UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 30, 20212022
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 000-22793
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 30,862,39131,050,917 shares of its common stock, par value $0.0001 per share, outstanding at December 31, 2021.2022
PRICESMART, INC.
INDEX TO FORM 10-Q
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CONSOLIDATED BALANCE SHEETS AS OF NOVEMBER 30, | 2 | |
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5 | ||
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9 | ||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PriceSmart, Inc.’s (“PriceSmart,” “we” or the “Company”) unaudited consolidated balance sheet as of November 30, 20212022 and the consolidated balance sheet as of August 31, 2021,2022, the unaudited consolidated statements of income for the three months ended November 30, 20212022 and 2020,2021, the unaudited consolidated statements of comprehensive income for the three months ended November 30, 20212022 and 2020,2021, the unaudited consolidated statements of equity for the three months ended November 30, 20212022 and 2020,2021, and the unaudited consolidated statements of cash flows for the three months ended November 30, 20212022 and 20202021 are included herein. Also included herein are the notes to the unaudited consolidated financial statements.
PRICESMART, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
November 30, | November 30, | |||||||||||
2021 | August 31, | 2022 | August 31, | |||||||||
(Unaudited) | 2021 | (Unaudited) | 2022 | |||||||||
ASSETS | ||||||||||||
Current Assets: | ||||||||||||
Cash and cash equivalents | $ | 176,072 | $ | 202,060 | $ | 267,944 | $ | 237,710 | ||||
Short-term restricted cash | 4,165 | 3,647 | 2,873 | 3,013 | ||||||||
Short-term investments | 39,201 | 50,233 | 8,920 | 11,160 | ||||||||
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 | ||||||||||
Receivables, net of allowance for doubtful accounts of $119 as of November 30, 2022 and $103 as of August 31, 2022, respectively | 18,757 | 13,391 | ||||||||||
Merchandise inventories | 500,767 | 389,711 | 510,060 | 464,411 | ||||||||
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 | ||||||||||
Prepaid expenses and other current assets (includes $194 and $2,761 as of November 30, 2022 and August 31, 2022, respectively, for the fair value of derivative instruments) | 44,731 | 43,894 | ||||||||||
Total current assets | 782,416 | 697,204 | 853,285 | 773,579 | ||||||||
Long-term restricted cash | 12,363 | 9,772 | 10,871 | 10,650 | ||||||||
Property and equipment, net | 733,219 | 730,204 | 756,663 | 757,241 | ||||||||
Operating lease right-of-use assets, net | 117,754 | 123,655 | 108,762 | 111,810 | ||||||||
Goodwill | 43,332 | 45,095 | 43,173 | 43,303 | ||||||||
Other intangibles, net | 1,922 | 7,762 | ||||||||||
Deferred tax assets | 23,922 | 24,225 | 27,427 | 28,355 | ||||||||
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 | ||||||||||
Other non-current assets (includes $15,986 and $11,884 as of November 30, 2022 and August 31, 2022, respectively, for the fair value of derivative instruments) | 77,242 | 72,928 | ||||||||||
Investment in unconsolidated affiliates | 10,534 | 10,544 | 10,497 | 10,534 | ||||||||
Total Assets | $ | 1,789,313 | $ | 1,705,790 | $ | 1,887,920 | $ | 1,808,400 | ||||
LIABILITIES AND EQUITY | ||||||||||||
Current Liabilities: | ||||||||||||
Short-term borrowings | $ | 4,986 | $ | — | $ | 11,050 | $ | 10,608 | ||||
Accounts payable | 461,046 | 388,791 | 446,572 | 408,407 | ||||||||
Accrued salaries and benefits | 30,221 | 41,896 | 33,693 | 44,097 | ||||||||
Deferred income | 28,128 | 26,898 | 29,609 | 29,228 | ||||||||
Income taxes payable | 6,955 | 8,310 | 9,617 | 7,243 | ||||||||
Other accrued expenses and other current liabilities | 39,204 | 39,736 | 40,388 | 38,667 | ||||||||
Operating lease liabilities, current portion | 6,771 | 8,526 | 7,349 | 7,491 | ||||||||
Long-term debt, current portion | 16,843 | 19,395 | 33,280 | 33,715 | ||||||||
Total current liabilities | 594,154 | 533,552 | 611,558 | 579,456 | ||||||||
Deferred tax liability | 1,631 | 1,568 | 1,877 | 2,165 | ||||||||
Long-term income taxes payable, net of current portion | 6,039 | 4,160 | 5,036 | 5,215 | ||||||||
Long-term operating lease liabilities | 125,046 | 129,256 | 115,808 | 118,496 | ||||||||
Long-term debt, net of current portion | 110,601 | 110,110 | 118,505 | 103,556 | ||||||||
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 | ||||||||||
Other long-term liabilities (includes $8,772 and $8,440 for post-employment plans as of November 30, 2022 and August 31, 2022, respectively) | 8,773 | 8,439 | ||||||||||
Total Liabilities | 847,167 | 789,576 | 861,557 | 817,327 | ||||||||
Stockholders' Equity: | ||||||||||||
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 | ||||||||||
Common stock $0.0001 par value, 45,000,000 shares authorized; 31,857,969 and 31,697,590 shares issued and 31,050,917 and 30,904,826 shares outstanding (net of treasury shares) as of November 30, 2022 and August 31, 2022, respectively | 3 | 3 | ||||||||||
Additional paid-in capital | 469,170 | 465,015 | 485,096 | 481,406 | ||||||||
Accumulated other comprehensive loss | (188,639) | (182,508) | (196,137) | (195,586) | ||||||||
Retained earnings | 689,430 | 658,919 | 769,799 | 736,894 | ||||||||
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 | 942,146 | 915,345 | ||||||||||
Noncontrolling interest in consolidated subsidiaries | — | 869 | ||||||||||
Less: treasury stock at cost, 807,052 shares as of November 30, 2022 and 792,764 shares as of August 31, 2022 | (32,398) | (31,644) | ||||||||||
Total Stockholders' Equity | 942,146 | 916,214 | 1,026,363 | 991,073 | ||||||||
Total Liabilities and Equity | $ | 1,789,313 | $ | 1,705,790 | $ | 1,887,920 | $ | 1,808,400 | ||||
See accompanying notes.
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended | Three Months Ended | |||||||||||
November 30, | November 30, | November 30, | November 30, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||||
Revenues: | ||||||||||||
Net merchandise sales | $ | 944,043 | $ | 838,369 | $ | 1,025,463 | $ | 944,043 | ||||
Export sales | 10,534 | 10,881 | 10,458 | 10,534 | ||||||||
Membership income | 14,791 | 13,299 | 15,895 | 14,791 | ||||||||
Other revenue and income | 5,988 | 14,883 | 2,990 | 5,988 | ||||||||
Total revenues | 975,356 | 877,432 | 1,054,806 | 975,356 | ||||||||
Operating expenses: | ||||||||||||
Cost of goods sold: | ||||||||||||
Net merchandise sales | 793,193 | 703,619 | 859,068 | 793,193 | ||||||||
Export sales | 10,067 | 10,433 | 9,989 | 10,067 | ||||||||
Non-merchandise | 1,809 | 5,824 | — | 1,809 | ||||||||
Selling, general and administrative: | ||||||||||||
Warehouse club and other operations | 91,196 | 84,832 | 96,892 | 91,196 | ||||||||
General and administrative | 31,693 | 27,521 | 33,172 | 31,693 | ||||||||
Pre-opening expenses | 970 | 602 | — | 970 | ||||||||
Loss on disposal of assets | 411 | 70 | 158 | 411 | ||||||||
Total operating expenses | 929,339 | 832,901 | 999,279 | 929,339 | ||||||||
Operating income | 46,017 | 44,531 | 55,527 | 46,017 | ||||||||
Other income (expense): | ||||||||||||
Interest income | 518 | 491 | 1,157 | 518 | ||||||||
Interest expense | (1,590) | (2,033) | (2,749) | (1,590) | ||||||||
Other income (expense), net | 1,409 | (1,545) | (4,566) | 1,409 | ||||||||
Total other income (expense) | 337 | (3,087) | (6,158) | 337 | ||||||||
Income before provision for income taxes and | 46,354 | 41,444 | 49,369 | 46,354 | ||||||||
Provision for income taxes | (15,814) | (13,618) | (16,426) | (15,814) | ||||||||
Loss of unconsolidated affiliates | (10) | (9) | (38) | (10) | ||||||||
Net income | 30,530 | 27,817 | 32,905 | 30,530 | ||||||||
Less: net income attributable to noncontrolling interest | (19) | (80) | — | (19) | ||||||||
Net income attributable to PriceSmart, Inc. | $ | 30,511 | $ | 27,737 | $ | 32,905 | $ | 30,511 | ||||
Net income attributable to PriceSmart, Inc. per share available for distribution: | ||||||||||||
Basic | $ | 0.98 | $ | 0.90 | $ | 1.05 | $ | 0.98 | ||||
Diluted | $ | 0.98 | $ | 0.90 | $ | 1.05 | $ | 0.98 | ||||
Shares used in per share computations: | ||||||||||||
Basic | 30,551 | 30,398 | 30,713 | 30,551 | ||||||||
Diluted | 30,603 | 30,420 | 30,719 | 30,603 | ||||||||
See accompanying notes.
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS)
Three Months Ended | Three Months Ended | |||||||||||
November 30, | November 30, | November 30, | November 30, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||||
Net income | $ | 30,530 | $ | 27,817 | $ | 32,905 | $ | 30,530 | ||||
Less: net income attributable to noncontrolling interest | (19) | (80) | — | (19) | ||||||||
Net income attributable to PriceSmart, Inc. | $ | 30,511 | $ | 27,737 | $ | 32,905 | $ | 30,511 | ||||
Other Comprehensive Income, net of tax: | ||||||||||||
Foreign currency translation adjustments (1) | (8,131) | 2,761 | (885) | (8,131) | ||||||||
Defined benefit pension plan: | ||||||||||||
Net gain arising during period | 17 | 60 | ||||||||||
Net gain/(loss) arising during period | (28) | 17 | ||||||||||
Amortization of prior service cost and actuarial gains included in net periodic pensions cost | 34 | 33 | 37 | 34 | ||||||||
Total defined benefit pension plan | 51 | 93 | 9 | 51 | ||||||||
Derivative instruments: (2) | ||||||||||||
Unrealized gains/(losses) on change in derivative obligations | (1,301) | 1,230 | ||||||||||
Unrealized gains/(losses) on change in | 3,250 | (922) | ||||||||||
Unrealized losses on change in derivative obligations | (695) | (1,301) | ||||||||||
Unrealized gains/(losses) on change in fair value of interest rate swaps | (1,716) | 3,250 | ||||||||||
Amounts reclassified from accumulated other comprehensive income to other expense, net for settlement of derivatives | 2,736 | — | ||||||||||
Total derivative instruments | 1,949 | 308 | 325 | 1,949 | ||||||||
Other comprehensive income (loss) | (6,131) | 3,162 | ||||||||||
Other comprehensive loss | (551) | (6,131) | ||||||||||
Comprehensive income | 24,380 | 30,899 | 32,354 | 24,380 | ||||||||
Less: comprehensive income attributable to noncontrolling interest | 3 | 31 | — | 3 | ||||||||
Comprehensive income attributable to PriceSmart, Inc. | $ | 24,377 | $ | 30,868 | $ | 32,354 | $ | 24,377 | ||||
(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 | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at August 31, 2020 | 31,418 | $ | 3 | $ | 454,455 | $ | (176,820) | $ | 582,487 | 747 | $ | (28,406) | $ | 831,719 | $ | 1,013 | $ | 832,732 | ||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | 7 | (526) | (526) | — | (526) | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of treasury stock | (96) | — | (7,864) | — | — | (96) | 7,864 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock award | 77 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Forfeiture of restricted stock awards | (3) | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 4,075 | — | — | — | — | 4,075 | — | 4,075 | ||||||||||||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Loss | Earnings | Shares | Amount | PriceSmart, Inc. | Interest | Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at August 31, 2021 | 31,468 | $ | 3 | $ | 465,015 | $ | (182,508) | $ | 658,919 | 713 | $ | (26,084) | $ | 915,345 | $ | 869 | $ | 916,214 | 31,468 | $ | 3 | $ | 465,015 | $ | (182,508) | $ | 658,919 | 713 | $ | (26,084) | $ | 915,345 | $ | 869 | $ | 916,214 | ||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | 32 | (2,433) | (2,433) | — | (2,433) | — | — | — | — | — | 32 | (2,433) | (2,433) | — | (2,433) | ||||||||||||||||||||||||||||||||||||||
Issuance of treasury stock | (9) | — | (699) | — | — | (9) | 699 | — | — | — | (9) | — | (699) | — | — | (9) | 699 | — | — | — | ||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock award | 140 | — | — | — | — | — | — | — | — | — | 140 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
Forfeiture of restricted stock awards | (1) | — | — | — | — | — | — | — | — | — | (1) | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 4,567 | — | — | — | — | 4,567 | — | 4,567 | — | — | 4,567 | — | — | — | — | 4,567 | — | 4,567 | ||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | 30,511 | — | — | 30,511 | 19 | 30,530 | — | — | — | — | 30,511 | — | — | 30,511 | 19 | 30,530 | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | (6,131) | — | — | — | (6,131) | 3 | (6,128) | — | — | — | (6,131) | — | — | — | (6,131) | 3 | (6,128) | ||||||||||||||||||||||||||||||||||||||
Sale of Aeropost stock | — | — | 287 | — | — | — | — | 287 | (891) | (604) | — | — | 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 | 31,598 | $ | 3 | $ | 469,170 | $ | (188,639) | $ | 689,430 | 736 | $ | (27,818) | $ | 942,146 | $ | — | $ | 942,146 | ||||||||||||||||||||||
Balance at August 31, 2022 | 31,698 | $ | 3 | $ | 481,406 | $ | (195,586) | $ | 736,894 | 793 | $ | (31,644) | $ | 991,073 | $ | — | $ | 991,073 | ||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | 21 | (1,300) | (1,300) | — | (1,300) | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of treasury stock | (7) | — | (546) | — | — | (7) | 546 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock award | 174 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Forfeiture of restricted stock awards | (7) | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 4,236 | — | — | — | — | 4,236 | — | 4,236 | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | 32,905 | — | — | 32,905 | — | 32,905 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | (551) | — | — | — | (551) | — | (551) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at November 30, 2022 | 31,858 | $ | 3 | $ | 485,096 | $ | (196,137) | $ | 769,799 | 807 | $ | (32,398) | $ | 1,026,363 | $ | — | $ | 1,026,363 | ||||||||||||||||||||||||||||||||||||||||
See accompanying notes
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED—AMOUNTS IN THOUSANDS)
Three Months Ended | Three Months Ended | ||||||||||
November 30, | November 30, | November 30, | November 30, | ||||||||
2021 | 2020 | 2022 | 2021 | ||||||||
Operating Activities: | |||||||||||
Net income | $ | 30,530 | 27,817 | $ | 32,905 | $ | 30,530 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 15,603 | 15,485 | 17,568 | 15,603 | |||||||
Allowance for doubtful accounts | 2 | 10 | 16 | 2 | |||||||
Loss on sale of property and equipment | 411 | 70 | 158 | 411 | |||||||
Deferred income taxes | 654 | 798 | 358 | 654 | |||||||
Equity in losses of unconsolidated affiliates | 10 | 9 | 38 | 10 | |||||||
Stock-based compensation | 4,567 | 4,075 | 4,236 | 4,567 | |||||||
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 | (27,108) | (8,907) | (15,856) | (27,108) | |||||||
Merchandise inventories | (111,062) | (63,669) | (45,649) | (111,062) | |||||||
Accounts payable | 73,054 | 6,539 | 36,689 | 73,054 | |||||||
Net cash used in operating activities | (13,339) | (17,773) | |||||||||
Net cash provided by (used in) operating activities | 30,463 | (13,339) | |||||||||
Investing Activities: | |||||||||||
Proceeds from the disposal of Aeropost, net of divested cash | 4,959 | — | — | 4,959 | |||||||
Additions to property and equipment | (29,729) | (21,171) | (23,944) | (29,729) | |||||||
Purchases of short-term investments | (4,310) | (32,121) | — | (4,310) | |||||||
Proceeds from settlements of short-term investments | 15,488 | 4,433 | 2,230 | 15,488 | |||||||
Purchases of long-term investments | — | (1,478) | |||||||||
Proceeds from settlements of long-term investments | 1,486 | — | — | 1,486 | |||||||
Proceeds from disposal of property and equipment | 56 | 27 | 221 | 56 | |||||||
Net cash used in investing activities | (12,050) | (50,310) | (21,493) | (12,050) | |||||||
Financing Activities: | |||||||||||
Proceeds from long-term bank borrowings | 4,204 | — | 19,914 | 4,204 | |||||||
Repayment of long-term bank borrowings | (6,126) | (3,897) | (5,113) | (6,126) | |||||||
Proceeds from short-term bank borrowings | 10,041 | — | 1,218 | 10,041 | |||||||
Repayment of short-term bank borrowings | (4,488) | (17,695) | — | (4,488) | |||||||
Purchase of treasury stock | (2,433) | (526) | (1,300) | (2,433) | |||||||
Other financing activities | — | (80) | |||||||||
Net cash provided by (used in) financing activities | 1,198 | (22,198) | |||||||||
Net cash provided by financing activities | 14,719 | 1,198 | |||||||||
Effect of exchange rate changes on cash and cash equivalents and restricted cash | 1,312 | (1,095) | 6,626 | 1,312 | |||||||
Net decrease in cash, cash equivalents | (22,879) | (91,376) | |||||||||
Net increase (decrease) in cash, cash equivalents | 30,315 | (22,879) | |||||||||
Cash, cash equivalents and restricted cash at beginning of period | 215,479 | 303,771 | 251,373 | 215,479 | |||||||
Cash, cash equivalents and restricted cash at end of period | $ | 192,600 | $ | 212,395 | $ | 281,688 | $ | 192,600 | |||
Supplemental disclosure of noncash investing activities: | |||||||||||
Capital expenditures accrued, but not yet paid | $ | 5,772 | 9,150 | $ | 4,606 | $ | 5,772 | ||||
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:
Three Months Ended | Three Months Ended | |||||||||||
November 30, | November 30, | November 30, | November 30, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||||
Cash and cash equivalents | $ | 176,072 | $ | 207,955 | $ | 267,944 | $ | 176,072 | ||||
Short-term restricted cash | 4,165 | 185 | 2,873 | 4,165 | ||||||||
Long-term restricted cash | $ | 12,363 | $ | 4,255 | $ | 10,871 | $ | 12,363 | ||||
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 192,600 | $ | 212,395 | $ | 281,688 | $ | 192,600 | ||||
See accompanying notes.
