Pricesmart Inc 10-Q for FY2023 Q3
Pricesmart Inc (PSMT)
10-Q
2023-07-10
For: 2023-05-31
View Original
Added on
April 09, 2026
About this 10-Q
Pricesmart Inc filed this 10-Q on July 10, 2023, covering the quarter ended May 31, 2023 (FY2023 Q3).
Headline figures
Quarter ended May 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.1B
- up 6.4% from $1.03B a year earlier
- Net income
- $29.57M
- up 53.6% from net income of $19.26M a year earlier
- Diluted EPS
- $0.94
- up 51.6% from $0.62 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended May 31, 2023
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (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 | ||||||
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.
No o | |||||
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).
No o | |||||
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):
| x | Accelerated filer | o | |||||||||
| Non-accelerated filer | o | 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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o | No | |||||||
The registrant had 31,049,026 shares of its common stock, par value $0.0001 per share, outstanding at June 30, 2023.
PRICESMART, INC.
INDEX TO FORM 10-Q
| Page | ||||||||
CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 2023 (UNAUDITED) AND AUGUST 31, 2022 | ||||||||
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2023 AND 2022 - UNAUDITED | ||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2023 AND 2022 - UNAUDITED | ||||||||
CONSOLIDATED STATEMENTS OF EQUITY FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2023 AND 2022 - UNAUDITED | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED MAY 31, 2023 AND 2022 - UNAUDITED | ||||||||
i
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PriceSmart, Inc.’s (“PriceSmart,” “we” or the “Company”) unaudited consolidated balance sheet as of May 31, 2023 and the consolidated balance sheet as of August 31, 2022, the unaudited consolidated statements of income for the three and nine months ended May 31, 2023 and 2022, the unaudited consolidated statements of comprehensive income for the three and nine months ended May 31, 2023 and 2022, the unaudited consolidated statements of equity for the three and nine months ended May 31, 2023 and 2022, and the unaudited consolidated statements of cash flows for the nine months ended May 31, 2023 and 2022 are included herein. Also included herein are the notes to the unaudited consolidated financial statements.
1
PRICESMART, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
| May 31, 2023 (Unaudited) | August 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term restricted cash | |||||||||||
| Short-term investments | |||||||||||
Receivables, net of allowance for doubtful accounts of $ | |||||||||||
| Merchandise inventories | |||||||||||
Prepaid expenses and other current assets (includes $ | |||||||||||
| Total current assets | |||||||||||
| Long-term restricted cash | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets, net | |||||||||||
| Goodwill | |||||||||||
| Deferred tax assets | |||||||||||
Other non-current assets (includes $ | |||||||||||
| Investment in unconsolidated affiliates | |||||||||||
| Total Assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Short-term borrowings | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued salaries and benefits | |||||||||||
| Deferred income | |||||||||||
| Income taxes payable | |||||||||||
Other accrued expenses and other current liabilities (includes $ | |||||||||||
| Operating lease liabilities, current portion | |||||||||||
| Dividends payable | |||||||||||
| Long-term debt, current portion | |||||||||||
| Total current liabilities | |||||||||||
| Deferred tax liability | |||||||||||
| Long-term income taxes payable, net of current portion | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Long-term debt, net of current portion | |||||||||||
Other long-term liabilities (includes $ | |||||||||||
| Total Liabilities | |||||||||||
2
| Stockholders' Equity: | |||||||||||
Common stock $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Retained earnings | |||||||||||
Less: treasury stock at cost, | ( | ( | |||||||||
| Total Stockholders' Equity | |||||||||||
| Total Liabilities and Equity | $ | $ | |||||||||
See accompanying notes.
3
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | May 31, 2023 | May 31, 2022 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Net merchandise sales | $ | $ | $ | $ | |||||||||||||||||||
| Export sales | |||||||||||||||||||||||
| Membership income | |||||||||||||||||||||||
| Other revenue and income | |||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of goods sold: | |||||||||||||||||||||||
| Net merchandise sales | |||||||||||||||||||||||
| Export sales | |||||||||||||||||||||||
| Non-merchandise | |||||||||||||||||||||||
| Selling, general and administrative: | |||||||||||||||||||||||
| Warehouse club and other operations | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Separation costs associated with Chief Executive Officer departure | |||||||||||||||||||||||
| Pre-opening expenses | |||||||||||||||||||||||
| Loss (gain) on disposal of assets | ( | ||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Total other expense | ( | ( | ( | ( | |||||||||||||||||||
| Income before provision for income taxes and loss of unconsolidated affiliates | |||||||||||||||||||||||
| Provision for income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income (loss) of unconsolidated affiliates | ( | ( | |||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Less: Net income attributable to noncontrolling interest | ( | ||||||||||||||||||||||
| Net income attributable to PriceSmart, Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Net income attributable to PriceSmart, Inc. per share available for distribution: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Shares used in per share computations: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes.
4
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | May 31, 2023 | May 31, 2022 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Less: net income attributable to non controlling interest | ( | ||||||||||||||||||||||
| Net income attributable to PriceSmart, Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Other Comprehensive Income, net of tax: | |||||||||||||||||||||||
Foreign currency translation adjustments (1) | ( | ( | |||||||||||||||||||||
| Defined benefit pension plan: | |||||||||||||||||||||||
| Net gain/(loss) arising during period | ( | ( | |||||||||||||||||||||
| Amortization of prior service cost and actuarial gains included in net periodic pensions cost | |||||||||||||||||||||||
| Total defined benefit pension plan | |||||||||||||||||||||||
Derivative instruments:(2) | |||||||||||||||||||||||
| Unrealized gains/(losses) on change in derivative obligations | ( | ||||||||||||||||||||||
| Unrealized gains/(losses) on change in fair value of interest rate swaps | ( | ( | |||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income to other expense, net for settlement of derivatives | |||||||||||||||||||||||
| Total derivative instruments | ( | ( | |||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||
| Less: comprehensive income attributable to noncontrolling interest | |||||||||||||||||||||||
| Comprehensive income attributable to PriceSmart, Inc. | $ | $ | $ | $ | |||||||||||||||||||
(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.
5
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at February 28, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock award | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forfeiture of restricted stock awards | ( | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at May 31, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at February 28, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock award | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend paid to stockholders | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend payable to stockholders | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at May 31, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes
6
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)
| Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Total Stockholders' Equity Attributable to PriceSmart, Inc. | Noncontrolling Interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at August 31, 2021 | $ | $ | $ | ( | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of treasury stock | ( | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock award | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Forfeiture of restricted stock awards | ( | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend paid to stockholders | — | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend payable to stockholders | — | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | ( | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of Aeropost stock | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at May 31, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at August 31, 2022 | $ | $ | $ | ( | $ | $ | ( | $ | $ | — | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of treasury stock | ( | — | ( | — | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock award | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Forfeiture of restricted stock awards | ( | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend paid to stockholders | — | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend payable to stockholders | — | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at May 31, 2023 | $ | $ | $ | ( | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes
7
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED—AMOUNTS IN THOUSANDS)
| Nine Months Ended | |||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||
| Operating Activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Allowance for doubtful accounts | ( | ||||||||||
| Loss on sale of property and equipment | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Equity in losses of unconsolidated affiliates | |||||||||||
| Stock-based compensation | |||||||||||
| 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 | ( | ( | |||||||||
| Merchandise inventories | ( | ||||||||||
| Accounts payable | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Investing Activities: | |||||||||||
| Proceeds from the disposal of Aeropost, net of divested cash | |||||||||||
| Additions to property and equipment | ( | ( | |||||||||
| Purchases of short-term investments | ( | ( | |||||||||
| Proceeds from settlements of short-term investments | |||||||||||
| Proceeds from settlements of long-term investments | |||||||||||
| Proceeds from disposal of property and equipment | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing Activities: | |||||||||||
| Proceeds from long-term bank borrowings | |||||||||||
| Repayment of long-term bank borrowings | ( | ( | |||||||||
| Proceeds from short-term bank borrowings | |||||||||||
| Repayment of short-term bank borrowings | ( | ( | |||||||||
| Cash dividend payments | ( | ( | |||||||||
| Purchase of treasury stock | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | ( | ||||||||||
| Net increase (decrease) in cash, cash equivalents | ( | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental disclosure of noncash investing activities: | |||||||||||
| Capital expenditures accrued, but not yet paid | $ | $ | |||||||||
| Dividends declared but not yet paid | |||||||||||
8
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
(UNAUDITED—AMOUNTS IN THOUSANDS)
The following table provides a breakdown of cash and cash equivalents, and restricted cash reported within the statement of cash flows:
| Nine Months Ended | |||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term restricted cash | |||||||||||
| Long-term restricted cash | |||||||||||
| Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | $ | |||||||||
See accompanying notes.
