting rights as other shares of common stock. Shares of common stock subject to RSUs are not issued nor outstanding until vested, and RSUs do not have the same dividend and voting rights as common stock. However, all outstanding RSUs have accompanying dividend equivalents, requiring payment to the employees and directors with unvested RSUs of amounts equal to the dividend they would have received had the shares of common stock underlying the RSUs been actually issued and outstanding. Payments of dividend equivalents to employees are recorded as compensation expense.
PSUs, similar to RSUs, are awarded with dividend equivalents, provided that such amounts become payable only if the performance metric is achieved. At the time the Compensation Committee confirms the performance metric has been achieved, the accrued dividend equivalents are paid on the PSUs.
Treasury Stock – Shares of common stock repurchased by the Company are recorded at cost as treasury stock and result in the reduction of stockholders’ equity in the Company’s consolidated balance sheets. The Company may reissue these treasury shares as part of its stock-based compensation programs. When treasury shares are reissued, the Company uses the first in/first out (“FIFO”) cost method for determining cost of the reissued shares. If the issuance price is higher than the cost, the excess of the issuance price over the cost is credited to additional paid-in capital (“APIC”). If the issuance price is lower than the cost, the difference is first charged against any credit balance in APIC from treasury stock and the balance is charged to retained earnings. During the ninethree months ended May 31,November 30, 2021, the Company reissued approximately 96,4009,000 treasury shares.
Fair Value Measurements – The Company measures the fair value for all financial and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring or nonrecurring basis. The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.
The Company has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring and revaluing fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company was not required to revalue any assets or liabilities utilizing Level 1 or Level 3 inputs at the balance sheet dates. The Company's Level 2 assets and liabilities revalued at the balance sheet dates, on a recurring basis, consisted of cash flow hedges (interest rate swaps and cross-currency interest rate swaps) and forward foreign exchange contracts. In addition, the Company utilizes Level 2 inputs in determining the fair value of long-term debt.
Non-financial assets and liabilities are revalued and recognized at fair value subsequent to initial recognition when there is evidence of impairment. For the periods reported, 0 impairment of such non-financial assets was recorded.
The Company’s current and long-term financial assets and liabilities have fair values that approximate their carrying values. The Company’s long-term financial liabilities consist of long-term debt, which is recorded on the balance sheet at issuance price and adjusted for any applicable unamortized discounts or premiums and debt issuance costs. There have been no significant changes in fair market value of the Company’s current and long-term financial assets, and there have been no material changes to the valuation techniques utilized in the fair value measurement of assets and liabilities disclosed in the Company’s 20202021 Annual Report on Form 10-K.
Derivatives Instruments and Hedging Activities – The Company uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to changes in interest and currency exchange rates. In using derivative financial instruments for the purpose of hedging the Company’s exposure to interest and currency exchange rate risks, the contractual terms of a hedged instrument closely mirror those of the hedged item and are intended to provide a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria (effective hedge) are recorded using hedge accounting. If a derivative financial instrument is an effective hedge, changes in the fair value of the instrument will be reported in accumulated other comprehensive loss until the hedged item completes its contractual term. Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. The Company did not change valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s consolidated balance sheets from previous practice during the reporting period. The Company seeks to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which the Company has an established banking relationship. There can be no assurance, however, that this practice effectively mitigates counterparty risk.
Cash Flow Instruments. The Company is a party to receive floating interest rate, pay fixed-rate interest rate swaps to hedge the interest rate risk of certain U.S. dollar denominated debt within its international subsidiaries. The swaps are designated as cash flow hedges of interest expense risk. These instruments are considered effective hedges and are recorded using hedge accounting. The Company is also a party to receive variable interest rate, pay fixed interest rate cross-currency interest rate swaps to hedge the interest rate and currency exposure associated with the expected payments of principal and interest of U.S. denominated debt within its international subsidiaries whose functional currency is other than the U.S. dollar. The swaps are designated as cash flow hedges of the currency risk and interest-rate risk related to payments on the U.S. denominated debt. These instruments are also considered to be effective hedges and are recorded using hedge accounting. Under cash flow hedging, the entire gain or loss of the derivative, calculated as the net present value of the future cash flows, is reported on the consolidated balance sheets in accumulated other comprehensive loss. Amounts recorded in accumulated other comprehensive loss are released to earnings in the same period that the hedged transaction impacts consolidated earnings. Refer to “Note 8 - Derivative Instruments and Hedging Activities” for information on the fair value of interest rate swaps and cross-currency interest rate swaps as of May 31,November 30, 2021 and August 31, 2020.2021.
Fair Value Instruments. The Company is exposed to foreign currency exchange rate fluctuations in the normal course of business. This includes exposure to foreign currency exchange rate fluctuations on U.S. dollar denominated liabilities within the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts that are intended to offset changes in cash flows attributable to currency exchange movements. The contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar.
Currently, these contracts are treated for accounting purposes as fair value instruments and do not qualify for derivative hedge accounting, and as such the Company does not apply derivative hedge accounting to record these transactions. As a result, these contracts are valued at fair value with unrealized gains or losses reported in earnings during the
period of the change. The Company seeks to mitigate foreign currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features and are limited to less than one year in duration.
Other Instruments. Other derivatives not designated as hedging instruments consist primarily of written call options in which the Company receives a premium that it uses to reduce the costs associated with its hedging activities. For derivative instruments not designated as hedging instruments, the Company recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Other expense, net in the consolidated statements of income in the period of change.
Revenue Recognition – The accounting policies and other disclosures such as the disclosure of disaggregated revenues are described in “Note 3 – Revenue Recognition.”
Insurance ReimbursementsGain Contingencies and Recoveries – ReceiptsA gain contingency is an existing condition, situation, or set of circumstances involving uncertainty as to a possible gain that will ultimately be resolved when one or more future events occur or fail to occur. During the ordinary course of our business, gain contingencies arise when we have the opportunity to recover costs or damages we incur 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. carriers or other third parties. Anticipated proceeds in excess of the amount of loss recognized are considered gains and are subject to gain contingency guidance.contingent gains. Anticipated proceeds in excess of a loss recognized in the financial statements are not recognized until all contingencies related to the insurance claimcollectability, timing and amount are resolved.realizable.
Cost of Goods Sold – The Company includes the cost of merchandise and food service and bakery raw materials in cost of goods sold, net merchandise sales. The Company also includes in cost of goods sold: net merchandise sales the external and internal distribution and handling costs for supplying merchandise, raw materials and supplies to the warehouse clubs, and, when applicable, costs of shipping to Members. External costs include inbound freight, duties, drayage, fees, insurance, and non-recoverable value-added tax related to inventory shrink, spoilage and damage. Internal costs include payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense and building and equipment depreciation at the Company's distribution facilities and payroll and other direct costs for in-club demonstrations.
For export sales, the Company includes the cost of merchandise and external and internal distribution and handling costs for supplying merchandise in cost of goods sold, exports.
For the marketplace and casillero operations, the Company includes the costs of external and internal shipping, handling and other direct costs incurred to provide delivery, insurance and customs processing services in cost of goods sold, non-merchandise.
Vendor consideration consists primarily of volume rebates, time-limited product promotions, cooperative marketing efforts, digital advertising, slotting fees, demonstration reimbursements and prompt payment discounts. Volume rebates and time-limited promotions are recognized on a systematic and rational allocation of the cash consideration as the Company progresses toward earning the rebate, provided the amounts to be earned are probable and reasonably estimable. Cooperative marketing efforts and digital advertising are related to consideration received by the Company from vendors for non-distinct online advertising services on the Company’s website and social media platforms. Slotting fees are related to consideration received by the Company from vendors for preferential "end cap" placement of the vendor's products within the warehouse club. Demonstration reimbursements are related to consideration received by the Company from vendors for the in-club promotion of the vendors' products. The Company records the reduction in cost of goods sold on a transactional basis for these programs. On a quarterly basis, the Company calculates the amount of rebates recorded in cost of goods sold that relates to inventory on hand and this amount is reclassified as a reduction to inventory, if significant. Prompt payment discounts are taken in substantially all cases and therefore are applied directly to reduce the acquisition cost of the related inventory, with the resulting effect recorded to cost of goods sold when the inventory is sold.
Selling, General and Administrative – Selling, general and administrative costs consist primarily of expenses associated with operating warehouse clubs and freight forwarding operations. These costs include payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense, building and equipment depreciation, bank, credit card processing fees, and amortization of intangibles. Also included in selling, general and administrative expenses are the payroll and related costs for the Company’s U.S. and regional management and purchasing centers.
Pre-Opening Costs – The Company expenses pre-opening costs (the costs of start-up activities, including organization costs and rent) for new warehouse clubs as incurred.
Loss Contingencies and Litigation – The Company records and reserves for loss contingencies if (a) information available prior to issuance of the consolidated financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the consolidated financial statements and (b) the amount of loss can be reasonably estimated. If one or both criteria for accrual are not met, but there is at least a reasonable possibility that a material loss will occur, the Company does not record and reserve for a loss contingency but describes the contingency within a note and provides detail, when possible, of the estimated potential loss or range of loss. If an estimate cannot be made, a statement to that effect is made.
Foreign Currency Translation – The assets and liabilities of the Company’s foreign operations are translated to U.S. dollars when the functional currency in the Company’s international subsidiaries is the local currency and not U.S. dollars. Assets and liabilities of these foreign subsidiaries are translated to U.S. dollars at the exchange rate on the balance sheet date, and revenue, costs and expenses are translated at average rates of exchange in effect during the period. The corresponding translation gains and losses are recorded as a component of accumulated other comprehensive income or loss. These adjustments will affect net income upon the sale or liquidation of the underlying investment.
The following table discloses the net effect of translation into the reporting currency on other comprehensive loss for these local currency denominated accounts for the three and nine months ended May 31,November 30, 2021 and 2020 (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||
May 31, | May 31, | May 31, | May 31, | |||||||||
2021 | 2020 | 2021 | 2020 | |||||||||
Effect on other comprehensive loss due to foreign currency translation | $ | (3,007) | $ | (12,874) | $ | (2,577) | $ | (19,981) | ||||
Three Months Ended | |||||||
November 30, | November 30, | ||||||
2021 | 2020 | ||||||
Effect on other comprehensive income (loss) due to foreign currency translation | $ | (8,131) | $ | 2,761 | |||
Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses), including transactions recorded involving these monetary assets and liabilities, are recorded as Other income (expense) in the consolidated statements of income (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||
May 31, | May 31, | May 31, | May 31, | |||||||||
2021 | 2020 | 2021 | 2020 | |||||||||
Currency loss | $ | (2,240) | $ | (1,529) | $ | (3,970) | $ | (2,431) | ||||
Three Months Ended | |||||||
November 30, | November 30, | ||||||
2021 | 2020 | ||||||
Currency loss | $ | (1,864) | $ | (1,492) | |||
Recent Accounting Pronouncements – Not Yet Adopted
FASB ASC 740 ASU 2019-12—Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. ASU No. 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The ASU is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. The Company expects to adoptadopted ASU No. 2019-12 on September 1, 2021, the first quarter of fiscal year 2022. The Company does not expect this guidance to have a material impact on the Company’s consolidated financial statements.
Recent Accounting Pronouncements Adopted
FASB ASC 848 ASU 2020-04—Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU No. 2020-04 provides optional expedients and exceptions, if certain criteria are met, for a limited period of time to ease the potential burden in accounting for contracts, hedging relationships, and other transactions affected by reference rate reform. This accounting standards update is intended to ease the process of migrating away from LIBOR to new reference rates. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). The amendments in this ASU refine the scope of ASC 848 and clarifies some of its guidance as it relates to recent rate reform activities.
A substantial number of the Company’s debt agreements and hedging relationships bear interest at variable interest rates, primarily based on USD-LIBOR. To preserve the presentation of the Company’s debt and derivatives, the Company adopted ASU 2020-04 and ASU 2021-01 effective December 1, 2020, on a prospective basis. The Company has elected to apply the contract modification expedient and the hedge accounting expedients related to critical terms, probability of forecasted transactions, and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. The adoption of, and future elections under ASU 2020-04 and ASU 2021-01, did not and are not expected to have a material impact on the Company’s accounting policies or consolidated financial statements. We will continue to monitor the impact the discontinuance of LIBOR will have on the Company’s contracts, hedging relationships and other transactions.
FASB ASC 350 ASU 2018-15 – Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). As such, the amendment in this ASU requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in subtopic 350-40 in order to determine which implementation costs to capitalize as an asset and which costs to expense.
Additionally, the amendments in this ASU require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments in this ASU are effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company adopted ASU No. 2018-15 on a prospective basis on September 1, 2020, the first quarter of fiscal year 2021. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
FASB ASC 820 ASU 2018-13 – Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). The standard eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. ASU No. 2018-13 adds new disclosure requirements for Level 3 measurements. The amendments in this ASU are effective for annual periods beginning after December 15, 2019. The Company adopted ASU No. 2018-13 on a prospective basis on September 1, 2020, the first quarter of fiscal year 2021. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
FASB ASC 350 ASU 2017-04 – Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU modify the concept of impairment from the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if
that reporting unit had been acquired in a business combination. Under this ASU, entities should now calculate any goodwill impairment by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge to the goodwill for the amount by which the carrying amount exceeds the reporting unit's fair value. The amendments in this ASU are effective for annual periods beginning after December 15, 2019. The Company adopted ASU No. 2017-04 on a prospective basis on September 1, 2020, the first quarter of fiscal year 2021. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
FASB ASC 326 ASU 2016-13 – Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), which amends the FASB’s guidance on the impairment of financial instruments. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments to clarify and address certain items related to the amendments in ASU 2016-13. These amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the amendments on a prospective basis on September 1, 2020, the first quarter of fiscal year 2021. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
There were no other new accounting standards that had a material impact on the Company’s consolidated financial statements during the three and nine month periodsthree-month period ended May 31,November 30, 2021, and there were no other new accounting standards or pronouncements that were issued but not yet effective as of May 31,November 30, 2021 that the Company expects to have a material impact on its consolidated financial statements.
NOTE 3 – REVENUE RECOGNITION
Performance Obligations
The Company identifies each distinct performance obligation to transfer goods (or bundle of goods) or services. The Company recognizes revenue when (or as) it satisfies a performance obligation by transferring control of the goods or services to the customer.
Net Merchandise Sales. The Company recognizes net merchandise sales revenue, net of sales taxes, on transactions where the Company has determined that it is the principal in the sale of merchandise. These transactions may include shipping commitments and/or shipping revenue if the transaction involves delivery to the customer.
Non-merchandise Sales. The Company recognizes non-merchandise revenue, net of sales taxes, on transactions where the Company has determined that it is the agent in the transaction. These transactions primarily consist of contracts the Company enters into with its customers to provide delivery, insurance and customs processing services for products its customers purchase online in the United States either directly from other vendors utilizing the vendor’s website or through the Company’s marketplace site. Revenue is recognized when the Company’s performance obligations have been completed (that is when delivery of the items have been made to the destination point) and is recorded in “non-merchandise revenue” on the consolidated statements of income. Prepayment for orders for which the Company has not fulfilled its performance obligation are recorded as deferred income. Additionally, the Company records revenue at the net amounts retained, i.e., the amount paid by the customer less amounts remitted to the respective merchandise vendors, as the Company is acting as an agent and is not the principal in the sale of those goods being purchased from the vendors by the Company’s customers.
Membership Fee Revenue. Membership income represents annual membership fees paid by the Company’s warehouse club Members, which are recognized ratably over the 12-month term of the membership. Our membership policy allows Members to cancel their membership in the first 60 days and receive a full refund. After the 60-day period, membership refunds are prorated over the remaining term of the membership. The Company has significant experience with membership refund patterns and expects membership refunds will not be material. Therefore, no refund reserve was required for the periods presented. Membership fee revenue is included in membership income in the Company's consolidated statements of income. The deferred membership fee is included in deferred income in the Company's consolidated balance sheets.
Platinum Points Reward Programs. The Company currently offers Platinum membershipsMemberships in all of its 13 countries. The annual fee for a Platinum membershipMembership is approximately $75. The Platinum membershipMembership provides Members with a 2% rebate on most items, up to an annual maximum of $500. The rebate is issued annually to Platinum Members on March 1 and expires August 31. Platinum Members can apply this rebate to future purchases at the warehouse club during the redemption period. The Company records this 2% rebate as a reduction of revenue at the time of the sales transaction. Accordingly, the Company has reduced warehouse sales and has accrued a liability within other accrued expenses and other current liabilities, platinum rewards. The Company has determined that breakage revenue is 5% of the awards issued; therefore, it records 95% of the Platinum membershipMembership liability at the time of sale. Annually, the Company reviews for expired unused rebates outstanding, and the expired unused rebates are recognized as “Other revenue and income” on the consolidated statements of income.
Co-branded Credit Card Points Reward Programs. Most of the Company’s subsidiaries have points reward programs related to co-branded credit cards. These points reward programs provide incremental points that can be used at a future time to acquire merchandise within the Company’s warehouse clubs. This results in two performance obligations, the first performance obligation being the initial sale of the merchandise or services purchased with the co-branded credit card and the second performance obligation being the future use of the points rewards to purchase merchandise or services. As a result, upon the initial sale, the Company allocates the transaction price to each performance obligation with the amount allocated to the future use points rewards recorded as a contract liability within other accrued expenses and other current liabilities on the consolidated balance sheet. The portion of the selling price allocated to the reward points is recognized as Net merchandise sales when the points are used or when the points expire. The Company reviews on an annual basis expired points rewards outstanding, and the expired rewards are recognized as Net merchandise sales on the consolidated statements of income within markets where the co-branded credit card agreement allows for such treatment.
Gift Cards. Members’ purchases of gift cards to be utilized at the Company's warehouse clubs are not recognized as sales until the card is redeemed and the customer purchases merchandise using the gift card. The outstanding gift cards are reflected as other accrued expenses and other current liabilities in the consolidated balance sheets. These gift cards generally have a one-year stated expiration date from the date of issuance and are generally redeemed prior to expiration. However, the absence of a large volume of transactions for gift cards impairs the Company's ability to make a reasonable estimate of the redemption levels for gift certificates; therefore, the Company assumes a 100% redemption rate prior to expiration of the gift certificate. The Company periodically reviews unredeemed outstanding gift certificates, and the gift certificates that have expired are recognized as “Other revenue and income” on the consolidated statements of income.
Co-branded Credit Card Revenue Sharing Agreements. As part of the co-branded credit card agreements that the Company has entered into with financial institutions within its markets, the Company often enters into revenue sharing agreements. As part of these agreements, in some countries, the Company receives a portion of the interest income generated from the average outstanding balances on the co-branded credit cards from these financial institutions (“interest generating portfolio” or “IGP”). The Company recognizes its portion of interest received as revenue during the period it is earned. The Company has determined that this revenue should be recognized as “Other revenue and income” on the consolidated statements of income.