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 20212022
NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION
PriceSmart, Inc.’s (“PriceSmart,” the “Company,” or "we") business consists primarily of international membership
shopping warehouse clubs similar to, but typically smaller in size than, warehouse clubs in the United States. As of November 30, 2021,2022, the Company had 4950 warehouse clubs in operation in 12 countries and 1one U.S. territory (9(nine in Colombia; 8eight in Costa Rica; 7seven in Panama; 5five in the Dominican Republic and Guatemala, 4four in Trinidad; 3three in Honduras; 2two each in El Salvador, Jamaica, and Nicaragua; and 1one 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). In addition, theThe Company plans to open its 50tha warehouse club in Portmore, JamaicaSan Miguel, El Salvador in April 2022. the spring of 2023 and a warehouse club in Medellín, Colombia in the summer of 2023. Once these two new clubs are open, the Company will operate 52 warehouse clubs. Our operating segments are the United States, Central America, the Caribbean, and Colombia.
PriceSmart continues to invest in technology and related talent for two main purposes:to support the following three major drivers of growth:
1.To drive growth by:Expand Real Estate Footprint with New Clubs and Distribution Facilities;
o2.Increasing membership benefits and creating greater value and connectivity with our Members, by optimizing use of our membership data;
oInforming and guiding our plans for physical and geographic expansion;Increase Membership Value; and
o3.Driving incremental sales through PriceSmart.com.
To increase our efficienciesDrive Incremental Sales via PriceSmart.com and provide valuable tools that will support better decision-making.Enhanced Online, Digital and Technological Capabilities.
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”).
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, 20212022 (the “2021“2022 Form 10-K”). The interim consolidated financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries. Intercompany 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.
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)— (Continued)
In the case of the Company's ownership interest in real estate development joint ventures, both parties to each joint venture share all rights, obligations and the power to direct the activities of the VIE that most significantly impact the VIE's economic performance. As a result, the Company has determined that it is not the primary beneficiary of the VIEs and, therefore, has accounted for these entities under the equity method. Under the equity method, the Company's investments in unconsolidated affiliates are initially recorded as an investment in the stock of an investee at cost and are adjusted for the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee after the date of the initial investment. The Company's ownership interest in real estate development joint ventures the Company has recorded under the equity method as of November 30, 20212022 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.
Disposals, 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 Members. 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 the transaction, with which we believe we can continue to grow our omni-channel business. This technology and 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 enhanced distribution system provide us with the potential to expand our geographic coverage, reach more Members in more ways, increase efficiencies, reduce costs and 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. These estimates and assumptions take into account historical and forward-looking factors that the Company believes are reasonable. Actual results could differ from those estimates. The novel coronavirus (COVID-19) pandemic continues to significantly impact the economies of the countries where the Company operates due to elevated infection ratesestimates 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.assumptions.
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):
November 30, | August 31, | November 30, | August 31, | |||||||||||
2021 | 2021 | 2022 | 2022 | |||||||||||
Short-term restricted cash | $ | 4,165 | $ | 3,647 | $ | 2,873 | $ | 3,013 | ||||||
Long-term restricted cash | 12,363 | 9,772 | 10,871 | 10,650 | ||||||||||
Total restricted cash(1) | $ | 16,528 | $ | 13,419 | $ | 13,744 | $ | 13,663 | ||||||
(1)Restricted cash consists mainly of cash deposits held within banking institutions in 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 $11.7$8.4 million with a few of its lenders as compensating balances for several U.S. dollar denominated loans payable over several years. The certificates of deposit will be reduced annually commensurate with the loan 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 $45.3$43.2 million as of November 30, 20212022 and $52.9$43.3 million as of August 31, 2021.2022. 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 mosttwo 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 $11.1 million and $9.7 million as of November 30, 2021 and August 31, 2021, respectively. In two other countries, there have been changes in the method of computing minimum income tax payments, under which the governments have sought torules 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 makeis 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 $11.1$11.2 million and $11.0 million and deferred tax assets of $3.5$3.7 million and $3.3$3.5 million as of November 30, 20212022 and August 31, 2021,2022, respectively, in these countries. While the rules related to refunds of income tax receivables in these countries are either unclear or complex, theThe 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):
November 30, | August 31, | November 30, | August 31, | |||||||||
2021 | 2021 | 2022 | 2022 | |||||||||
Prepaid expenses and other current assets | $ | 4,703 | 3,173 | $ | 3,523 | $ | 3,890 | |||||
Other non-current assets | 32,438 | 28,437 | 34,443 | 32,460 | ||||||||
Total amount of VAT receivables reported | $ | 37,141 | $ | 31,610 | $ | 37,966 | $ | 36,350 | ||||
The following table summarizes the Income tax receivables reported by the Company (in thousands):
November 30, | August 31, | November 30, | August 31, | |||||||||
2021 | 2021 | 2022 | 2022 | |||||||||
Prepaid expenses and other current assets | $ | 12,144 | 11,491 | $ | 13,496 | $ | 12,077 | |||||
Other non-current assets | 19,361 | 18,872 | 20,721 | 19,985 | ||||||||
Total amount of income tax receivables reported | $ | 31,505 | $ | 30,363 | $ | 34,217 | $ | 32,062 | ||||
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 3three 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 thatWhen an award is unlikely to vest,forfeited, 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 three months ended November 30, 2021,2022, the Company reissued approximately 9,0007,000 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, 0no 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 20212022 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 November 30, 20212022 and August 31, 2021.2022.
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.
Revenue Recognition – The accounting policies and other disclosures such as the disclosure of disaggregated revenues are described in “Note 3 – Revenue Recognition.”
Gain Contingencies and Recoveries – A 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 carriers or other third parties. Anticipated proceeds in excess of the amount of loss recognized are considered contingent gains. Anticipated proceeds in excess of a loss recognized in the financial statements are not recognized until all contingencies related to the collectability, timing and amount are 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, which were disposed of in the first quarter of fiscal year 2022, the Company includesincluded 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 months ended November 30, 20212022 and 20202021 (in thousands):
Three Months Ended | |||||||
November 30, | November 30, | ||||||
2021 | 2020 | ||||||
Effect on other comprehensive income (loss) due to foreign currency translation | $ | (8,131) | $ | 2,761 | |||
Three Months Ended | |||||||
November 30, | November 30, | ||||||
2022 | 2021 | ||||||
Effect on other comprehensive loss due to foreign currency translation | $ | (885) | $ | (8,131) | |||
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 | |||||||
November 30, | November 30, | ||||||
2021 | 2020 | ||||||
Currency loss | $ | (1,864) | $ | (1,492) | |||
Three Months Ended | |||||||
November 30, | November 30, | ||||||
2022 | 2021 | ||||||
Currency loss | $ | (4,503) | $ | (1,864) | |||
Recent Accounting Pronouncements
There were no new accounting standards that had a material impact on the Company’s consolidated financial statements during the three-month period ended November 30, 2022, and there were no new accounting standards or pronouncements that were issued but not yet effective as of November 30, 2022 that the Company expects to have a material impact on its consolidated financial statements.
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)— (Continued)
Recent Accounting Pronouncements 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 adopted ASU No. 2019-12 on September 1, 2021, the first quarter of fiscal year 2022. 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-month period ended November 30, 2021, and there were no other new accounting standards or pronouncements that were issued but not yet effective as of 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. TheUntil the disposal of Aeropost in the first quarter of fiscal 2022, the Company recognizes non-merchandiserecognized non merchandise revenue, net of sales taxes, on transactions where the Company hashad determined that it iswas the agent in the transaction. These transactions primarily consistconsisted of contracts the Company entersentered into with its customers to provide delivery, insurance and customs processing services for products its customers purchasepurchased online in the United States either directly from other vendors utilizing the vendor’s website or through the Company’s marketplace site. Revenue iswas recognized when the Company’s performance obligations have beenwere completed (that is when delivery of the items have been made to the destination point) and iswas recorded in “non-merchandise revenue” on the consolidated statements of income. Prepayment for orders for which the Company hashad not fulfilled its performance obligation arewere recorded as deferred income. Additionally, the Company recordsrecorded 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 iswas acting as an agent and iswas 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 Memberships in all of its 13thirteen countries. The annual fee for a Platinum Membership is approximately $75.$75. The Platinum Membership provides Members with a 2% rebate on most items, up to an annual maximum of $500.$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%5% of the awards issued; therefore, it records 95% of the Platinum Membership liability at the time of sale. Annually, the Company reviews for expired unused rebates outstanding, and the expired unused rebates are recognized as “Other revenue and income” on the consolidated statements of income.
Co-branded Credit Card Points Reward Programs. Most of the Company’s subsidiaries have points reward programs related to co-branded credit cards. These points reward programs provide incremental points that can be used at a future time to acquire merchandise within the Company’s warehouse clubs. This results in two performance obligations, the first performance obligation being the initial sale of the merchandise or services purchased with the co-branded credit card and the second performance obligation being the future use of the points rewards to purchase merchandise or services. As a result, upon the initial sale, the Company allocates the transaction price to each performance obligation with the amount allocated to the future use points rewards recorded as a contract liability within other accrued expenses and other current liabilities on the consolidated balance sheet. The portion of the selling price allocated to the reward points is recognized as Net merchandise sales when the points are used or when the points expire. The Company reviews on an annual basis expired points rewards outstanding, and the expired rewards are recognized as Net merchandise sales on the consolidated statements of income within markets where the co-branded credit card agreement allows for such treatment.
Gift Cards. Members’ purchases of gift cards to be utilized at the Company's warehouse clubs are not recognized as sales until the card is redeemed and the customer purchases merchandise using the gift card. The outstanding gift cards are reflected as other accrued expenses and other current liabilities in the consolidated balance sheets. These gift cards generally have a one-year stated expiration date from the date of issuance and are generally redeemed prior to expiration. However, the absence of a large volume of transactions for gift cards impairs the Company's ability to make a reasonable estimate of the redemption levels for gift certificates;cards; therefore, the Company assumes a 100% redemption rate prior to expiration of the gift certificate.card. The Company periodically reviews unredeemed outstanding gift certificates,cards, and the gift certificatescards 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 | |||||||||
November 30, 2021 | August 31, 2021 | November 30, 2022 | August 31, 2022 | |||||||
Deferred membership income | $ | 26,952 | $ | 25,951 | $ | 28,250 | $ | 28,000 | ||
Other contract performance liabilities | $ | 11,811 | $ | 7,871 | $ | 15,387 | $ | 10,473 | ||
Disaggregated Revenues
In the following table, net merchandise sales are disaggregated by merchandise category (in thousands):
Three Months Ended | |||||
November 30, 2022 | November 30, 2021 | ||||
Foods & Sundries | $ | 511,894 | $ | 470,950 | |
Fresh Foods | 295,288 | 269,677 | |||
Hardlines | 115,594 | 111,936 | |||
Softlines | 54,420 | 50,474 | |||
Other Business | 48,267 | 41,006 | |||
Net Merchandise Sales | $ | 1,025,463 | $ | 944,043 | |
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)— (Continued)
Disaggregated Revenues
In the following table, net merchandise sales are disaggregated by merchandise category (in thousands):
Three Months Ended | |||||
November 30, 2021 | November 30, 2020 | ||||
Foods & Sundries | $ | 470,950 | $ | 418,374 | |
Fresh Foods | 269,677 | 235,289 | |||
Hardlines | 111,936 | 112,785 | |||
Softlines | 50,474 | 40,329 | |||
Other Business | 41,006 | 31,592 | |||
Net Merchandise Sales | $ | 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 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-months ended November 30, 20212022 and 20202021 (in thousands, except per share amounts):
Three Months Ended | Three Months Ended | |||||||||||
November 30, | November 30, | November 30, | November 30, | |||||||||
2021 | 2020 | 2022 | 2021 | |||||||||
Net income attributable to PriceSmart, Inc. | $ | 30,511 | $ | 27,737 | $ | 32,905 | $ | 30,511 | ||||
Less: Allocation of income to unvested stockholders | (560) | (459) | (586) | (560) | ||||||||
Net income attributable to PriceSmart, Inc. per share available for distribution | $ | 29,951 | $ | 27,278 | $ | 32,319 | $ | 29,951 | ||||
Basic weighted average shares outstanding | 30,551 | 30,398 | 30,713 | 30,551 | ||||||||
Add dilutive effect of performance stock units (two-class method) | 52 | 22 | 6 | 52 | ||||||||
Diluted average shares outstanding | 30,603 | 30,420 | 30,719 | 30,603 | ||||||||
Basic net income per share | $ | 0.98 | $ | 0.90 | $ | 1.05 | $ | 0.98 | ||||
Diluted net income per share | $ | 0.98 | $ | 0.90 | $ | 1.05 | $ | 0.98 | ||||
NOTE 5 – STOCKHOLDERS’ EQUITY
Dividends
NaNNo dividends were declared by the Company’s Board of Directors during the first three months of fiscal year 2022.2023. The following table summarizes the dividends declared and paid during fiscal year 20212022 (amounts are per share).