9
NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION
PriceSmart, Inc.’s (“PriceSmart,” the “Company,”, "we" or "our") business consists primarily of international membership shopping and services offered both online and at warehouse clubs similar to, but typically smaller in size than, warehouse clubs in the United States. As of May 31, 2023, the Company had 51 warehouse clubs in operation in 12 countries and one U.S. territory (nine in Colombia; eight in Costa Rica; seven in Panama; five in the Dominican Republic and Guatemala; four in Trinidad; three two one 100 % of the corresponding legal entities (see Note 2 - Summary of Significant Accounting Policies). In addition, the Company plans to open a warehouse club in Medellín, Colombia in August 2023, a club in Escuintla, Guatemala in the fall of 2023 and a warehouse club in Santa Ana, El Salvador in early 2024. Once these three new clubs are open, the Company will operate 54 warehouse clubs. Our operating segments are the United States, Central America, the Caribbean and Colombia.
PriceSmart continues to invest in technology and talent to support the following three major drivers of growth:
1.Invest in Remodeling Current PriceSmart Clubs, Adding New PriceSmart Locations and Opening More Distribution Centers;
2.Increase Membership Value; and
3.Drive Incremental Sales via PriceSmart.com and 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, 2022 (the “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 non-controlling interests. The Company reports non-controlling 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.
10
| Real Estate Development Joint Ventures | Countries | Ownership | Basis of Presentation | |||||||||||||||||
| GolfPark Plaza, S.A. | Panama | % | Equity(1) | |||||||||||||||||
| Price Plaza Alajuela PPA, S.A. | Costa Rica | % | Equity(1) | |||||||||||||||||
(1)Joint venture interests are recorded as investment in unconsolidated affiliates on the consolidated balance sheets.
Restricted Cash – The following table summarizes the restricted cash reported by the Company (in thousands):
| May 31, 2023 | August 31, 2022 | ||||||||||
| Short-term restricted cash | $ | $ | |||||||||
| Long-term restricted cash | |||||||||||
Total restricted cash(1) | $ | $ | |||||||||
11
In two countries where the Company operates, minimum income tax rules require the Company to pay taxes based on the 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 $11.3 million and $11.0 million and deferred tax assets of $3.6 million and $3.5 million as of May 31, 2023 and August 31, 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.
In one of the countries with a significant VAT receivable balance, the Company received unfavorable rulings at the supreme court level of that country denying a portion of the Company’s appeals for refund of over-withholdings of VAT. After evaluating the merits of the Company’s arguments, the court’s decision, and probability that the other related refund appeals would receive the same judgment, the Company concluded that a total of $2.3 million of related VAT receivables would not be recoverable and this amount was written-off in the third quarter of fiscal year 2023. These charges were recorded in the Warehouse club and other expenses line item under the Selling, general and administrative caption within the consolidated statements of income.
The Company's various outstanding VAT receivables and/or income tax receivables are based on cases or appeals with their own set of facts and circumstances. The Company consults and evaluates with legal and tax advisors regularly to understand the strength of its legal arguments and probability of successful outcomes in addition to its own experience handling complex tax issues. Based on those evaluations, the Company has not placed any type of allowance on the recoverability of the remaining 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.
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.
12
The following table summarizes the VAT receivables reported by the Company (in thousands):
| May 31, 2023 | August 31, 2022 | ||||||||||
| Prepaid expenses and other current assets | $ | $ | |||||||||
| Other non-current assets | |||||||||||
| Total amount of VAT receivables reported | $ | $ | |||||||||
The following table summarizes the Income tax receivables reported by the Company (in thousands):
| May 31, 2023 | August 31, 2022 | ||||||||||
| Prepaid expenses and other current assets | $ | $ | |||||||||
| Other non-current assets | |||||||||||
| Total amount of income tax receivables reported | $ | $ | |||||||||
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 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.
13
Stock Based Compensation – The Company utilizes three types of equity awards: restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”). Compensation related to RSAs, RSUs and PSUs is based on the fair market value at the time of grant. The Company recognizes the compensation cost related to RSAs and RSUs over the requisite service period as determined by the grant, amortized ratably or on a straight-line basis over the life of the grant. The Company also recognizes compensation cost for PSUs over the performance period of each tranche, adjusting this cost based on the Company’s estimate of the probability that performance metrics will be achieved. If the Company determines that an award is unlikely to vest, any previously recorded expense is then reversed.
The Company accounts for actual forfeitures as they occur. The Company records the tax savings resulting from tax deductions in excess of expense for stock-based compensation and the tax deficiency resulting from stock-based compensation in excess of the related tax deduction as income tax expense or benefit. In addition, the Company reflects the tax savings (deficiency) resulting from the taxation of stock-based compensation as an operating cash flow in its consolidated statement of cash flows.
RSAs are outstanding shares of common stock and have the same cash dividend and voting rights as other shares of common stock. Shares of common stock subject to RSUs are not issued nor outstanding until vested, and RSUs do not have the same dividend and voting rights as common stock. However, all outstanding RSUs have accompanying dividend equivalents, requiring payment to the employees and directors with unvested RSUs of amounts equal to the dividend they would have received had the shares of common stock underlying the RSUs been actually issued and outstanding. Payments of dividend equivalents to employees are recorded as compensation expense.
PSUs, similar to RSUs, are awarded with dividend equivalents, provided that such amounts become payable only if the performance metric is achieved. At the time the Compensation Committee confirms the performance metric has been achieved, the accrued dividend equivalents are paid on the PSUs.
Fair Value Measurements – The Company measures the fair value for all financial and non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring or non-recurring 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, no
14
Derivatives Instruments and Hedging Activities – The Company uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to changes in interest and currency exchange rates. In using derivative financial instruments for the purpose of hedging the Company’s exposure to interest and currency exchange rate risks, the contractual terms of a hedged instrument closely mirror those of the hedged item and are intended to provide a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria (effective hedge) are recorded using hedge accounting. If a derivative financial instrument is an effective hedge, changes in the fair value of the instrument will be reported in accumulated other comprehensive loss until the hedged item completes its contractual term. Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. The Company did not change valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s consolidated balance sheets from previous practice during the reporting period. The Company seeks to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which the Company has an established banking relationship. There can be no assurance, however, that this practice effectively mitigates counterparty risk.
Cash Flow Instruments. The Company is a party to receive floating interest rate, pay fixed-rate interest rate swaps to hedge the interest rate risk of certain U.S. dollar denominated debt within its international subsidiaries. The swaps are designated as cash flow hedges of interest expense risk. These instruments are considered effective hedges and are recorded using hedge accounting. The Company is also a party to receive variable interest rate, pay fixed interest rate cross-currency interest rate swaps to hedge the interest rate and currency exposure associated with the expected payments of principal and interest of U.S. denominated debt within its international subsidiaries whose functional currency is other than the U.S. dollar. The swaps are designated as cash flow hedges of the currency risk and interest-rate risk related to payments on the U.S. denominated debt. These instruments are also considered to be effective hedges and are recorded using hedge accounting. Under cash flow hedging, the entire gain or loss of the derivative, calculated as the net present value of the future cash flows, is reported on the consolidated balance sheets in accumulated other comprehensive loss. Amounts recorded in accumulated other comprehensive loss are released to earnings in the same period that the hedged transaction impacts consolidated earnings. Refer to “Note 8 - Derivative Instruments and Hedging Activities” for information on the fair value of interest rate swaps and cross-currency interest rate swaps as of May 31, 2023 and August 31, 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.
15
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.
Until the disposal of Aeropost in the first quarter of fiscal year 2022, the Company included the costs for the marketplace and casillero operations 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, including separation costs associated with the Chief Executive Officer departure, 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.
In December 2022, the Company announced that Sherry Bahrambeygui would resign as Chief Executive Officer effective February 3, 2023. In connection with her departure, the Company recognized a one-time separation charge of approximately $7.7 million ($7.2 million net of tax) in the second quarter of fiscal year 2023. This amount consists of approximately $4.2 million of non-cash charges related to the acceleration of certain equity awards and approximately $3.5 million for other separation costs. Given that Ms. Bahrambeygui had substantially rendered the required services per her separation agreement, the Company recorded these charges in the second quarter of fiscal year 2023. These charges were recorded in the Separation costs associated with Chief Executive Officer departure line item under the Selling, general and administrative caption within the Consolidated Statements of Income and are recorded in the Company’s United States segment. The Company substantially fulfilled all payment obligations by the end of the second quarter of fiscal year 2023; however, some vesting of PSUs will occur in the first quarter of fiscal year 2024.