Contract Performance Liabilities
Contract performance liabilities as a result of transactions with customers primarily consist of deferred membership income, other deferred income, deferred gift card revenue, Platinum points programs, and liabilities related to co-branded credit card points rewards programs which are included in deferred income and other accrued expenses and other current liabilities in the Company’s consolidated balance sheets. The following table provides these contract balances from transactions with customers as of the dates listed (in thousands):
Contract Liabilities | Contract Liabilities | |||||||||
May 31, 2021 | August 31, 2020 | November 30, 2021 | August 31, 2021 | |||||||
Deferred membership income | $ | 26,457 | $ | 23,051 | $ | 26,952 | $ | 25,951 | ||
Other contract performance liabilities | $ | 5,895 | $ | 5,190 | $ | 11,811 | $ | 7,871 | ||
Disaggregated Revenues
In the following table, net merchandise sales are disaggregated by merchandise category (in thousands):
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||
May 31, 2021 | May 31, 2020 | May 31, 2021 | May 31, 2020 | November 30, 2021 | November 30, 2020 | |||||||||||
Foods & Sundries | $ | 431,007 | $ | 419,579 | $ | 1,298,134 | $ | 1,250,728 | $ | 470,950 | $ | 418,374 | ||||
Fresh Foods | 252,365 | 228,858 | 745,158 | 685,413 | 269,677 | 235,289 | ||||||||||
Hardlines | 94,732 | 70,374 | 318,229 | 261,796 | 111,936 | 112,785 | ||||||||||
Softlines | 43,468 | 25,597 | 130,732 | 115,860 | 50,474 | 40,329 | ||||||||||
Other Business | 35,906 | 23,960 | 101,998 | 105,025 | 41,006 | 31,592 | ||||||||||
Net Merchandise Sales | $ | 857,478 | $ | 768,368 | $ | 2,594,251 | $ | 2,418,822 | $ | 944,043 | $ | 838,369 | ||||
NOTE 4 – EARNINGS PER SHARE
The Company presents basic net income per share using the two-class method. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders and that determines basic net income per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings that would have been available to common stockholders. A participating security is defined as a security that may participate in undistributed earnings with common stock. The Company’s capital structure includes securities that participate with common stock on a one-for-one basis for distribution of dividends. These are the restricted stock awards and restricted stock units issued pursuant to the 2013 Equity Incentive Award Plan. The Company does not include performance stock units as participating securities until they vest.the performance criteria are satisfied. The Company determines the diluted net income per share by using the more dilutive of the two class-method or the treasury stock method and by including the basic weighted average of outstanding performance stock units for which performance criteria have not been met in the calculation of diluted net income per share under the two-class method and including all potential common shares assumed issued in the calculation of diluted net income per share under the treasury stock method.
The following table sets forth the computation of net income per share for the three and nine monthsthree-months ended May 31,November 30, 2021 and 2020 (in thousands, except per share amounts):
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||
May 31, | May 31, | May 31, | May 31, | November 30, | November 30, | |||||||||||||
2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||
Net income attributable to PriceSmart, Inc. | $ | 22,529 | $ | 12,705 | $ | 78,502 | $ | 58,033 | $ | 30,511 | $ | 27,737 | ||||||
Less: Allocation of income to unvested stockholders | (372) | (188) | (952) | (527) | (560) | (459) | ||||||||||||
Net income attributable to PriceSmart, Inc. per share available for distribution | $ | 22,157 | $ | 12,517 | $ | 77,550 | $ | 57,506 | $ | 29,951 | $ | 27,278 | ||||||
Basic weighted average shares outstanding | 30,414 | 30,271 | 30,396 | 30,268 | 30,551 | 30,398 | ||||||||||||
Add dilutive effect of performance stock units (two-class method) | 32 | 4 | 27 | 5 | 52 | 22 | ||||||||||||
Diluted average shares outstanding | 30,446 | 30,275 | 30,423 | 30,273 | 30,603 | 30,420 | ||||||||||||
Basic net income per share | $ | 0.73 | $ | 0.41 | $ | 2.55 | $ | 1.90 | $ | 0.98 | $ | 0.90 | ||||||
Diluted net income per share | $ | 0.73 | $ | 0.41 | $ | 2.55 | $ | 1.90 | $ | 0.98 | $ | 0.90 | ||||||
NOTE 5 – STOCKHOLDERS’ EQUITY
Dividends
NaN dividends were declared by the Company’s Board of Directors during the first three months of fiscal year 2022. The following table summarizes the dividends declared and paid during fiscal year 2021 and 2020 (amounts are per share).
First Payment | Second Payment | First Payment | Second Payment | |||||||||||||||||||||||||||||||||||
Declared | Amount | Record | Date | Date | Amount | Record | Date | Date | Amount | Amount | Record | Date | Amount | Record | Date | Amount | ||||||||||||||||||||||
2/4/2021 |
| $ | 0.70 |
| 2/15/2021 |
| 2/26/2021 |
| N/A |
| $ | 0.35 |
| 8/15/2021 |
| N/A |
| 8/31/2021 |
| $ | 0.35 | $ | 0.70 | 2/15/2021 | 2/26/2021 | 0.35 | 8/15/2021 | 8/31/2021 | 0.35 | |||||||||
2/6/2020 |
| $ | 0.70 |
| 2/15/2020 |
| 2/28/2020 |
| N/A |
| $ | 0.35 |
| 8/15/2020 |
| 8/31/2020 |
| N/A |
| $ | 0.35 | |||||||||||||||||
The Company anticipates the ongoing payment of semi-annual dividends in subsequent periods, although the actual declaration of future dividends, if any, the amount of such dividends, and the establishment of record and payment dates is subject to final determination by the Board of Directors at its discretion after its review of the Company’s financial performance and anticipated capital requirements, taking into account the uncertainty surrounding the ongoing effects of the COVID-19 pandemic on our results of operations and cash flows.
Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
The following tables disclose the effects on accumulated other comprehensive loss of each component of other comprehensive income (loss), net of tax (in thousands):
Attributable to | Noncontrolling | Attributable to | Noncontrolling | |||||||||||||
PriceSmart | Interests | Total | PriceSmart | Interests | Total | |||||||||||
Beginning balance, September 1, 2020 | $ | (176,820) | $ | 134 | $ | (176,686) | ||||||||||
Beginning balance, September 1, 2021 | $ | (182,508) | 251 | $ | (182,257) | |||||||||||
Foreign currency translation adjustments | (2,577) | 91 | (2,486) | (8,131) | 3 | (8,128) | ||||||||||
Defined benefit pension plans (1) | 164 | — | 164 | 51 | — | 51 | ||||||||||
Derivative instruments (2) | 1,865 | — | 1,865 | 1,949 | — | 1,949 | ||||||||||
Ending balance, May 31, 2021 | $ | (177,368) | $ | 225 | $ | (177,143) | ||||||||||
Sale of Aeropost | — | (254) | (254) | |||||||||||||
Ending balance, November 30, 2021 | $ | (188,639) | $ | — | $ | (188,639) | ||||||||||
Attributable to | Noncontrolling | Attributable to | Noncontrolling | |||||||||||||
PriceSmart | Interests | Total | PriceSmart | Interests | Total | |||||||||||
Beginning balance, September 1, 2019 | $ | (144,339) | $ | 20 | $ | (144,319) | ||||||||||
Beginning balance, September 1, 2020 | $ | (176,820) | $ | 134 | $ | (176,686) | ||||||||||
Foreign currency translation adjustments | (19,981) | 90 | (19,891) | 2,761 | 31 | 2,792 | ||||||||||
Defined benefit pension plans (1) | 53 | — | 53 | 93 | — | 93 | ||||||||||
Derivative Instruments (2) | (3,752) | — | (3,752) | 308 | — | 308 | ||||||||||
Ending balance, May 31, 2020 | $ | (168,019) | $ | 110 | $ | (167,909) | ||||||||||
Ending balance, November 30, 2020 | $ | (173,658) | $ | 165 | $ | (173,493) | ||||||||||
Attributable to | Noncontrolling | Attributable to | Noncontrolling | |||||||||||||
PriceSmart | Interests | Total | PriceSmart | Interests | Total | |||||||||||
Beginning balance, September 1, 2019 | $ | (144,339) | $ | 20 | $ | (144,319) | ||||||||||
Beginning balance, September 1, 2020 | $ | (176,820) | $ | 134 | $ | (176,686) | ||||||||||
Foreign currency translation adjustments | (29,413) | 114 | (29,299) | (7,837) | 117 | (7,720) | ||||||||||
Defined benefit pension plans (1) | (79) | — | (79) | (230) | — | (230) | ||||||||||
Derivative Instruments (2) | (5,803) | — | (5,803) | 2,252 | — | 2,252 | ||||||||||
Amounts reclassified from accumulated other comprehensive loss | 2,814 | — | 2,814 | 127 | — | 127 | ||||||||||
Ending balance, August 31, 2020 | $ | (176,820) | $ | 134 | $ | (176,686) | ||||||||||
Ending balance, August 31, 2021 | $ | (182,508) | $ | 251 | $ | (182,257) | ||||||||||
(1)Amounts reclassified from accumulated other comprehensive income (loss) related to the minimum pension liability are included in warehouse club and other operations in the Company's consolidated statements of income.
(2)Refer to Note 8 - Derivative Instruments and Hedging Activities.
Retained Earnings Not Available for Distribution
The following table summarizes retained earnings designated as legal reserves of various subsidiaries which cannot be distributed as dividends to PriceSmart, Inc. according to applicable statutory regulations (in thousands):
May 31, | August 31, | |||||
2021 | 2020 | |||||
Retained earnings not available for distribution | $ | 7,921 | $ | 7,375 | ||
November 30, | August 31, | |||||
2021 | 2021 | |||||
Retained earnings not available for distribution | $ | 8,136 | $ | 8,022 | ||
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, the Company and its subsidiaries are subject to legal proceedings, claims and litigation arising in the ordinary course of business related to the Company’s operations and property ownership. The Company evaluates such matters on a case by case basis, and vigorously contests any such legal proceedings or claims which the Company believes are without merit. The Company believes that the final disposition of these matters will not have a material adverse effect on its financial position, results of operations or liquidity. It is possible, however, that the Company's results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to such matters.
The Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss and the accrued amount, if any, thereof, and adjusts the amount as appropriate. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. If it is at least a reasonable possibility that a material loss will occur, the Company will provide disclosure regarding the contingency.
Income Taxes – For interim reporting, the Company uses an estimated annual effective tax rate (AETR), pursuant to ASC 740-270, to calculate income tax expense. Income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of the consolidated income tax expense. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating its ability to recover deferred tax assets in the jurisdictions from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, the Company begins with historical results adjusted for the results of discontinued operations and incorporates assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating income (loss).
The Company is required to file federal and state tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with the interpretations the Company used to calculate its tax liability and therefore require the Company to pay additional taxes.
The Company accrues an amount for its estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less
than 50% likelihood of being sustained. As of May 31, 2021,There were no material changes in the Company'sCompany’s uncertain income tax position balance has been reduced by $1.2 million since August 31, 2020, due topositions during the expiration of statutes of limitation and other current year adjustments.three months ended November 30, 2021.
In evaluating the exposure associated with various non-income tax filing positions, the Company accrues for probable and estimable exposures for non-income tax related tax contingencies. As of May 31,November 30, 2021 and August 31, 2020,2021, the Company has recorded within other accrued expenses and other current liabilities a total of $1.7 million and $2.5$1.8 million, respectively, for various non-income tax related tax contingencies.
While the Company believes the recorded liabilities are adequate, there are inherent limitations in projecting the outcome of litigation, in estimating probable additional income tax liability taking into account uncertain tax positions and in evaluating the probable additional tax associated with various non-income tax filing positions. As such, the Company is unable to make a reasonable estimate of the sensitivity to change of estimates affecting its recorded liabilities. As additional information becomes available, the Company assesses the potential liability and revises its estimates as appropriate.
In two countries where the Company operates, minimum income tax rules require the Company to pay taxes based on a percentage of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those it would expect to pay based on taxable income. The Company had income tax receivables of $11.0$11.1 million and $10.4$11.0 million and deferred tax assets of $3.2$3.5 million and $2.8$3.3 million as of May 31,November 30, 2021 and August 31, 2020,2021, respectively, in these countries. While the rules related to refunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets, because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests.
Other Commitments
The Company is also committed to non-cancelable construction service obligations for various warehouse club developments and expansions. As of May 31,November 30, 2021 and August 31, 2020,2021, the Company had approximately $16.3$10.1 million and $5.1$16.2 million, respectively, in contractual obligations for construction services not yet rendered.
From time to time, the Company has entered into general land purchase and land purchase option agreements. The Company’s land purchase agreements are typically subject to various conditions, including, but not limited to, the ability to obtain necessary governmental permits or approvals. A deposit under an agreement is typically returned to the Company if all permits or approvals are not obtained. Generally, the Company has the right to cancel any of its agreements to purchase land without cause by forfeiture of some or all of the deposits it has made pursuant to the agreement. As of May 31,November 30, 2021, the Company had entered into atwo land purchase option agreementagreements that, if completed, would result in the use of approximately $7.4$9.4 million in cash.
The table below summarizes the Company’s interest in real estate joint ventures, commitments to additional future investments and the Company’s maximum exposure to loss as a result of its involvement in these joint venture as of May 31,November 30, 2021 (in thousands):
Entity | % | Initial | Additional | Net Income Inception to Date | Company’s | Commitment | Company's | % | Initial | Additional | Net Income | Company’s | Commitment | Company's | ||||||||||||||||||||||||||||
GolfPark Plaza, S.A. | 50 | % | $ | 4,616 | $ | 2,402 | $ | 22 | $ | 7,040 | $ | 99 | $ | 7,139 | 50 | % | $ | 4,616 | $ | 2,402 | $ | (23) | $ | 6,995 | $ | 99 | $ | 7,094 | ||||||||||||||
Price Plaza Alajuela PPA, S.A. | 50 | % | 2,193 | 1,236 | 100 | 3,529 | 785 | 4,314 | 50 | % | 2,193 | 1,236 | 110 | 3,539 | 785 | 4,324 | ||||||||||||||||||||||||||
Total | $ | 6,809 | $ | 3,638 | $ | 122 | $ | 10,569 | $ | 884 | $ | 11,453 | $ | 6,809 | $ | 3,638 | $ | 87 | $ | 10,534 | $ | 884 | $ | 11,418 | ||||||||||||||||||
(1)The parties intend to seek alternate financing for the project, which could reduce the amount of investments each party would be required to provide. The parties may mutually agree on changes to the project, which could increase or decrease the amount of contributions each party is required to provide.
(2)The maximum exposure is determined by adding the Company’s variable interest in the entity and any explicit or implicit arrangements that could require the Company to provide additional financial support.
NOTE 7 – DEBT
Short-term borrowings consist of unsecured lines of credit. The following table summarizes the balances of total facilities, facilities used and facilities available (in thousands):
Facilities Used | |||||||||||||||
Total Amount | Short-term | Letters of | Facilities | Weighted average | |||||||||||
of Facilities | Borrowings | Credit | Available | interest rate | |||||||||||
May 31, 2021 | $ | 131,000 | $ | — | $ | 125 | $ | 130,875 | — | % | |||||
August 31, 2020 | $ | 81,210 | $ | 65,143 | $ | 388 | $ | 15,679 | 3.7 | % | |||||
Facilities Used | |||||||||||||||
Total Amount | Short-term | Letters of | Facilities | Weighted average | |||||||||||
of Facilities | Borrowings | Credit | Available | interest rate | |||||||||||
November 30, 2021 | $ | 131,000 | $ | 4,986 | $ | — | $ | 126,014 | 3.0 | % | |||||
August 31, 2021 | $ | 131,000 | $ | — | $ | 97 | $ | 130,903 | — | % | |||||
As of May 31,November 30, 2021 and August 31, 2020,2021, the Company was in compliance with all covenants or amended covenants for each of its short-term facility agreements. These facilities generally expire annually or bi-annually and are normally renewed.
The following table provides the changes in long-term debt for the nine-monthsthree months ended May 31,November 30, 2021:
(Amounts in thousands) | Current | Long-term | Total | Current | Long-term | Total | ||||||||||||||
Balances as of August 31, 2020 | $ | 19,437 | $ | 112,610 | $ | 132,047 | (1) | |||||||||||||
Balances as of August 31, 2021 | $ | 19,395 | $ | 110,110 | $ | 129,505 | (1) | |||||||||||||
Proceeds from long-term debt incurred during the period: | ||||||||||||||||||||
Trinidad subsidiary | 547 | 2,453 | 3,000 | |||||||||||||||||
Guatemala subsidiary | — | 4,204 | 4,204 | |||||||||||||||||
Repayments of long-term debt: | ||||||||||||||||||||
Guatemala subsidiary | (377) | — | (377) | |||||||||||||||||
Costa Rica subsidiary | (1,261) | (109) | (1,370) | |||||||||||||||||
Regularly scheduled loan payments | (1,164) | (11,971) | (13,135) | (1,739) | (2,640) | (4,379) | ||||||||||||||
Reclassifications of long-term debt due in the next 12 months | 1,706 | (1,706) | — | 879 | (879) | — | ||||||||||||||
Translation adjustments on foreign currency debt of subsidiaries whose functional currency is not the U.S. dollar (2) | 28 | (92) | (64) | (54) | (85) | (139) | ||||||||||||||
Balances as of May 31, 2021 | $ | 20,554 | $ | 101,294 | $ | 121,848 | (3) | |||||||||||||
Balances as of November 30, 2021 | $ | 16,843 | $ | 110,601 | $ | 127,444 | (3) | |||||||||||||
(1)The carrying amount of non-cash assets assigned as collateral for these loans was $158.6$153.5 million. NaNThe carrying amount of cash assets were assigned as collateral for these loans.loans was $7.0 million.
(2)These foreign currency translation adjustments are recorded within Other comprehensive loss.income (loss).
(3)The carrying amount of cash and non-cash assets assigned as collateral for these loans was $2.8$146.0 million and $143.7$6.2 million, respectively.
As of May 31,November 30, 2021 and August 31, 2020,2021, the Company had approximately $96.0$99.3 million and $107.4$103.4 million, respectively, of long-term loans in several foreign subsidiaries that require these subsidiaries to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. The Company was in compliance with all covenants or amended covenants for both periods.
Annual maturities of long-term debt are as follows (in thousands):
Twelve Months Ended May 31, | Amount | |||||
Twelve Months Ended November 30, | Amount | |||||
2022 | $ | 20,554 | $ | 16,843 | ||
2023 | 26,381 | 26,836 | ||||
2024 | 9,174 | 27,024 | ||||
2025 | 25,608 | 10,907 | ||||
2026 | 4,310 | 11,481 | ||||
Thereafter | 35,821 | 34,353 | ||||
Total | $ | 121,848 | $ | 127,444 | ||
NOTE 8 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to interest rate risk relating to its ongoing business operations. To manage interest rate exposure, the Company enters into hedge transactions (interest rate swaps) using derivative financial instruments. The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the LIBOR interest payments associated with variable-rate loans over the life of the loans. As changes in interest rates impact the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements.
In addition, the Company is exposed to foreign currency and interest rate cash flow exposure related to non-functional currency long-term debt of two of its wholly owned subsidiaries. To manage this foreign currency and interest rate cash flow exposure, the Company’s subsidiaries entered into cross-currency interest rate swaps that convert their U.S. dollar denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument. As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedges are intended to offset changes in cash flows attributable to interest rate and foreign exchange movements.