First Payment | Second Payment | First Payment | Second Payment | |||||||||||||||||||||||||||||||
Declared | Amount | Record | Date | Amount | Record | Date | Amount | Amount | Record | Date | Amount | Record | Date | Amount | ||||||||||||||||||||
2/4/2021 | $ | 0.70 | 2/15/2021 | 2/26/2021 | 0.35 | 8/15/2021 | 8/31/2021 | 0.35 | ||||||||||||||||||||||||||
2/3/2022 | $ | 0.86 | 2/15/2022 | 2/28/2022 | $ | 0.43 | 8/15/2022 | 8/31/2022 | $ | 0.43 | ||||||||||||||||||||||||
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 pandemicuncertain macroeconomic conditions 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, 2021 | $ | (182,508) | 251 | $ | (182,257) | |||||||||||
Beginning balance, September 1, 2022 | $ | (195,586) | $ | — | $ | (195,586) | ||||||||||
Foreign currency translation adjustments | (8,131) | 3 | (8,128) | (885) | — | (885) | ||||||||||
Defined benefit pension plans (1) | 51 | — | 51 | 9 | — | 9 | ||||||||||
Derivative instruments (2) | 1,949 | — | 1,949 | 325 | — | 325 | ||||||||||
Sale of Aeropost | — | (254) | (254) | |||||||||||||
Ending balance, November 30, 2021 | $ | (188,639) | $ | — | $ | (188,639) | ||||||||||
Ending balance, November 30, 2022 | $ | (196,137) | $ | — | $ | (196,137) | ||||||||||
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 | 2,761 | 31 | 2,792 | (8,131) | 3 | (8,128) | ||||||||||
Defined benefit pension plans (1) | 93 | — | 93 | 51 | — | 51 | ||||||||||
Derivative Instruments (2) | 308 | — | 308 | 1,949 | — | 1,949 | ||||||||||
Ending balance, November 30, 2020 | $ | (173,658) | $ | 165 | $ | (173,493) | ||||||||||
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, 2020 | $ | (176,820) | $ | 134 | $ | (176,686) | ||||||||||
Beginning balance, September 1, 2021 | $ | (182,508) | $ | 251 | $ | (182,257) | ||||||||||
Foreign currency translation adjustments | (7,837) | 117 | (7,720) | (19,034) | 3 | (19,031) | ||||||||||
Defined benefit pension plans (1) | (230) | — | (230) | (341) | — | (341) | ||||||||||
Derivative Instruments (2) | 2,252 | — | 2,252 | 6,170 | — | 6,170 | ||||||||||
Amounts reclassified from accumulated other comprehensive loss | 127 | — | 127 | 127 | — | 127 | ||||||||||
Ending balance, August 31, 2021 | $ | (182,508) | $ | 251 | $ | (182,257) | ||||||||||
Sale of Aeropost | — | (254) | (254) | |||||||||||||
Ending balance, August 31, 2022 | $ | (195,586) | $ | — | $ | (195,586) | ||||||||||
(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):
November 30, | August 31, | |||||
2021 | 2021 | |||||
Retained earnings not available for distribution | $ | 8,136 | $ | 8,022 | ||
November 30, | August 31, | |||||
2022 | 2022 | |||||
Retained earnings not available for distribution | $ | 8,750 | $ | 8,648 | ||
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, the Company and its subsidiaries are subject to legal proceedings, claims and litigation arising in the ordinary course of business related to the Company’s operations and property ownership. The Company evaluates such matters on a case by case basis, and vigorously contests any such legal proceedings or claims which the Company believes are without merit. The Company believes that the final disposition of these matters will not have a material adverse effect on its financial position, results of operations or liquidity. It is possible, however, that the Company's results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to such matters.
The Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss and the accrued amount, if any, thereof, and adjusts the amount as appropriate. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. If it is at least a reasonable possibility that a material loss will occur, the Company will provide disclosure regarding the contingency.
On August 5, 2022, PriceSmart received notice from Click USA Inc. and Aeropost, Inc. alleging that PriceSmart had breached certain provisions of a Stock Purchase Agreement between PriceSmart and Click USA, Inc. dated October 1, 2021, concerning the sale of Aeropost, Inc. to Click USA Inc. In this notice, Click USA Inc. and Aeropost, Inc. allege that PriceSmart made inaccurate or incomplete representations and warranties relating to Aeropost, Inc.’s cyber security and the condition of its IT systems in connection with the sale. Click USA Inc. and Aeropost, Inc. further asserted that, in or around April 2022, Aeropost, Inc. suffered cyberattacks, and they seek to hold PriceSmart liable for some amount of damages due to alleged losses directly relating to the cyber-attacks as well as due to possible third-party claims as a result of the cyber-attacks. The notice suggested that aggregate losses attributable to these losses and future claims could exceed $3,000,000. On October 17, 2022, PriceSmart received a letter from Click USA Inc. supplementing its August 5, 2022 notice with additional information concerning Click USA Inc.’s direct losses and the existence or likelihood of third-party claims and potential related losses. Click USA Inc.’s letter estimates its total losses for direct and third-party claims at $2.9 million. Per the express terms of the agreement, the maximum amount of all losses for which PriceSmart may be liable for claims arising out of allegations concerning the above-referenced representations and warranties is $4,000,000. In its October 17, 2022 letter, Click USA Inc. notified PriceSmart of a separate and unrelated claim for breach of representations and warranties in the Stock Purchase Agreement relating to the alleged misclassification of an employee in Costa Rica. Click USA Inc. alleges that the amount of possible loss relating to this claim is approximately $300,000. PriceSmart intends to vigorously defend itself against all of Click USA Inc.’s claims and, as such, we have concluded that a loss related to this matter is not probable and any potential loss is not reasonably estimable; therefore, we have not accrued a liability for this matter.
Income Taxes – For interim reporting, the Company useswe estimate an estimated annual effective tax rate (AETR), pursuant to ASC 740-270, to calculate income tax expense. IncomeOur 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 isWe 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 itsour ability to recover our deferred tax assets in the jurisdictionsjurisdiction from which they arise, the Company considerswe 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, the Company beginswe begin with historical results adjusted for the results of discontinued operations and incorporatesincorporate 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 considerswe consider three years of cumulative operating income (loss).
The Company is required to file federal and state tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with the interpretations the Company used to calculate its tax liability and therefore require the Company to pay additional taxes.
The Company accrues an amount for its estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. There were no material changes in the Company’s uncertain income tax positions during the three months ended November 30, 2021.2022.
In evaluating the exposure associated with various non-income tax filing positions, the Company accrues for probable and estimable exposures for non-income tax related tax contingencies. As of November 30, 20212022 and August 31, 2021,2022, the Company has recorded within other accrued expenses and other current liabilities a total of $1.7$1.1 million and $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 $11.1$11.2 million and $11.0 million and deferred tax assets of $3.5$3.7 million and $3.3$3.5 million as of November 30, 20212022 and August 31, 2021,2022, 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 November 30, 20212022 and August 31, 2021,2022, the Company had approximately $10.1$15.8 million and $16.2$16.5 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 November 30, 2021,2022, the Company had entered into twothree land purchase agreements for new warehouse clubs that, if completed, would result in the use of approximately $9.4$9.7 million in cash.
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)— (Continued)
The table below summarizes the Company’s interest in real estate joint ventures, commitments to additional future investments and the Company’s maximum exposure to loss as a result of its involvement in these joint venture as of November 30, 20212022 (in thousands):
Entity | % | Initial | Additional | Net Income | Company’s | Commitment | Company's | % | Initial | Additional | Net Income | Company’s | Commitment | Company's | ||||||||||||||||||||||||||||
GolfPark Plaza, S.A. | 50 | % | $ | 4,616 | $ | 2,402 | $ | (23) | $ | 6,995 | $ | 99 | $ | 7,094 | 50 | % | $ | 4,616 | $ | 2,402 | $ | (85) | $ | 6,933 | $ | 99 | $ | 7,032 | ||||||||||||||
Price Plaza Alajuela PPA, S.A. | 50 | % | 2,193 | 1,236 | 110 | 3,539 | 785 | 4,324 | 50 | % | 2,193 | 1,236 | 135 | 3,564 | 785 | 4,349 | ||||||||||||||||||||||||||
Total | $ | 6,809 | $ | 3,638 | $ | 87 | $ | 10,534 | $ | 884 | $ | 11,418 | $ | 6,809 | $ | 3,638 | $ | 50 | $ | 10,497 | $ | 884 | $ | 11,381 | ||||||||||||||||||
(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 | |||||||||||
November 30, 2021 | $ | 131,000 | $ | 4,986 | $ | — | $ | 126,014 | 3.0 | % | |||||
August 31, 2021 | $ | 131,000 | $ | — | $ | 97 | $ | 130,903 | — | % | |||||
Facilities Used | |||||||||||||||
Total Amount | Short-term | Letters of | Facilities | Weighted average | |||||||||||
of Facilities | Borrowings | Credit | Available | interest rate | |||||||||||
November 30, 2022 - Committed | $ | 75,000 | — | — | 75,000 | — | % | ||||||||
November 30, 2022 - Uncommitted | 91,000 | 11,050 | — | 79,950 | 6.3 | ||||||||||
November 30, 2022 - Total | $ | 166,000 | $ | 11,050 | $ | — | $ | 154,950 | 6.3 | % | |||||
August 31, 2022 - Committed | $ | 75,000 | — | 73 | 74,927 | — | % | ||||||||
August 31, 2022 - Uncommitted | 91,000 | 10,608 | — | 80,392 | 5.3 | ||||||||||
August 31, 2022 - Total | $ | 166,000 | $ | 10,608 | $ | 73 | $ | 155,319 | 5.3 | % | |||||
As of November 30, 20212022 and August 31, 2021,2022, 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.
these facilities is a committed credit agreement with one bank for $75.0 million. In exchange for the bank’s commitment to fund any drawdowns the Company requests, the Company pays an annual commitment fee of 0.25%, payable quarterly, on any unused portion of this facility. Additionally, the Company has uncommitted facilities in most of the countries where it operates, with drawdown requests subject to approval by the individual banks each time a drawdown is requested.
The following table provides the changes in long-term debt for the three months ended November 30, 2021:2022:
(Amounts in thousands) | Current | Long-term | Total | Current | Long-term | Total | ||||||||||||||
Balances as of August 31, 2021 | $ | 19,395 | $ | 110,110 | $ | 129,505 | (1) | |||||||||||||
Balances as of August 31, 2022 | $ | 33,715 | $ | 103,556 | $ | 137,271 | (1) | |||||||||||||
Proceeds from long-term debt incurred during the period: | ||||||||||||||||||||
Guatemala subsidiary | — | 4,204 | 4,204 | — | 12,454 | 12,454 | ||||||||||||||
Barbados subsidiary | — | 7,460 | 7,460 | |||||||||||||||||
Total proceeds from long-term debt received during the period | — | 19,914 | 19,914 | |||||||||||||||||
Repayments of long-term debt: | (713) | (4,400) | (5,113) | |||||||||||||||||
Guatemala subsidiary | (377) | — | (377) | |||||||||||||||||
Costa Rica subsidiary | (1,261) | (109) | (1,370) | |||||||||||||||||
Regularly scheduled loan payments | (1,739) | (2,640) | (4,379) | |||||||||||||||||
Reclassifications of long-term debt due in the next 12 months | 879 | (879) | — | 280 | (280) | — | ||||||||||||||
Translation adjustments on foreign currency debt of subsidiaries whose functional currency is not the U.S. dollar (2) | (54) | (85) | (139) | (2) | (285) | (287) | ||||||||||||||
Balances as of November 30, 2021 | $ | 16,843 | $ | 110,601 | $ | 127,444 | (3) | |||||||||||||
Balances as of November 30, 2022 | $ | 33,280 | $ | 118,505 | $ | 151,785 | (3) | |||||||||||||
(1)The carrying amount of non-cash assets assigned as collateral for these loans was $153.5$155.6 million. The carrying amount of cash assets assigned as collateral for these loans was $7.0$5.3 million.
(2)These foreign currency translation adjustments are recorded within Other comprehensive income (loss).
(3)The carrying amount of cash and non-cash assets assigned as collateral for these loans was $146.0 million and $6.2 million, respectively.$179.6 million. The carrying amount of cash assets assigned as collateral for these loans was $4.9 million.
As of November 30, 20212022 and August 31, 2021,2022, the Company had approximately $99.3$113.9 million and $103.4$110.7 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 November 30, | Amount | ||
2022 | $ | 16,843 | |
2023 | 26,836 | ||
2024 | 27,024 | ||
2025 | 10,907 | ||
2026 | 11,481 | ||
Thereafter | 34,353 | ||
Total | $ | 127,444 | |
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)— (Continued)
Annual maturities of long-term debt are as follows (in thousands):
Twelve Months Ended November 30, | Amount | ||
2023 | $ | 33,280 | |
2024 | 34,343 | ||
2025 | 18,302 | ||
2026 | 14,157 | ||
2027 | 34,676 | ||
Thereafter | 17,027 | ||
Total | $ | 151,785 | |
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.