16
The following table discloses the net effect of translation into the reporting currency on other comprehensive loss for these local currency denominated accounts for the three and nine months ended May 31, 2023 and 2022 (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | May 31, 2023 | May 31, 2022 | ||||||||||||||||||||
| Effect on other comprehensive income (loss) due to foreign currency translation | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses), including transactions recorded involving these monetary assets and liabilities, are recorded as Other income (expense) in the consolidated statements of income (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | May 31, 2023 | May 31, 2022 | ||||||||||||||||||||
| Currency loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
17
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. Until the disposal of Aeropost in the first quarter of fiscal year 2022, the Company recognized non-merchandise revenue, net of sales taxes, on transactions where the Company had determined that it was the agent in the transaction. These transactions primarily consisted of contracts the Company entered into with its customers to provide delivery, insurance and customs processing services for products its customers purchased online in the United States either directly from other vendors utilizing the vendor’s website or through the Company’s marketplace site. Revenue was recognized when the Company’s performance obligations were completed (that is when delivery of the items have been made to the destination point) and was recorded in “non-merchandise revenue” on the consolidated statements of income. Prepayment for orders for which the Company had not fulfilled its performance obligation were recorded as deferred income. Additionally, the Company recorded 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 was acting as an agent and was 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 markets. The annual fee for a Platinum Membership is approximately $75 . The Platinum Membership provides Members with a 2 % rebate on most items, up to an annual maximum of $500 . The rebate is issued annually to Platinum Members on March 1 and expires August 31. Platinum Members can apply this rebate to future purchases at the warehouse club during the redemption period. The Company records this 2 % rebate as a reduction of revenue at the time of the sales transaction. Accordingly, the Company has reduced warehouse sales and has accrued a liability within other accrued expenses and other current liabilities, platinum rewards. The Company has determined that breakage revenue is 5 % of the awards issued; therefore, it records 95 % of the Platinum Membership liability at the time of sale. Annually, the Company reviews for expired unused rebates outstanding, and the expired unused rebates are recognized as “Other revenue and income” on the consolidated statements of income.
Co-branded Credit Card Points Reward Programs. Most of the Company’s subsidiaries have points reward programs related to co-branded credit cards. These points reward programs provide incremental points that can be used at a future time to acquire merchandise within the Company’s warehouse clubs. This results in two performance obligations, the first performance obligation being the initial sale of the merchandise or services purchased with the co-branded credit card and the second performance obligation being the future use of the points rewards to purchase merchandise or services. As a result, upon the initial sale, the Company allocates the transaction price to each performance obligation with the amount allocated to the future use points rewards recorded as a contract liability within other accrued expenses and other current liabilities on the consolidated balance sheet. The portion of the selling price allocated to the reward points is recognized as Net merchandise sales when the points are used or when the points expire. The Company reviews on an annual basis expired points rewards outstanding, and the expired rewards are recognized as Net merchandise sales on the consolidated statements of income within markets where the co-branded credit card agreement allows for such treatment.
18
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 cards; therefore, the Company assumes a 100 % redemption rate prior to expiration of the gift cards. The Company periodically reviews unredeemed outstanding gift cards, and the gift cards that have expired are recognized as “Other revenue and income” on the consolidated statements of income.
Co-branded Credit Card Revenue Sharing Agreements. As part of the co-branded credit card agreements that the Company has entered into with financial institutions within its markets, the Company often enters into revenue sharing agreements. As part of these agreements, in some countries, the Company receives a portion of the interest income generated from the average outstanding balances on the co-branded credit cards from these financial institutions (“interest generating portfolio” or “IGP”). The Company recognizes its portion of interest received as revenue during the period it is earned. The Company has determined that this revenue should be recognized as “Other revenue and income” on the consolidated statements of income.
Contract Performance Liabilities
Contract performance liabilities as a result of transactions with customers primarily consist of deferred membership income, other deferred income, deferred gift card revenue, Platinum points programs, and liabilities related to co-branded credit card points rewards programs which are included in deferred income and other accrued expenses and other current liabilities in the Company’s consolidated balance sheets. The following table provides these contract balances from transactions with customers as of the dates listed (in thousands):
| Contract Liabilities | |||||||||||
| May 31, 2023 | August 31, 2022 | ||||||||||
| Deferred membership income | $ | $ | |||||||||
| Other contract performance liabilities | $ | $ | |||||||||
Disaggregated Revenues
In the following table, net merchandise sales are disaggregated by merchandise category (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | May 31, 2023 | May 31, 2022 | ||||||||||||||||||||
| Foods & Sundries | $ | $ | $ | $ | |||||||||||||||||||
| Fresh Foods | |||||||||||||||||||||||
| Hardlines | |||||||||||||||||||||||
| Softlines | |||||||||||||||||||||||
| Other Business | |||||||||||||||||||||||
| Net Merchandise Sales | $ | $ | $ | $ | |||||||||||||||||||
19
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 and nine-months ended May 31, 2023 and 2022 (in thousands, except per share amounts):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | May 31, 2023 | May 31, 2022 | ||||||||||||||||||||
| Net income attributable to PriceSmart, Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Less: Allocation of income to unvested stockholders | ( | ( | ( | ( | |||||||||||||||||||
| Net income attributable to PriceSmart, Inc. available for distribution | $ | $ | $ | $ | |||||||||||||||||||
| Basic weighted average shares outstanding | |||||||||||||||||||||||
| Add dilutive effect of performance stock units (two-class method) | |||||||||||||||||||||||
| Diluted average shares outstanding | |||||||||||||||||||||||
| Basic net income per share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted net income per share | $ | $ | $ | $ | |||||||||||||||||||
NOTE 5 – STOCKHOLDERS’ EQUITY
Dividends
The following table summarizes the dividends declared and paid during fiscal year 2023 and 2022 (amounts are per share):
| First Payment | Second Payment | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Declared | Amount | Record Date | Date Paid | Date Payable | Amount | Record Date | Date Paid | Date Payable | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| 2/3/2023 | $ | 2/16/2023 | 2/28/2023 | N/A | $ | 8/15/2023 | N/A | 8/31/2023 | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| 2/3/2022 | $ | 2/15/2022 | 2/28/2022 | N/A | $ | 8/15/2022 | 8/31/2022 | N/A | $ | |||||||||||||||||||||||||||||||||||||||||||||||
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 uncertain macroeconomic conditions on our results of operations and cash flows.
20
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 PriceSmart | Noncontrolling Interests | Total | |||||||||||||||
| Beginning balance, September 1, 2022 | $ | ( | $ | $ | ( | ||||||||||||
| Foreign currency translation adjustments | |||||||||||||||||
Defined benefit pension plans (1) | |||||||||||||||||
Derivative instruments (2) | ( | ( | |||||||||||||||
| Ending balance, May 31, 2023 | $ | ( | $ | $ | ( | ||||||||||||
| Attributable to PriceSmart | Noncontrolling Interests | Total | |||||||||||||||
| Beginning balance, September 1, 2021 | $ | ( | $ | $ | ( | ||||||||||||
| Foreign currency translation adjustments | ( | ( | |||||||||||||||
Defined benefit pension plans (1) | |||||||||||||||||
Derivative instruments (2) | |||||||||||||||||
| Sale of Aeropost | ( | ( | |||||||||||||||
| Ending balance, May 31, 2022 | $ | ( | $ | $ | ( | ||||||||||||
| Attributable to PriceSmart | Noncontrolling Interests | Total | |||||||||||||||
| Beginning balance, September 1, 2021 | $ | ( | $ | $ | ( | ||||||||||||
| Foreign currency translation adjustments | ( | ( | |||||||||||||||
Defined benefit pension plans (1) | ( | ( | |||||||||||||||
Derivative instruments (2) | |||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | |||||||||||||||||
| Sale of Aeropost | $ | ( | ( | ||||||||||||||
| Ending balance, August 31, 2022 | $ | ( | $ | $ | ( | ||||||||||||
(1)Amounts reclassified from accumulated other comprehensive income (loss) related to the minimum pension liability are included in warehouse club and other operations in the Company's consolidated statements of income.
(2)Refer to Note 8 - Derivative Instruments and Hedging Activities.
Retained Earnings Not Available for Distribution
The following table summarizes retained earnings designated as legal reserves of various subsidiaries which cannot be distributed as dividends to PriceSmart, Inc. according to applicable statutory regulations (in thousands):
| May 31, 2023 | August 31, 2022 | ||||||||||
Retained earnings not available for distribution | $ | $ | |||||||||
21
Repurchases of Common Stock
The Board of Directors authorized a program to repurchase up to $75 million of our common stock (the "Stock Buyback Program"). Under the Stock Buyback Program, shares of common stock may be repurchased from time to time on a discretionary basis through open market repurchases, privately negotiated transactions, block purchases, or other means, and will be structured to occur in compliance with applicable securities laws. In addition, open market repurchases of common stock could be made pursuant to trading plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which would permit common stock to be repurchased at a time that we might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The Stock Buyback Program does not obligate us to acquire any specific number of shares.
The timing and actual number of shares repurchased will depend on a variety of factors, including the common stock price, trading volume, market conditions, our cash flow and liquidity profile, the capital needs of the business, and other considerations. Repurchases are funded with existing cash on hand. The Stock Buyback Program has no expiration date and may be modified, suspended or terminated at any time by the Board of Directors at its discretion.