These derivative instruments (cash flow hedging instruments) are designated and qualify as cash flow hedges, with the entire gain or loss on the derivative reported as a component of other comprehensive loss. Amounts are deferred in other comprehensive loss and reclassified into earnings in the same income statement line item that is used to present the earnings effect of the hedged item when the hedged item affects earnings.
The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business, including foreign-currency exchange-rate fluctuations on U.S. dollar denominated liabilities within its international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts (NDFs) that are intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate foreign-currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features.
The Company uses other derivatives not designated as hedging instruments that consist primarily of written call options in which the Company receives a premium from the holder. This premium lowers the cost of the Company’s hedging activities. The Company recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Other expense, net in the consolidated statements of income in the period of change.
Cash Flow Hedges
As of May 31,November 30, 2021, all of the Company’s interest rate swap and cross-currency interest rate swap derivative financial instruments are designated and qualify as cash flow hedges. The Company formally documents the hedging relationships for its derivative instruments that qualify for hedge accounting.
The following table summarizes agreements for which the Company has recorded cash flow hedge accounting for the ninethree months ended May 31,November 30, 2021:
Subsidiary | Date | Derivative | Derivative | Initial | Bank | Floating Leg | Fixed Rate | Settlement | Effective | Date | Derivative | Derivative | Initial | Bank | Floating Leg | Fixed Rate | Settlement | Effective | ||||||||||||||||||||||
Colombia | 3-Dec-19 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | 7,875,000 | Citibank, N.A. | Variable rate 3-month Libor plus 2.45% | 7.87 | % | 3rd day of each December, March, June, and September, beginning on March 3, 2020 | December 3, 2019 - | 17-Nov-21 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | 10,000,000 | PriceSmart, Inc. | 3.00% | 8.40 | % | 17th day of each February, May, August, and November, beginning on February 17, 2022 | November 17, 2021 - | ||||||||||||||||||
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 - | 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 | 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 - | 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 | 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 | 25-Jun-18 | Bank of Nova Scotia ("Scotiabank") | Interest rate swap | $ | 14,625,000 | Bank of Nova Scotia | Variable rate 3-month Libor plus 3.0% | 5.99 | % | 23rd day of each month beginning on July 23, 2018 | June 25, 2018 - | 25-Jun-18 | Bank of Nova Scotia ("Scotiabank") | Interest rate swap | $ | 14,625,000 | Bank of Nova Scotia | Variable rate 3-month Libor plus 3.0% | 5.99 | % | 23rd day of each month beginning on July 23, 2018 | June 25, 2018 - | ||||||||||||||||||
Honduras | 26-Feb-18 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | 13,500,000 | Citibank, N.A. | Variable rate 3-month Libor plus 3.00% | 9.75 | % | 29th day of May, August, November and February beginning May 29, 2018 | February 26, 2018 - | 26-Feb-18 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | 13,500,000 | Citibank, N.A. | Variable rate 3-month Libor plus 3.00% | 9.75 | % | 29th day of May, August, November and February beginning May 29, 2018 | February 26, 2018 - | ||||||||||||||||||
PriceSmart, Inc | 7-Nov-16 | MUFG Union Bank, N.A. ("Union Bank") | Interest rate swap | $ | 35,700,000 | Union Bank | Variable rate 1-month Libor plus 1.7% | 3.65 | % | 1st day of each month beginning on April 1, 2017 | March 1, 2017 - March 1, 2027 | 7-Nov-16 | MUFG Union Bank, N.A. ("Union Bank") | Interest rate swap | $ | 35,700,000 | Union Bank | Variable rate 1-month Libor plus 1.7% | 3.65 | % | 1st day of each month beginning on April 1, 2017 | March 1, 2017 - | ||||||||||||||||||
For the three and nine months ended May 31,November 30, 2021 and May 31,November 30, 2020, the Company included the gain or loss on the hedged items (that is, variable-rate borrowings) in the same line item—interest expense—as the offsetting gain or loss on the related interest rate swaps as follows (in thousands):
Income Statement Classification | Interest | Cost of | Total | ||||||
Interest expense for the three months ended May 31, 2021 | $ | 656 | $ | 907 | $ | 1,563 | |||
Interest expense for the three months ended May 31, 2020 | $ | 1,067 | $ | 620 | $ | 1,687 | |||
Interest expense for the nine months ended May 31, 2021 | $ | 2,015 | $ | 2,785 | $ | 4,800 | |||
Interest expense for the nine months ended May 31, 2020 | $ | 3,287 | $ | 1,477 | $ | 4,764 | |||
Income Statement Classification | Interest | Cost of | Total | ||||||
Interest expense for the three months ended November 30, 2021 | $ | 557 | $ | 849 | $ | 1,406 | |||
Interest expense for the three months ended November 30, 2020 | $ | 642 | $ | 925 | $ | 1,567 | |||
(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.
The total notional balance of the Company’s pay-fixed/receive-variable interest rate swaps and cross-currency interest rate swaps was as follows (in thousands):
Notional Amount as of | Notional Amount as of | |||||||||||
May 31, | August 31, | November 30, | August 31, | |||||||||
Floating Rate Payer (Swap Counterparty) | 2021 | 2020 | 2021 | 2021 | ||||||||
Union Bank | $ | 32,938 | $ | 33,894 | $ | 32,300 | $ | 32,619 | ||||
Citibank N.A. | 52,201 | 55,086 | 59,862 | 51,032 | ||||||||
Scotiabank | 10,500 | 11,625 | 9,750 | 10,125 | ||||||||
Total | $ | 95,639 | $ | 100,605 | $ | 101,912 | $ | 93,776 | ||||
Derivatives listed on the table below were designated as cash flow hedging instruments. The table summarizes the effect of the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting and its associated tax effect on accumulated other comprehensive (income)/loss (in thousands):
May 31, 2021 | August 31, 2020 | November 30, 2021 | August 31, 2021 | |||||||||||||||||||||||||||||||||||||
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 | $ | 1,160 | $ | (353) | $ | 807 | $ | 872 | $ | (265) | $ | 607 | Other non-current assets | $ | 4,412 | $ | (1,327) | $ | 3,085 | $ | 2,464 | $ | (741) | $ | 1,723 | ||||||||||||||
Cross-currency interest rate swaps | Other current assets | 1,717 | (517) | 1,200 | — | — | — | |||||||||||||||||||||||||||||||||
Interest rate swaps | Other long-term liabilities | (2,338) | 547 | (1,791) | (3,857) | 898 | (2,959) | Other long-term liabilities | (1,563) | 362 | (1,201) | (2,305) | 535 | (1,770) | ||||||||||||||||||||||||||
Cross-currency interest rate swaps | Other long-term liabilities | (816) | 245 | (571) | (828) | 248 | (580) | Other long-term liabilities | (534) | 160 | (374) | (705) | 212 | (493) | ||||||||||||||||||||||||||
Net fair value of derivatives designated as hedging instruments | $ | (1,994) | $ | 439 | $ | (1,555) | $ | (3,813) | $ | 881 | $ | (2,932) | $ | 4,032 | $ | (1,322) | $ | 2,710 | $ | (546) | $ | 6 | $ | (540) | ||||||||||||||||
Fair Value Instruments
From time to time the Company enters into non-deliverable forward foreign-exchange contracts. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting. The use of non-deliverable forward foreign-exchange contracts is intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar.
The following table summarizes the non-deliverable forward foreign exchange contracts that are open as of May 31,November 30, 2021.
Subsidiary | Dates | Financial | Derivative | Notional | Settlement Date | Effective Period | |||||||
Colombia | 28-Apr-21 | Scotiabank Colpatria, S.A. | Forward foreign | $ | 5,000 | 28-Dec-21 | April 28, 2021 - December 28, 2021 | ||||||
Colombia | 28-May-21 | Scotiabank Colpatria, S.A. | Forward foreign | $ | 2,000 | 29-Dec-21 | May 28, 2021 - December 29, 2021 | ||||||
While forwardForward derivative gains and (losses) on non-deliverable forward foreign-exchange contracts were immaterial for the three and nine-months ended May 31, 2021 and May 31, 2020, they are included in Other expense,income (expense), net in the consolidated statements of income in the period of change.change, but the amounts were immaterial for the three months ended November 30, 2021 and November 30, 2020.
Other Instruments
Other derivatives not designated as hedging instruments consist primarily of written call options in which the Company receives a premium that it uses to reduce the costs associated with its hedging activities. As of May 31, 2021, all of the Company’s contracts are designated as hedging instruments.
For the three and nine months ended May 31, 2021 and May 31, 2020, the Company included in its consolidated statements of income the loss of its other non-designated derivative contracts as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||
May 31, | May 31, | May 31, | May 31, | |||||||||
Income Statement Classification | 2021 | 2020 | 2021 | 2020 | ||||||||
Other expense, net | $ | — | $ | — | $ | — | $ | (912) | ||||
NOTE 9 – SEGMENTS
The Company and its subsidiaries are principally engaged in the international operation of membership shopping in 4749 warehouse clubs located in 12 countries and 1 U.S. territory that are located in Central America, the Caribbean and Colombia. In addition, the Company operates distribution centers and corporate offices in the United States. The Company has aggregated its warehouse clubs, distribution centers and corporate offices into reportable segments. The Company’s reportable segments are based on management’s organization of these locations into operating segments by general geographic location, which are used by management and the Company's chief operating decision maker in setting up management lines of responsibility, providing support services, and making operational decisions and assessments of financial performance. Segment amounts are presented after converting to U.S. dollars and consolidating eliminations. Certain revenues, operating costs and inter-company charges included in the United States segment are not allocated to the segments within this presentation, as it is impractical to do so, and they appear as reconciling items to reflect the amount eliminated on consolidation of intersegment transactions. From time to time, the Company revises the measurement of each segment's operating income and net income, including certain corporate overhead allocations, and other measures as determined by the information regularly reviewed by the Company's chief operating decision maker. When the Company does so, the previous period amounts and balances are reclassified to conform to the current period's presentation.
The following tables summarize by segment certain revenues, operating costs and balance sheet items (in thousands):
United | Central | Caribbean | Colombia Operations | Reconciling | Total | United | Central | Caribbean | Colombia Operations | Reconciling | Total | |||||||||||||||||||||||||
Three Months Ended May 31, 2021 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 21,237 | $ | 531,595 | $ | 243,468 | $ | 98,964 | $ | — | $ | 895,264 | ||||||||||||||||||||||||
Intersegment revenues | 309,261 | 4,305 | 1,228 | 434 | (315,228) | — | ||||||||||||||||||||||||||||||
Depreciation, Property and equipment | 1,666 | 7,990 | 3,920 | 2,403 | — | 15,979 | ||||||||||||||||||||||||||||||
Amortization, Intangibles | 606 | — | — | — | — | 606 | ||||||||||||||||||||||||||||||
Operating income (loss) | 545 | 38,313 | 17,240 | 5,135 | (25,184) | 36,049 | ||||||||||||||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. | (2,388) | 32,700 | 13,524 | 3,929 | (25,236) | 22,529 | ||||||||||||||||||||||||||||||
Capital expenditures, net | 3,334 | 8,724 | 6,486 | 4,870 | — | 23,414 | ||||||||||||||||||||||||||||||
Nine Months Ended May 31, 2021 | ||||||||||||||||||||||||||||||||||||
Three Months Ended November 30, 2021 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 67,622 | $ | 1,567,287 | $ | 762,153 | $ | 313,203 | $ | — | $ | 2,710,265 | $ | 13,423 | $ | 572,065 | $ | 272,487 | $ | 117,381 | $ | — | $ | 975,356 | ||||||||||||
Intersegment revenues | 955,619 | 12,842 | 3,498 | 2,413 | (974,372) | — | 414,342 | 4,998 | 1,443 | 822 | (421,605) | — | ||||||||||||||||||||||||
Depreciation, Property and equipment | 5,115 | 23,367 | 11,570 | 6,500 | — | 46,552 | 465 | 8,300 | 4,018 | 2,364 | — | 15,147 | ||||||||||||||||||||||||
Amortization, Intangibles | 1,798 | — | — | — | — | 1,798 | 456 | — | — | — | — | 456 | ||||||||||||||||||||||||
Operating income (loss) | 8,315 | 113,120 | 59,600 | 17,139 | (72,615) | 125,559 | 6,257 | 43,379 | 19,878 | 6,378 | (29,875) | 46,017 | ||||||||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. | (4,306) | 94,247 | 48,175 | 13,224 | (72,838) | 78,502 | 3,373 | 35,900 | 16,450 | 4,682 | (29,894) | 30,511 | ||||||||||||||||||||||||
Long-lived assets (other than deferred tax assets) | 79,178 | 484,039 | 189,873 | 163,266 | — | 916,356 | 71,399 | 495,517 | 203,042 | 167,762 | — | 937,720 | ||||||||||||||||||||||||
Intangibles, net | 8,368 | — | — | — | — | 8,368 | 1,922 | — | — | — | — | 1,922 | ||||||||||||||||||||||||
Goodwill | 10,695 | 24,359 | 10,088 | — | — | 45,142 | 8,981 | 24,313 | 10,038 | — | — | 43,332 | ||||||||||||||||||||||||
Total assets | 202,770 | 777,703 | 427,078 | 224,404 | — | 1,631,955 | 212,371 | 867,868 | 460,381 | 248,693 | — | 1,789,313 | ||||||||||||||||||||||||
Capital expenditures, net | 6,052 | 30,334 | 14,748 | 20,416 | — | 71,550 | 1,909 | 12,690 | 7,073 | 12,383 | — | 34,055 | ||||||||||||||||||||||||
Three Months Ended May 31, 2020 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 15,852 | $ | 452,927 | $ | 250,304 | $ | 80,848 | $ | — | $ | 799,931 | ||||||||||||||||||||||||
Intersegment revenues | 230,826 | 4,791 | 1,548 | 787 | (237,952) | — | ||||||||||||||||||||||||||||||
Depreciation, Property and equipment | 1,294 | 7,577 | 3,810 | 1,591 | — | 14,272 | ||||||||||||||||||||||||||||||
Amortization, Intangibles | 607 | — | — | — | — | 607 | ||||||||||||||||||||||||||||||
Operating income (loss) | (1,115) | 27,606 | 13,547 | 3,487 | (19,558) | 23,967 | ||||||||||||||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. | (3,785) | 22,724 | 10,849 | 2,403 | (19,486) | 12,705 | ||||||||||||||||||||||||||||||
Capital expenditures, net | 1,446 | 9,395 | 2,163 | 3,508 | — | 16,512 | ||||||||||||||||||||||||||||||
Nine Months Ended May 31, 2020 | ||||||||||||||||||||||||||||||||||||
Three Months Ended November 30, 2020 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 52,039 | $ | 1,442,336 | $ | 747,004 | $ | 277,228 | $ | — | $ | 2,518,607 | $ | 23,617 | $ | 494,692 | $ | 258,516 | $ | 100,607 | $ | — | $ | 877,432 | ||||||||||||
Intersegment revenues | 868,137 | 12,745 | 3,627 | 1,870 | (886,379) | — | 350,103 | 4,736 | 1,146 | 1,129 | (357,114) | — | ||||||||||||||||||||||||
Depreciation, Property and equipment | 3,981 | 22,027 | 11,602 | 5,452 | — | 43,062 | 1,665 | 7,694 | 3,792 | 1,735 | — | 14,886 | ||||||||||||||||||||||||
Amortization, Intangibles | 1,805 | — | — | — | — | 1,805 | 599 | — | — | — | — | 599 | ||||||||||||||||||||||||
Operating income (loss) | 3,401 | 96,972 | 40,436 | 13,411 | (60,730) | 93,490 | 5,742 | 34,445 | 21,594 | 5,565 | (22,815) | 44,531 | ||||||||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. | (5,350) | 79,815 | 34,978 | 9,340 | (60,750) | 58,033 | (372) | 29,238 | 17,170 | 4,596 | (22,895) | 27,737 | ||||||||||||||||||||||||
Long-lived assets (other than deferred tax assets) | 83,813 | 481,942 | 181,578 | 143,437 | — | 890,770 | 81,277 | 472,892 | 178,879 | 159,459 | — | 892,507 | ||||||||||||||||||||||||
Intangibles, net | 10,772 | — | — | — | — | 10,772 | 9,566 | — | — | — | — | 9,566 | ||||||||||||||||||||||||
Goodwill | 10,695 | 24,484 | 10,137 | — | — | 45,316 | 10,695 | 24,317 | 10,111 | — | — | 45,123 | ||||||||||||||||||||||||
Total assets | 224,682 | 727,527 | 384,168 | 238,112 | — | 1,574,489 | 212,434 | 771,933 | 436,418 | 257,210 | — | 1,677,995 | ||||||||||||||||||||||||
Capital expenditures, net | 5,564 | 42,766 | 13,913 | 28,807 | — | 91,050 | 1,218 | 7,544 | 2,458 | 8,539 | — | 19,759 | ||||||||||||||||||||||||
As of August 31, 2020 | ||||||||||||||||||||||||||||||||||||
As of August 31, 2021 | ||||||||||||||||||||||||||||||||||||
Long-lived assets (other than deferred tax assets) | $ | 81,008 | $ | 475,744 | $ | 177,166 | $ | 146,862 | $ | — | $ | 880,780 | $ | 79,404 | $ | 490,099 | $ | 197,030 | $ | 164,970 | $ | — | $ | 931,503 | ||||||||||||
Intangibles, net | 10,166 | — | — | — | — | 10,166 | 7,762 | — | — | — | — | 7,762 | ||||||||||||||||||||||||
Goodwill | 10,696 | 24,418 | 10,092 | — | — | 45,206 | 10,695 | 24,332 | 10,068 | — | — | 45,095 | ||||||||||||||||||||||||
Total assets | 272,190 | 741,523 | 395,244 | 247,868 | — | 1,656,825 | 246,896 | 795,940 | 434,428 | 228,526 | — | 1,705,790 | ||||||||||||||||||||||||
(1)Management considers its club in the U.S. Virgin Islands to be part of its Caribbean operations.
(2)The reconciling items reflect the amount eliminated on consolidation of intersegment transactions.
NOTE 10 – SUBSEQUENT EVENTS
The Company has evaluated all events subsequent to the balance sheet date as of May 31,November 30, 2021 through the date of issuance of these consolidated financial statements and has determined that, except as set forth below, there are no subsequent events that require disclosure.
Financing Transactions
On December 3, 2021, the Company's Trinidad subsidiary entered into a long-term loan agreement for $25.0 million U.S. dollars with a term of four years and a fixed interest rate of 7.7% per annum. The loan is indexed to local currency (Trinidad Dollar).