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)— (Continued)
Cash Flow Hedges
As of November 30, 2021,2022, 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 three months ended November 30, 2021:2022:
Subsidiary | Date | Derivative | Derivative | Initial | Bank | Floating Leg | Fixed Rate | Settlement | Effective | |||||||||||
Colombia | 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 | 3-Dec-19 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | 7,875,000 | Citibank, N.A. | Variable rate 3-month Libor plus 2.45% | 7.87 | % | 3rd day of each December, March, June, and September, beginning on March 3, 2020 | December 3, 2019 - | |||||||||
Colombia | 27-Nov-19 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | 25,000,000 | Citibank, N.A. | Variable rate 3-month Libor plus 2.45% | 7.93 | % | 27th day of each November, February, May and August beginning February 27, 2020 | November 27, 2019 - | |||||||||
Colombia | 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 - | |||||||||
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 - | |||||||||
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 - | |||||||||
Entity | Date | Derivative | Derivative | Initial | Bank | Floating Leg | Fixed Rate | Settlement | Effective | |||||||||||
Colombia subsidiary | 26-Sep-22 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | 12,500,000 | PriceSmart, Inc. | 3.00% | 10.35 | % | 24th day of each December, March, June and September beginning December 26, 2022 | September 26, 2022 - | |||||||||
Colombia subsidiary | 3-May-22 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | 10,000,000 | PriceSmart, Inc. | 3.00% | 9.04 | % | 3rd day of each May, August, November and February, beginning on August 3, 2022 | May 3, 2022 - | |||||||||
Colombia subsidiary | 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 subsidiary | 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 subsidiary | 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 - | |||||||||
Panama subsidiary | 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 subsidiary | 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 - | |||||||||
For the three months ended November 30, 20212022 and November 30, 2020,2021, the Company included the gain or loss on the hedged items (that is, variable-rate borrowings) in the same line item—interest expense—as the offsetting gain or loss on the related interest rate swaps as follows (in thousands):
Income Statement Classification | Interest | Cost of | Total | ||||||
Interest expense for the three months ended November 30, 2022 | $ | 1,103 | $ | 347 | $ | 1,450 | |||
Interest expense for the three months ended November 30, 2021 | $ | 557 | $ | 849 | $ | 1,406 | |||
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 | |||||||||||
November 30, | August 31, | November 30, | August 31, | |||||||||
Floating Rate Payer (Swap Counterparty) | 2021 | 2021 | 2022 | 2022 | ||||||||
Union Bank | $ | 32,300 | $ | 32,619 | $ | 31,025 | $ | 31,344 | ||||
Citibank N.A. | 59,862 | 51,032 | 65,183 | 66,353 | ||||||||
Scotiabank | 9,750 | 10,125 | 8,250 | 8,625 | ||||||||
Total | $ | 101,912 | $ | 93,776 | $ | 104,458 | $ | 106,322 | ||||
Derivatives listed on the table below were designated as cash flow hedging instruments. The table summarizes the effect of the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting and its associated tax effect on accumulated other comprehensive (income)/loss (in thousands):
November 30, 2022 | August 31, 2022 | |||||||||||||||||||||||||||||||||||||||
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 | $ | 4,412 | $ | (1,327) | $ | 3,085 | $ | 2,464 | $ | (741) | $ | 1,723 | Other current assets | $ | 41 | $ | (11) | $ | 30 | $ | 2,736 | $ | (348) | $ | 2,388 | ||||||||||||||
Cross-currency interest rate swaps | Other current assets | 1,717 | (517) | 1,200 | — | — | — | Other non-current assets | 13,958 | (4,885) | 9,073 | 10,289 | (4,559) | 5,730 | ||||||||||||||||||||||||||
Cross-currency interest rate swaps | Other current liabilities | (15) | 4 | (11) | (82) | 25 | (57) | |||||||||||||||||||||||||||||||||
Interest rate swaps | Other long-term liabilities | (1,563) | 362 | (1,201) | (2,305) | 535 | (1,770) | Other non-current assets | 2,028 | (448) | 1,580 | 1,596 | (6) | 1,590 | ||||||||||||||||||||||||||
Cross-currency interest rate swaps | Other long-term liabilities | (534) | 160 | (374) | (705) | 212 | (493) | |||||||||||||||||||||||||||||||||
Net fair value of derivatives designated as hedging instruments | $ | 4,032 | $ | (1,322) | $ | 2,710 | $ | (546) | $ | 6 | $ | (540) | Net fair value of derivatives designated as hedging instruments | $ | 16,012 | $ | (5,340) | $ | 10,672 | $ | 14,539 | $ | (4,888) | $ | 9,651 | |||||||||||||||
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 November 30, 2021.2022.
Subsidiary | Dates | Financial | Derivative | Notional | Settlement
| Effective Period | |||||||
Colombia |
| Scotiabank Colpatria, S.A. | Forward foreign | $ |
|
|
| ||||||
Colombia |
|
| Forward foreign | $ | 1,500 | 11-Jan-23 | August 30, 2022 - January 11, 2023 | ||||||
Colombia | 24-Oct-22 | Citibank, N.A. | Forward foreign | $ | 2,000 |
|
| ||||||
Forward derivative gains and (losses) on non-deliverable forward foreign-exchange contracts are included in Other income (expense), net in the consolidated statements of income in the period of change, but the amounts were immaterial for the three months ended November 30, 20212022 and November 30, 2020.
NOTE 9 – SEGMENTS
The Company and its subsidiaries are principally engaged in the international operation of membership shopping in 4950 warehouse clubs located in 12 countries and 1one 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'speriod’s presentation.
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)— (Continued)
The following tables summarize by segment certain revenues, operating costs and balance sheet items (in thousands):
United | Central | Caribbean | Colombia Operations | Reconciling | Total | |||||||||||||||||||||||||||||||
Three Months Ended November 30, 2022 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 10,458 | $ | 629,079 | $ | 307,525 | $ | 107,744 | $ | — | $ | 1,054,806 | ||||||||||||||||||||||||
Intersegment revenues | 407,640 | 6,582 | 1,514 | 705 | (416,441) | — | ||||||||||||||||||||||||||||||
Depreciation, Property and equipment | 1,378 | 8,799 | 4,631 | 2,376 | — | 17,184 | ||||||||||||||||||||||||||||||
Amortization, Intangibles | 384 | — | — | — | — | 384 | ||||||||||||||||||||||||||||||
Operating income (loss) | 13,592 | 50,130 | 24,503 | 4,868 | (37,566) | 55,527 | ||||||||||||||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. | 5,825 | 42,006 | 19,284 | 3,356 | (37,566) | 32,905 | ||||||||||||||||||||||||||||||
Long-lived assets (other than deferred tax assets) | 73,083 | 509,961 | 213,963 | 167,027 | — | 964,034 | ||||||||||||||||||||||||||||||
Goodwill | 8,981 | 24,142 | 10,050 | — | — | 43,173 | ||||||||||||||||||||||||||||||
Total assets | 238,551 | 924,049 | 492,744 | 232,576 | — | 1,887,920 | ||||||||||||||||||||||||||||||
Capital expenditures, net | 5,491 | 12,244 | 3,401 | 4,283 | — | 25,419 | ||||||||||||||||||||||||||||||
United | Central | Caribbean | Colombia Operations | Reconciling | Total | |||||||||||||||||||||||||||||||
Three Months Ended November 30, 2021 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 13,423 | $ | 572,065 | $ | 272,487 | $ | 117,381 | $ | — | $ | 975,356 | $ | 13,423 | $ | 572,065 | $ | 272,487 | $ | 117,381 | $ | — | $ | 975,356 | ||||||||||||
Intersegment revenues | 414,342 | 4,998 | 1,443 | 822 | (421,605) | — | 414,342 | 4,998 | 1,443 | 822 | (421,605) | — | ||||||||||||||||||||||||
Depreciation, Property and equipment | 465 | 8,300 | 4,018 | 2,364 | — | 15,147 | 465 | 8,300 | 4,018 | 2,364 | — | 15,147 | ||||||||||||||||||||||||
Amortization, Intangibles | 456 | — | — | — | — | 456 | 456 | — | — | — | — | 456 | ||||||||||||||||||||||||
Operating income (loss) | 6,257 | 43,379 | 19,878 | 6,378 | (29,875) | 46,017 | 6,257 | 43,379 | 19,878 | 6,378 | (29,875) | 46,017 | ||||||||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. | 3,373 | 35,900 | 16,450 | 4,682 | (29,894) | 30,511 | 3,373 | 35,900 | 16,450 | 4,682 | (29,894) | 30,511 | ||||||||||||||||||||||||
Long-lived assets (other than deferred tax assets) | 71,399 | 495,517 | 203,042 | 167,762 | — | 937,720 | 73,321 | 495,517 | 203,042 | 167,762 | — | 939,642 | ||||||||||||||||||||||||
Intangibles, net | 1,922 | — | — | — | — | 1,922 | ||||||||||||||||||||||||||||||
Goodwill | 8,981 | 24,313 | 10,038 | — | — | 43,332 | 8,981 | 24,313 | 10,038 | — | — | 43,332 | ||||||||||||||||||||||||
Total assets | 212,371 | 867,868 | 460,381 | 248,693 | — | 1,789,313 | 212,371 | 867,868 | 460,381 | 248,693 | — | 1,789,313 | ||||||||||||||||||||||||
Capital expenditures, net | 1,909 | 12,690 | 7,073 | 12,383 | — | 34,055 | 1,909 | 12,690 | 7,073 | 12,383 | — | 34,055 | ||||||||||||||||||||||||
Three Months Ended November 30, 2020 | ||||||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 23,617 | $ | 494,692 | $ | 258,516 | $ | 100,607 | $ | — | $ | 877,432 | ||||||||||||||||||||||||
Intersegment revenues | 350,103 | 4,736 | 1,146 | 1,129 | (357,114) | — | ||||||||||||||||||||||||||||||
Depreciation, Property and equipment | 1,665 | 7,694 | 3,792 | 1,735 | — | 14,886 | ||||||||||||||||||||||||||||||
Amortization, Intangibles | 599 | — | — | — | — | 599 | ||||||||||||||||||||||||||||||
Operating income (loss) | 5,742 | 34,445 | 21,594 | 5,565 | (22,815) | 44,531 | ||||||||||||||||||||||||||||||
Net income (loss) attributable to PriceSmart, Inc. | (372) | 29,238 | 17,170 | 4,596 | (22,895) | 27,737 | ||||||||||||||||||||||||||||||
As of August 31, 2022 | ||||||||||||||||||||||||||||||||||||
Long-lived assets (other than deferred tax assets) | 81,277 | 472,892 | 178,879 | 159,459 | — | 892,507 | $ | 71,743 | $ | 498,204 | $ | 218,021 | $ | 175,194 | $ | — | $ | 963,162 | ||||||||||||||||||
Intangibles, net | 9,566 | — | — | — | — | 9,566 | ||||||||||||||||||||||||||||||
Goodwill | 10,695 | 24,317 | 10,111 | — | — | 45,123 | 8,981 | 24,250 | 10,072 | — | — | 43,303 | ||||||||||||||||||||||||
Investment in unconsolidated affiliates | — | 10,534 | — | — | — | 10,534 | ||||||||||||||||||||||||||||||
Total assets | 212,434 | 771,933 | 436,418 | 257,210 | — | 1,677,995 | 230,411 | 867,898 | 474,411 | 235,680 | — | 1,808,400 | ||||||||||||||||||||||||
Capital expenditures, net | 1,218 | 7,544 | 2,458 | 8,539 | — | 19,759 | ||||||||||||||||||||||||||||||
As of August 31, 2021 | ||||||||||||||||||||||||||||||||||||
Long-lived assets (other than deferred tax assets) | $ | 79,404 | $ | 490,099 | $ | 197,030 | $ | 164,970 | $ | — | $ | 931,503 | ||||||||||||||||||||||||
Intangibles, net | 7,762 | — | — | — | — | 7,762 | ||||||||||||||||||||||||||||||
Goodwill | 10,695 | 24,332 | 10,068 | — | — | 45,095 | ||||||||||||||||||||||||||||||
Total assets | 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.
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)— (Continued)
NOTE 10 – SUBSEQUENT EVENTS
The Company has evaluated all events subsequent to the balance sheet date as of November 30, 20212022 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 TransactionsOn December 9, 2022, the Company announced that Sherry Bahrambeygui will be resigning as Chief Executive Officer, effective February 3, 2023. Robert Price, a Company founder and Chairman of the Board, will become Interim Chief Executive Officer. Ms. Bahrambeygui will continue serving as a member of the Board of Directors of the Company. In connection with her departure, the Company expects to recognize a one-time pre-tax separation charge of approximately $7.7 million (reducing Earnings per share, on an after tax basis, by approximately $0.23) in the second quarter of fiscal year 2023. This amount consists of approximately $4.2 million of non-cash charges related to the net cost of the acceleration of certain equity awards and approximately $3.5 million of other separation costs.
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 only as of the date they are made, and we do not undertake to update these statements, except as required by law. These statements are subject to risks and uncertainties that could cause actual results to differ materially including, but not limited to: adverse changesto the risks detailed 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 discussedthis Quarterly Report under the captions “Itemheading “Part II. Item 1A. Risk Factors” and “Itemin the Annual Report on Form 10-K under the heading “Part I. Item 1A. Risk Factors” and “Part I 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, 20212022 filed with the United States Securities and Exchange Commission (“SEC”) on October 21, 2021.31, 2022. 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 existsThe mission of our business is to improve the lives and businesses of our Members, our employees and Members, provide socially responsible support to the communities in which we operate our communities by reliablybusiness and consistently providingdeliver a fair financial return to our investors. PriceSmart is the only membership-based warehouse club business in the markets where we operate in Latin America and the Caribbean. Following in the tradition of PriceClub® and Costco®, our goal is to offer high quality goods and valuable servicesmerchandise at the lowest possible prices. We believe that lower prices on productsby leveraging volume purchasing and services drive sales volume, which increaseseliminating inefficiencies from 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.distribution network.
PriceSmart began operationsopened its first location in 1996Panama City, Panama in San Diego, California, with the intent to bringOctober of 1996. Today, our U.S. style membership shopping warehouse club concept to underserved countries. We currently operate 49company operates 50 warehouse clubs in Central America,12 countries, plus the Caribbean and Colombia. Our Members also are able to shop on our e-commerce platform, PriceSmart.com, which is availableU.S. Virgin Islands, with revenues in all 13 markets.excess of $4.0 billion in fiscal year 2022.
Membership is a key characteristic of warehouse clubs. As of November 30, 2022, PriceSmart had in excess of 1.7 million membership accounts, with the average Member paying approximately $35 per year in membership fees. These membership fees are applied to lowering the price of the products we sell. We offerbelieve membership also provides a sense of identity and loyalty that, in turn, reduces the need for PriceSmart to spend money on advertising.
As is typical of all warehouse club businesses, PriceSmart stocks a limited number of stock keeping units (SKU’s). Our SKU count is less than 3,000 items, compared to a grocery store that might stock 30,000 SKU’s or a hypermarket that might stock over 100,000 SKU’s. We believe limiting the number of SKU’s contributes to efficiencies at all levels of our individual and business, Members a carefully-curatedthereby supporting lower prices for our Members.
PriceSmart offers an extensive selection of its own private label products under the brand “Member’s Selection®”. The Member’s Selection® brand provides our Members with high quality brand name and private label consumer products, essential goodsmerchandise at prices significantly less than the comparable national brands. Similar to other warehouse clubs, PriceSmart has food courts at all locations with the traditional selection of hot dogs 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 Click & Go™ service. Somepizza, along with other items. Unique to many of our PriceSmart clubs, are our coffee bars selling coffee and coffee specialties, with coffee sourced from the coffee growing regions in our markets. PriceSmart also provide services that include Optical, Pharmacy, Audiology and Tire departments and serve food atoffers an extensive line of bakery products, which are produced by our food courts. Historically, our typicalbakeries.