During the three and nine-months ended May 31, 2023, no repurchases were made under the Stock Buyback Program.
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.
22
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 cyberattacks 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 $3.0 million. 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 $4.0 million. 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 settle this litigation with Click USA Inc. and offered to release Aeropost, Inc. from an approximately $750,000 receivable owed to PriceSmart, Inc in exchange for release of the aforementioned claims. The Company has determined that settlement is probable as of May 31, 2023, and has written-off the receivable with the expense being recorded in the General and administrative line item in the Company's consolidated statements of income.
Income Taxes
For interim reporting, the Company uses an estimated annual effective tax rate (AETR) 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 its ability to recover deferred tax assets in the jurisdictions 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, the Company considers three years of cumulative operating income (loss).
The Company is required to file federal and state tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with the interpretations the Company used to calculate its tax liability and therefore require the Company to pay additional taxes.
The Company accrues an amount for its estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. There were no material changes in the Company’s uncertain income tax positions during the nine months ended May 31, 2023.
23
In evaluating the exposure associated with various non-income tax filing positions, the Company accrues for probable and estimable exposures for non-income tax related tax contingencies. As of May 31, 2023 and August 31, 2022, the Company has recorded within other accrued expenses and other current liabilities a total of $1.0 million and $1.1 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 $11.3 million and $11.0 million, as of May 31, 2023 and August 31, 2022, respectively, and deferred tax assets of $3.6 million and $3.5 million as of May 31, 2023 and August 31, 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 May 31, 2023 and August 31, 2022, the Company had approximately $9.1 million and $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 May 31, 2023, the Company had entered into three land purchase agreements that, if completed, would result in the use of approximately $9.2 million in cash.
The table below summarizes the Company’s interest in real estate joint ventures, commitments to additional future investments and the Company’s maximum exposure to loss as a result of its involvement in these joint venture as of May 31, 2023 (in thousands):
| Entity | % Ownership | Initial Investment | Additional Investments | Net Income (Loss) Inception to Date | Company’s Variable Interest in Entity | Commitment to Future Additional Investments(1) | Company's Maximum Exposure to Loss in Entity(2) | |||||||||||||||||||||||||||||||||||||
| GolfPark Plaza, S.A. | % | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Price Plaza Alajuela PPA, S.A. | % | |||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
(1)The parties intend to seek alternate financing for the projects, which could reduce the amount of investments each party would be required to provide. The parties may mutually agree on changes to the projects, 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.
24
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 of Facilities | Short-term Borrowings | Letters of Credit | Facilities Available | Weighted average interest rate | |||||||||||||||||||||||||
| May 31, 2023 - Committed | $ | $ | $ | $ | % | ||||||||||||||||||||||||
| May 31, 2023 - Uncommitted | |||||||||||||||||||||||||||||
| May 31, 2023 - Total | $ | $ | $ | $ | % | ||||||||||||||||||||||||
| August 31, 2022 - Committed | $ | $ | % | ||||||||||||||||||||||||||
| August 31, 2022 - Uncommitted | |||||||||||||||||||||||||||||
| August 31, 2022 - Total | $ | $ | $ | $ | % | ||||||||||||||||||||||||
As of May 31, 2023 and August 31, 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. One of 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 nine months ended May 31, 2023:
| (Amounts in thousands) | Current portion of long-term debt | Long-term debt (net of current portion) | Total | |||||||||||||||||
| Balances as of August 31, 2022 | $ | $ | $ | (1) | ||||||||||||||||
| Proceeds from long-term debt incurred during the period: | ||||||||||||||||||||
| Guatemala subsidiary | ||||||||||||||||||||
| Barbados subsidiary | ||||||||||||||||||||
| Honduras subsidiary | ||||||||||||||||||||
| Trinidad subsidiary | ||||||||||||||||||||
| Total proceeds from long-term debt incurred during the period | ||||||||||||||||||||
| Repayments of long-term debt: | ( | ( | ( | |||||||||||||||||
| Reclassifications of long-term debt due in the next 12 months | ( | |||||||||||||||||||
Translation adjustments on foreign currency debt of subsidiaries whose functional currency is not the U.S. dollar(2) | ( | ( | ||||||||||||||||||
| Balances as of May 31, 2023 | $ | $ | $ | (3) | ||||||||||||||||
(1)The carrying amount of non-cash assets assigned as collateral for these loans was $155.6 million. The carrying amount of cash assets assigned as collateral for these loans was $5.3 million.
(2)These foreign currency translation adjustments are recorded within Other comprehensive income (loss).
(3)The carrying amount of non-cash assets assigned as collateral for these loans was $160.9 million. The carrying amount of cash assets assigned as collateral for these loans was $3.9 million.
25
As of May 31, 2023 and August 31, 2022, the Company had approximately $94.6 million and $110.7 million, respectively, of long-term loans held in the U.S. entity and in several foreign subsidiaries, which require these entities to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. The Company was in compliance with all covenants or amended covenants for both periods.
Annual maturities of long-term debt are as follows (in thousands):
| Twelve Months Ended May 31, | Amount | |||||||
| 2024 | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
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 one 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.
26
Cash Flow Hedges
As of May 31, 2023, all of the Company’s interest rate swap and cross-currency interest rate swap derivative financial instruments are designated and qualify as cash flow hedges. The Company formally documents the hedging relationships for its derivative instruments that qualify for hedge accounting.
The following table summarizes agreements for which the Company has recorded cash flow hedge accounting for the nine months ended May 31, 2023:
| Entity | Date Entered into | Derivative Financial Counter- party | Derivative Financial Instruments | Initial US$ Notional Amount | US$ Loan Held With | Floating Leg (swap counter-party) | Fixed Rate for PSMT Subsidiary | Settlement Dates | Effective Period of swap | |||||||||||||||||||||||||||||||||||||||||||||||
| Colombia subsidiary | 12-Apr-23 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | PriceSmart, Inc. | % | 11th day of each July, October, January and April, beginning on July 11, 2023 | April 12, 2023 - April 11, 2028 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Colombia subsidiary | 26-Sep-22 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | PriceSmart, Inc. | % | 24th day of each December, March, June and September beginning December 26, 2022 | September 26, 2022 - September 24, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Colombia subsidiary | 3-May-22 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | PriceSmart, Inc. | % | 3rd day of each May, August, November and February, beginning on August 3, 2022 | May 3, 2022 - May 3, 2027 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Colombia subsidiary | 17-Nov-21 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | PriceSmart, Inc. | % | 17th day of each February, May, August, and November, beginning on February 17, 2022 | November 17, 2021 - November 18, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Colombia subsidiary | 3-Dec-19 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | Citibank, N.A. | Variable rate 3-month Libor plus | % | 3rd day of each December, March, June and September beginning March 3, 2020 | December 3, 2019 - December 3, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||
| Colombia subsidiary | 27-Nov-19 | Citibank, N.A. ("Citi") | Cross currency interest rate swap | $ | Citibank, N.A. | Variable rate 3-month Libor plus | % | 27th day of each November, February, May and August beginning February 27, 2020 | November 27, 2019 - November 27, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||
| PriceSmart, Inc. | 7-Nov-16 | MUFG Union Bank, N.A. ("Union Bank") | Interest rate swap | $ | Union Bank | Variable rate 3-month Libor plus | % | 1st day of each month beginning on April 1, 2017 | March 1, 2017 - March 1, 2027 | |||||||||||||||||||||||||||||||||||||||||||||||
27
For the three and nine months ended May 31, 2023 and May 31, 2022, the Company included the gain or loss on the hedged items (that is, variable-rate borrowings) in the same line item—interest expense—as the offsetting gain or loss on the related interest rate swaps as follows (in thousands):
| Income Statement Classification | Interest expense on borrowings(1) | Cost of swaps(2) | Total | |||||||||||||||||
| Interest expense for the three months ended May 31, 2023 | $ | $ | $ | |||||||||||||||||
| Interest expense for the three months ended May 31, 2022 | $ | $ | $ | |||||||||||||||||
| Interest expense for the nine months ended, May 31, 2023 | $ | $ | $ | |||||||||||||||||
| Interest expense for the nine months ended May 31, 2022 | $ | $ | $ | |||||||||||||||||
(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 | ||||||||||||||
Floating Rate Payer (Swap Counterparty) | May 31, 2023 | August 31, 2022 | ||||||||||||
| Union Bank | $ | $ | ||||||||||||
| Citibank N.A. | ||||||||||||||
| Scotiabank | ||||||||||||||
| Total | $ | $ | ||||||||||||
Derivatives listed on the table below were designated as cash flow hedging instruments. The table summarizes the effect of the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting and its associated tax effect on accumulated other comprehensive (income)/loss (in thousands):
| May 31, 2023 | August 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||
| Derivatives designated as cash flow hedging instruments | Balance Sheet Classification | Fair Value | Net Tax Effect | Net OCI | Fair Value | Net Tax Effect | Net OCI | |||||||||||||||||||||||||||||||||||||
| Cross-currency interest rate swaps | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Cross-currency interest rate swaps | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Cross-currency interest rate swaps | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Cross-currency interest rate swaps | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Net fair value of derivatives designated as hedging instruments | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
28
Fair Value Instruments
From time to time the Company enters into non-deliverable forward foreign-exchange contracts. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting. The use of non-deliverable forward foreign-exchange contracts is intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar.