PRICESMART, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements concerning PriceSmart, Inc.'s ("PriceSmart", the "Company" or "we") anticipated future revenues and earnings, adequacy of future cash flows, omni-channel initiatives, proposed warehouse club openings, the Company's performance relative to competitors and related matters. These forward-looking statements include, but are not limited to, statements containing the words “expect,” “believe,” “will,” “may,” “should,” “project,” “estimate,” “anticipated,” “scheduled,” “intend,” and like expressions, and the negative thereof. These statements are subject to risks and uncertainties that could cause actual results to differ materially including, but not limited to: adverse changes in economic conditions in our markets, natural disasters, compliance risks, volatility in currency exchange rates and illiquidity of certain local currencies in our markets, competition, consumer and small business spending patterns, political instability, increased costs associated with the integration of online commerce with our traditional business, whether the Company can successfully execute strategic initiatives, cybersecurity breaches that could cause disruptions in our systems or jeopardize the security of Member or business information, cost increases from product and service providers, interruption of supply chains, novel coronavirus (COVID-19) related factors and challenges, including among others, the duration of the pandemic, the unknown long-term economic impact, the impact of government policies and restrictions that have limited access for our Members, and shifts in demand away from discretionary or higher priced products to lower priced products, exposure to product liability claims and product recalls, recoverability of moneys owed to PriceSmart from governments, and other important factors discussed under the captions “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended August 31, 20202021 filed with the United States Securities and Exchange Commission (“SEC”) on October 30, 2020.21, 2021. These risk factors may be updated from time to time in our other filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. Forward-looking statements speak only as of the date that they are made, and the Company does not undertake to update them, except as required by law. In addition, these risks are not the only risks that the Company faces. The Company could also be affected by additional factors that apply to all companies operating globally and in the U.S., as well as other risks that are not presently known to the Company or that the Company currently considers to be immaterial.
Overview
PriceSmart exists to improve the lives and businesses of our Members, our employees and our communities through the ethical delivery of the bestby reliably and consistently providing quality goods and valuable services at the lowest possible prices. We believe that lower prices on products and services drive sales volume, which increases the Company’s buying leverage, which in turn leads to better pricing that we can then offer to our Members, validating the value of the annual membership fee.
PriceSmart began operations in 1996 in San Diego, California. We own and operateCalifornia, with the intent to bring our U.S. style membership shopping warehouse club concept to underserved countries. We currently operate 49 warehouse clubs in Central America, the Caribbean and Colombia. Our Members also are able to shop on our e-commerce platform, PriceSmart.com, which is available in all 13 markets.
We selloffer our individual and business Members a carefully-curated selection of high quality, brand name and private label consumer products, offeressential goods and direct-from-farm fresh produce. We also provide prepared foods and fresh-baked goods. Most all merchandise is available for delivery or contactless curbside pickup through our bakeries and food courts with the option for delivery, and in certainClick & Go™ service. Some of our clubs wealso provide services such as opticalthat include Optical, Pharmacy, Audiology and tiresTire departments and serve food at low prices to individuals and businesses.our food courts. 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 likelymay be less dense and/or where there may be significant business to support abusiness opportunities. We also have utilized the smaller club or densely populatedformat option to access and serve urban areas where it is challengingdifficult to secure sufficient real estate at a reasonable cost forcost. The option of using a larger club. This smaller format club, coupled with our omni-channel initiatives, has the potential tohelps us expand our membership base and geographic reach in existing markets and provide greater value and more convenience for our Members.markets. We continue tostrategically invest in technology to enhance Member experience and convenience. Technology allows us to use valuable membership and other data to increase efficiencies and use our insights about our Members to enhance the Member shopping experience with omni-channel capabilities, including e-commerce online shopping. Most notably, the Company launched its Click & Go™ online order, curbside pickup and delivery service, in fiscal 2020, which provides contactless shopping in all 13 of our markets. We also have launched digital membership, which helps us gather higher quality data we can use to make better informed decisions in all areas of the business and facilitates a more seamless auto-renewal process, increasing predictability of membership income. We believe digital membership also provides more convenience to Members with digital cards and online payment.positively impact their lives. We also provide wholesale supply services to a retailer in the Philippines.
We believe that our business success depends on strengthening the trust of our Members by providing curated high-quality items and valuable services at a low cost in our markets and by offering the best value on attractive products and services in a safe and responsible environment.We believe that lower prices on products and services drive sales volume, which increases the Company’s buying leverage, which in turn leads to better pricing that we can then offer to our Members, validating the value of the annual membership fee.
Logistics and distribution efficiencies are fundamental to delivering high quality merchandise at low prices to our Members. We utilize regional distribution centers in the U.S. and Costa Rica as well as several smaller local distribution centers which enables us to moredistribute merchandise efficiently, distribute our merchandise while also giving us increasedretain flexibility and provide alternatives to source and transport goods. We continuegoods, and mitigate the risk of supply-chain disruption. As our business grows and includes more e-commerce activity, we continually evaluate how to explore waysutilize our logistics and distribution system to deliver value, improve efficiency, reduce costs and ensure a flow of high quality, curatedmost efficiently provide merchandise to our warehouse clubs.Members. We also seek to drive membership value and efficiencies by expanding our network of Produce Distribution Centers and are exploring centralizing production activities, such as bakery and meat processing.
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 believeOwnership of our real estate ownershipin many of our markets provides a number ofseveral 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 residualpotential increase of value that the real estate may have in future years. We own and lease our real estate, depending upon the best available opportunities.
Our warehouse clubs currently operate in emerging markets that historically have had higher growth rates and lower warehouse club market penetration than the U.S. market. In the countries in which we operate, we do not currently face direct competition from U.S. membership warehouse club operators. However, we do face competition from various retail formats such as hypermarkets, supermarkets, cash and carry, home improvement centers, electronic retailers, specialty stores, convenience stores, traditional wholesale distribution and growing online sales.
The number of warehouse clubs for each country or territory were as follows:
Number of | Number of | Number of | Number of | |||||
Warehouse Clubs | Warehouse Clubs | Warehouse Clubs | Warehouse Clubs | |||||
in Operation as of | in Operation as of | in Operation as of | in Operation as of | |||||
Country/Territory | May 31, 2021 | May 31, 2020 | November 30, 2021 | November 30, 2020 | ||||
Colombia | 9 | 7 | ||||||
Costa Rica | 8 | 7 | 8 | 8 | ||||
Colombia | 8 | 7 | ||||||
Panama | 7 | 7 | 7 | 7 | ||||
Dominican Republic | 5 | 5 | 5 | 5 | ||||
Guatemala | 5 | 4 | ||||||
Trinidad | 4 | 4 | 4 | 4 | ||||
Guatemala | 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 | 47 | 45 | 49 | 46 | ||||
Our warehouse clubs, one regional distribution center and several smaller local distribution centers are located in Latin America and the Caribbean, and our corporate headquarters, U.S. buying operations and our larger regional distribution center are located primarily in the United States. Our operating segments are the United States, Central America, the Caribbean and Colombia. We also operate a package forwarding business (casillero) and marketplace business under the “Aeropost” banner in 38 countries in Latin America and the Caribbean, many of which overlap with markets where we operate warehouse clubs.
While we continue to closely monitor the continuing COVID-19 situations in each of our markets and recognize that the potential social and economic impacts in the markets where we operate and any resulting consequences to our results of operations and cash flow remain unknown, we have decided to proceedWe are currently proceeding with the construction of three warehouse clubs on land we previously acquired. The first will be a standard format warehouse club located within the Zone 5 locality of Guatemala City, Guatemala, which will be our fifth warehouse club located in Guatemala. We expect to open this warehouse club in the first quarter of fiscal 2022. The second will be a smaller format warehouse club located within the city of Bucaramanga, Colombia. We expect to open this warehouse club, which will be our ninth warehouse club in Colombia, in the first quarter of fiscal 2022. The third will be a standard format warehouse club located within the city of Portmore, Jamaica. Portmore is a suburb west of the capital city of Kingston. We expect to open this warehouse club, which will be our second warehouse club in Jamaica, in the third quarter of fiscal 2022. April 2022; it will also be our 50th warehouse club.
Factors Affecting Our Business
The COVID-19 pandemic has resulted in significant challenges across our 13 markets since March 2020. Many markets imposed limitations, varying by market and in frequency, on access to the Company’s clubs and on the Company’s club operations, including in some cases frequent temporary club closures, a reduction in the number of days during the week and hours per day the Company’s clubs were permitted to be open, restrictions on segments of the population permitted to shop or circulate on particular days, and significant limits on the number of people permitted to be in the club at the same time. We also experienced product mix shifts due to changing consumer habits and/or government imposed limitations on many non-food categories, decreases in purchases by many business Members, particularly restaurants and hotels, and sporadic supply chain challenges, which can impact inventory levels.
We are currently focused on these four main priorities:
Protect the safety and well-being of our employees and our Members.
Take proactive measures to protect and expand our supply chain options.
Expand technology-enabled shopping and more effective use of data.
Manage cash and capital resources.
We remain vigilant inrecognize that this is an evolving and fluid situation; therefore, we are vigilantly adapting to the ever-evolvingshifting consumer demands emerging from the COVID experience and the apparent desire of consumers to satisfy their shopping and service needs in one location.pandemic. The COVID-19 pandemicsituation remains unpredictable in duration and intensity, in our markets, and we continue to see periodic reinstatements of stay-at-home orders and other restrictions. In addition, we expect continued uncertainty in the economies of our markets as a result of the pandemic and expectanticipate volatility in employment trends, industry and consumer confidence and demand; volatility and liquidity of foreign currency exchange rates; volatility of commodity prices; and possible fiscal austerity measures taken by governments in our markets, which will likely impact our results for the foreseeable future. For additional information, refer to the risk factors discussed in Part I. “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended August 31, 2020.
We view the continued development and integration of technology to create an omni-channel Member experience as an important component of our value proposition, which can also offset some of the impact of pandemic-related restrictions we continue to see. Our Click & Go™ curbside and delivery service contributed approximately 3.5% of total net merchandise sales for the fiscal third quarter ended May 31, 2021. The demand for delivery through our Click &Go™ service has been increasing and represents a growing proportion of total Click & Go™ sales. Developing greater efficiencies remains a priority especially within these new sales channels. We believe that Click & Go™ curbside and delivery services will remain important alternative shopping methods and provide increased value for our Members by enabling them to leverage their membership across multiple shopping platforms. We also see value in the insights gained by communicating with our Members in real-time through a number of the online channels we have developed. Beyond Click & Go™, we continue to invest in technology to increase efficiencies, enhance our Member experience by enabling additional omni-channel capabilities, and finding new ways to generate value and benefits for our Members and the Company.
Increasing “same store” sales is an important element of our growth strategy, and we believe that there are a number of ways to achieve this goal. We are committed to increasing same store sales by increasing both the number of Member transactions and by increasing the average ticket. We have started or recently completed expansions and/or remodels of several clubs in our Central America segment in fiscal 2021, which we believe will contribute to same store sales growth. We have also increased our digital marketing efforts, which has resulted in enhanced reach and visibility of our products and services, contributing to the success of our recent programs. In particular, we believe that our Wellness programs offered in our clubs, such as Optical, which is now available in eight markets, and Pharmacy, which we are piloting in two Costa Rica clubs, and audiology centers that we will begin piloting later this calendar year, will create value for our Members and help drive overall sales growth.
Additionally, in an effort to provide healthy options for our Members, we source additional high quality fresh products through our Direct Farm Program. We believe that our Direct Farm Program reduces costs and improves quality on our fresh produce offerings, while simultaneously supporting local farmers and industry. Our produce distribution centers allow us to provide farm-to-table produce quicker and more efficiently. We opened two produce distribution centers in fiscal 2020 and expect to open additional produce distribution centers in the future.
Overall economic trends, foreign currency exchange volatility, and other factors impacting the business
Our sales and profits vary from market to market depending on general economic factors, including GDP growth; consumer preferences; foreign currency exchange rates; political policies and social conditions; local demographic characteristics
(such (such as population growth); the number of years we have operated in a particular market; and the level of retail and wholesale competition in that market. The economies of many of our markets are dependent on foreign trade, tourism, and foreign direct investments. Global and local travel restrictions and thea general slowdownslow-down in global economic activity as a result of COVID-19 have significantly impacted and may continue to impact the economies in several of our markets, causing significant declines in GDP and employment and devaluations and illiquidity of local currencies against the U.S. dollar.
During the last half of fiscal year 2021 and continuing into fiscal 2022, we saw several factors pressuring supply chains, including container shortages, port delays, and truck and driver shortages. These disruptions and shortages are impacting the timing of deliveries and leading to higher freight costs. Despite all these issues, we continue to see strong sales. We are working to hold down and/or mitigate the price increases passed on to the Members and maintain sufficient inventory to grow sales. One key mitigating factor has been our expanded network of distribution centers, which has facilitated alternative routings of shipments, increased throughput, and provided flexibility to more effectively mitigate these challenges. In general, positiveaddition, we have made strategic investments in inventory and worked with our local vendors to source alternative products, in order to reduce future out-of-stocks on high demand items that have been impacted by these disruptions or that have been affected by electronic part shortages. We expect pandemic-related conditions in the broader economy promote greater Member spending in our warehouse clubs, and economic weakness generally results in a reduction of customer spending.to continue throughout fiscal 2022.
Currency fluctuations can be one of the largest variables affecting our overall sales and profit performance, as we have experienced in prior fiscal years, because many of our markets are susceptible to foreign currency exchange rate volatility. During the first ninethree months of both fiscal year 20212022 and 2020,2021, approximately 77.8% and 77.6%, respectively, of our net merchandise sales were in currencies other than the U.S. dollar. Of those sales, 48.1%48.5% and 49.1%49.5% consisted of sales of products we purchased in U.S. dollars for each period, respectively.
A devaluation of local currency reduces the value of sales and membership income that is generated in that country when translated to U.S. dollars for our consolidated results. In addition, when local currency experiences devaluation, we may elect to increase the local currency price of imported merchandise to maintain our target margins, which could impact demand for the merchandise affected by the price increase. We may also modify the mix of imported versus local merchandise and/or the source of imported merchandise in an effort to mitigate the impact of currency fluctuations. Information about the effect of local currency devaluations is discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Net Merchandise Sales and Comparable Sales.”
Our capture of total retail and wholesale sales can vary from market to market due to competition and the availability of other shopping options for our Members. Demographic characteristics within each of our markets can affect both the overall level of sales and future sales growth opportunities. Certain island markets, such as Aruba, Barbados and the U.S. Virgin Islands offer us limited upside for sales growth given their overall market size.
Political and other factors in each of our markets may have significant effects on our business. The recent and ongoingFor example, the civil unrest in Colombia paralyzed significant portions of the country’s infrastructure as roadblocks and riots disrupted normal economic activity during the third quarter of fiscal 2021. Austerity and tax reform measures for Colombia and other Latin American countries with high national debt levels and income disparity pose a risk for political instability. Similar unrest happened in Nicaragua and Honduras in 2018 and 2019, respectively; Costa Rica also had a general strike against tax reform measures that significantly impeded regular economic activity in 2018. Events of this sort have, and may continue to have, an adverse effect on our business.
Our operations are subject to volatile weather conditions and natural disasters. In November 2020, Hurricanes Eta and Iota brought severe rainfall, winds, and flooding to a significant portion of Central America, especially Honduras, that caused significant damage to parts of that country’s infrastructure. Although our warehouse clubs were not significantly affected and we were able to manage our supply chain to keep our warehouse clubs stocked with merchandise, these natural disasters could adversely impact our overall sales, costs and profit performance in the future.
In the past, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity), particularly in Trinidad. This can and has impeded our ability to convert local currencies obtained through merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products and to otherwise redeploy these funds in our Company and,Company. This illiquidity also increases our foreign exchange exposure to any devaluation of the local currency relative to the U.S. dollar. We continuedDuring fiscal year 2021 and continuing into fiscal year 2022, we continue to experience significant limitations on our ability to convert Trinidad dollars to U.S. dollars or other tradeable currencies during fiscal 2020, with a further deterioration and the problem becoming more acute in August 2020. This U.S. dollar illiquidity situation has persisted thus far into fiscal 2021 and we anticipate the situation to continue.currencies. As liquidity conditions have tightened, we have methodically raised prices on imported goods in Trinidad due to increased costs of conversion of Trinidad dollars to U.S. dollars and risks associated with continued illiquidity. We have also sought to shift the purchase of certain goods to local sources where appropriate, and we are actively seeking to exchange Trinidad dollars for tradeable currencies in order to manage our exposure to any potential devaluation. Moreover, in the first quarter of fiscal 2021,In addition, we began limitingsignificantly limited shipments of goods from the U.S. to Trinidad during most of fiscal 2021 and subsequently, wecontinuing into fiscal 2022 due to the illiquidity of the Trinidad dollar. We further reduced our already limited shipments late in the thirdlast quarter of fiscal 2021 duebecause of the government imposed restrictions on non-essential items during that period. However, while shipments remained low relative to historic levels, shipments did increase sequentially from the government’s general prohibition on sales on most non-food or non-essential items. This prohibition is expected to persist for at least some part of our fiscal fourth quarter, depending on the local COVID-19 situation.
Comparable net merchandise sales declined in Trinidad by 21.8% in the third quarter of fiscal year 2021 due to reductions in the levels of imported merchandise to amounts in-line with our ability to exchange Trinidad dollars for U.S. dollars or other tradeable currencies and the increased COVID-19 restrictions in that market. We also saw a drop in Member accounts of 2.7% during the third quarter and 5.0% since the end of last year, which we believe is also related to the reductionfirst quarter of fiscal 2022 in imports and COVID-19connection with the government’s lifting of restrictions on Member traffic and prohibition on sales of non-essential items. Atitems during the start of the third quarter of fiscal 2021, we began raising U.S. imports into Trinidad; however, with the aforementioned COVID-19 restrictions, we significantly reduced U.S. shipments into Trinidad at the end of the quarter, temporarily, until the local situation improves. We expect that the combination of these factors will continue to negatively impact our sales in Trinidad in our fourth fiscalfirst quarter.
Despite these headwinds, weWe continue to explore and execute several options to increase our ability to generate more reliable sources of U.S. dollars in Trinidad. These options include,Trinidad, some of which may lead us to incur additional expenses. For instance, in December 2021, we executed a loan whereby we received $25 million of U.S. dollars, but are not limited to, sourcing locally produced goodsthe associated principal and interest will be repaid in Trinidad dollars and exporting these goods to our clubs and/or third parties(converted at rates in other countrieseffect in exchange for U.S. dollars. While these initiatives are being developed, we are exploring ways to finance additional imports, even ifDecember 2021) over a higher levelfour-year period, thereby locking in the conversion of imports exceeds thea significant amount of U.S. dollars we are able to source in Trinidad. Alternatives we are considering include new U.S. dollar denominated loans, foreign currency exchange forwards, investing in financial instruments, and purchase and sales of commodities, which could create immediate U.S. dollar liquidity and/or fix the exchange rate of Trinidad dollars to U.S. dollars. Some of these alternatives may not mitigate the resulting increaseat current conversion rates and freeing up this cash in exposure to a potential devaluation of the Trinidad dollar and could result in us being required to take a discount on the amount of U.S. dollars we accept in exchange for Trinidad dollars, relative to what we would receive upon exchange in accordance with the official exchange rate and/or incur additional financing costs.deployment for general corporate purposes.
As of May 31,November 30, 2021, our Trinidad subsidiary had Trinidad dollar denominated cash and cash equivalents and short and long-term investments measured in U.S. dollars of approximately $76.7$49.9 million, a decrease of $2.9$3.0 million from August 31, 20202021 when these same balances were approximately $79.6$52.9 million. The Trinidad central bank manages the exchange rate of the Trinidad dollar with the U.S. dollar. While the Trinidad government has publicly stated it has no intention to devalue the Trinidad dollar, it could in the future decide to devalue the currency to improve market liquidity, resulting in a devaluation in the U.S. dollar value of these cash and investments balances.