Our warehouse buildings have rangedclubs range in sales floor size from approximately 40,00030,000 to 60,000 square feet andfeet. Our larger clubs are typically located in and around thedensely populated major cities in our markets to take advantagethat include a large penetration of dense populations and relatively higher levels ofconsumers with significant disposable income. Additionally, weOur smaller clubs tend to be in areas with less population density, but where there are significant opportunities to serve the population and supply and support businesses. We also operate smaller format clubs with sales floors ranging from approximately 30,000 to 40,000 square feet. These smaller format clubs serve markets where the population may be less dense and/or where there may be significant business to business opportunities. We also have utilized the smaller format option to access and servein urban areas where it is difficult to secure sufficient real estate at a reasonable cost. The option of using a smaller format club, coupled with our omni-channel initiatives, helps us expand our membership base and geographic reach in existing markets. We strategically 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 positively impact their lives. We also provide wholesale supply services to a retailer in the Philippines.
LogisticsWe strategically invest in technology to enhance Member experience and convenience. We believe technology allows us to access valuable data that supports our ability to increase efficiencies and gain important insights about our Members. We now provide digital membership and auto-renewal for the convenience of our Members.
Our logistics and distribution infrastructure is key to maximizing efficiencies. We continually review and upgrade our logistics and distribution systems in an attempt to capture efficiencies are fundamental to delivering high quality merchandise at low prices toas our Members.business grows in sales volume, in geography and through activity generated by e-commerce. We utilize regional distribution centers in the U.S. and Costa Rica as well as several local distribution centers to distribute merchandise efficiently retainand to create flexibility and provide alternatives to source and transport goods, and mitigate the risk of supply-chain disruption. As our business grows and includes more e-commerce activity, we continually evaluate how to utilize our logistics and distribution system to most efficiently provide merchandise to our Members. We also seek to drive membership value andcapture efficiencies by expanding our network of Produce Distribution Centersusing specialized distribution centers for produce and are exploring centralizingcentralized production activities,for categories 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. OwnershipWe believe ownership of our real estate in many of our markets provides several advantages, including lower operating expenses, flexibility to expand or otherwise enhance our buildings, long-term control over the use of the property and potential increase of value in future years. WeAlthough we prefer to own andreal estate, we sometimes lease our real estate depending uponwhen leasing provides the best available opportunities.opportunity.
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, weWe do not currently face direct competition from U.S. membership warehouse club operators. However, we do face competition from various local and international retail formats such as hypermarkets, supermarkets, cash and carry outlets, hard discounters, home improvement centers, electronic retailers, specialty stores, convenience stores, traditional wholesale distribution and online sales.
The number of warehouse clubs for each country or territory were as follows:
Number of | Number of | Number of | Number of | Anticipated | ||||||
Warehouse Clubs | Warehouse Clubs | Warehouse Clubs | Warehouse Clubs | Warehouse | ||||||
in Operation as of | in Operation as of | in Operation as of | in Operation as of | Club Openings | ||||||
Country/Territory | November 30, 2021 | November 30, 2020 | November 30, 2021 | November 30, 2022 | In Fiscal Year 2023 | |||||
Colombia | 9 | 7 | 9 | 9 | 1 | |||||
Costa Rica | 8 | 8 | 8 | 8 | — | |||||
Panama | 7 | 7 | 7 | 7 | — | |||||
Dominican Republic | 5 | 5 | 5 | 5 | — | |||||
Guatemala | 5 | 4 | 5 | 5 | — | |||||
Trinidad | 4 | 4 | 4 | 4 | — | |||||
Honduras | 3 | 3 | 3 | 3 | — | |||||
El Salvador | 2 | 2 | 2 | 2 | 1 | |||||
Nicaragua | 2 | 2 | 2 | 2 | — | |||||
Jamaica | 1 | 2 | — | |||||||
Aruba | 1 | 1 | 1 | 1 | — | |||||
Barbados | 1 | 1 | 1 | 1 | — | |||||
U.S. Virgin Islands | 1 | 1 | 1 | 1 | — | |||||
Jamaica | 1 | 1 | ||||||||
Totals | 49 | 46 | 49 | 50 | 2 | |||||
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 are currently proceeding with the construction of 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 April 2022; it will also be our 50th warehouse club.
We are currently constructing a smaller format warehouse club in the Hacienda San Andrés area of San Miguel, El Salvador, approximately 100 miles east of the capital city San Salvador, which is anticipated to open in the spring of 2023. It will be our third club in El Salvador. In addition, we are proceeding with the construction of a smaller format warehouse club in the affluent El Poblado area of Medellín, Colombia. We expect to open this warehouse club, which will be our second club in Medellín and the Company’s tenth warehouse club in Colombia, in the summer of 2023. Once these two new clubs are open, we will operate 52 warehouse clubs.
We also export products to a retailer in the Philippines and are exploring expansion of that business in other markets.
Factors Affecting Our Business
We continue to encounter operational challenges directly or indirectly related to the COVID-19 pandemic, including increased supply chain pressures, inflation, and foreign currency fluctuations relative to the U.S. dollar. 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 accessmay continue 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 changingaffect 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 recognize that this is an evolving and fluid situation; therefore, we are vigilantly adapting to shifting consumer demands emerging from the pandemic. The situation remains unpredictable in duration and intensity,purchasing behavior as it evolves, and we continuemight not be able to see periodic reinstatementsmeet unanticipated shifts in consumer demand. The pandemic could also give rise to additional operating costs that could have long-term impacts on our financial condition and results 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 anticipate 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.operations. For additional information, refer to the risk factors discussed in Part“Part I. “ItemItem 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended August 31, 2021.2022.
However, the COVID pandemic also has presented us opportunities to improve how we do business, how we serve our Members and how we treat our employees. In response to the pandemic, we:
Increased our focus on expanding local sourcing and near-shoring of goods that we offer,
Expedited our efforts to engage with Members online, including the launch of PriceSmart.com, and
Highlighted the importance of employee well-being and accelerated our decision to ensure health coverage for all employees in our Company. We also are establishing flexible schedules and hybrid work environments for office employees in order to maximize efficiencies and provide opportunity for balance in our employees’ lives.
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 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. GlobalUncertain economic conditions and local travel restrictions and a general slow-downslowdown in global economic activity as a result of COVID-19 have significantly impactedgrowth and investment may continue to impact the economies in several of our markets, causing significant declines in GDP and employment and devaluations of local currencies against the U.S. dollar.
During the last halffirst quarter of fiscal year 20212023, inflation in all of our markets and continuing intodevaluations of foreign currency, especially in Colombia, were significant headwinds. However, some markets, like Costa Rica, benefited from currency appreciation. Substantial product cost increases due to inflation or commodity price increases could impact our financial results and could lead to reduced sales, fewer units sold, and/or margin pressure. Events directly or indirectly related to COVID-19 have resulted in market and supply-chain disruptions. These factors have increased the complexity of managing our inventory flow and business; however, during the first quarter of fiscal year 2023, when compared to the fourth quarter of fiscal year 2022, we saw several factors pressuring supply chains, including container shortages, port delays,a general improvement in transit days and truck and driver shortages. These disruptions and shortages are impacting the timingreduction in freight rates of deliveries and leading to higher freight costs. Despite all these issues, we continue to see strong sales.our shipping containers. We are working to hold down and/or mitigate the price increases passed on to our Members while maintaining the Members and maintain sufficientright inventory mix 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 mitigate our supply-chain challenges and risks more effectively mitigate these challenges. In addition, we have made strategic investmentseffectively. Our Colombian market has experienced a foreign currency devaluation against the U.S. dollar of approximately 20% as of November 30, 2022 compared to November 30, 2021. This devaluation increases the cost of imported merchandise to the Member, negatively impacts sales volume and may result 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 to continue throughout fiscal 2022.
margin pressure.
Currency fluctuationsfluctuation 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 three monthsquarter of both fiscal year 2022 and 2021,2023, approximately 77.8%78.5% of our net merchandise sales were in currencies other than the U.S. dollar. Of those sales, 48.5% and 49.5%49.2% consisted of sales of products we purchased in U.S. dollars for each period, respectively.
dollars.
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. Our Colombia market has experienced a foreign currency devaluation against the U.S. dollar of approximately 20% as of November 30, 2022 compared to November 30, 2021. This can increase the cost of imported merchandise to the Member and negatively impact sales volume. As a result, we are considering actions, such as strategically holding pricing steady on certain key U.S. imports to Colombia, instead of increasing the prices to reflect the rising costs of these items. This would adversely impact our total gross margin percentage for our Colombia segment and our Company overall. Information about the effect of local currency devaluations is discussed further in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Net Merchandise Sales and Comparable Sales.”
Our wallet-share 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 eachWe continue to face the risk of our marketspolitical instability which may have significant effects on our business. For example, the civil unrest in Colombia in response to tax reform and austerity measures paralyzed significant portions of the country’s infrastructure as roadblocks and riots disrupted normal economic activity during the third quarter of fiscal year 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 experienced anti-government protests in 2018 and 2019, respectively;2019; 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.disasters. In November 2020, Hurricanes Eta and Iota brought severe rainfall, winds, and flooding to a significant portion of Central America, especially Honduras, thatwhich 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, thesesimilar natural disasters could adversely impact our overall sales, costs and profit performance in the future.
In the past,Periodically, we have experiencedexperience 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. This illiquidity also increases our foreign exchange exposure to any devaluation of the local currency relative to the U.S. dollar. DuringFor instance, during fiscal year 2021, and continuing into fiscal year 2022, we continue to experienceexperienced significant limitations on our ability to convert Trinidad dollars to U.S. dollars or other tradeable currencies. As liquidity conditions have tightened, we have 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 to manage our exposure to any potential devaluation. In addition, we significantly limited shipments of goods from the U.S. to Trinidad during most of fiscal 2021 and continuing into fiscal 2022 due to the illiquidity of the Trinidad dollar. We further reduced our already limited shipments in the last quarter of fiscal 2021 because 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 fourth quarter of fiscal 2021 to the first quarter of fiscal 2022 in connection with the government’s lifting of restrictions on sales of non-essential items during the first quarter.
We continue to explore and execute several options to increase our ability to generate more reliable sources of U.S. dollars in 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 the associated principal and interest will be repaid in Trinidad dollars (converted at rates in effect in December 2021) over a four-year period, thereby locking in the conversion of a significant amount of Trinidad dollars at current conversion rates and freeing up this cash in U.S. dollars for deployment for general corporate purposes.
AsOur balance as of November 30, 2021, our Trinidad subsidiary had2022 of Trinidad dollar denominated cash and cash equivalents and short and long-term investments measured in U.S. dollars of approximately $49.9was $25.6 million, a decrease of $3.0$74.9 million from August 31, 2021 when these same balances were approximately $52.9 million. Thethe peak of $100.5 million as of November 30, 2020.However, as the Trinidad central bank strictly manages the exchange rate of the Trinidad dollar with the U.S. dollar. Whiledollar and affects the Trinidad government has publicly stated it has no intention to devalue the Trinidad dollar, it couldlevel of US Dollar liquidity in the future decidemarket through its interventions, we are subject to devalue the currency to improve market liquidity, resultingcontinued challenges 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 ofconverting our Trinidad dollar cash and investments position, measured indollars to U.S. dollars, would decrease by approximately $10.0 million, with a corresponding increase in Accumulated other comprehensive loss reflected on our consolidated balance sheet. Separate fromas well as being exposed to the Trinidad dollar denominated cash and investments balances described above, asrisk of November 30, 2021, we had a U.S. dollar denominated monetary asset position of approximately $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 $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.currency.
Our Barbados subsidiary also began facing a U.S. dollar illiquidity 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. As of November 30, 2021, our Barbados subsidiary had Barbados dollar denominated cash and cash equivalents measured in U.S. dollars of approximately $3.3 million, which could 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 responsible 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 in safe U.S.-styleU.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 opportunityopportunities for growth.advancement. 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 their 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 ourcontinue to invest in technological capabilities, we are increasing our tools to drive sales and operational efficiencies. We believe we are well-positionedwell positioned to blend the excitement and appeal of our brick-and-mortar business with the convenience and additional benefits of online shopping and services.services, and meanwhile, enhance Member experience and engagement.
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
Growth
As we look to the future, our Company is focused on three major drivers of growth:
Invest in Remodeling Current PriceSmart Clubs, Adding New PriceSmart Locations and Opening More Distribution Centers
Increase Membership Value
Drive Incremental Sales via PriceSmart.com and Enhanced Online, Digital and Technological Capabilities
I.Invest in Remodeling Current PriceSmart Clubs, Adding New PriceSmart Locations and Opening More Distribution Centers. We believe that one of the quickest and most effective ways to increase sales and profitability is to increase the size and number of parking spaces in our high-volume locations. For instance, we are currently preparing to remodel and expand one of our clubs in San Salvador, El Salvador. We continue to pursue warehouse club growth opportunities in our markets and to assess opportunities in new markets. For example, we plan to open a warehouse club in El Salvador, located in the city of San Miguel in the spring of 2023 and to add a second warehouse club in the city of Medellin, Colombia, in late summer 2023. Our distribution network currently consists of major distribution centers in Miami and Costa Rica, complemented by varying distribution activities in our other markets. Based on our experience with our Costa Rica distribution center, we believe that investing in similar distribution centers in other major markets will play a strategic role in a variety of ways. Configuring these distribution centers to effectively operate as cross-docking facilities, helps us more efficiently manage the high volumes of locally sourced and imported merchandise for our club business. Distribution centers are also strategically important in providing the infrastructure to support PriceSmart.com online sales to both our business and our family Members. In addition to major distribution centers, PriceSmart has been investing in what we call Produce Distribution Centers, which enable us to purchase product directly from farms both in our markets, as well as for imported produce.
II.Increase Membership Value. We are seeking to attract more Members and retain our current Members by expanding the benefits of being a Member of PriceSmart through sales, services, and convenience. As benefits grow and the value of being a PriceSmart Member increases, adjustments to the membership fee may be warranted. A larger membership base and higher membership fee contribute 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 determining how Members see our value. By adding more benefits that Members can only obtain with us, we expect to see growth in the number of Members, which drives Membership income.income and Merchandise sales. Recent examples of enhancements we have made to the value of membership include: additional services such as the ability for all of our Members to transact on PriceSmart.com; Click & Go™ curbside pickup and delivery 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 memberMember and additional members of their families and deeply discounted eyeglass frames,frames; Audiology services with free hearing exams and deeply discounted hearing aids,aids; and Pharmacy, which provides a significant convenience to our Members.
Another driver ofway we enhance Membership value is through our private label offering, “Member’s Selection®,” a brand which we are workingis available only to expand.PriceSmart Members. We believe the Member’s Selection® brand carries goodwill and is recognized in our markets for value. 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 industryenhancing business activity 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.Our private label sales penetration grew to 25.9% of merchandise sales in the first quarter of fiscal 2023, from 23.6% in the same period of fiscal year 2022, and we plan to continue to invest in the development of additional private label products under the “Member’s Selection®” brand.