The following table summarizes the non-deliverable forward foreign exchange contracts that are open as of May 31, 2023:
| Financial Derivative (Counterparty) | Subsidiary | Dates Entered into (Range) | Derivative Financial Instrument | Total Notional Amounts (in thousands) | Settlement Dates (Range) | |||||||||||||||||||||||||||
| Scotiabank Colpatria, S.A. | Colombia | 11-Jan-2023 - 27-Mar-2023 | Forward foreign exchange contracts (USD) | $ | 8-Sep-2023 - 21-Dec-2023 | |||||||||||||||||||||||||||
| Citibank, N.A. ("Citi") | Colombia | 18-Jan-2023 - 16-Mar-2023 | Forward foreign exchange contracts (USD) | $ | 22-Jun-2023 - 16-Nov-2023 | |||||||||||||||||||||||||||
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 and nine month periods ended May 31, 2023 and May 31, 2022.
NOTE 9 – SEGMENTS
29
The following tables summarize by segment certain revenues, operating costs and balance sheet items (in thousands):
| United States Operations | Central American Operations | Caribbean Operations(1) | Colombia Operations | Reconciling Items(2) | Total | |||||||||||||||||||||||||||||||||
| Three Months Ended May 31, 2023 | ||||||||||||||||||||||||||||||||||||||
| Revenue from external customers | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Intersegment revenues | ( | — | ||||||||||||||||||||||||||||||||||||
| Depreciation, Property and equipment | ||||||||||||||||||||||||||||||||||||||
| Operating income (loss) | ( | |||||||||||||||||||||||||||||||||||||
| Net income (loss) attributable to PriceSmart, Inc. | ( | |||||||||||||||||||||||||||||||||||||
| Capital expenditures, net | ||||||||||||||||||||||||||||||||||||||
| Nine Months Ended May 31, 2023 | ||||||||||||||||||||||||||||||||||||||
| Revenue from external customers | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Intersegment revenues | ( | — | ||||||||||||||||||||||||||||||||||||
| Depreciation, Property and equipment | ||||||||||||||||||||||||||||||||||||||
| Amortization, Intangibles | ||||||||||||||||||||||||||||||||||||||
| Operating income (loss) | ( | |||||||||||||||||||||||||||||||||||||
| Net income (loss) attributable to PriceSmart, Inc. | ( | |||||||||||||||||||||||||||||||||||||
| Long-lived assets (other than deferred tax assets) | ||||||||||||||||||||||||||||||||||||||
| Goodwill | ||||||||||||||||||||||||||||||||||||||
| Total assets | ||||||||||||||||||||||||||||||||||||||
| Capital expenditures, net | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended May 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Revenue from external customers | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Intersegment revenues | ( | — | ||||||||||||||||||||||||||||||||||||
| Depreciation, Property and equipment | ||||||||||||||||||||||||||||||||||||||
| Amortization, Intangibles | ||||||||||||||||||||||||||||||||||||||
| Operating income (loss) | ( | |||||||||||||||||||||||||||||||||||||
| Net income (loss) attributable to PriceSmart, Inc. | ( | ( | ||||||||||||||||||||||||||||||||||||
| Capital expenditures, net | ||||||||||||||||||||||||||||||||||||||
| Nine Months Ended May 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Revenue from external customers | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Intersegment revenues | ( | — | ||||||||||||||||||||||||||||||||||||
| Depreciation, Property and equipment | ||||||||||||||||||||||||||||||||||||||
| Amortization, Intangibles | ||||||||||||||||||||||||||||||||||||||
| Operating income (loss) | ( | |||||||||||||||||||||||||||||||||||||
| Net income (loss) attributable to PriceSmart, Inc. | ( | |||||||||||||||||||||||||||||||||||||
| Long-lived assets (other than deferred tax assets) | ||||||||||||||||||||||||||||||||||||||
| Goodwill | ||||||||||||||||||||||||||||||||||||||
| Total assets | ||||||||||||||||||||||||||||||||||||||
| Capital expenditures, net | ||||||||||||||||||||||||||||||||||||||
| As of August 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| Long-lived assets (other than deferred tax assets) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
Goodwill | ||||||||||||||||||||||||||||||||||||||
Investment in unconsolidated affiliates | ||||||||||||||||||||||||||||||||||||||
| Total assets | ||||||||||||||||||||||||||||||||||||||
(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.
30
NOTE 10 – SUBSEQUENT EVENTS
The Company has evaluated all events subsequent to the balance sheet date as of May 31, 2023 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.
On May 30, 2023, the Company entered into a lease agreement for land and a building, which commenced on June 5, 2023 when the asset was made available to the Company. The purpose of the lease is the relocation of a distribution center in Panama. The lease agreement will result in the recognition of a lease liability and right-of-use asset of approximately $7.3
31
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", "we" or "our") 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, the risks detailed in under the heading "Part II. Item 1A. Risk Factors" in this Quarterly Report and 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, 2022 filed with the United States Securities and Exchange Commission (“SEC”) on October 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
The mission of our business is to improve the lives of our employees and Members, provide socially responsible support to the communities in which we operate our business and deliver 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 Price Club® and Costco®, our goal is to offer high quality merchandise at the lowest possible prices by leveraging volume purchasing and eliminating inefficiencies from the distribution network.
PriceSmart opened its first location in Panama City, Panama in October of 1996. Today, our company operates 51 warehouse clubs in 12 countries, plus the U.S. Virgin Islands, with revenues in excess of $4.0 billion in fiscal year 2022.
Membership is a key characteristic of warehouse clubs. As of May 31, 2023, PriceSmart had almost 1.8 million membership accounts. Our Diamond Members generally pay an annual membership fee of approximately $35, and our Platinum Members generally pay $75 per year, in exchange for an annual 2% cash-back rebate. These membership fees are applied to lowering the price of the products we sell. We believe 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 business, thereby supporting lower prices for our Members.
PriceSmart also 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 private label merchandise at prices lower 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 pizza, 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 offers an extensive line of bakery products, which are produced by our bakeries.
32
Our warehouse clubs range in sales floor size from approximately 30,000 to 60,000 square feet. Our larger clubs are typically located in and around densely populated major cities that include a large penetration of consumers with significant disposable income. Our 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 in urban areas where it is difficult to secure sufficient real estate at a reasonable cost. However, for future clubs with a smaller physical footprint, beginning with our San Miguel, El Salvador club, we have redesigned the layout in order to accommodate a similar number of selling pallet positions as our larger clubs.
We 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 and their shopping preferences. We now provide digital membership and auto-renewal for the convenience of our Members. Additionally, technology is fundamental to providing a platform for our Members to shop online.
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 as our 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 and to create flexibility to mitigate the risk of supply-chain disruption. We also seek to capture efficiencies by using specialized distribution centers for produce and centralized production 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. We 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. Although we prefer to own real estate, we sometimes lease our real estate when leasing provides the best available opportunity.
We do not currently face direct competition from U.S. membership warehouse club operators in our markets. 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.
33
The number of warehouse clubs for each country or territory were as follows:
| Country/Territory | Number of Warehouse Clubs in Operation as of May 31, 2022 | Number of Warehouse Clubs in Operation as of May 31, 2023 | Anticipated Warehouse Club Openings in Calendar Year 2023 | Anticipated Warehouse Club Openings in Calendar Year 2024 | ||||||||||||||||||||||
| Colombia | 9 | 9 | 1 | — | ||||||||||||||||||||||
| Costa Rica | 8 | 8 | — | — | ||||||||||||||||||||||
| Panama | 7 | 7 | — | — | ||||||||||||||||||||||
| Dominican Republic | 5 | 5 | — | — | ||||||||||||||||||||||
| Guatemala | 5 | 5 | 1 | — | ||||||||||||||||||||||
| Trinidad | 4 | 4 | — | — | ||||||||||||||||||||||
| Honduras | 3 | 3 | — | — | ||||||||||||||||||||||
| El Salvador | 2 | 3 | — | 1 | ||||||||||||||||||||||
| Nicaragua | 2 | 2 | — | — | ||||||||||||||||||||||
| Jamaica | 2 | 2 | — | — | ||||||||||||||||||||||
| Aruba | 1 | 1 | — | — | ||||||||||||||||||||||
| Barbados | 1 | 1 | — | — | ||||||||||||||||||||||
| U.S. Virgin Islands | 1 | 1 | — | — | ||||||||||||||||||||||
| Totals | 50 | 51 | 2 | 1 | ||||||||||||||||||||||
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 proceeding with the construction of a 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 August 2023. In addition, we have recently leased land and have plans to open our sixth warehouse club in Guatemala, located in Escuintla, approximately 40 miles south of the nearest club in the capital of Guatemala City. The club will be built on a five-acre property and is anticipated to open in the fall of 2023. We have also purchased land and plan to open our fourth warehouse club in El Salvador, located in Santa Ana, approximately 40 miles west from the nearest club in the capital of San Salvador. The club will be built on a five-acre property and is anticipated to open in early 2024. Once these three new clubs are open, we will operate 54 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
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. Uncertain economic conditions and slowdown in global economic growth and investment may impact the economies in our markets, causing significant declines in GDP and employment and devaluations of local currencies against the U.S. dollar.