If, for example, a hypothetical 20% devaluation of the Trinidad dollar were to occur, the value of our Trinidad dollar cash and investments position, measured in U.S. dollars, would decrease by approximately $15.3$10.0 million, with a corresponding increase in Accumulated other comprehensive loss reflected on our consolidated balance sheet. Separate from the Trinidad dollar denominated cash and investments balances described above, as of May 31,November 30, 2021, we had a U.S. dollar denominated monetary asset position of approximately $7.0$21.1 million in Trinidad (net of U.S. dollar denominated liabilities), which would produce a gain from a potential devaluation of Trinidad dollars. If, for example, a hypothetical 20% devaluation of the Trinidad dollar occurred, the net effect on Other income (expense), net on our consolidated statement of operations of revaluing these U.S. dollar denominated net monetary assets would be an approximate $1.4$4.2 million gain. While we may pay premiums or enter into financial transactions at a discount from the official government rate to convert our Trinidad dollars into U.S. dollars, we use the official exchange rate published by the Central Bank of Trinidad and Tobago to measure the U.S. dollar equivalent of Trinidad dollar-based revenues, expenses, assets and liabilities and the Trinidad dollar equivalent of U.S. dollar-based monetary assets and liabilities for financial reporting purposes, as there are no other reliable references available to translate or remeasure our revenues, expenses, assets and liabilities.
Our Barbados subsidiary also recently began facing a U.S. dollar illiquidity situation.situation in fiscal 2020. The Barbados dollar has a conventional fixed-peg currency arrangement, in which the Barbados dollar exchange rate is fixed to the U.S. dollar. Thus, we do not expect a devaluation of this currency at this time. However, asAs of May 31,November 30, 2021, our Barbados subsidiary had Barbados dollar denominated cash and cash equivalents measured in U.S. dollars of approximately $15.6$3.3 million, which cannotcould not be readily converted to U.S. dollars for general use within the Company. However, this balance has decreased significantly from the $12.4 million balance as of August 31, 2021.
Mission and Business Strategy
PriceSmart exists to improve the lives and businesses of our Members, our employees, and our communities through the ethicalresponsible delivery of the best quality goods and services at the lowest possible prices. Our mission is to serve as a model company, which operates profitably and provides a good return to our investors, by providing Members in emerging and developing markets with exciting, high qualityhigh-quality merchandise sourced from around the world and valuable services at compelling prices.prices in safe U.S.-style clubs and through PriceSmart.com. We prioritize the well-being and safety of our Members and employees. We provide good jobs, fair wages and benefits and the opportunity for growth. We strive to treat our suppliers right and empower them when we can. We conduct ourselves in a socially responsible manner as we endeavor to improve the quality of the lives of our Members and respecttheir businesses, while respecting the environment and the laws of all the countries in which we operate. The annual membership fee enables us to operate our business with lower margins than traditional retail stores. As we increase our technological capabilities, we are increasing technological capabilitiesour tools to drive sales and expanding our omni-channel shopping experience, we believe we can realize greater efficiencies in the supply chain, enhance our ability to satisfy our Members’ shopping expectations, and play a greater role in their lives.operational efficiencies. We believe we are well-positioned to blend the excitement and appeal of our brick-and-mortar business with the convenience and additional benefits of online shopping and services.
Growth
As we look to the future, our Company is focused on three major drivers of growth:
Real Estate – New Clubs and Distribution facilities
Membership Value
Incremental sales generated from PriceSmart.com and digital and online capabilities
Real Estate - New Clubs and Distribution Facilities. We continue to actively seek opportunities to expand our geographic footprint for brick-and-mortar warehouse clubs. Our 50th club is scheduled to open in Jamaica in April 2022. We intend to continue, and even accelerate, our current pace of club growth over the next 3-5 years and to continue to explore and evaluate opportunities in new markets. Our growth strategy, as it pertains to real estate, includes physical distribution centers of various types to most efficiently support the flow of merchandise from the supplier to the Member, be it sales generated from the clubs or through PriceSmart.com. Also, the need for optionality in today’s world has proven essential. Therefore, we plan to make appropriate investments in our distribution network to maximize efficiencies, minimize supply chain disruption, and to provide optimal support for a growing e-commerce business. In addition to our distribution center in Miami, Florida, we also operate a regional distribution center in Costa Rica and are actively considering others. We also intend to expand our network of Produce Distribution Centers. In some cases, these facilities also provide the opportunity to capture efficiencies by centralizing certain production activities, such as bakery, meat processing, packaging and labeling.
Membership Value. Driving membership value leads to a higher membership base, the opportunity to increase the membership fee when appropriate, and contributes to the bottom line of the business. We focus on growth of our membership base, member renewal rates and spend per Member as part of how we determine how Members see our value. By adding more
benefits that Members can only obtain with us, we expect to blendsee growth in Membership income. Recent examples include: additional services such as the excitement and appealability for all of our brickMembers to transact on PriceSmart.com; Click & Go™ curbside pickup and mortar businessdelivery service in all of our clubs; and the implementation and expansion of our Well-being initiative, which offers Optical services with free eye exams for the conveniencemember and additional benefitsmembers of online shoppingtheir families and services.
Growthdeeply discounted eyeglass frames, Audiology services with free hearing exams and deeply discounted hearing aids, and Pharmacy, which provides a significant convenience to our Members.
We measureAnother driver of Membership value is our growth primarilyprivate label offering, which we are working to expand. Private label also provides us the opportunity to source quality items locally when appropriate. Select local sourcing has multiple benefits including support of local communities in which we operate by developing industry and creating direct and indirect jobs, mitigation of foreign currency exchange risk, local currency procurement, and reduced supply chain exposure. These initiatives offer additional benefits and services for our Members whether they choose to shop on-line, in-club, or both.
Incremental sales generated from PriceSmart.com and digital and online capabilities. Members continue to seek all the amountgreat value our distinct business model provides in terms of the period-over-period activityquality, pricing and an exciting experience. However, there is a growing expectation of consumers in our net merchandise sales,markets for convenience. We continue to build capabilities and our comparable club net merchandise sales,offerings on PriceSmart.com. We also build and apply technological tools to continue to learn more about and strengthen our relationships with each of our Members. Together with data analytics, we have been able to provide our Members with enhancements to the membership incomeexperience. PriceSmart.com and total revenues. Our investments are geared toward enhancing Member experience while creating greater efficiencies, which enablethese tools provide the opportunity for us to continually strengthen and expand the scope of our relationship with each Member and offer lower prices, moreincremental products and services and convenience. We believe these efforts will support membership renewals and sustained growth forin the Company. However, these investments can impact near-term results, such as when we invest in technology and talent that are expected to yield long-term benefits or when we incur fixed costs in advance of achieving full projected sales, negatively impacting near-term operating profit and net income. When we open a new warehouse club in an existing market, which may reduce reported comparable net merchandise sales due to the transfer of sales from existing warehouse clubs, we do so to enhance the Member experience, grow membership and support long-term sales growth and profitability.future.
Financial highlights for the thirdfirst quarter of fiscal year 20212022 included:
Total revenues increased 11.9%11.2% over the comparable prior year period.
Net merchandise sales increased 11.6%12.6% over the comparable prior year period. We ended the quarter with 4749 warehouse clubs compared to 4546 warehouse clubs at the end of the thirdfirst quarter of fiscal 2020.2021. Foreign currency exchange rate fluctuations impacted net merchandise sales negatively by 1.6%1.0% versus the comparable three-month period.
Comparable net merchandise sales (that is, sales in the 4546 warehouse clubs that have been open for greater than 13 ½
calendar months) for the 13 weeks ended May 30,November 28, 2021 increased 8.8%9.4%. Foreign currency exchange rate fluctuations impacted comparable net merchandise sales negatively by 1.5%1.0%.
Membership income for the thirdfirst quarter of fiscal 20212022 increased 5.9%11.2% to $14.3$14.8 million.
Total gross margins (net merchandise sales less associated cost of goods sold) increased 27.7%11.9% over the prior-year period, and merchandise gross profits as a percent of net merchandise sales were 15.9%16%, an increasea decrease of 20010 basis points (2.0%(0.1%) 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 thirdfirst quarter of fiscal 20212022 was $36.0$46.0 million, an increase of 50.4%3.3%, or $12.0$1.5 million, compared to the thirdfirst quarter of fiscal 2020.2021.
We recorded a $2.2$1.4 million gain in Other income (expense), net, currencyprimarily from a $2.7 million gain from the sale of Aeropost, Inc., partially offset by a $1.9 million loss primarily from foreign currency transactions, in the thirdfirst quarter of fiscal 20212022 compared to a $1.5 million net currency loss in the same period last year. The gain from the sale of Aeropost, net of tax, resulted in a $1.5 million net income gain and contributed $0.05 to basic and diluted net income per share in the first quarter of fiscal 2022.
Our effective tax rate decreasedincreased in the thirdfirst quarter of fiscal 2022 to 34.1% from 32.9% in first quarter of fiscal 2021, to 30.9% from 38.0% in the third quarter of fiscal 2020, primarily because we were ablerelated to recognize greater benefits from foreignchanges in uncertain tax credits in the current quarter compared to the prior year period.positions.
Net income attributable to PriceSmart for the thirdfirst quarter of fiscal 20212022 was $22.5$30.5 million, or $0.73$0.98 per diluted share, compared to $12.7$27.7 million, or $0.41$0.90 per diluted share, in the thirdfirst quarter of fiscal 2020.
Financial highlights for the nine months ended May 31, 2021 included:
Total revenues increased 7.6% over the comparable prior year period.
Net merchandise sales increased 7.3% over the comparable prior year period. We ended the quarter with 47 warehouse clubs compared to 45 warehouse clubs at the end of the third quarter of fiscal year 2020. Foreign currency exchange rate fluctuations impacted net merchandise sales negatively by 2.7%.
Comparable net merchandise sales (that is, sales in the 45 warehouse clubs that have been open for greater than 13 ½ calendar months) for the 39 weeks ended May 30, 2021 increased 4.3%. Foreign currency exchange rate fluctuations impacted comparable net merchandise sales negatively by 2.7%.
Membership income increased 0.2% to $41.4 million.
Merchandise gross profits (net merchandise sales less associated cost of goods sold) increased 18.0% over the comparable prior year period and warehouse gross profits as a percent of net merchandise club sales were 16.0%, an increase of 150 basis points (1.5%) from the same period last year.
Operating income was $125.6 million, an increase of 34.3%, or $32.1 million, compared to the same period last year.
We recorded a $4.0 million net currency loss, primarily from foreign currency transactions, in the current nine-month period compared to a $2.4 million net loss in the same period last year.
Our effective tax rate decreased for the first nine months of fiscal 2021 to 32.7% from 33.9% in the first nine months of fiscal year 2020 because we were able to recognize greater benefits from foreign tax credits in the current year nine-month period compared to the prior-year period.
Net income attributable to PriceSmart, Inc. for the first nine months of fiscal year 2021 was $78.5 million, or $2.55 per diluted share, compared to $58.0 million, or $1.90 per diluted share, in the comparable prior year period.2021.
COMPARISON OF THE three and nine months ended May 31,NOVEMBER 30, 2021 and 2020
The following discussion and analysis compares the results of operations for the three-month and nine-month periodsperiod ended on May 31,November 30, 2021 with the three-month and nine-month periodsperiod ended on May 31,November 30, 2020 and should be read in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this report. Unless otherwise noted, all tables on the following pages present U.S. dollar amounts in thousands. Certain percentages presented are calculated using actual results prior to rounding.
Net Merchandise Sales
The following tables indicate the net merchandise club sales in the segments in which we operate and the percentage growth in net merchandise sales by segment during the three and nine months ended May 31,November 30, 2021 and May 31,November 30, 2020.
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||
May 31, 2021 | May 31, 2020 | November 30, 2021 | November 30, 2020 | |||||||||||||||||||||||||||||||||
Amount | % of net | Increase/ | Change | Amount | % of net | Amount | % of net | Increase from prior year | Change | Amount | % of net | |||||||||||||||||||||||||
Central America | $ | 521,355 | 60.8 | % | $ | 78,551 | 17.7 | % | $ | 442,804 | 57.6 | % | $ | 560,596 | 59.4 | % | $ | 75,556 | 15.6 | % | $ | 485,040 | 57.8 | % | ||||||||||||
Caribbean | 239,323 | 27.9 | (7,138) | (2.9) | 246,461 | 32.1 | 268,334 | 28.4 | 13,728 | 5.4 | 254,606 | 30.4 | ||||||||||||||||||||||||
Colombia | 96,800 | 11.3 | 17,697 | 22.4 | 79,103 | 10.3 | 115,113 | 12.2 | 16,390 | 16.6 | 98,723 | 11.8 | ||||||||||||||||||||||||
Net merchandise sales | $ | 857,478 | 100.0 | % | $ | 89,110 | 11.6 | % | $ | 768,368 | 100.0 | % | $ | 944,043 | 100.0 | % | $ | 105,674 | 12.6 | % | $ | 838,369 | 100.0 | % | ||||||||||||
Nine Months Ended | |||||||||||||||||||
May 31, 2021 | May 31, 2020 | ||||||||||||||||||
Amount | % of net | Increase | Change | Amount | % of net | ||||||||||||||
Central America | $ | 1,537,228 | 59.3 | % | $ | 125,221 | 8.9 | % | $ | 1,412,007 | 58.4 | % | |||||||
Caribbean | 750,057 | 28.9 | 14,758 | 2.0 | 735,299 | 30.4 | |||||||||||||
Colombia | 306,966 | 11.8 | 35,450 | 13.1 | 271,516 | 11.2 | |||||||||||||
Net merchandise sales | $ | 2,594,251 | 100.0 | % | $ | 175,429 | 7.3 | % | $ | 2,418,822 | 100.0 | % | |||||||
Comparison of Three and Nine Months Ended May 31,November 30, 2021 and May 31,November 30, 2020
Overall, total net merchandise sales grew 11.6%12.6% for the third quarter and 7.3% for the nine-month period ended May 31, 2021.first quarter. The third quarter increase resulted from a 19.0%an 11.3% increase in transactions partially offset byand a 6.2% decrease1.2% increase in average ticket. For the nine-month period, the increase resulted from a 7.9% increase in average ticket, partially offset by a 0.6% 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. We had 4749 clubs in operation as of May 31,November 30, 2021 compared to 4546 clubs as of May 31,November 30, 2020.
Net merchandise sales in our Central America segment increased 17.7% and 8.9%15.6% for the third quarter and the nine-monthsthree-months ended May 31, 2021, respectively. These increasesNovember 30, 2021. The increase had a 1,020900 basis point (10.2%) and 520 basis point (5.2%(9.0%) positive impact on total net merchandise sales growth, respectively.growth. All markets within this segment showed increasedhad positive net merchandise sales growth for the three and nine-month periods ended May 31, 2021.three-month period. We added one new club to the segment when compared to the comparable prior-year periods. We opened our eighthfifth club in Costa RicaGuatemala in June 2020.October 2021.
Net merchandise sales in our Caribbean segment decreased 2.9% and increased 2.0%5.4% for the third quarter and the nine-months ended May 31, 2021, respectively.first quarter. The decreaseincrease for the quarter had a 90160 basis point (0.9%) negative impact on net merchandise sales growth and the increase year-to-date had a 60 basis point (0.6%(1.6%) positive impact on net merchandise sales growth. Our Dominican Republic market continued its strong performance in the quarter with 16.8% growth. Our Aruba and nine-month period, despite
experiencing a significant foreign currency devaluation,Jamaica markets also showed strong performance this quarter with 16.3%12.4% and 16.6%10.7% growth, respectively. This strong performance was offset by our Trinidad market which had declines in net merchandise sales for each period presented.the same period. Trinidad sales were adversely affected by our measured approach to rebalance our merchandise mix following the reopening of the economy from the pandemic restrictions, and we generally continue to manage our imports to be in line with the amounts of U.S. dollars we expect to source in Trinidad. Net merchandise sales growth for Trinidad improved during the thirdfirst quarter because we continued limiting merchandise shipmentsof fiscal year 2022 compared to the market due to the ongoing U.S. dollar illiquidity situation and due to significant COVID-19 restrictions. Trinidad saw a significant rise in COVID-19 cases during the recent quarter, and the government responded by shutting down all non-essential business and activities. PriceSmart was allowed to continue selling food and other essential goods, but the government prohibited sales of most non-foods/non-essential items by PriceSmart and other local retailers. As a result, we have further reduced shipments of U.S. imports until the infection rate improves and restrictions are eased. We expect the government restrictions to continue into the fourth quarter of fiscal year2021 as the Trinidad government lifted restrictions on sales of non-essential merchandise, but sales have still not returned to the level we achieved in the first quarter of fiscal 2021. Refer to “Management’s Discussion & Analysis – Factors Affecting Our Business” for more discussioninformation regarding the impact on us of the illiquidity of the Trinidad liquidity situation. Aruba also had soft sales in both periods presented due to this market’s on-going economic slowdown caused by the COVID-19 pandemic due primarily to a reduction in tourism. dollar.
Net merchandise sales in our Colombia segment increased 22.4% and 13.1%16.6% for the third quarter and the nine-months ended May 31, 2021, respectively. These increasesfirst quarter. This increase had a 230200 basis point (2.3%(2.0%) and 150 basis point (1.5%) positive impact on total net merchandise sales growth, respectively.growth. The primary driver of the increased revenue for the quarter and nine-month period was due to the additional club addedaddition of two clubs to the segment when compared to the comparable prior year period. We opened our eighth club in Colombia in December 2020. Additionally, the market experienced a strengthening2020 and our ninth club in Colombia in November 2021.
The following table indicates the impact that currency exchange rates had on our net merchandise sales in dollars and the percentage change from the three and nine-monththree-month period ended May 31,November 30, 2021. 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 | Currency exchange rate fluctuations for the | |||||||||||
Three months ended | Three months ended | |||||||||||
May 31, 2021 | November 30, 2021 | |||||||||||
Amount | % change | Amount | % change | |||||||||
Central America | $ | (10,735) | (2.5) | % | $ | (6,642) | (1.4) | % | ||||
Caribbean | (6,465) | (2.6) | 874 | 0.4 | ||||||||
Colombia | 5,616 | 7.1 | (2,649) | (2.7) | ||||||||
Net merchandise sales | $ | (11,584) | (1.6) | % | $ | (8,417) | (1.0) | % | ||||
Currency exchange rate fluctuations for the | ||||||
Nine months ended | ||||||
May 31, 2021 | ||||||
Amount | % change | |||||
Central America | $ | (30,812) | (2.2) | % | ||
Caribbean | (26,991) | (3.7) | ||||
Colombia | (8,466) | (3.1) | ||||
Net merchandise sales | $ | (66,269) | (2.7) | % | ||
Overall, the effects of currency fluctuations within our markets had an approximately $11.6 million and $66.3$8.4 million, or 160100 basis point (1.6%) and 270 basis point (2.7%(1.0%), negative impact on net merchandise sales for the quarter and nine-months ended May 31, 2021, respectively.November 30, 2021.