III.Drive Incremental sales generated fromSales via PriceSmart.com and digitalEnhanced Online, Digital and online capabilities.Technological Capabilities. Members continue to seek allWe recognize the great value our distinct business model provides in terms of quality, pricing and an exciting experience. However, there is a growing expectation of consumers in our markets for convenience. Wealternative ways of shopping. As a result, we continue to build capabilitiesimprove the functionality and content of PriceSmart.com and to expand our product offerings on PriceSmart.com.available online. We also build and apply technological tools to continue to learn more about and strengthen our relationships with each of our Members. Together withUsing data analytics, we believe we have been able to provide our Members with enhancements to the membership experience. PriceSmart.com and these tools provide the opportunity for us to continually strengthen and expand the scope of our relationship with each Member and offer incremental products and services in the future. Our PriceSmart.com offering provides data that informs us regarding the potential viability of new clubs in new areas and offers us options to serve and expand into new markets without the need for a traditional brick & mortar club location. We also invest in technology to capture operational efficiencies and enhance our decision-making for the increasingly dynamic environment we are in.
Financial highlights for the first quarter of fiscal year 20222023 included:
Total revenues increased 11.2%8.1% over the comparable prior year period.
Net merchandise sales increased 12.6%8.6% over the comparable prior year period. We ended the quarter with 4950 warehouse clubs compared to 4649 warehouse clubs at the end of the first quarter of fiscal 2021.year 2022. Foreign currency exchange rate fluctuations impacted net merchandise sales negatively by 1.0%2.3% versus the comparablesame three-month period.period in the prior year.
Comparable net merchandise sales (that is, sales in the 4647 warehouse clubs that have been open for greater than 13 ½
calendar months) for the 13 weeks ended November 28, 2021December 4, 2022 increased 9.4%5.0%. Foreign currency exchange rate fluctuations impacted comparable net merchandise sales negatively by 1.0%2.1%.
Membership income for the first quarter of fiscal 2022year 2023 increased 11.2%7.5% to $14.8 million.$15.9 million over the comparable prior year period.
Total gross margins (net merchandise sales less associated cost of goods sold) increased 11.9%10.3% over the prior-year period, and merchandise gross profits as a percent of net merchandise sales were 16%16.2%, a decreasean increase of 1020 basis points (0.1%(0.2%) from the same period in the prior year.
Operating income for the first quarter of fiscal 2022year 2023 was $46.0$55.5 million, an increase of 3.3%20.7%, or $1.5$9.5 million, compared to the first quarter of fiscal 2021.year 2022.
We recorded a $1.4$4.6 million gainnet loss in Otherother income (expense), net primarily from a $2.7 million gain from the sale of Aeropost, Inc., partially offset by a $1.9 million loss from foreign currency transactions in the first quarter of fiscal 2022year 2023 compared to a $1.5$1.9 million net currency lossgain primarily from the disposal of Aeropost 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 increaseddecreased in the first quarter of fiscal 2022year 2023 to 33.3% from 34.1% from 32.9% in the first quarter of fiscal 2021, primarilyyear 2022. The decrease in the effective tax rate is related to the favorable impact from fewer valuation allowances we took on foreign tax credits that are no longer deemed recoverable and changes in uncertain tax positions.
Net income attributable to PriceSmart for the first quarter of fiscal 2022year 2023 was $30.5$32.9 million, or $0.98$1.05 per diluted share, compared to $27.7$30.5 million, or $0.90$0.98 per diluted share, in the first quarter of fiscal 2021.year 2022.
COMPARISON OF THE three months ended NOVEMBER 30, 20212022 and 20202021
The following discussion and analysis compares the results of operations for the three-month period ended on November 30, 20212022 with the three-month period ended on November 30, 20202021 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 months ended November 30, 20212022 and November 30, 2020.2021.
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||
November 30, 2021 | November 30, 2020 | November 30, 2022 | November 30, 2021 | |||||||||||||||||||||||||||||||||
Amount | % of net | Increase from prior year | Change | Amount | % of net | Amount | % of net | Increase/ (decrease) from prior year | Change | Amount | % of net | |||||||||||||||||||||||||
Central America | $ | 560,596 | 59.4 | % | $ | 75,556 | 15.6 | % | $ | 485,040 | 57.8 | % | $ | 617,052 | 60.2 | % | $ | 56,456 | 10.1 | % | $ | 560,596 | 59.4 | % | ||||||||||||
Caribbean | 268,334 | 28.4 | 13,728 | 5.4 | 254,606 | 30.4 | 302,864 | 29.5 | 34,530 | 12.9 | 268,334 | 28.4 | ||||||||||||||||||||||||
Colombia | 115,113 | 12.2 | 16,390 | 16.6 | 98,723 | 11.8 | 105,547 | 10.3 | (9,566) | (8.3) | 115,113 | 12.2 | ||||||||||||||||||||||||
Net merchandise sales | $ | 944,043 | 100.0 | % | $ | 105,674 | 12.6 | % | $ | 838,369 | 100.0 | % | $ | 1,025,463 | 100.0 | % | $ | 81,420 | 8.6 | % | $ | 944,043 | 100.0 | % | ||||||||||||
Comparison of Three Months Ended November 30, 20212022 and November 30, 20202021
Overall, total net merchandise sales grew 12.6%by 8.6% for the first quarter. The increase resulted from an 11.3%quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022, driven by a 3.0% increase in transactions and a 1.2%5.5% increase in average ticket. Transactions represent the total number of visits our Members make to our warehouse clubs andplus the number of Click & Go™ curbside pickup and delivery service transactions. Average ticket represents the amount our Members spend on each visit or Click & Go™ order. WeWe had 4950 clubs in operation as of November 30, 20212022 compared to 4649 clubs as of November 30, 2020.2021.
Net merchandise sales in our Central America segment increased 15.6% for10.1% during the three-months ended November 30, 2021. Thefirst quarter of fiscal year 2023. This increase had a 900600 basis point (9.0%(6.0%) positive impact on total net merchandise sales growth. All markets within this segment had positiveshowed increased net merchandise sales growth forduring the three-month period. We added one new club to the segment when compared to the comparable prior-year periods. We opened our fifth club in Guatemala in October 2021.first quarter of fiscal year 2023.
Net merchandise sales in our Caribbean segment increased 5.4% for12.9% during the first quarter. Thequarter of fiscal year 2023. This increase for the quarter had a 160360 basis point (1.6%(3.6%) positive impact on total net merchandise sales growth. All of our markets in this segment had positive net merchandise sales growth. Our Dominican Republic market continued its strong performance in the quarter with 16.8%19.6% growth. Our Aruba and Jamaica markets also showed strong performance this quarter with 12.4% and 10.7% growth, respectively. This strong performance was offset by our Trinidad market which had declines in net merchandise sales forWe added one new club to 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 first quarter of fiscal year 2022segment when compared to the fourth quarter of fiscal 2021 as the Trinidad government lifted restrictions on sales of non-essential merchandise, but sales have still not returned to the level we achievedcomparable prior-year period. We opened our second warehouse club in the first quarter of fiscal 2021. Refer to “Management’s Discussion & Analysis – Factors Affecting Our Business” for more information regarding the impact on us of the illiquidity of the Trinidad dollar.Jamaica in April 2022.
Net merchandise sales in our Colombia segment increased 16.6% for decreased 8.3% during the first quarter.quarter of fiscal year 2023. This increasedecrease had a 200100 basis point (2.0%(1.0%) basis point positivenegative impact on total net merchandise sales growth. The primary driver of the increased revenuedecreased sales for the quarter was the addition of two clubsdue to the segment when compared tosignificant devaluation of the comparable priorColombian peso during the past several months, which has negatively impacted sales in the first quarter of fiscal year period. We opened our eighth club in Colombia in December 2020 and our ninth club in Colombia in November 2021.2023.
The following table indicates the impact that currency exchange rates had on our net merchandise sales in dollars and the percentage change from the three-month period ended November 30, 2021.2022. 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 | |||||||||||
November 30, 2021 | November 30, 2022 | |||||||||||
Amount | % change | Amount | % change | |||||||||
Central America | $ | (6,642) | (1.4) | % | $ | (2,312) | (0.4) | % | ||||
Caribbean | 874 | 0.4 | 4,664 | 1.8 | ||||||||
Colombia | (2,649) | (2.7) | (23,568) | (20.5) | ||||||||
Net merchandise sales | $ | (8,417) | (1.0) | % | $ | (21,216) | (2.3) | % | ||||
Overall, the effects of currency fluctuations within our markets had an approximately $8.4$21.2 million, or 100230 basis point (1.0%(2.3%), negative impact on net merchandise sales for the quarterthree-months ended November 30, 2021.2022.
Currency fluctuations had a $6.6$2.3 million, or 14040 basis point (1.4%(0.4%), negative impact on net merchandise sales in our Central America segment for the quarterthree months ended November 30, 2021.2022. These currency fluctuations contributed approximately 8030 basis points (0.8%(0.3%) of the total negative impact on total net merchandise sales for the current period.quarter ended November 30, 2022. The Costa Rica Colón depreciatedHonduran Lempira and Guatemalan Quetzal devalued significantly against the dollar as compared to the same three-month period a year ago, andUS dollar. This devaluation was a significant factorpartially offset by an appreciation in the contribution to the unfavorable currency fluctuations in this segment.Costa Rica Colón.
Currency fluctuations had a $0.9$4.7 million, or 40180 basis point (0.4%(1.8%), positive impact on net merchandise sales in our Caribbean segment for the quarterthree months ended November 30, 2021.2022. These currency fluctuations contributed approximately 1050 basis points (0.1%(0.5%) of positive impact on total net merchandise sales growth for the period. The Dominican Republic market experienced currency appreciation when compared to the same three-month period last year.
Currency fluctuations had a $2.6$23.6 million, or 2702,050 basis point (2.7%(20.5%), negative impact on net merchandise sales in our Colombia segment for the quarter.three months ended November 30, 2022. These currency fluctuations contributed approximately 30260 basis points (0.3%(2.6%) of the total negative impact on total net merchandise sales for the quarter.current fiscal year period.
Comparable Merchandise Sales
We report comparable net merchandise sales on a “same���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 onethree of our warehouse clubs opened during calendarfiscal year 20212022 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 4647 warehouse clubs for the thirteen-week period ended November 28, 2021.
December 4, 2022.
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 period ended December 4, 2022 and November 28, 2021 and November 29, 2020 compared to the prior year.
Thirteen Weeks Ended | Thirteen Weeks Ended | |||||||||||
November 28, 2021 | November 29, 2020 | December 4, 2022 | November 28, 2021 | |||||||||
% Increase/(decrease) in comparable net merchandise sales | % Increase/(decrease) in comparable net merchandise sales | % Increase/(decrease) in comparable net merchandise sales | % Increase/(decrease) in comparable net merchandise sales | |||||||||
Central America | 14.1 | % | (0.7) | % | 8.0 | % | 14.1 | % | ||||
Caribbean | 5.0 | 9.9 | 6.6 | 5.0 | ||||||||
Colombia | (2.8) | 8.6 | (13.1) | (2.8) | ||||||||
Consolidated comparable net merchandise sales | 9.4 | % | 3.6 | % | 5.0 | % | 9.4 | % | ||||
Comparison of Thirteen-Week Periods Ended December 4, 2022 and November 28, 2021 and 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 November 28, 2021December 4, 2022 increased 9.4%5.0%.
Comparable net merchandise sales in our Central America segment increased 14.1%8.0% for the thirteen-week period ended November 28, 2021.December 4, 2022. All of our markets in Central America had positive comparable net merchandise sales growth and this increase contributed approximately 820470 basis points (8.2%(4.7%) of positive impact in total comparable merchandise sales for the period.
Comparable net merchandise sales in our Caribbean segment increased 5.0%6.6% for the thirteen-week period ended November 28, 2021.December 4, 2022. The increase contributed approximately 150190 basis points (1.5%(1.9%) of positive impact on total comparable merchandise sales for the period.
Our Dominican Republic market continued its strong performance in the thirteen-week period with 16.8%19.2% comparable sales growth. Our ArubaU.S. Virgin Islands and JamaicaBarbados markets also showed strong performance this quarter with 12.9%4.3% and 7.7%3.4% comparable sales growth, respectively. This strong performance was offset by our TrinidadJamaica market, which declined in comparable net merchandise sales by 6.2%6.9% for the thirteen-week period. Trinidad sales were adversely affected during most of the first quarter because we limited merchandise shipments to the marketperiod due to sales transfers from the ongoing U.S. dollar illiquidity situation. Referexisting club included in the comparable net merchandise sales calculation to “Management’s Discussion & Analysis – Factors Affecting Our Business” for more discussion onnew clubs not included in the Trinidad illiquidity situation.calculation.
Comparable net merchandise sales in our Colombia segment decreased 2.8%13.1% for the thirteen-week period ended November 28, 2021.December 4, 2022. This decrease contributed approximately 30160 basis points (0.3%(1.6%) of negative impact in total comparable merchandise sales for the period. The decrease in Colombia during the current quarter was primarily due to the foreign currency devaluation and sales transfers from existing clubs included in the comparable net merchandise sales calculation to a new clubsclub not included in 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-week period ended November 28, 2021.December 4, 2022.
Currency Exchange Rate Fluctuations for the | Currency Exchange Rate Fluctuations for the | |||||||||||
Thirteen Weeks Ended | Thirteen Weeks Ended | |||||||||||
November 28, 2021 | December 4, 2022 | |||||||||||
Amount | % change | Amount | % change | |||||||||
Central America | $ | (6,800) | (1.4) | % | $ | (1,541) | (0.2) | % | ||||
Caribbean | 867 | 0.3 | 4,777 | 1.7 | ||||||||
Colombia | (2,538) | (2.5) | (22,763) | (19.6) | ||||||||
Consolidated comparable net merchandise sales | $ | (8,471) | (1.0) | % | $ | (19,527) | (2.1) | % | ||||
Overall, the mix of currency fluctuations within our markets had an approximately $8.5$19.5 million, or 100210 basis point (1.0%(2.1%), negative impact on comparable net merchandise sales for the thirteen-week period ended November 28, 2021.December 4, 2022.
Currency fluctuations within our Central America segment contributed approximately 8020 basis points (0.8%(0.2%) of negative impact in total comparable merchandise sales for the thirteen-week period. Our Honduras and Guatemala markets experienced currency devaluation, which was partially offset by our Costa Rica market was the main contributor as the marketwhich experienced currency devaluationappreciation when compared to the same period last year.
Currency fluctuations within our Caribbean segment contributed approximately 1050 basis points (0.1%(0.5%) points of positive impact in total comparable merchandise sales for the thirteen-week period. Our Dominican Republic market experienced currency appreciation which was partially offset by our Jamaica market, which experienced currency devaluation when compared to the same period last year.