34
During the first nine months of fiscal year 2023, inflation in all of our markets and devaluations of local currencies, especially in Colombia, created significant headwinds. However, some markets, especially Costa Rica, benefited from currency appreciation which helped offset the currency devaluations we experienced in our other countries. Substantial product cost increases due to inflation or commodity price increases have and could continue to 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 nine months of fiscal year 2023, we saw a general improvement in transit days and a reduction in freight rates of our shipping containers. We are working to hold down and/or mitigate the price increases passed on to our Members while maintaining the right inventory mix to grow sales. One key mitigating factor has been our expanded network of distribution centers, which has facilitated alternative shipping routes, increased throughput, and provided flexibility to mitigate our supply chain challenges and risks more effectively.
Currency fluctuation can be one of the largest variables affecting our overall sales and profit performance, as we have experienced in prior fiscal years, because many of our markets are susceptible to foreign currency exchange rate volatility. During the first nine months of fiscal year 2023 and 2022, approximately 78.8% and 78.0%, respectively, of our net merchandise sales were in currencies other than the U.S. dollar. Of those sales, 48.6% and 48.7% consisted of sales of products we purchased in U.S. dollars for each period, respectively.
A devaluation of local currency reduces the value of sales and membership income that is generated in that country when translated to U.S. dollars for our consolidated results. In addition, when local currency experiences devaluation, we may elect to increase the local currency price of imported merchandise to maintain our target margins, which could impact demand for the merchandise affected by the price increase. We may also modify the mix of imported versus local merchandise and/or the source of imported merchandise to mitigate the impact of currency fluctuations. Our Colombia market has experienced a foreign currency devaluation against the U.S. dollar of approximately 13% as of May 31, 2023 compared to May 31, 2022. Notwithstanding inflation and this currency devaluation in Colombia, during the third quarter of fiscal year 2023, we strategically decreased sales prices in select items across all of our imported merchandise categories in Colombia. While in the short term this action has adversely impacted our total gross margin percentage for our Colombia segment, and our Company overall, we see Colombia as a key market for growth, and we believe this strategy will enable us to provide value for the Member during a particularly difficult economic period of high inflation and significant currency devaluation. 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.
We continue to face the risk of political instability which may have significant effects on our business. For example, 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. Nicaragua and Honduras experienced anti-government protests in 2019; Costa Rica also had a general strike against tax reform measures that significantly impeded regular economic activity in 2018.
Our operations are subject to volatile weather conditions and natural disasters. In November 2020, Hurricanes Eta and Iota brought severe rainfall, winds, and flooding to a significant portion of Central America, especially Honduras, which 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, similar natural disasters could adversely impact our overall sales, costs and profit performance in the future.
35
Periodically, we experience a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). 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. For instance, during fiscal year 2021, we experienced significant limitations on our ability to convert Trinidad dollars to U.S. dollars or other tradable currencies. Our balance as of May 31, 2023 of Trinidad dollar denominated cash and cash equivalents and short and long-term investments measured in U.S. dollars was $13.5 million, a decrease of $87.0 million from the 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 and affects the level of U.S. Dollar liquidity in the market through its interventions, we are subject to continued challenges in converting our Trinidad dollars to U.S. dollars, as well as being exposed to the risk of a potential devaluation of the currency.
During the third quarter of fiscal year 2023, the Honduran Central Bank began limiting the availability and controlling the allocation of U.S. dollars for the conversion from Honduran lempiras to U.S. dollars. As of May 31, 2023, our Honduran subsidiary had approximately $15.9 million of cash and cash equivalents denominated in lempiras, which cannot be readily converted to U.S. dollars for general use within the Company. We are actively working with our banking partners and government authorities to address this situation.
We face difficulties in the shipment of, and the risks inherent in the importation of, merchandise to our warehouse clubs. One of those difficulties is possible governmental restrictions on the importation of merchandise. In late May 2023, certain disputes with Nicaraguan customs and tax authorities resulted in delays in the issuance of our importation clearance, and general delays in the customs inspection process. While this situation has occurred frequently in the last few years, we generally have been able to plan around these import blockages and resume within a manner of days. However, the most recent delay in obtaining importation clearance, resulted in us being unable to import merchandise into Nicaragua for several weeks in June. While at this time our tax clearances and imports seem to have returned to a more normal cadence, we continue to monitor this situation closely and are working with local officials to seek continuity of imports into Nicaragua. The duration and uncertainty surrounding this situation may result in a decline in merchandise sales in Nicaragua during our fiscal fourth quarter, as imports for the first nine months of fiscal year 2023 made up approximately 53% of our sales in that market.
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-quality merchandise sourced from around the world and valuable services at compelling prices in safe U.S. style clubs and through PriceSmart.com. We prioritize the well-being and safety of our Members and employees. We provide good jobs, fair wages and benefits and opportunities for 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. We charge Members an annual membership fee that enables us to operate our business with lower margins than traditional retail stores. As we continue to invest in technological capabilities, we are increasing our tools to drive sales and operational efficiencies. We believe we are well positioned to blend the excitement and appeal of our brick-and-mortar business with the convenience and additional benefits of online shopping and services and, meanwhile, enhance Member experience and engagement.
36
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 of our warehouse clubs and the number of parking spaces at our high-volume locations. For instance, we are currently remodeling and expanding one of our clubs in San Salvador, El Salvador, our club in San Pedro Sula, Honduras, our club in Santiago, Dominican Republic and our club in Port of Spain, Trinidad and Tobago. We continue to pursue opportunities to add new warehouse clubs in our existing markets and to assess opportunities in new markets. In Medellin, Colombia, we are currently building our second warehouse club which we plan to open in August 2023. In the fall of 2023, we also intend to open our sixth warehouse club in Escuintla, Guatemala. Additionally, we have plans to open a new warehouse club in Santa Ana, El Salvador, in early 2024. 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. 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, process and package produce 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 and can be reinvested in providing better pricing to our Members. 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 believe we can achieve growth in the number of Members, which drives Membership 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; 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 Member and additional members of their families and deeply discounted eyeglass frames, Audiology services with free hearing exams and deeply discounted hearing aids, and, in some of our markets, Pharmacy, which provides a significant convenience to our Members. Another way we enhance Membership value is through our private label offering, “Member’s Selection®,” a brand that is available only to 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 enhancing business activity and creating direct and indirect jobs, mitigation of foreign currency exchange risk, 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. During the first nine months of fiscal year 2023, our private label sales represented 26.0% of total merchandise sales, up from 24.2% for fiscal year 2022, and we plan to continue to invest in the development of additional private label products under the “Member’s Selection®” brand.
37
III.Drive Incremental sales via PriceSmart.com and Enhanced Online, Digital and Technological Capabilities. We recognize the growing expectation of consumers in our markets for convenience. As a result, we continue to improve the functionality of PriceSmart.com and to expand our product offerings and related content available online. We also build and apply technology tools to continue to learn more about and strengthen our relationships with each of our Members. 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 also 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 third quarter of fiscal year 2023 included:
•Total revenues increased 6.4% over the comparable prior year period.
•Net merchandise sales increased 7.1% over the comparable prior year period. We ended the quarter with 51 warehouse clubs compared to 50 warehouse clubs at the end of the third quarter of fiscal year 2022. Net merchandise sales - constant currency increased 5.6% over the comparable prior year period.
•Comparable net merchandise sales (that is, sales in the 49 warehouse clubs that have been open for greater than 13 ½ calendar months) for the 13 weeks ended June 4, 2023 increased 5.8%. Comparable net merchandise sales - constant currency for the 13 weeks ended June 4, 2023 increased 4.3%.
•Membership income for the third quarter of fiscal year 2023 increased 8.4% to $16.7 million over the comparable prior year period.
•Total gross margins (net merchandise sales less associated cost of goods sold) increased 15.1% over the prior-year period, and merchandise gross profits as a percent of net merchandise sales were 15.3%, an increase of 110 basis points or 1.1% from the same period in the prior year.