Currency fluctuations had a $10.7 million and $30.8$6.6 million, or 250140 basis point (2.5%) and 220 basis point (2.2%(1.4%), negative impact on net merchandise sales in our Central America segment for the quarter and nine months ended May 31,November 30, 2021. These currency fluctuations contributed approximately 15080 basis points (1.5%) and 130 basis points (1.3%(0.8%) of the total negative impact on total net merchandise sales for the respectivecurrent period. The Costa Rica Colón depreciated significantly against the dollar as compared to the same three and nine-month periodsthree-month period a year ago, and was a significant factor in the contribution to the unfavorable currency fluctuations in this segment.
Currency fluctuations had a $6.5 million and $27.0$0.9 million, or 26040 basis point (2.6%) and 370 basis point (3.7%(0.4%), negativepositive impact on net merchandise sales in our Caribbean segment for the quarter and nine months ended May 31,November 30, 2021. These currency fluctuations contributed approximately 9010 basis points (0.9%) and 110 basis points (1.1%(0.1%) of the total negativepositive impact on total net merchandise sales for the respective periods. Jamaica and theperiod. The Dominican Republic markets both experienced currency devaluationappreciation when compared to the same periodsperiod last year.
Currency fluctuations had a $5.6$2.6 million, or 710270 basis point (7.1%), positive impact on net merchandise sales in our Colombia segment for the quarter and an $8.5 million, or 310 basis point (3.1%(2.7%), negative impact on net merchandise sales in our Colombia segment for the nine months ended May 31, 2021.quarter. These currency fluctuations contributed approximately 80 basis points (0.8%) of positive impact on total net merchandise sales for the quarter and 30 basis points (0.3%) of the total negative impact on total net merchandise sales for the nine months ended May 31, 2021.quarter.
Comparable Merchandise Sales
We report comparable net merchandise sales on a “same week” basis with 13 weeks in each quarter beginning on a Monday and ending on a Sunday. The periods are established at the beginning of the fiscal year to provide as close of a match as possible to the calendar month and quarter that is used for financial reporting purposes. This approach equalizes the number of weekend days and weekdays in each period for improved sales comparison, as we experience higher merchandise club sales on the weekends. Each of the warehouse clubs used in the calculations was open for at least 13 ½ calendar months before its results for the current period were compared with its results for the prior period. As a result, sales related to twoone of our warehouse clubs opened during calendar year 2020,2021 will not be used in the calculation of comparable sales until they have been open for at least 13 ½ months. Therefore, comparable net merchandise sales includes 4546 warehouse clubs for the thirteen and thirty-nine weekthirteen-week period ended May 30,November 28, 2021.
The following tables indicate the comparable net merchandise sales in the reportable segments in which we operate and the percentage changes in net merchandise sales by segment during the thirteen week and thirty-nine week periodsthirteen-week period ended May 30,November 28, 2021 and May 31,November 29, 2020 compared in each case, to the same period in the prior year.
Thirteen Weeks Ended | Thirteen Weeks Ended | |||||||||||
May 30, 2021 | May 31, 2020 | November 28, 2021 | November 29, 2020 | |||||||||
% Increase/(decrease) | % Increase/(decrease) | % Increase/(decrease) in comparable net merchandise sales | % Increase/(decrease) in comparable net merchandise sales | |||||||||
Central America | 16.0 | % | (6.4) | % | 14.1 | % | (0.7) | % | ||||
Caribbean | (2.5) | 6.4 | 5.0 | 9.9 | ||||||||
Colombia | 3.6 | (14.8) | (2.8) | 8.6 | ||||||||
Consolidated comparable net merchandise sales | 8.8 | % | (3.6) | % | 9.4 | % | 3.6 | % | ||||
Thirty-Nine Weeks Ended | ||||||
May 30, 2021 | May 31, 2020 | |||||
% Increase | % Increase/(decrease) | |||||
Central America | 5.7 | % | (1.4) | % | ||
Caribbean | 2.6 | 3.2 | ||||
Colombia | 2.2 | (6.6) | ||||
Consolidated comparable net merchandise sales | 4.3 | % | (0.7) | % | ||
Comparison of Thirteen and Thirty-Nine WeekThirteen-Week Periods Ended May 30,November 28, 2021 and May 31,November 29, 2020
Comparable net merchandise sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the thirteen-week period ended May 30,November 28, 2021 increased 8.8%. Comparable net merchandise sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the thirty-nine week period ended May 30, 2021 increased 4.3%9.4%.
Comparable net merchandise sales in our Central America segment increased 16.0% and 5.7%14.1% for the thirteen weekthirteen-week period ended November 28, 2021. All of our markets in Central America had positive comparable net merchandise sales growth and thirty-nine week periods ended May 30, 2021, respectively. These increasesthis increase contributed approximately 920820 basis points (9.2%) and 330 basis points (3.3%(8.2%) of positive impact in total comparable merchandise sales for each period, respectively.
For the thirteen-week period ended May 30, 2021, strong performance in the relatively smaller markets of Guatemala, Nicaragua, Honduras, and El Salvador, along with our second largest market, Panama, contributed approximately 1,000 basis points (10.0%) of positive impact on the segment’s comparable net merchandise sales. This increase was offset by an 80 basis point (0.8%) negative impact on the segment’s comparable net merchandise sales from our largest market, Costa Rica. During the quarter, Costa Rica experienced foreign currency exchange headwinds, with the Costa Rica Colón devaluing versus the comparable prior year period.
For the thirty-nine week period ended May 30, 2021, strong performance in the relatively smaller markets of Guatemala, Nicaragua, Honduras, and El Salvador contributed approximately 430 basis points (4.3%) of positive impact on comparable net merchandise sales in this segment. This increase was partially offset by a 100 basis point (1.0%) negative impact on comparable net merchandise sales in this segment from the larger Panama and Costa Rica markets, as Panama had governmental restrictions on days the clubs were permitted to operate throughout the year and due to the devaluation of the Costa Rica Colón.
Comparable net merchandise sales in our Caribbean segment decreased 2.5% and increased 2.6%5.0% for the thirteen week and thirty-nine week periodsthirteen-week period ended May 30, 2021, respectively.November 28, 2021. The decrease contributed approximately 80 basis points (0.8%) of negative impact on total comparable merchandise sales and the increase contributed approximately 80150 basis points (0.8%(1.5%) of positive impact on total comparable merchandise sales for the respective periods.period.
Our Dominican Republic market continued its strong performance in the thirteenthirteen-week period with 16.8% comparable sales growth. Our Aruba and thirty-nine week period, despite having a foreign currency exchange devaluation,Jamaica markets also showed strong performance this quarter with 16.7%12.9% and 17.0%7.7% comparable sales growth, respectively. This strong performance was offset by our Trinidad market, which declined in comparable net merchandise sales by 6.2% for each period presented.the thirteen-week period. Trinidad sales were adversely affected during most of the third fiscalfirst quarter because we are limitinglimited merchandise shipments to the market due to the ongoing U.S. dollar illiquidity situation. Refer to “Management’s Discussion & Analysis – Factors Affecting Our Business” for more discussion on the Trinidad illiquidity situation. In addition, the market was also adversely affected by government restrictions imposed in response to a significant increase COVID-19 cases during the quarter as previously described.
Comparable net merchandise sales in our Colombia segment increased 3.6% and 2.2%decreased 2.8% for the thirteen week and thirty-nine week periodsthirteen-week period ended May 30, 2021, respectively. These increasesNovember 28, 2021. This decrease contributed approximately 4030 basis points (0.4%) and 20 basis points (0.2%(0.3%) of positivenegative impact in total comparable merchandise sales for the respective periods.period. The increasedecrease in Colombia during the current quarter was primarily due to the foreign currency tailwind partially offset by increasing COVID-19 restrictionsdevaluation and civil unrest that significantly impacted normal commerce in the market, particularly in the city of Cali. Refer to “Management’s Discussion & Analysis – Factors Affecting Our Business” for more discussion on the political situation in Colombia. The year-to-date increase is primarily due to year-over-year improvements in sales growth due to the comparably improved COVID-19 situation and related restrictions offset by sales transfers from existing clubs included in the comparable net merchandise sales calculation to our recent club that openednew clubs not included in December 2020.the calculation.
The following tables illustrate the impact that changes in foreign currency exchange rates had on our comparable merchandise sales in dollars and the percentage change for the thirteen and thirty-nine week periodsthirteen-week period ended May 30,November 28, 2021.
Currency Exchange Rate Fluctuations for the | Currency Exchange Rate Fluctuations for the | |||||||||||
Thirteen Weeks Ended | Thirteen Weeks Ended | |||||||||||
May 30, 2021 | November 28, 2021 | |||||||||||
Amount | % change | Amount | % change | |||||||||
Central America | $ | (10,184) | (2.3) | % | $ | (6,800) | (1.4) | % | ||||
Caribbean | (6,195) | (2.5) | 867 | 0.3 | ||||||||
Colombia | 4,557 | 5.9 | (2,538) | (2.5) | ||||||||
Consolidated comparable net merchandise sales | $ | (11,822) | (1.5) | % | $ | (8,471) | (1.0) | % | ||||
Currency Exchange Rate Fluctuations for the | ||||||
Thirty-Nine Weeks Ended | ||||||
May 30, 2021 | ||||||
Amount | % change | |||||
Central America | $ | (29,383) | (2.1) | % | ||
Caribbean | (26,808) | (3.6) | ||||
Colombia | (8,835) | (3.3) | ||||
Consolidated comparable net merchandise sales | $ | (65,026) | (2.7) | % |
Overall, the mix of currency fluctuations within our markets had an approximately $11.8 million and $65.0$8.5 million, or 150100 basis point (1.5%(1.0%) and 270 basis point (2.7%), negative impact on comparable net merchandise sales for the thirteen and thirty-nine week periodsthirteen-week period ended May 30,November 28, 2021.
Currency fluctuations within our Central America segment contributed approximately 13080 basis points (1.3%) and 120 basis points (1.2%(0.8%) of negative impact in total comparable merchandise sales for the thirteen and thirty-nine week period, respectively.thirteen-week period. Our Costa Rica market was the main contributor as the market experienced currency devaluation when compared to the same period last year.
Currency fluctuations within our Caribbean segment contributed approximately 8010 basis points (0.8%(0.1%) and 110 basis points (1.1%) of negativepositive impact in total comparable merchandise sales for the thirteen and thirty-nine week period, respectively.thirteen-week period. Our Dominican Republic andmarket experienced currency appreciation, which was partially offset by our Jamaica marketsmarket, which experienced currency devaluation when compared to the same period last year.
Currency fluctuations within our Colombia segment contributed approximately 6030 basis points (0.6%) of positive impact in total comparable merchandise sales for the thirteen-week period and 40 basis points (0.4%(0.3%) of negative impact in total comparable merchandise sales for the thirty-nine weekthirteen-week period. This reflects the movement of the Colombian peso’s foreign currency exchange rate when compared to the same period a year ago.
Membership Income
Membership income is recognized ratably over the one-year life of the membership.
Three Months Ended | |||||||||||||||
May 31, | May 31, | ||||||||||||||
2021 | 2020 | ||||||||||||||
Amount | Increase | % Change | Membership | Amount | |||||||||||
Membership income - Central America | $ | 8,488 | $ | 294 | 3.6 | % | 1.6 | % | $ | 8,194 | |||||
Membership income - Caribbean | 3,927 | 197 | 5.3 | 1.6 | 3,730 | ||||||||||
Membership income - Colombia | 1,914 | 313 | 19.6 | 2.0 | 1,601 | ||||||||||
Membership income - Total | $ | 14,329 | $ | 804 | 5.9 | % | 1.7 | % | $ | 13,525 | |||||
Nine Months Ended | Three Months Ended | |||||||||||||||||||||||||||||
May 31, | May 31, | November 30, | November 30, | |||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||
Amount | Increase (decrease) | % Change | Membership | Amount | Amount | Increase from prior year | % Change | Membership | Amount | |||||||||||||||||||||
Membership income - Central America | $ | 24,442 | $ | (496) | (2.0) | % | 1.6 | % | $ | 24,938 | $ | 8,776 | $ | 901 | 11.4 | % | 1.6 | % | $ | 7,875 | ||||||||||
Membership income - Caribbean | 11,453 | 277 | 2.5 | 1.5 | 11,176 | 3,973 | 262 | 7.1 | 1.5 | 3,711 | ||||||||||||||||||||
Membership income - Colombia | 5,532 | 282 | 5.4 | 1.8 | 5,250 | 2,042 | 329 | 19.2 | 1.8 | 1,713 | ||||||||||||||||||||
Membership income - Total | $ | 41,427 | $ | 63 | 0.2 | % | 1.6 | % | $ | 41,364 | $ | 14,791 | $ | 1,492 | 11.2 | % | 1.6 | % | $ | 13,299 | ||||||||||
Number of accounts - Central America | 885,522 | 45,282 | 5.4 | % | 840,240 | 917,929 | 78,542 | 9.4 | % | 839,387 | ||||||||||||||||||||
Number of accounts - Caribbean | 429,421 | 599 | 0.1 | 428,822 | 432,144 | 4,273 | 1.0 | 427,871 | ||||||||||||||||||||||
Number of accounts - Colombia | 323,890 | 10,261 | 3.3 | 313,629 | 341,412 | 27,252 | 8.7 | 314,160 | ||||||||||||||||||||||
Number of accounts - Total | 1,638,833 | 56,142 | 3.5 | % | 1,582,691 | 1,691,485 | 110,067 | 7.0 | % | 1,581,418 | ||||||||||||||||||||
Comparison of Three and Nine Months Ended May 31,November 30, 2021 and May 31,November 30, 2020
The number of Member accounts as of May 31,November 30, 2021 was 3.5%7.0% higher than the number as of May 31, 2020.prior year period. Membership income increased 5.9% and 0.2%11.2% over the three and nine-month periodsthree-month period ended May 31,November 30, 2021, respectively, compared to the same prior-year periods.period.
Membership income increased inacross all of our Caribbean and Colombiaoperating segments in the ninethree months ended May 31,November 30, 2021. The consolidated increase in membership income is due to an increasing membership base since the start of fiscal year 2021. Since August 31, 2020,2021, all segments have increased their membership base. ColombiaCentral America had the largest increase in membership base in the first ninethree months of fiscal year 20212022, with 9.4% growth, due primarily to the opening of its eighthour fifth club in December 2020 and had 6.9% growth,Guatemala in November 2021, followed by Central AmericaColombia with a 6.8%an 8.7% increase due primarily to the opening of our ninth club in that country and the Caribbean with a 0.7%1.0% increase.
We now offer thisthe Platinum Membership program in all locations where PriceSmart operates. The annual fee for a Platinum membershipMembership in most markets is approximately $75. The Platinum membershipMembership 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. Platinum Membership accounts are 6.5% of our total membership base as of November 30, 2021, an increase from 5.3% as of November 30, 2020. Platinum Members tend to have higher renewal rates than our Diamond Members.
Our trailing twelve-month renewal rate was 87.6%89.0% and 82.5%81.9% for the periods ended May 31,November 30, 2021 and May 31,November 30, 2020, respectively. With our twelve-month renewal rate at 87.6%, this surpasses our renewal rate immediately preceding theThe COVID-19 pandemic which we believe iscaused a key indicator of membership satisfaction and loyalty and demonstrates that our Members recognize the value we bring. Although we continue to see reductionsdecrease in in-club traffic in the first quarter of fiscal year 2021, resulting fromin fewer in-club visits and thus fewer renewals as most of our renewals occur in the COVID-19 pandemic, we have seen increased sign-ups and renewals completed online with the launch of a new online catalog and our Click & Go™ services. Approximatelywarehouse club. However, approximately 15% and 5%11% of our membership sign-ups were completed using our online platform for the nine monththree-month periods ended May 31,November 30, 2021 and May 31,November 30, 2020, respectively. Our online platform facilitates capturing data and provides the opportunity for automatic renewal of memberships, as well as improving our digital connection with our Members.
Other Revenue
Other revenue primarily consists of non-merchandise revenue from freight and handling fees generated from ourthe marketplace and casillero operations we sold in October 2021, interest-generating portfolio from our co-branded credit cards, and rental income from operating leases where the Company is the lessor.
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
May 31, 2021 | May 31, 2020 | November 30, 2021 | November 30, 2020 | |||||||||||||||||||||
Amount | Increase (decrease) from | % Change | Amount | Amount | Increase (decrease) from | % Change | Amount | |||||||||||||||||
Non-merchandise revenue | $ | 10,806 | $ | 3,585 | 49.6 | % | $ | 7,221 | $ | 3,307 | $ | (9,348) | (73.9) | % | $ | 12,655 | ||||||||
Miscellaneous income | 1,646 | (215) | (11.6) | 1,861 | 2,046 | 549 | 36.7 | 1,497 | ||||||||||||||||
Rental income | 792 | 157 | 24.7 | 635 | 635 | (96) | (13.1) | 731 | ||||||||||||||||
Other revenue | $ | 13,244 | $ | 3,527 | 36.3 | % | $ | 9,717 | $ | 5,988 | $ | (8,895) | (59.8) | % | $ | 14,883 | ||||||||
Nine Months Ended | ||||||||||||
May 31, 2021 | May 31, 2020 | |||||||||||
Amount | Increase (decrease) from | % Change | Amount | |||||||||
Non-merchandise revenue | $ | 36,479 | $ | 10,312 | 39.4 | % | $ | 26,167 | ||||
Miscellaneous income | 5,044 | (45) | (0.9) | 5,089 | ||||||||
Rental income | 2,264 | 128 | 6.0 | 2,136 | ||||||||
Other revenue | $ | 43,787 | $ | 10,395 | 31.1 | % | $ | 33,392 | ||||
Comparison of Three and Nine Months Ended May 31,November 30, 2021 and May 31,November 30, 2020
The primary driver of the increasedecrease in other revenue for the quarter is due to the sale of our Aeropost subsidiary and nine-month period is higher package volume in ourits marketplace and casillero operations which appearson October 1, 2021. For additional information on the results of the disposition, refer to have increased due“Item 1. Financial Statements: Notes to the pandemic.Consolidated Financial Statements, Note 2 – Summary of Significant Accounting Policies.”