Currency fluctuations within our Colombia segment contributed approximately 30240 basis points (0.3%(2.4%) of negative impact in total comparable merchandise sales for the thirteen-week period. This reflects the movementdevaluation 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 | |||||||||||||||
November 30, | November 30, | ||||||||||||||
2021 | 2020 | ||||||||||||||
Amount | Increase from prior year | % Change | Membership | Amount | |||||||||||
Membership income - Central America | $ | 8,776 | $ | 901 | 11.4 | % | 1.6 | % | $ | 7,875 | |||||
Membership income - Caribbean | 3,973 | 262 | 7.1 | 1.5 | 3,711 | ||||||||||
Membership income - Colombia | 2,042 | 329 | 19.2 | 1.8 | 1,713 | ||||||||||
Membership income - Total | $ | 14,791 | $ | 1,492 | 11.2 | % | 1.6 | % | $ | 13,299 | |||||
Number of accounts - Central America | 917,929 | 78,542 | 9.4 | % | 839,387 | ||||||||||
Number of accounts - Caribbean | 432,144 | 4,273 | 1.0 | 427,871 | |||||||||||
Number of accounts - Colombia | 341,412 | 27,252 | 8.7 | 314,160 | |||||||||||
Number of accounts - Total | 1,691,485 | 110,067 | 7.0 | % | 1,581,418 | ||||||||||
Comparison of Three Months Ended November 30, 2021 and November 30, 2020
The number of Member accounts as of November 30, 2021 was 7.0% higher than the prior year period. Membership income increased 11.2% over the three-month period ended November 30, 2021, compared to the prior-year period.
Membership income increased across all of our operating segments in the three months ended 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, 2021, all segments have increased their membership base. Central America had the largest increase in membership in the first three months of fiscal year 2022, with 9.4% growth, due primarily to the opening of our fifth club in Guatemala in November 2021, followed by Colombia with an 8.7% increase due primarily to the opening of our ninth club in that country and the Caribbean with a 1.0% increase.
Membership Income
Membership income is recognized ratably over the one-year life of the membership.
Three Months Ended | ||||||||||||||||||
November 30, | November 30, | |||||||||||||||||
2022 | 2021 | |||||||||||||||||
Amount | Increase/ (Decrease) from prior year | % Change | Membership income % to net merchandise club sales | Amount | ||||||||||||||
Membership income - Central America | $ | 9,525 | $ | 749 | 8.5 | % | 1.5 | % | $ | 8,776 | ||||||||
Membership income - Caribbean | 4,415 | 442 | 11.1 | 1.5 | 3,973 | |||||||||||||
Membership income - Colombia | 1,955 | (87) | (4.3) | 1.9 | 2,042 | |||||||||||||
Membership income - Total | $ | 15,895 | $ | 1,104 | 7.5 | % | 1.6 | % | $ | 14,791 | ||||||||
Number of accounts - Central America | 953,660 | 35,731 | 3.9 | % | 917,929 | |||||||||||||
Number of accounts - Caribbean | 455,800 | 23,656 | 5.5 | 432,144 | ||||||||||||||
Number of accounts - Colombia | 347,739 | 6,327 | 1.9 | 341,412 | ||||||||||||||
Number of accounts - Total | 1,757,199 | 65,714 | 3.9 | % | 1,691,485 | |||||||||||||
Comparison of Three Months Ended November 30, 2022 and November 30, 2021
The number of Member accounts as of November 30, 2022 was 3.9% higher than the prior year period. Membership income increased 7.5% over the three-month period ended November 30, 2022, compared to the prior-year period.
Membership income increased across our Central America and Caribbean segments and decreased in our Colombia segment for the three months ended November 30, 2022. The consolidated increase in membership income is due to an increasing membership base since the comparable prior year period. The Caribbean had the largest increase in membership base in the first three months of fiscal year 2023 compared to the comparable prior year period with 5.5% growth, followed by Central America with a 3.9% increase and Colombia with a 1.9% increase. Since August 31, 2022, our Central America and Caribbean segments have increased their membership base and our Colombia segment has faced a decline in its membership base.
We now offer the Platinum Membership program in all locations where PriceSmart operates. The annual fee for a Platinum Membership in most markets is approximately $75. The Platinum Membership program provides Members with a 2% rebate on most items, up to an annual maximum of $500. We record the 2% rebate as a reduction on net merchandise sales at the time of the sales transaction. Platinum Membership accounts are 6.5%were 7.9% of our total membership base as of November 30, 2021,2022, an increase from 5.3%6.5% as of November 30, 2020.2021. Platinum Members tend to have higher renewal rates than our Diamond Members.
Our trailing twelve-month renewal rate was 89.0%87.9% and 81.9%89.0% for the periods ended November 30, 20212022 and November 30, 2020,2021, respectively. The COVID-19 pandemic caused a decrease in in-club traffic in the first quarter
Other Revenue
Other revenue primarily consists of non-merchandise revenue from freight and handling fees generated from the 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 | |||||||||||||||||||||||
November 30, 2021 | November 30, 2020 | November 30, 2022 | November 30, 2021 | |||||||||||||||||||||
Amount | Increase (decrease) from | % Change | Amount | Amount | Increase/ (decrease) from prior year | % Change | Amount | |||||||||||||||||
Non-merchandise revenue | $ | 3,307 | $ | (9,348) | (73.9) | % | $ | 12,655 | $ | — | $ | (3,307) | (100.0) | % | $ | 3,307 | ||||||||
Miscellaneous income | 2,046 | 549 | 36.7 | 1,497 | 2,397 | 351 | 17.2 | 2,046 | ||||||||||||||||
Rental income | 635 | (96) | (13.1) | 731 | 593 | (42) | (6.6) | 635 | ||||||||||||||||
Other revenue | $ | 5,988 | $ | (8,895) | (59.8) | % | $ | 14,883 | $ | 2,990 | $ | (2,998) | (50.1) | % | $ | 5,988 | ||||||||
Comparison of Three Months Ended November 30, 20212022 and November 30, 20202021
The primary driver of the decrease in other revenue for the quarter is due to the sale of our Aeropost subsidiary and its marketplace and casillero operations on October 1, 2021. For additional information on the results of the disposition, refer to “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 2 – Summary of Significant Accounting Policies.”
Results of Operations
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
Results of Operations Consolidated | November 30, 2021 | November 30, 2020 | Increase/(Decrease) | November 30, 2022 | November 30, 2021 | Increase/(Decrease) | ||||||||||||||||||
(Amounts in thousands, except percentages and | ||||||||||||||||||||||||
(Amounts in thousands, except percentages and number of warehouse clubs) | ||||||||||||||||||||||||
Net merchandise sales | ||||||||||||||||||||||||
Net merchandise sales | $ | 944,043 | $ | 838,369 | $ | 105,674 | $ | 1,025,463 | $ | 944,043 | $ | 81,420 | ||||||||||||
Total gross margin | $ | 150,850 | $ | 134,750 | $ | 16,100 | $ | 166,395 | $ | 150,850 | $ | 15,545 | ||||||||||||
Total gross margin percentage | 16.0 | % | 16.1 | % | (0.1) | % | 16.2 | % | 16.0 | % | 0.2 | % | ||||||||||||
Revenues | ||||||||||||||||||||||||
Total revenues | $ | 975,356 | $ | 877,432 | $ | 97,924 | $ | 1,054,806 | $ | 975,356 | $ | 79,450 | ||||||||||||
Percentage change from prior period | 11.2 | % | 8.1 | % | ||||||||||||||||||||
Comparable net merchandise sales | ||||||||||||||||||||||||
Total comparable net merchandise sales increase | 9.4 | % | 3.6 | % | 5.8 | % | ||||||||||||||||||
Total comparable net merchandise sales increase/(decrease) | 5.0 | % | 9.4 | % | (4.4) | % | ||||||||||||||||||
Total revenue margin | ||||||||||||||||||||||||
Total revenue margin | $ | 170,287 | $ | 157,556 | $ | 12,731 | $ | 185,749 | $ | 170,287 | $ | 15,462 | ||||||||||||
Total revenue margin percentage | 17.4 | % | 18.0 | % | (0.6) | % | 17.6 | % | 17.4 | % | 0.2 | % | ||||||||||||
Selling, general and administrative | ||||||||||||||||||||||||
Selling, general and administrative | $ | 124,270 | $ | 113,025 | $ | 11,245 | $ | 130,222 | $ | 124,270 | $ | 5,952 | ||||||||||||
Selling, general and administrative percentage of total revenues | 12.7 | % | 12.9 | % | (0.2) | % | 12.3 | % | 12.7 | % | (0.4) | % | ||||||||||||
Warehouse clubs | ||||||||||||||||||||||||
Warehouse clubs at period end | 49 | 46 | 3 | 50 | 49 | 1 | ||||||||||||||||||
Warehouse club sales square feet at period end | 2,424 | 2,267 | 157 | 2,484 | 2,424 | 60 | ||||||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
November 30, | % of | November 30, | % of | November 30, | % of | November 30, | % of | |||||||||||||||||
Results of Operations Consolidated | 2021 | Total Revenue | 2020 | Total Revenue | 2022 | Total Revenue | 2021 | Total Revenue | ||||||||||||||||
Operating income- by segment | ||||||||||||||||||||||||
Central America | $ | 43,379 | 4.4 | % | $ | 34,445 | 3.9 | % | $ | 50,130 | 4.8 | % | $ | 43,379 | 4.4 | % | ||||||||
Caribbean | 19,878 | 2.0 | 21,594 | 2.5 | 24,503 | 2.3 | 19,878 | 2.0 | ||||||||||||||||
Colombia | 6,378 | 0.7 | 5,565 | 0.6 | 4,868 | 0.5 | 6,378 | 0.7 | ||||||||||||||||
United States | 6,257 | 0.7 | 5,742 | 0.7 | 13,592 | 1.3 | 6,257 | 0.7 | ||||||||||||||||
Reconciling Items (1) | (29,875) | (3.1) | (22,815) | (2.6) | (37,566) | (3.6) | (29,875) | (3.1) | ||||||||||||||||
Operating income - Total | $ | 46,017 | 4.7 | % | $ | 44,531 | 5.1 | % | $ | 55,527 | 5.3 | % | $ | 46,017 | 4.7 | % | ||||||||
(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 | |||||||||||||||||||||||
November 30, | % of | November 30, | % of | November 30, | % of | November 30, | % of | |||||||||||||||||
2021 | Total Revenue | 2020 | Total Revenue | 2022 | Total Revenue | 2021 | Total Revenue | |||||||||||||||||
Warehouse club and other operations | $ | 91,196 | 9.4 | % | $ | 84,832 | 9.7 | % | $ | 96,892 | 9.2 | % | $ | 91,196 | 9.4 | % | ||||||||
General and administrative | 31,693 | 3.2 | 27,521 | 3.1 | 33,172 | 3.1 | 31,693 | 3.2 | ||||||||||||||||
Pre-opening expenses | 970 | 0.1 | 602 | 0.1 | — | — | 970 | 0.1 | ||||||||||||||||
Loss on disposal of assets | 411 | — | 70 | — | 158 | — | 411 | — | ||||||||||||||||
Total Selling, general and administrative | $ | 124,270 | 12.7 | % | $ | 113,025 | 12.9 | % | $ | 130,222 | 12.3 | % | $ | 124,270 | 12.7 | % | ||||||||
Comparison of Three Months Ended November 30, 20212022 and November 30, 2020 —2021
Total gross margin is derived from our Revenue – Net merchandise sales less our Cost of goods sold – Net merchandise sales and represents our sales andless 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 November 30, 20212022 was 16.0%16.2%, 1020 basis points (0.1%(0.2%) lowerhigher than the comparable prior year period. The primary driver of the decrease for the quarterThis increase was a decrease in sales in Trinidad, where our gross margins have recently been higher because of the foreign currency exchange premium we include in prices we charge thereprimarily due to increased costsgeneral margin improvement across most of conversion of Trinidad dollars to U.S. dollarsour sales categories, particularly food service and risks associated with continued illiquidity of the Trinidad dollar. Trinidad sales were adversely affected by our measured approach to rebalance our merchandise mix following the reopening of the economybakery, and 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.favorable freight costs.
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 decreased 60increased 20 basis points (0.6%(0.2%) for the three months ended November 30, 2021 compared2022, primarily due to the prior-year period, which is primarily the result of lower revenue margins from our casillero and marketplace business of 50 basis points (0.5%) along with the lowerimproved total gross margins of 1020 basis points (0.1%(0.2%).
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 $11.2$6.0 million compared to the prior year but decreased as a percentage of total revenue, declining 2040 basis points (0.2%(0.4%) to 12.7%12.3% of total revenue compared to 12.9%12.7% of total revenues for the first quarter of fiscal year 2021.2022. We expect selling, general, and administrative expenses to increase in the second quarter of fiscal year 2023 due to severance costs. Please refer to “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 10 – Subsequent Events” for further discussion.
Warehouse club and other operations expenses decreased to 9.4%9.2% of total revenues for the first quarter of fiscal year 20222023 compared to 9.7%9.4% for the first quarter of fiscal year 20212022, primarily due to 4010 basis points (0.40%) of lower operations expenses fromassociated with our casillero and marketplace business due to the sale of Aeropost on October 1, 2021. This decreaseThe 10 basis point savings resulting from the Aeropost sale was partially offsetsupplemented by reduced warehouse club and other operations expenses as a percentage of revenue in our Colombia market, which decreased 10 basis points (0.10%(0.1%) fromprimarily due to the new clubs in Colombia and Guatemala that had not reached sales maturity asdevaluation of November 30, 2021.the Colombian peso.
General and administrative expenses increaseddecreased to 3.2%3.1% of total revenues for the current quarter compared to 3.1%3.2% for the first quarter of fiscal year 2021.2022. The 10 basis point (0.1%) increasedecrease 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 20222023 increased to $46.0$55.5 million (4.7%(5.3% of total revenue) compared to $44.5$46.0 million (5.1%(4.7% of total revenue) for the same period last year. This reflects the increase in total revenue margin of 20 basis points (0.2%), along with a 40 basis point (0.4%) increase due to leveraging 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 | Three Months Ended | |||||||||||||||||
November 30, | November 30, | November 30, | November 30, | |||||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||||||
Amount | Change | Amount | Amount | Change | Amount | |||||||||||||
Interest expense on loans | $ | 1,335 | $ | (390) | $ | 1,725 | $ | 2,653 | $ | 1,318 | $ | 1,335 | ||||||
Interest expense related to hedging activity | 850 | (75) | 925 | 347 | (503) | 850 | ||||||||||||
Less: Capitalized interest | (595) | 22 | (617) | (251) | 344 | (595) | ||||||||||||
Net interest expense | $ | 1,590 | $ | (443) | $ | 2,033 | $ | 2,749 | $ | 1,159 | $ | 1,590 | ||||||
Comparison of Three Months Ended November 30, 20212022 and November 30, 20202021
Net interest expense decreasedincreased for the three-month period ended November 30, 20212022, primarily due to lower short-termthe increase in long-term borrowings in our Trinidad market to facilitate conversion of Trinidad dollars to US dollars and a decrease in capitalized interest from fewer construction projects compared to the comparable prior year period. We drew down on short-term lines of credit in the first quarter of fiscal year 2021 as a part of our efforts to secure adequate cash to cover contingencies arising from COVID-19 related risks.
year.
Other Income (Expense), Net
Other income (expense), net, consists of currency gains or losses, as well as net benefit costs related to our defined benefit retirement plans and other items considered to be non-operating in nature.
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) | ||||
Three Months Ended | ||||||||||||
November 30, | November 30, | |||||||||||
2022 | 2021 | |||||||||||
Amount | Increase from prior year | % Change | Amount | |||||||||
Other income (expense), net | $ | (4,566) | $ | (5,975) | (424.1) | % | $ | 1,409 | ||||
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 than the functional currency of the respective entity also generate currency gains or losses.