•Selling, general and administrative expenses increased 10.7% compared to the third quarter of fiscal year 2022, primarily due to unfavorable rulings on a portion of our VAT receivables and higher compensation, travel and professional fees.
•Operating income for the third quarter of fiscal year 2023 was $43.1 million, an increase of 27.5%, or $9.3 million, compared to the third quarter of fiscal year 2022.
•We recorded a $1.5 million net loss in total other expense, net in the third quarter of fiscal year 2023 compared to a $4.7 million net loss in total other expense, net in the same period last year primarily due to higher interest income of $2.7 million, comparatively, because of significantly more investments of surplus cash at higher yields.
•Our effective tax rate decreased in the third quarter of fiscal year 2023 to 28.9% from 33.7% in the third quarter of fiscal year 2022. The decrease in the effective tax rate is primarily related to expected cost savings for CEO compensation.
•Net income attributable to PriceSmart for the third quarter of fiscal year 2023 was $29.6 million, or $0.94 per diluted share, compared to $19.3 million, or $0.62 per diluted share, in the third quarter of fiscal year 2022.
•Adjusted net income attributable to PriceSmart for the third quarter of fiscal year 2023 was $31.9 million, or an adjusted $1.02 per diluted share, compared to adjusted net income of $19.3 million, or an adjusted $0.62 per diluted share, in the comparable prior year period.
•Adjusted EBITDA for the third quarter of fiscal year 2023 was $63.2 million compared to $51.3 million in the same period last year.
Financial highlights for the nine months ended May 31, 2023 included:
•Total revenues increased 8.2% over the comparable prior year period.
•Net merchandise sales increased 8.7% over the comparable prior year period. We ended the first nine months of fiscal year 2023 with 51 warehouse clubs compared to 50 warehouse clubs at the end of the third quarter of fiscal year 2022. Net merchandise sales - constant currency increased 9.0% over the comparable prior year period.
•Comparable net merchandise sales (that is, sales in the 49 warehouse clubs that have been open for greater than 13 ½ calendar months) for the 39 weeks ended June 4, 2023 increased 6.5%. Comparable net merchandise sales - constant currency for the 39 weeks ended June 4, 2023 increased 6.7%.
•Membership income increased 7.7% to $48.8 million.
•Total gross margins (net merchandise sales less associated cost of goods sold) increased 12.7% over the prior-year period, and merchandise gross profits as a percent of net merchandise sales were 15.8%, an increase of 50 basis points or 0.5% from the same period in the prior year.
38
•Selling, general and administrative expenses increased 9.3% compared to the nine months ended of fiscal year 2022, primarily due to $7.7 million of CEO departure-related costs we incurred in the current-year period.
•Operating income was $152.4 million, an increase of 19.0%, or $24.3 million, compared to the first nine months of fiscal year 2022.
•We recorded a $13.8 million net loss in total other expense, net in the first nine months of fiscal year 2023 compared to a $7.1 million net loss in total other expense, net in the same period last year primarily due to an increase of $10.0 million of foreign currency losses partially offset by an increase of $4.7 million in interest income comparatively.
•Our effective tax rate decreased for the first nine months of fiscal year 2023 to 32.2% from 32.8% in the first nine months of fiscal year 2022.
•Net income attributable to PriceSmart for the first nine months of fiscal year 2023 was $93.8 million, or $3.01 per diluted share, compared to $81.2 million, or $2.63 per diluted share, in the comparable prior year period.
•Adjusted net income attributable to PriceSmart for the first nine months of fiscal year 2023 was $103.3 million, or an adjusted $3.32 per diluted share, compared to adjusted net income of $79.8 million, or an adjusted $2.58 per diluted share, in the comparable prior year period.
•Adjusted EBITDA for the first nine months of fiscal year 2023 was $215.6 million compared to $178.3 million in the same period last year.
Non – GAAP (Generally Accepted Accounting Principles) Financial Measures
The accompanying Consolidated Financial Statements, including the related notes, are presented in accordance with U.S. GAAP (Generally Accepted Accounting Principles). In addition to relevant GAAP measures, we also provide non-GAAP measures including adjusted net income, adjusted net income per diluted share, adjusted EBITDA and net merchandise sales - constant currency because management believes these metrics are useful to investors and analysts by excluding items that we do not believe are indicative of our core operating performance. These measures are customary for our industry and commonly used by competitors. These non-GAAP financial measures should not be reviewed in isolation or considered as an alternative to any other performance measure derived in accordance with GAAP and may not be comparable to similarly titled measures used by other companies in our industry or across different industries.
Adjusted Net Income
The adjusted net income and adjusted net income per diluted share metrics are important measures used by management to compare the performance of core operating results between periods. We define adjusted net income as net income, as reported, adjusted for: separation costs associated with the departure of our former Chief Executive Officer, gain on the sale of our Aeropost subsidiary, the write-off of certain VAT receivables following unfavorable court rulings, and the tax impact of the foregoing adjustments on net income. We define adjusted net income per diluted share as adjusted net income divided by the weighted-average diluted shares outstanding.
We believe adjusted net income and adjusted net income per diluted share are useful metrics to investors and analysts because they present more accurate year-over-year comparisons for our net income and net income per diluted share because adjusted items are not the result of our normal operations.
39
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | May 31, 2023 | May 31, 2022 | ||||||||||||||||||||
| Net income attributable to PriceSmart as reported | $ | 29,572 | $ | 19,258 | $ | 93,824 | $ | 81,230 | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
Separation costs associated with Chief Executive Officer departure (1) | — | — | 7,747 | — | |||||||||||||||||||
Gain on sale of Aeropost subsidiary (2) | — | — | — | (2,736) | |||||||||||||||||||
VAT receivable write-off (3) | 2,309 | — | 2,309 | — | |||||||||||||||||||
Tax impact of adjustments to net income (4) | — | — | (550) | 1,280 | |||||||||||||||||||
| Adjusted net income attributable to PriceSmart | $ | 31,881 | $ | 19,258 | $ | 103,330 | $ | 79,774 | |||||||||||||||
| Net income attributable to PriceSmart per diluted share | $ | 0.94 | $ | 0.62 | $ | 3.01 | $ | 2.63 | |||||||||||||||
| Separation costs associated with Chief Executive Officer departure | — | — | 0.23 | — | |||||||||||||||||||
| Gain on sale of Aeropost subsidiary | — | — | — | (0.05) | |||||||||||||||||||
| VAT receivable write-off | 0.08 | — | 0.08 | — | |||||||||||||||||||
| Adjusted net income attributable to PriceSmart per diluted share | $ | 1.02 | $ | 0.62 | $ | 3.32 | $ | 2.58 | |||||||||||||||
(1) Reflects $7.7 million of separation costs associated with the departure of our former Chief Executive Officer in February 2023.
(2) Reflects a gain of $2.7 million associated with the sale of our Aeropost subsidiary on October 1, 2021.
(3) Reflects $2.3 million of VAT receivables deemed not recoverable and written-off in the third quarter of fiscal year 2023 following unfavorable court rulings.
(4) Reflects the tax effect of the above-mentioned adjustments.
Adjusted EBITDA
Adjusted EBITDA is defined as net income before interest expense, net, provision for income taxes and depreciation and amortization, adjusted for the impact of certain other items, including interest income; other income (expense), net; separation costs associated with Chief Executive Officer departure; and the write-off of certain VAT receivables following unfavorable court rulings. The following is a reconciliation of our Net income to Adjusted EBITDA for the periods presented:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | May 31, 2023 | May 31, 2022 | ||||||||||||||||||||
| Net income attributable to PriceSmart as reported | $ | 29,572 | $ | 19,258 | $ | 93,824 | $ | 81,230 | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Interest expense | 2,747 | 2,796 | 8,310 | 6,824 | |||||||||||||||||||
| Provision for income taxes | 12,019 | 9,776 | 44,647 | 39,729 | |||||||||||||||||||
| Depreciation and amortization | 17,821 | 17,557 | 53,264 | 50,258 | |||||||||||||||||||
| Interest income | (3,161) | (473) | (6,260) | (1,540) | |||||||||||||||||||
Other expense, net (1) | 1,885 | 2,423 | 11,795 | 1,833 | |||||||||||||||||||
Separation costs associated with Chief Executive Officer departure (2) | — | — | 7,747 | — | |||||||||||||||||||
VAT receivable write-off (3) | 2,309 | — | 2,309 | — | |||||||||||||||||||
| Adjusted EBITDA | $ | 63,192 | $ | 51,337 | $ | 215,636 | $ | 178,334 | |||||||||||||||
(1) Primarily consists of foreign currency losses or gains due to the revaluation of monetary assets and liabilities (primarily U.S. dollars). This line item includes a gain of $2.7 million associated with the sale of our Aeropost subsidiary on October 1, 2021.