Results of Operations
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
Results of Operations Consolidated | May 31, 2021 | May 31, 2020 | Increase | November 30, 2021 | November 30, 2020 | Increase/(Decrease) | ||||||||||||||||||
(Amounts in thousands, except percentages and | ||||||||||||||||||||||||
Net merchandise sales | ||||||||||||||||||||||||
Net merchandise sales | $ | 857,478 | $ | 768,368 | $ | 89,110 | $ | 944,043 | $ | 838,369 | $ | 105,674 | ||||||||||||
Total gross margin | $ | 136,752 | $ | 107,110 | $ | 29,642 | $ | 150,850 | $ | 134,750 | $ | 16,100 | ||||||||||||
Total gross margin percentage | 15.9 | % | 13.9 | % | 2.0 | % | 16.0 | % | 16.1 | % | (0.1) | % | ||||||||||||
Revenues | ||||||||||||||||||||||||
Total revenues | $ | 895,264 | $ | 799,931 | $ | 95,333 | $ | 975,356 | $ | 877,432 | $ | 97,924 | ||||||||||||
Percentage change from prior period | 11.9 | % | 11.2 | % | ||||||||||||||||||||
Comparable net merchandise sales | ||||||||||||||||||||||||
Total comparable net merchandise sales increase / (decrease) | 8.8 | % | (3.6) | % | 12.4 | % | ||||||||||||||||||
Total comparable net merchandise sales increase | 9.4 | % | 3.6 | % | 5.8 | % | ||||||||||||||||||
Total revenue margin | ||||||||||||||||||||||||
Total revenue margin | $ | 158,963 | $ | 127,175 | $ | 31,788 | $ | 170,287 | $ | 157,556 | $ | 12,731 | ||||||||||||
Total revenue margin percentage | 17.8 | % | 15.9 | % | 1.9 | % | 17.4 | % | 18.0 | % | (0.6) | % | ||||||||||||
Selling, general and administrative | ||||||||||||||||||||||||
Selling, general and administrative | $ | 122,914 | $ | 103,208 | $ | 19,706 | $ | 124,270 | $ | 113,025 | $ | 11,245 | ||||||||||||
Selling, general and administrative percentage of total revenues | 13.7 | % | 12.9 | % | 0.8 | % | 12.7 | % | 12.9 | % | (0.2) | % | ||||||||||||
Warehouse clubs | ||||||||||||||||||||||||
Warehouse clubs at period end | 49 | 46 | 3 | |||||||||||||||||||||
Warehouse club sales square feet at period end | 2,424 | 2,267 | 157 | |||||||||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
May 31, | % of | May 31, | % of | November 30, | % of | November 30, | % of | |||||||||||||||||
Results of Operations Consolidated | 2021 | Total Revenue | 2020 | Total Revenue | 2021 | Total Revenue | 2020 | Total Revenue | ||||||||||||||||
Operating income- by segment | ||||||||||||||||||||||||
Central America | $ | 38,313 | 4.3 | % | $ | 27,606 | 3.4 | % | $ | 43,379 | 4.4 | % | $ | 34,445 | 3.9 | % | ||||||||
Caribbean | 17,240 | 1.9 | 13,547 | 1.7 | 19,878 | 2.0 | 21,594 | 2.5 | ||||||||||||||||
Colombia | 5,135 | 0.6 | 3,487 | 0.4 | 6,378 | 0.7 | 5,565 | 0.6 | ||||||||||||||||
United States | 545 | - | (1,115) | (0.1) | 6,257 | 0.7 | 5,742 | 0.7 | ||||||||||||||||
Reconciling Items (1) | (25,184) | (2.8) | (19,558) | (2.4) | (29,875) | (3.1) | (22,815) | (2.6) | ||||||||||||||||
Operating income - Total | $ | 36,049 | 4.0 | % | $ | 23,967 | 3.0 | % | $ | 46,017 | 4.7 | % | $ | 44,531 | 5.1 | % | ||||||||
(1)The reconciling items reflect the amount eliminated upon consolidation of intersegment transactions.
Nine Months Ended | ||||||||||||
Results of Operations Consolidated | May 31, 2021 | May 31, 2020 | Increase | |||||||||
(Amounts in thousands, except percentages and number of warehouse clubs) | ||||||||||||
Net merchandise sales | ||||||||||||
Net merchandise sales | $ | 2,594,251 | $ | 2,418,822 | $ | 175,429 | ||||||
Total gross margin | $ | 414,798 | $ | 351,406 | $ | 63,392 | ||||||
Total gross margin percentage | 16.0 | % | 14.5 | % | 1.5 | % | ||||||
Revenues | ||||||||||||
Total revenues | $ | 2,710,265 | $ | 2,518,607 | $ | 191,658 | ||||||
Percentage change from comparable period | 7.6 | % | ||||||||||
Comparable net merchandise sales | ||||||||||||
Total comparable net merchandise sales increase / (decrease) | 4.3 | % | (0.7) | % | 5.0 | % | ||||||
Total revenue margin | ||||||||||||
Total revenue margin | $ | 483,397 | $ | 414,731 | $ | 68,666 | ||||||
Total revenue margin percentage | 17.8 | % | 16.5 | % | 1.3 | % | ||||||
Selling, general and administrative | ||||||||||||
Selling, general and administrative | $ | 357,838 | $ | 321,241 | $ | 36,597 | ||||||
Selling, general and administrative percentage of total revenues | 13.2 | % | 12.8 | % | 0.4 | % | ||||||
Warehouse clubs | ||||||||||||
Warehouse clubs at period end | 47 | 45 | 2 | |||||||||
Warehouse club sales square feet at period end | 2,325 | 2,232 | 93 | |||||||||
Nine Months Ended | ||||||||||||
May 31, | % of | May 31, | % of | |||||||||
Results of Operations Consolidated | 2021 | Total Revenue | 2020 | Total Revenue | ||||||||
Operating income- by segment | ||||||||||||
Central America | $ | 113,120 | 4.2 | % | $ | 96,972 | 3.9 | % | ||||
Caribbean | 59,600 | 2.2 | 40,436 | 1.6 | ||||||||
Colombia | 17,139 | 0.6 | 13,411 | 0.5 | ||||||||
United States | 8,315 | 0.3 | 3,401 | 0.0 | ||||||||
Reconciling Items (1) | (72,615) | (2.7) | (60,730) | (2.4) | ||||||||
Operating income - Total | $ | 125,559 | 4.6 | % | $ | 93,490 | 3.7 | % | ||||
(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 | Three Months Ended | |||||||||||||||||||||||
May 31, | % of | May 31, | % of | November 30, | % of | November 30, | % of | |||||||||||||||||
2021 | Total Revenue | 2020 | Total Revenue | 2021 | Total Revenue | 2020 | Total Revenue | |||||||||||||||||
Warehouse club and other operations | $ | 89,322 | 10.0 | % | $ | 78,431 | 9.8 | % | $ | 91,196 | 9.4 | % | $ | 84,832 | 9.7 | % | ||||||||
General and administrative | 33,225 | 3.7 | 24,408 | 3.1 | 31,693 | 3.2 | 27,521 | 3.1 | ||||||||||||||||
Pre-opening expenses | 1 | — | 257 | — | 970 | 0.1 | 602 | 0.1 | ||||||||||||||||
Loss on disposal of assets | 366 | — | 112 | — | 411 | — | 70 | — | ||||||||||||||||
Total Selling, general and administrative | $ | 122,914 | 13.7 | % | $ | 103,208 | 12.9 | % | $ | 124,270 | 12.7 | % | $ | 113,025 | 12.9 | % | ||||||||
Nine Months Ended | ||||||||||||
May 31, | % of | May 31, | % of | |||||||||
2021 | Total Revenue | 2020 | Total Revenue | |||||||||
Warehouse club and other operations | $ | 264,603 | 9.8 | % | $ | 241,826 | 9.6 | % | ||||
General and administrative | 92,016 | 3.4 | 77,910 | 3.1 | ||||||||
Pre-opening expenses | 651 | — | 1,254 | 0.1 | ||||||||
Loss on disposal of assets | 568 | — | 251 | — | ||||||||
Total Selling, general and administrative | $ | 357,838 | 13.2 | % | $ | 321,241 | 12.8 | % | ||||
Comparison of Three and Nine Months Ended May 31,November 30, 2021 and May 31,November 30, 2020 —
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, total gross margin for the three months ended May 31,November 30, 2021 was 15.9%16.0%, 20010 basis points (2.0%(0.1%) higherlower than the comparable prior year period. Approximately 80 basis points (0.8%)The primary driver of this increase is due to certain pricing actions we took to offsetthe decrease for the quarter was a decrease in sales in Trinidad, where our gross margins have recently been higher because of the foreign currency exchange costs and COVID-related operating costs. In particular, we substantially increased the liquidity premium we factor intoinclude in prices we charge there due to increased costs of conversion of Trinidad dollars to U.S. dollars and risks associated with continued illiquidity of the Trinidad dollar. Trinidad sales were adversely affected by our sales prices in Trinidad onmeasured approach to rebalance our imported merchandise asmix following the reopening of the economy from the pandemic restrictions, and we generally continue to experience a shortagemanage our imports to be in line with the amounts of available U.S. dollars for exchangewe expect to source in that market. Refer to “Management’s Discussion & Analysis – Factors Affecting Our Business” for additional discussion. Of the remaining approximately 120 basis points (1.2%), 50 basis points (0.5%) of this improvement is primarily attributable to returning margin of our other business categories such as food services, tire center, and optical compared to the prior-year period. The remaining 70 basis points (0.7%) is the result of more focused merchandising strategies and inventory management that primarily resulted from fewer markdowns and spoilage.
On a consolidated basis, total gross margin for the nine months ended May 31, 2021 was 16.0%, 150 basis points (1.5%) higher than the comparable prior-year period. Approximately 80 basis points (0.8%) of this increase is due to the pricing actions described above with the remaining 70 basis points (0.7%) primarily attributable to more focused merchandising strategies and inventory management that resulted primarily from fewer markdowns and spoilage.Trinidad.
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 190decreased 60 basis points (1.9%(0.6%) for the three months ended May 31,November 30, 2021 compared to the prior-year period, which is primarily the result of the higher total gross margins of 200 basis points (2.0%). This increase was offset by 10 basis points (0.1%) from lower revenue margins from our casillero and marketplace business in the current quarter compared to the prior year. Total revenue margin increased 130of 50 basis points (1.3%(0.5%) foralong with the nine months ended May 31, 2021 compared to the prior-year period, which is primarily the result of the higherlower total gross margins of 15010 basis points (1.5%(0.1%). This increase was offset by 20 basis points (0.2%) from lower revenue margins from our casillero and marketplace business in the current period compared to the prior year.
Selling, general, and administrative expenses consist of warehouse club and other operations, general and administrative expenses, pre-opening expenses, and loss on disposal of assets. In total, selling, general and administrative expenses increased $19.7$11.2 million compared to 13.7%the prior year but decreased as a percentage of total revenue, declining 20 basis points (0.2%) to 12.7% of total revenue compared to 12.9% of total revenues for the thirdfirst quarter of fiscal year 2021.
Warehouse club and other operations expenses decreased to 9.4% of total revenues for the first quarter of fiscal year 2022 compared to 9.7% for the first quarter of fiscal year 2021 primarily due to 40 basis points (0.40%) of lower operations expenses from our casillero and marketplace business due to the sale of Aeropost on October 1, 2021. This decrease was partially offset by 10 basis points (0.10%) from the new clubs in Colombia and Guatemala that had not reached sales maturity as of November 30, 2021.
General and administrative expenses increased to 3.2% of total revenues for the current quarter compared to 3.1% for the thirdfirst quarter of fiscal year 2020.2021. The 10 basis point (0.1%) increase is primarily due to a 20 basis point (0.2%) increase from our continued investments to support our technology development, talent acquisition, and employee development offset by a 10 basis point (0.1%) decrease from the reduction in general and administrative expenses due to the sale of Aeropost. Given our strategic initiatives, we anticipate that we will continue to make investments at comparable levels (as a percentage of revenue) to further our omni-channel, technology and employee development initiatives.
Operating income in the first quarter of fiscal year 2022 increased to $46.0 million (4.7% of total revenue) compared to $44.5 million (5.1% of total revenue) for the same period last year.
Warehouse club and other operations expenses increased to 10.0% of total revenues for the third quarter of fiscal year 2021 compared to 9.8% for the third quarter of fiscal year 2020 primarily due to the opening of a new club in Colombia that had not reached sales maturity as of May 31, 2021.
General and administrative expenses increased to 3.7% of total revenues for the current quarter compared to 3.1% for the third quarter of fiscal year 2020. The 60 basis point (0.6%) increase is primarily due to our continued investments to support our technology development, talent acquisition, and employee development.
In total, selling, general and administrative expenses, increased $36.6 million to 13.2% of total revenues for the nine-month period ended May 31, 2021 compared to 12.8% of total revenues in the same prior year period.
Warehouse club and other operations expenses increased to 9.8% of total revenues for the first nine months of the fiscal year 2021 compared to 9.6% for the prior-year period. Colombia, Guatemala, Costa Rica, and Honduras together added 20 basis points (0.2%) as a percentage of revenue year over year. Colombia, Guatemala, and Costa Rica have new clubs that had not reached sales maturity as of May 31, 2021, thus increasing the operational expense ratios in those markets, and Honduras experienced currency appreciation during the first nine-month period which led to a slight deleveraging of expenses.
General and administrative expenses increased to 3.4% of total revenues for the first nine months of fiscal year 2021 compared to 3.1% for the same period in the prior year. The 30 basis point (0.3%) increase is primarily due to our continued investments to support our technology development, talent acquisition, and employee development.
Pre-opening expenses decreased in the third quarter ended May 31, 2021 compared to the same prior year period with no club openings or preparation for an opening in the current quarter. The decrease for the nine-month period is attributable to fewer club openings in fiscal 2021 compared to the prior year period.
Operating income in the third quarter of fiscal year 2021 increased to $36.0 million (4.0% of total revenue) compared to $24.0 million (3.0% of total revenue) for the same period last year. This reflects the increase in total revenue margin dollars primarily from net merchandise sales of 180 basis points (1.8%), partially offset by an 80 basis point (0.8%) decrease due to deleveraging of selling, general and administrative expenses over the comparable prior-year period.
Operating income for the nine months ended May 31, 2021 increased to $125.6 million (4.6% of total revenue) compared to $93.5 million (3.7% of total revenue) for the same period last year. This reflects the increase in total revenue margin dollars primarily from net merchandise sales of 130 basis points (1.3%), partially offset by a 40 basis point (0.4%) decrease due to deleveraging of selling, general and administrative expenses over the comparable prior-year period.
Interest Expense
Net interest expense reflects borrowings by PriceSmart, Inc. and our wholly owned foreign subsidiaries to finance new land acquisition and construction for new warehouse clubs, warehouse club expansions and distribution centers, the capital requirements of warehouse club and other operations and ongoing working capital requirements.
Three Months Ended | |||||||||
May 31, | May 31, | ||||||||
2021 | 2020 | ||||||||
Amount | Change | Amount | |||||||
Interest expense on loans | $ | 1,295 | $ | (925) | $ | 2,220 | |||
Interest expense related to hedging activity | 907 | 287 | 620 | ||||||
Less: Capitalized interest | (606) | (330) | (276) | ||||||
Net interest expense | $ | 1,596 | $ | (968) | $ | 2,564 | |||
Nine Months Ended | Three Months Ended | |||||||||||||||||
May 31, | May 31, | November 30, | November 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||||
Amount | Change | Amount | Amount | Change | Amount | |||||||||||||
Interest expense on loans | $ | 4,592 | $ | (673) | $ | 5,265 | $ | 1,335 | $ | (390) | $ | 1,725 | ||||||
Interest expense related to hedging activity | 2,785 | 1,308 | 1,477 | 850 | (75) | 925 | ||||||||||||
Less: Capitalized interest | (1,520) | 106 | (1,626) | (595) | 22 | (617) | ||||||||||||
Net interest expense | $ | 5,857 | $ | 741 | $ | 5,116 | $ | 1,590 | $ | (443) | $ | 2,033 | ||||||
Comparison of Three and Nine Months Ended May 31,November 30, 2021 and May 31,November 30, 2020
Net interest expense decreased for the three-month period ended May 31,November 30, 2021 primarily due to lower short-term borrowings compared to the comparable prior year period. We drew down on short-term lines of credit in the thirdfirst quarter of fiscal year 20202021 as a part of our efforts to secure adequate cash to cover contingencies arising from COVID-19 related risks. We repaid all of these borrowings by the end of the current quarter. The increase in interest expense related to hedging activity is a result of the increase in the volatility of interest rates. We also capitalized more interest compared to a year ago due to the increase of construction projects as we continue to add to our new club pipeline.
Net interest expense increased for the nine-month period ended May 31, 2021 primarily due to higher average long-term loan balances to fund our capital projects in Guatemala and U.S. dollar working capital needs in Trinidad, offset by lower short-term borrowings compared to the comparable prior year period. The increase in interest expense related to hedging activity is a result of the increase in the volatility of interest rates.
Other expense, netIncome (Expense), Net
Other expense,income (expense), net, consists of currency gains or losses, as well as net benefit costs related to our defined benefit plans and the receipt of a one-time indemnification payment from a business combination escrow account.other items considered to be non-operating in nature.
Three Months Ended | ||||||||||||
May 31, | May 31, | |||||||||||
2021 | 2020 | |||||||||||
Amount | Increase from prior year | % Change | Amount | |||||||||
Other expense, net | $ | (2,295) | $ | (731) | (46.7) | % | $ | (1,564) | ||||
Three Months Ended | ||||||||||||
November 30, | November 30, | |||||||||||
2021 | 2020 | |||||||||||
Amount | Increase from prior year | % Change | Amount | |||||||||
Other income (expense), net | $ | 1,409 | $ | 2,954 | 191.2 | % | $ | (1,545) | ||||
Nine Months Ended | ||||||||||||
May 31, | May 31, | |||||||||||
2021 | 2020 | |||||||||||
Amount | Increase | % Change | Amount | |||||||||
Other expense, net | $ | (4,132) | $ | (2,306) | (126.3) | % | $ | (1,826) | ||||
Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains/(losses) are recorded as currency gains or losses. Additionally, gains or losses from transactions denominated in currencies other thatthan the functional currency of the respective entity also generate currency gains or losses.
Comparison of Three and Nine Months Ended May 31,November 30, 2021 and 2020
For the three- and nine-monthsthree-months ended May 31,November 30, 2021 the primary driver of Other expense,income (expense), net included lossesa gain of $2.2$2.7 million and $4.0associated with the sale of our Aeropost subsidiary on October 1, 2021. This gain was partially offset by a $1.9 million respectively,loss associated with foreign currency transactions 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.
The primary foreign currency impacts during the quarter were higher transaction costs associated with converting Trinidad dollars into available tradeable currencies such as Euros or Canadian dollars before converting them to U.S. dollars. Additionally, the Jamaican dollar appreciated, whichdevaluation of the Colombian Peso resulted in a loss recognized on our net U.S. dollar assetliability position in that market. The primary impacts during the nine-month periodThese losses were higher transaction costs associated with converting Trinidad dollars into available tradeable currencies such as Euros or Canadian dollars, before converting them to U.S. dollars. This was partially offset by an appreciationa devaluation of the Honduran Lempira,Jamaican dollar, which resulted in a gain fromrecognized on our net U.S. dollar liabilityasset position in that market.
Provision for Income Taxes
Three Months Ended | Three Months Ended | |||||||||||||||||||||
May 31, | May 31, | November 30, | November 30, | |||||||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Amount | Increase from prior year | Amount | Amount | Increase from prior year | Amount | |||||||||||||||||
Provision for income taxes | $ | 10,082 | $ | 2,338 | $ | 7,744 | $ | 15,814 | $ | 2,196 | $ | 13,618 | ||||||||||
Effective tax rate | 30.9 | % | 38.0 | % | 34.1 | % | 32.9 | % | ||||||||||||||
Nine Months Ended | |||||||||||
May 31, | May 31, | ||||||||||
2021 | 2020 | ||||||||||
Amount | Increase | Amount | |||||||||
Provision for income taxes | $ | 38,265 | $ | 8,416 | $ | 29,849 | |||||
Effective tax rate | 32.7 | % | 33.9 | % | |||||||
Comparison of Three and Nine Months Ended May 31,November 30, 2021 and May 31,November 30, 2020
For the three months ended May 31,November 30, 2021, the effective tax rate was 30.9%.34.1% compared to 32.9% for the prior year period. The decreaseincrease in the effective tax rate versus the prior year was primarily attributable to the following factors:
A comparably favorable benefit from recurring items of 8.4%0.5%, primarily becauseresulting from valuation allowances we were abletook with respect to recognize greater benefitsdeferred tax assets from foreign tax credits in the current year three-month period compared to the prior-year period due to higher income before the provision for income taxes for the current quarter, and improvements in other tax credits in our countries of operation;that are no longer deemed recoverable; and
A comparably unfavorable net tax impact from non-recurring items of 1.3%1.7%, primarily related to changes in uncertain tax positions.