Comparison of Three Months Ended November 30, 20212022 and 20202021
For the three-months ended November 30, 20212022, the primary driver of Otherother income (expense), net included a gainwas $3.2 million of $2.7 million associated with the sale of our Aeropost subsidiary on October 1, 2021. This gain was partially offset by a $1.9 million loss associated with foreign currency transactions and thelosses due to revaluation of monetary assets and liabilities (primarily U.S. dollars) 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 wereIn addition, we had higher transaction costs of $1.1 million associated with converting Trinidad dollars into available tradeable currencies, such as Euroseuros or Canadian dollars, before converting them to U.S. dollars. Additionally, the devaluation of the Colombian Peso resulted in a loss recognized on our net U.S. dollar liability position in that market. These losses were partially offset by a devaluation of the Jamaican dollar, which resulted in a gain recognized on our U.S. dollar asset position in that market.
Provision for Income Taxes
Three Months Ended | Three Months Ended | |||||||||||||||||||||
November 30, | November 30, | November 30, | November 30, | |||||||||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||||||||||
Amount | Increase from prior year | Amount | Amount | Increase from prior year | Amount | |||||||||||||||||
Provision for income taxes | $ | 15,814 | $ | 2,196 | $ | 13,618 | $ | 16,426 | $ | 612 | $ | 15,814 | ||||||||||
Effective tax rate | 34.1 | % | 32.9 | % | 33.3 | % | 34.1 | % | ||||||||||||||
Comparison of Three Months Ended November 30, 20212022 and November 30, 20202021
For the three months ended November 30, 2021,2022, the effective tax rate was 34.1%33.3% compared to 32.9%34.1% for the prior year period. The increasedecrease in the effective tax rate versus the prior year was primarily attributable to the following factors:
A comparably favorable benefit from recurring items of 0.5%, primarily resulting from fewer valuation allowances we took with respect to deferred tax assets from foreign tax credits that are no longer deemed recoverable; and
A comparably unfavorablefavorable net tax impact from non-recurring items of 1.7%0.4%, primarily related to changes in uncertain tax positions.
Other Comprehensive Income (Loss)
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 | ||||
Three Months Ended | ||||||||||||
November 30, | November 30, | |||||||||||
2022 | 2021 | |||||||||||
Amount | Change | % Change | Amount | |||||||||
Other comprehensive loss | $ | (551) | $ | 5,580 | 91.0 | % | $ | (6,131) | ||||
Comparison of Three Months Ended November 30, 20212022 and November 30, 20202021
Our other comprehensive loss of approximately $6.1$0.6 million for the first quarter of fiscal year 20222023 resulted primarily from the comprehensive loss of approximately $8.1$0.9 million from foreign currency translation adjustments related to assets and liabilities and the translation of revenue, costs and expenses on the statements of income of our subsidiaries whose functional currency is not the U.S. dollar. During the first three months of fiscal year 2023, the largest translation adjustments were related to the devaluation of the local currencies against the U.S. dollar for our Colombia, Dominican Republic and Jamaica subsidiaries, partially offset by the translation adjustment for the appreciation of the local currency against the U.S. dollar of our Costa Rica subsidiary. These losses were offset by approximately $2.0$0.3 million related to unrealized gains on changes in the value of our derivative obligations. For the first quarter of fiscal year 2022, the Colombia Peso, Costa Rica Colón and Jamaican Dollar exchange rate with the U.S. Dollar declined significantly.
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 consistconsists 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).:
November 30, | August 31, | November 30, | August 31, | |||||||||
2021 | 2021 | 2022 | 2022 | |||||||||
Amounts held by foreign subsidiaries | $ | 174,429 | $ | 160,808 | $ | 214,329 | $ | 203,952 | ||||
Amounts held domestically | 18,171 | 54,671 | 67,359 | 47,421 | ||||||||
Total cash and cash equivalents, including restricted cash | $ | 192,600 | $ | 215,479 | $ | 281,688 | $ | 251,373 | ||||
The following table summarizes the short-term investments held by our foreign subsidiaries and domestically (in thousands).:
November 30, | August 31, | November 30, | August 31, | |||||||||
2021 | 2021 | 2022 | 2022 | |||||||||
Amounts held by foreign subsidiaries | $ | 39,201 | $ | 50,233 | $ | 8,920 | $ | 11,160 | ||||
Amounts held domestically | — | — | — | — | ||||||||
Total short-term investments | $ | 39,201 | $ | 50,233 | $ | 8,920 | $ | 11,160 | ||||
As of November 30, 20212022 and August 31, 2021,2022, there were no certificates of deposit with a maturity of over onea year held by our foreign subsidiaries and domestically were $0 and $1.5 million, respectively.domestically.
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 sourceconvert all of our Trinidad dollars into tradeable currencies. We expect the illiquid market conditionshave and continue to take additional actions 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.respect. 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):
Three Months Ended | |||||||||
November 30, | November 30, | ||||||||
2021 | 2020 | Change | |||||||
Net cash used in operating activities | $ | (13,339) | $ | (17,773) | $ | 4,434 | |||
Net cash used in investing activities | (12,050) | (50,310) | 38,260 | ||||||
Net cash provided by (used in) financing activities | 1,198 | (22,198) | 23,396 | ||||||
Effect of exchange rates | 1,312 | (1,095) | 2,407 | ||||||
Net increase in cash and cash equivalents | $ | (22,879) | $ | (91,376) | $ | 68,497 | |||
Three Months Ended | |||||||||
November 30, | November 30, | ||||||||
2022 | 2021 | Change | |||||||
Net cash provided by (used in) operating activities | $ | 30,463 | $ | (13,339) | $ | 43,802 | |||
Net cash used in investing activities | (21,493) | (12,050) | (9,443) | ||||||
Net cash provided by financing activities | 14,719 | 1,198 | 13,521 | ||||||
Effect of exchange rates | 6,626 | 1,312 | 5,314 | ||||||
Net increase (decrease) in cash and cash equivalents | $ | 30,315 | $ | (22,879) | $ | 53,194 | |||
Net cash provided by operating activities totaled $30.5 million and net cash used in operating activities totaled $13.3 million and $17.8 million for the three months ended November 30, 20212022 and November 30, 2020,2021, respectively. The decreaseShifts in working capital generated from changes in our merchandise inventory and accounts payable positions for the three months ended November 30, 2022 contributed $29.0 million to net cash used is primarily a result of the increase in profits during the quarter whenprovided by operating activities compared to the same prior year three-month period ended November 30, 2021. The prior year increase in inventory reflected our efforts to increase inventory to accommodate pandemic influenced consumer preferences and to mitigate out-of-stocks due to supply-chain disruptions during that period. Our inventory buildup for the holiday season this fiscal year was lower as we set our inventory position to align more with changesour historical days-on-hand, and we have rebalanced our inventory mix to reflect current and anticipated consumer demand and preferences.
This net positive change was supplemented by another net positive change of $11.3 million in operatingvarious current and non-current assets and liabilities, largely offsetting each other. However,primarily driven by less prepaid VAT and fewer security deposits as the build-up of inventory was $500.8 million as of November 30, 2021, compared with $389.7 million and $373.2 million at August 31, 2021 and November 30, 2020, respectively. The increase over the balances as of November 30, 2021 reflects our efforts to bring our inventory levels in-line with our sales trends. In addition, we 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.significantly less for these periods, comparatively.
Net cash used in investing activities totaled $12.1$21.5 million and $50.3$12.1 million for the three months ended November 30, 20212022 and November 30, 2020.2021. The decrease$9.4 million increase in cash used in investing activities is primarily the result of a net $13.3 million decrease in proceeds from settlements of short-term investments, with a $4.3 million decrease in purchases of certificates of depositsshort-term investments, compared to the same three-month period a year-ago,year-ago. The decrease in proceeds from settlements and purchases of short-term investments is primarily due to the significant improvement (decrease)overall net decrease of short-term investments in Trinidad as our balance of Trinidad dollars on hand. Refer to “Management’s Discussion and Analysis – Factors Affecting Our Business” for additional discussion ofdollar balances are comparably lower than the current U.S. dollar illiquidity we are experiencing in that market.prior year period.
Net cash provided by financing activities totaled $1.2$14.7 million and net cash used in financing activities was $22.2$1.2 million for the three months ended November 30, 20212022 and November 30, 2020,2021, 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 $23.4$13.5 million shift from cash usedincrease in to cash provided by financing activities is primarily due to the result of higher net $16.7 million increase in long-term bank proceeds and repayments, partially offset by a $4.3 million net decrease between the proceeds and repayment of short-term debtborrowings, compared to the same three-month period a year-ago, when we were repaying short-term facilities accessed atyear-ago. Total proceeds from long-term debt received during the early stagesfirst quarter of fiscal year 2023 was $19.9 million compared to $4.2 million in the COVID-19 pandemic.same period last year. Please refer to “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 7 – Debt” for further discussion.
The following table summarizes the dividends declared and paid during fiscal year 20212022 (amounts are per share).:
First Payment | Second Payment | First Payment | Second Payment | |||||||||||||||||||||||||||||||
Declared | Amount | Record | Date | Amount | Record | Date | Amount | Amount | Record | Date | Amount | Record | Date | Amount | ||||||||||||||||||||
2/4/2021 | $ | 0.70 | 2/15/2021 | 2/26/2021 | 0.35 | 8/15/2021 | 8/31/2021 | 0.35 | ||||||||||||||||||||||||||
2/3/2022 | $ | 0.86 | 2/15/2022 | 2/28/2022 | $ | 0.43 | 8/15/2022 | 8/31/2022 | $ | 0.43 | ||||||||||||||||||||||||
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 three-months ended November 30, 2021,2022, we reissued approximately 79,000,000 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.paid by us. 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 50% or less than 50% likelihood of being sustained. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as appropriate. There were no material changes in our uncertain income tax positions infor the three monthsperiod ended on November 30, 2021.2022.
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.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 $11.1 million and $9.7 million as of November 30, 2021 and August 31, 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 $11.1$11.2 million and $11.0 million as of November 30, 2022 and August 31, 2022, respectively, and deferred tax assets of $3.5$3.7 million and $3.3$3.5 million as of November 30, 20212022 and August 31, 2021,2022, 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 wethe Company 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 requirerequiring an adjustment of these assets to their then-current fair market value. Loss/(gain)Future business conditions and/or activity could differ materially from the projections made by management causing the need for additional impairment charges. We did not record any impairment charges during the first quarter of fiscal year 2023 related to the loss of legal ownership or title to assets; significant changes in the Company's strategic business objectives or utilization of assets; or the impact of significant negative industry or economic trends. Loss on disposal of assets recorded during the years reported resulted from improvements to operations and normal preventive maintenance.
Goodwill
Goodwill is not amortized, but is 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 have generated sufficient returns to recover the cost of 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 $45.3$43.2 million of certain acquired goodwill, the fair value was greater than the carrying value; however, any deterioration in the fair value may result in an impairment charge.
Seasonality
Historically, our merchandising businesses have experienced holiday retail seasonality in their markets. In addition to seasonal fluctuations, our operating results fluctuate quarter-to-quarter as a result of economic and political events in markets that we serve, the timing of holidays, weather, the timing of shipments, product mix, and currency effects on the cost of U.S.-sourced products which may make these products more or less expensive in local currencies and therefore more or less affordable. Because of such fluctuations, the results of operations of any quarter are not indicative of the results that may be achieved for a full fiscal year or any future quarter. In addition, there can be no assurance that our future results will be consistent with past results or the projections of securities analysts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in interest rates and changes in currency exchange rates. There have been no material changes in our market risk factors at November 30, 20212022 compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended August 31, 2021.2022.
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-month period ended November 30, 20212022 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-month period ended November 30, 20212022 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-month period ended November 30, 20212022 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. Refer to Part I. “Item 1. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements, Note 6 – Commitments and Contingencies ” for additional information regarding our legal proceedings.
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 discussedfollowing risk factor, which supplements and should be read in conjunction with the information appearing under Part I. “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended August 31, 2021. There2022.
We may not successfully manage the transition associated with the resignation of our Chief Executive Officer, which could have an adverse impact on us.
On December 9, 2022, the Company announced that Sherry Bahrambeygui will be resigning as Chief Executive Officer, effective February 3, 2023, the date of the Company’s annual stockholder meeting, in order to pursue new professional and philanthropic interests. Robert Price, a Company founder and Chairman of the Board, will become Interim Chief Executive Officer. John Hildebrandt has been no material changespromoted to President and Chief Operating Officer. David Price has been promoted to Executive Vice President and Chief of Staff to the Chairman. When Robert Price becomes Interim Chief Executive Officer, David Price will be Executive Vice President and Chief of Staff to the Interim CEO.
Ms. Bahrambeygui will continue serving stockholders as a member of the Board of Directors of the Company, and is also included in the Company's risk factors from those disclosed in Part I, Item 1Aslate of directors for election at the 2023 Annual Meeting of Stockholders. Prior to her tenure as CEO, she served on the Company’s Board as a director for eight years, including having served as Vice Chair and Chair of the Company's Annual Report on Form 10-KCompensation Committee. Between now and February 3, 2023, Ms. Bahrambeygui will continue her employment and will work towards the orderly transition of her responsibilities. She has agreed to make herself available at the Company’s request for up to 100 hours of transition support during the fiscal year ended August 31, 2021.twelve months following the date of her separation agreement.
Leadership transitions can be inherently difficult to manage. An inadequate transition to a new leadership team may cause disruption within the Company, adversely affecting our financial performance and ability to meet operational goals and strategic plans. Management turnover also inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution. In addition, to the extent we experience additional management turnover, competition for top management is high and it may take months to find a candidate that meets our requirements. If we are unable to attract and retain qualified management personnel, our business could suffer.
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 November 30, 2021,2022, the Company repurchased 31,55120,621 shares in the indicated months. These were the only repurchases of equity securities made by the Company during the first quarter of fiscal year 2022.2023. The Company does not have a stock repurchase program.
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 | — | — | |||||||
Period | (a) | (b) | (c) | (d) | ||||||||
September 1, 2022 - September 30, 2022 | — | — | — | N/A | ||||||||
October 1, 2022 - October 31, 2022 | 20,621 | $ | 63.05 | — | N/A | |||||||
November 1, 2022 - November 30, 2022 | — | $ | — | — | N/A | |||||||
Total | 20,621 | $ | 63.05 | — | — | |||||||
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. | ||
|
| ||
| 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) | |||
3.5(5) | |||
| |||
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) |
|
|
** | These certifications are being furnished solely to accompany this Report pursuant to 18 U.S.C. 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of PriceSmart, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
(1)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 1997 filed with the Commission on November 26, 1997.
(2)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2004 filed with the Commission on April 14, 2004.
(3)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2004 filed with the Commission on November 24, 2004.
(4)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Commission on July 17, 2015.
(5)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Commission on December 9, 2022.
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: | January | By: | /s/ SHERRY S. BAHRAMBEYGUI | |
Sherry S. Bahrambeygui | ||||
Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Date: | January | By: | /s/ MICHAEL L. MCCLEARY | |
Michael L. McCleary | ||||
Executive Vice President and Chief Financial Officer | ||||
(Principal Financial Officer and Principal Accounting Officer) | ||||