For the nine months ended May 31, 2021, the effective tax rate was 32.7%. The decrease in the effective tax rate versus the prior year was primarily attributable to the following factors:
A comparably favorable benefit from recurring items, of 3.7%, primarily because we were able to recognize greater benefits from foreign tax credits in the current year three-month period compared to the prior-year period due to higher income before the provision for income taxes for the current nine-month period and improvements in other tax credits in our countries of operation; and
A comparably unfavorable net tax impact from non-recurring items, of 2.5%, primarily related to changes in uncertain tax positions.
Other Comprehensive LossIncome (Loss)
Three Months Ended | ||||||||||||
May 31, | May 31, | |||||||||||
2021 | 2020 | |||||||||||
Amount | Change | % Change | Amount | |||||||||
Other comprehensive loss | $ | (2,590) | $ | 12,856 | 83.2 | % | $ | (15,446) | ||||
Three Months Ended | ||||||||||||
November 30, | November 30, | |||||||||||
2021 | 2020 | |||||||||||
Amount | Change | % Change | Amount | |||||||||
Other comprehensive income (loss) | $ | (6,131) | $ | (9,293) | (293.9) | % | $ | 3,162 | ||||
Nine Months Ended | ||||||||||||
May 31, | May 31, | |||||||||||
2021 | 2020 | |||||||||||
Amount | Change | % Change | Amount | |||||||||
Other comprehensive loss | $ | (548) | $ | 23,132 | 97.7 | % | $ | (23,680) | ||||
Comparison of Three and Nine Months Ended May 31,November 30, 2021 and May 31,November 30, 2020
Our other comprehensive loss of approximately $2.6$6.1 million for the thirdfirst quarter of fiscal year 20212022 resulted primarily from the comprehensive loss of approximately $3.0$8.1 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, offset by approximately $381,000$2.0 million related to unrealized gains on changes in our derivative obligations. Other comprehensive loss for nine-months ended May 31, 2021 of approximately $548,000 was primarily the result of the comprehensive loss of $2.6 million from foreign currency translation adjustments offset by approximately $1.9 million related to unrealized gains on changes in the fair value of our derivative obligations. For the first quarter of fiscal year 2022, the Colombia Peso, Costa Rica Colón and Colombia PesoJamaican Dollar exchange rate with the U.S. Dollar declined significantly, and these declines were offset by an appreciationsignificantly.
LIQUIDITY AND CAPITAL RESOURCES
Financial Position and Cash Flow
Our operations have historically supplied us with a significant source of liquidity. 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 club and distribution center operating costs (including payroll, employee benefits and utilities), as well as payments for income taxes. Our cash flows provided by operating activities, supplemented with our long-term debt and short-term borrowings, have generally been sufficient to fund our operations while allowing us to invest in activities that support the long-term growth of our operations and to pay dividends on our common stock. We evaluate our funding requirements on a regular basis to cover any shortfall in our ability to generate sufficient cash from operations to meet our capital requirements. We may consider funding alternatives to provide additional liquidity if necessary. Refer to “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 7 - Debt” for additional information regarding our available short-term facilities, short-term and long-term borrowings, and any repayments.
Repatriation of cash and cash equivalents held by foreign subsidiaries may require us to accrue and pay taxes. We have no plans at this time to repatriate cash through the payment of cash dividends by our foreign subsidiaries to our domestic operations and, therefore, have not accrued taxes that would be due from repatriation.
The following table summarizes the cash and cash equivalents, including restricted cash, held by our foreign subsidiaries and domestically (in thousands).
May 31, | August 31, | November 30, | August 31, | |||||||||
2021 | 2020 | 2021 | 2021 | |||||||||
Amounts held by foreign subsidiaries | $ | 158,064 | $ | 203,598 | $ | 174,429 | $ | 160,808 | ||||
Amounts held domestically | 40,376 | 100,173 | 18,171 | 54,671 | ||||||||
Total cash and cash equivalents, including restricted cash | $ | 198,440 | $ | 303,771 | $ | 192,600 | $ | 215,479 | ||||
The following table summarizes the short-term investments held by our foreign subsidiaries and domestically (in thousands).
May 31, | August 31, | November 30, | August 31, | |||||||||
2021 | 2020 | 2021 | 2021 | |||||||||
Amounts held by foreign subsidiaries | $ | 67,068 | $ | 46,509 | $ | 39,201 | $ | 50,233 | ||||
Amounts held domestically | — | — | — | — | ||||||||
Total short-term investments | $ | 67,068 | $ | 46,509 | $ | 39,201 | $ | 50,233 | ||||
As of May 31,November 30, 2021 and August 31, 2020,2021, certificates of deposit with a maturity of over one year held by our foreign subsidiaries and domestically were $0 and $1.5 million, in both periods.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 merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products or otherwise fund our operations. Since fiscal 2017, we have experienced this situation in Trinidad and have been unable to source a sufficient level of tradeable currencies. We are working with our banks in Trinidad and government officials to source tradeable currencies. We expect the illiquid market conditions in Trinidad to continue and are considering various measures to address the adverse effect of this situation on the Company’s liquidity. In addition, our Barbados subsidiary recently began facing a similar U.S. dollar liquidity situation. Refer to “Management’s Discussion & Analysis – Factors Affecting Our Business” for our quantitative analysis and discussion.
Our cash flows are summarized as follows (in thousands):
Nine Months Ended | Three Months Ended | |||||||||||||||||
May 31, | May 31, | November 30, | November 30, | |||||||||||||||
2021 | 2020 | Change | 2021 | 2020 | Change | |||||||||||||
Net cash provided by operating activities | $ | 79,967 | $ | 174,130 | $ | (94,163) | ||||||||||||
Net cash used in operating activities | $ | (13,339) | $ | (17,773) | $ | 4,434 | ||||||||||||
Net cash used in investing activities | (93,991) | (113,978) | 19,987 | (12,050) | (50,310) | 38,260 | ||||||||||||
Net cash provided by (used in) financing activities | (88,956) | 101,508 | (190,464) | 1,198 | (22,198) | 23,396 | ||||||||||||
Effect of exchange rates | (2,351) | (1,872) | (479) | 1,312 | (1,095) | 2,407 | ||||||||||||
Net increase (decrease) in cash and cash equivalents | $ | (105,331) | $ | 159,788 | $ | (265,119) | ||||||||||||
Net increase in cash and cash equivalents | $ | (22,879) | $ | (91,376) | $ | 68,497 | ||||||||||||
Net cash provided byused in operating activities totaled $80.0$13.3 million and $174.1$17.8 million for the ninethree months ended May 31,November 30, 2021 and May 31,November 30, 2020, respectively. The decrease in net cash provided by operating activities wasused is primarily due toa result of the increase in our inventory position andprofits during the higher net settlement of accounts payable versusquarter when compared to the comparable prior year, period, whichwith changes in operating assets and liabilities largely offsetting each other. However, inventory was partially offset by a significant increase in net income for the nine months ended May 31, 2021 over the prior-year period.
Inventory was $336.7$500.8 million as of May 31,November 30, 2021, compared with $309.5$389.7 million and $268.8$373.2 million at August 31, 20202021 and May 31,November 30, 2020, respectively. The increase over the balances as of May 31, 2020November 30, 2021 reflects our efforts to bring our inventory levels in-line with our sales trends. In addition, the lower balance as May 31, 2020 reflected the rapid sell-through of merchandise as Members stockpiled items in anticipation of the impacts of the COVID-19 pandemic in the third fiscal quarter of 2020 and the reduction of certain non-food categories to align with initial consumer preferences at the start of the pandemic. Wewe have made strategic investments in inventory to avoid future out-of-stocks on high volume items that have been impacted from container, commodity, and electronic part shortages. Lastly, we have two additional clubs in the current year. Accounts payable was $341.0 million as of May 31, 2021, compared with $373.2 million and $283.0 million at August 31, 2020 and May 31, 2020, respectively. The decrease from the balances as of August 31, 2020 is largely the result of the expiration of temporary extensions of vendor terms negotiated as part of our response to the pandemic in fiscal 2020. However, on average and although not quite to the same extent, we have been able to permanently extend some of our vendor payment terms.
Net cash used in investing activities totaled $94.0$12.1 million and $114.0$50.3 million for the ninethree months ended May 31,November 30, 2021 and May 31,November 30, 2020. The decrease is primarily the result of a decrease in construction expenditures and an increase in the net proceedspurchases of short-term and long-term certificatecertificates of deposit purchases and settlementsdeposits compared to the same nine-monththree-month period a year-ago. The increaseyear-ago, primarily due to the significant improvement (decrease) in net proceeds from certificatesour balance of deposit is primarily a result of improved sources versus uses of U.S.Trinidad dollars in Trinidad during our fiscal third quarter, reducing our need to invest Trinidad dollars.on hand. Refer to “Management’s Discussion and Analysis – Factors Affecting Our Business” for additional discussion of the current U.S. dollar illiquidity we are experiencing in that market.
Net cash provided by financing activities totaled $1.2 million and net cash used in financing activities totaled $89.0 million and net cash provided by financing activities was $101.5$22.2 million for the ninethree months ended May 31,November 30, 2021 and May 31,November 30, 2020, respectively. We use cash flows provided by financing primarily to fund our working capital needs, our warehouse club and distribution center acquisitions and expansions, and investments in technology to support our omni-channel initiatives. The $190.5$23.4 million shift from cash provided byused in, to cash used inprovided by financing activities is primarily the result of ahigher net decreaserepayments of proceeds from long-term borrowings and a net decrease in short-term borrowingsdebt compared to the same nine-monththree-month period a year-ago. In the prior year period,year-ago, when we executed long-term loans primarily to finance land purchases and construction of several of our warehouse clubs and increased ourwere repaying short-term borrowings as part of our cash management strategy infacilities accessed at the early stages of the COVID-19 pandemic.
The following table summarizes the dividends declared and paid during fiscal year 2021 (amounts are per share).
First Payment | Second Payment | First Payment | Second Payment | |||||||||||||||||||||||||||||||||||
Declared | Amount | Record | Date | Date | Amount | Record | Date | Date | Amount | Amount | Record | Date | Amount | Record | Date | Amount | ||||||||||||||||||||||
2/4/2021 |
| $ | 0.70 |
| 2/15/2021 |
| 2/26/2021 |
| N/A |
| $ | 0.35 |
| 8/15/2021 |
| N/A |
| 8/31/2021 |
| $ | 0.35 | $ | 0.70 | 2/15/2021 | 2/26/2021 | 0.35 | 8/15/2021 | 8/31/2021 | 0.35 | |||||||||
2/6/2020 |
| $ | 0.70 |
| 2/15/2020 |
| 2/28/2020 |
| N/A |
| $ | 0.35 |
| 8/15/2020 |
| 8/31/2020 |
| N/A |
| $ | 0.35 | |||||||||||||||||
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 our financial performance and anticipated capital requirements, taking into account all relevant factors, including, but not limited to, the uncertainty surrounding the ongoing effects of the COVID-19 pandemic on our results of operations and cash flows.
Short-Term Borrowings and Long-Term Debt
Our financing strategy is to ensure liquidity and access to capital markets while minimizing our borrowing costs. The proceeds of these borrowings were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, acquisitions, and repayment of existing debt. Please 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 Hedging Activities” for further discussion.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on its financial condition or consolidated financial statements.
Repurchase of Equity Securities and Reissuance of Treasury Shares
At the vesting dates for restricted stock awards to our employees, we repurchase a portion of the shares that have vested at the prior day's closing price per share and apply the proceeds to pay the employees' minimum statutory tax withholding requirements related to the vesting of restricted stock awards. The Company expects to continue this practice going forward. We do not currently have a stock repurchase program.
Shares of common stock repurchased by us are recorded at cost as treasury stock and result in the reduction of stockholders’ equity in our consolidated balance sheets. We may reissue these treasury shares in the future.
We have reissued treasury shares as part of our stock-based compensation programs. During the nine-monthsthree-months ended May 31,November 30, 2021, we reissued approximately 96,4009,000 treasury shares.
Critical Accounting Estimates
The preparation of our consolidated financial statements requires that management make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require management to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Management continues to review its accounting policies and evaluate its estimates, including those related to business acquisitions, contingencies and litigation, income taxes, value added taxes, and long-lived assets. We base our estimates on historical experience and on other assumptions that management believes to be reasonable under the present circumstances. Using different estimates could have a material impact on our financial condition and results of operations.
Income Taxes
For interim reporting, we estimate an annual effective tax rate (AETR) pursuant to ASC 740-270 to calculate income tax expense. Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in the determination of the consolidated income tax expense. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. In evaluating our ability to recover our deferred tax assets in the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).
We are required to file federal and state income tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires us to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax we pay. We, in consultation with our tax advisors, base our tax returns on interpretations that we believe to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which we file our tax returns. As part of these reviews, a taxing authority may disagree with respect to the interpretations we used to calculate our tax liability and, therefore, require us to pay additional taxes.
We accrue an amount for our estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as appropriate. As of May 31, 2021, the Company'sThere were no material changes in our uncertain income tax position balance has been reduced by $1.2 million since August 31, 2020 due topositions in the expiration of statutes of limitation and other current year estimate adjustments.three months ended November 30, 2021.
Tax Receivables
We pay Value Added Tax (“VAT”) or similar taxes, 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 acquire 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 generally 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 applied to subsequent returns, and the net underpaid VAT must be remitted to the government. With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due this creates an income tax receivable. In most countries where we operate, the governments have implemented additional collection procedures, such as requiring credit card processors to remit a portion of sales processed via credit and debit cards directly to the government as advance payments of VAT and/or income tax. This collection mechanism generally leaves us with net VAT and/or income tax receivables, forcing us to process significant refund claims on a recurring basis. These refund or offset processes can take anywhere from several months to several years to complete.
In most countries where 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 $9.1$11.1 million and $7.0$9.7 million as of May 31,November 30, 2021 and August 31, 2020,2021, respectively. In addition, in two other countries where the Company operates, there have been changes in the method of computing minimum tax payments under which the governments have sought to require the Company to pay taxes based on a percentage of sales rather than taxable income. As a result, we have made and may continue to make income tax payments substantially in excess of those we would expect to pay based on taxable income. The Company had income tax receivables of $11.0$11.1 million and $10.4$11.0 million and deferred tax assets of $3.2$3.5 million and $2.8$3.3 million as of May 31,November 30, 2021 and August 31, 2020,2021, respectively, in these countries. While the rules related to refunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests. Similarly, we have not placed any recoverability allowances on tax receivables that arise from payments we are required to make originating from tax assessments that we are appealing, as we believe it is more likely than not that we will ultimately prevail in the related appeals. There can be no assurance, however, that we will be successful in recovering all tax receivables or deferred tax assets.
Our policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:
Short-term VAT and Income tax receivables, recorded as Other current assets: This classification is used for any countries where our subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. We also classify as short-term any approved refunds or credit notes to the extent that we expect to receive the refund or use the credit notes within one year.
Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where our subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when we do not expect to eventually prevail in our recovery of such balances. We do not currently have any allowances provided against VAT and income tax receivables.
Long-lived Assets
We evaluate quarterly our long-lived assets for indicators of impairment. Indicators that an asset may be impaired are:
the asset's inability to continue to generate income from operations and positive cash flow in future periods;
loss of legal ownership or title to the asset;
significant changes in its strategic business objectives and utilization of the asset(s); and
the impact of significant negative industry or economic trends.
Management's judgments are based on market and operational conditions at the time of the evaluation and can include management's best estimate of future business activity, which in turn drives estimates of future cash flows from these assets. These periodic evaluations could cause management to conclude that impairment factors exist, which could require an adjustment of these assets to their then-current fair market value. Loss/(gain) on disposal of assets recorded during the years reported resulted from improvements to operations and normal preventive maintenance.
Goodwill and Other Indefinite-Lived Intangibles
Goodwill and other indefinite-lived acquired intangible assets areis not amortized, but areis 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.our goodwill. 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$45.3 million of certain acquired indefinite-lived intangible assets,goodwill, the fair value approximatedwas greater than 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 May 31,November 30, 2021 compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended August 31, 2020.2021.
From time to time, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products. Since fiscal year 2017, we have experienced this situation in Trinidad and have been unable to source a sufficient level of tradeable currencies. We are working with our banks in Trinidad and Barbados to source tradeable currencies. We expect the illiquid 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 foreign currency exchange rate fluctuations for the three and nine-monththree-month period ended May 31,November 30, 2021 is disclosed in “Item 2. Management’s Discussion & Analysis – Other Expense, net”.
Information about the change in the fair value of our hedges and the financial impact thereof for the three and nine-monththree-month period ended May 31,November 30, 2021 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 for the three and nine-monththree-month period ended May 31,November 30, 2021 is disclosed in “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.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are often involved in claims arising in the ordinary course of business seeking monetary damages and other relief. Based upon information currently available to us, none of these claims is expected to have a material adverse effect on our business, financial condition or results of operations.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Part I. “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended August 31, 2020.2021. 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, 2020.2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) Purchase of Equity Securities by the Issuer and Affiliated Purchasers.
Upon vesting of restricted stock awarded by the Company to employees, the Company repurchases shares and withholds the amount of the repurchase payment to cover employees’ tax withholding obligations. As set forth in the table below, during the quarter ended May 31,November 30, 2021, the Company repurchased 3,40731,551 shares in the indicated months. These were the only repurchases of equity securities made by the Company during the thirdfirst quarter of fiscal year 2021.2022. The Company does not have a stock repurchase program.
Period | (a) | (b) | (c) | (d) | ||||||||
March 1, 2021 - March 31, 2021 | 3,108 | $ | 98.37 | — | N/A | |||||||
April 1, 2021 - April 30, 2021 | 299 | $ | 97.77 | — | N/A | |||||||
May 1, 2021 - May 31, 2021 | — | $ | — | — | N/A | |||||||
Total | 3,407 | $ | 98.31 | — | — | |||||||
Period | (a) | (b) | (c) | (d) | ||||||||
September 1, 2021 - September 30, 2021 | — | — | — | N/A | ||||||||
October 1, 2021 - October 31, 2021 | 31,437 | $ | 77.12 | — | N/A | |||||||
November 1, 2021 - November 30, 2021 | 114 | $ | 72.65 | — | N/A | |||||||
Total | 31,551 | $ | 77.11 | — | — | |||||||
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(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(4) | |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
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. |
(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. | ||||
Date: |
| By: | /s/ SHERRY S. BAHRAMBEYGUI | |
Sherry S. Bahrambeygui | ||||
Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Date: |
| By: | /s/ MICHAEL L. MCCLEARY | |
Michael L. McCleary | ||||
Executive Vice President and Chief Financial Officer | ||||
(Principal Financial Officer and Principal Accounting Officer) | ||||