40
(2) Reflects $7.7 million of separation costs associated with the departure of our former Chief Executive Officer in February 2023. On a go-forward basis, our Interim Chief Executive Officer has declined to receive compensation for his services during his term; therefore, we expect selling, general and administrative expenses will be positively impacted by approximately $2.5 million of savings each quarter during his term, reduced by compensation increases for other executives related to the change in leadership.
(3) Reflects $2.3 million of VAT receivables deemed not recoverable and written-off in the third quarter of fiscal year 2023 following unfavorable court rulings.
Net Merchandise Sales - Constant Currency
As a multinational enterprise, we are exposed to changes in foreign currency exchange rates. The translation of the operations of our foreign-based entities from their local currencies into U.S. dollars is sensitive to changes in foreign currency exchange rates and can have a significant impact on our reported financial results. We believe that constant currency is a useful measure, indicating the actual growth of our operations. When we use the term "net merchandise sales - constant currency", it means that we have translated current year net merchandise sales at prior year monthly average exchanges rates. Net merchandise sales - constant currency results exclude the effects of foreign currency translation. Impact of foreign currency is the effect of currency fluctuations on our net merchandise sales. Refer to “Management’s Discussion & Analysis – Net Merchandise Sales” and Refer to “Management’s Discussion & Analysis – Comparable Net Merchandise Sales” for our quantitative analysis and discussion. Reconciliations between net merchandise sales - constant currency and comparable net merchandise sales - constant currency and the most directly comparable GAAP measure are included where applicable.
COMPARISON OF THE THREE AND NINE MONTHS ENDED MAY 31, 2023 AND 2022
The following discussion and analysis compares the results of operations for the three-month and nine-month periods ended on May 31, 2023 with the three-month and nine month-periods ended on May 31, 2022 and should be read in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this report. Unless otherwise noted, all tables on the following pages present U.S. dollar amounts in thousands. Certain percentages presented are calculated using actual results prior to rounding.
Net Merchandise Sales
The following tables indicate the net merchandise club sales in the segments in which we operate and the percentage growth in net merchandise sales by segment during the three and nine months ended May 31, 2023 and May 31, 2022:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||||||||||||||||||||
| Amount | % of net sales | Increase/ (Decrease) from prior year | Change | Amount | % of net sales | ||||||||||||||||||||||||||||||
| Central America | $ | 656,719 | 61.4 | % | $ | 69,103 | 11.8 | % | $ | 587,616 | 58.8 | % | |||||||||||||||||||||||
| Caribbean | 311,578 | 29.1 | 21,137 | 7.3 | 290,441 | 29.1 | |||||||||||||||||||||||||||||
| Colombia | 101,966 | 9.5 | (18,988) | (15.7) | 120,954 | 12.1 | |||||||||||||||||||||||||||||
| Net merchandise sales | $ | 1,070,263 | 100.0 | % | $ | 71,252 | 7.1 | % | $ | 999,011 | 100.0 | % | |||||||||||||||||||||||
41
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||||||||||||||||||||
| Amount | % of net sales | Increase/ (Decrease) from prior year | Change | Amount | % of net sales | ||||||||||||||||||||||||||||||
| Central America | $ | 1,955,437 | 60.9 | % | $ | 204,189 | 11.7 | % | $ | 1,751,248 | 59.3 | % | |||||||||||||||||||||||
| Caribbean | 942,196 | 29.3 | 93,990 | 11.1 | 848,206 | 28.7 | |||||||||||||||||||||||||||||
| Colombia | 314,092 | 9.8 | (41,404) | (11.6) | 355,496 | 12.0 | |||||||||||||||||||||||||||||
| Net merchandise sales | $ | 3,211,725 | 100.0 | % | $ | 256,775 | 8.7 | % | $ | 2,954,950 | 100.0 | % | |||||||||||||||||||||||
Comparison of Three and Nine Months Ended May 31, 2023 and 2022
Overall, total net merchandise sales grew 7.1% for the third quarter and 8.7% for the nine-month period ended May 31, 2023. The third quarter increase resulted from a 2.8% increase in transactions and a 4.2% increase in average ticket. For the nine-month period, the increase resulted from a 3.2% increase in transactions and a 5.3% increase in average ticket. Transactions represent the total number of visits our Members make to our warehouse clubs and PriceSmart.com curbside pickup and delivery service transactions. Average ticket represents the amount our Members spend on each visit or PriceSmart.com order. We had 51 clubs in operation as of May 31, 2023 compared to 50 clubs as of May 31, 2022.
Net merchandise sales in our Central America segment increased 11.8% and 11.7% for the third quarter and nine-months ended May 31, 2023, respectively. These increases had a 690 basis point (6.9%) positive impact on total net merchandise sales growth for the third quarter and nine-months ended May 31, 2023. All markets within this segment had positive net merchandise sales growth for the three and nine-month periods ended May 31, 2023.
Net merchandise sales in our Caribbean segment increased 7.3% and 11.1%, respectively, for the third quarter and the nine-months ended May 31, 2023. The increase for the quarter had a 210 basis point (2.1%) positive impact on net merchandise sales growth and the increase for the nine-months had a 320 basis point (3.2%) positive impact on net merchandise sales growth. All of our markets in this segment had positive net merchandise sales growth. We opened our second warehouse club in Jamaica in April 2022.
Net merchandise sales in our Colombia segment decreased 15.7% and 11.6% for the third quarter and the nine-months ended May 31, 2023, respectively. This decrease had a 190 basis point (1.9%) and 140 basis point (1.4%) negative impact on total net merchandise sales growth. The primary driver of the decreased revenue for the quarter and nine months ended was due to the significant devaluation of the Colombian peso during the current fiscal year, which has negatively impacted reported sales in the third quarter of fiscal year 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 and nine-month period ended May 31, 2023. When we use the term "net merchandise sales - constant currency", it means that we have translated current year net merchandise sales at prior year monthly average exchanges rates. Net merchandise sales - constant currency results exclude the effects of foreign currency translation. Impact of foreign currency is the effect of currency fluctuations on our net merchandise sales.
Three Months Ended May 31, 2023 | |||||||||||||||||||||||||||||||||||
| Net Merchandise Sales | Net Merchandise Sales - Constant Currency | Impact of Foreign Currency Exchange | Net Merchandise Sales Growth | Net Merchandise Sales - Constant Currency Growth | % Impact of Foreign Currency Exchange | ||||||||||||||||||||||||||||||
| Central America | $ | 656,719 | $ | 623,249 | $ | 33,470 | 11.8 | % | 6.1 | % | 5.7 | % | |||||||||||||||||||||||
| Caribbean | 311,578 | 310,364 | 1,214 | 7.3 | 6.9 | 0.4 | |||||||||||||||||||||||||||||
| Colombia | 101,966 | 121,711 | (19,745) | (15.7) | 0.6 | (16.3) | |||||||||||||||||||||||||||||
| Consolidated total | $ | 1,070,263 | $ | 1,055,324 | $ | 14,939 | 7.1 | % | 5.6 | % | 1.5 | % | |||||||||||||||||||||||
42
Nine Months Ended May 31, 2023 | |||||||||||||||||||||||||||||||||||
| Net Merchandise Sales | Net Merchandise Sales - Constant Currency | Impact of Foreign Currency Exchange | Net Merchandise Sales Growth | Net Merchandise Sales - Constant Currency Growth | % Impact of Foreign Currency Exchange | ||||||||||||||||||||||||||||||
| Central America | $ | 1,955,437 | $ | 1,908,021 | $ | 47,416 | 11.7 | % | 9.0 | % | 2.7 | % | |||||||||||||||||||||||
| Caribbean | 942,196 | 933,366 | 8,830 | 11.1 | 10.0 | 1.1 | |||||||||||||||||||||||||||||
| Colombia | 314,092 | 378,918 | (64,826) | (11.6) | 6.6 | (18.2) | |||||||||||||||||||||||||||||
| Consolidated total | $ | 3,211,725 | $ | 3,220,305 | $ | (8,580) | 8.7 | % | 9.0 | % | (0.3) | % | |||||||||||||||||||||||
Overall, the effects of currency fluctuations within our markets had approximately $14.9 million and $8.6 million, or 150 basis points (1.5%) of positive impact and 30 basis points (0.3%) of negative impact on net merchandise sales for the quarter and nine-months ended May 31, 2023, respectively.
Currency fluctuations had a $33.5 million and $47.4 million, or 570 basis points (5.7%) and 270 basis points (2.7%), positive impact on net merchandise sales in our Central America segment for the quarter and nine-months ended May 31, 2023. These currency fluctuations contributed approximately 340 basis points (3.4%) and 170 basis points (1.7%) of the positive impact on net merchandise sales for the quarter and nine-months ended May 31, 2023. The Costa Rica Colón appreciated significantly against the dollar as compared to the same three-month and nine-month period a year ago, and was a significant factor in the contribution to the favorable currency fluctuations in this segment.
Currency fluctuations had a $1.2 million and $8.8 million, or 40 basis point (0.4%) and 110 basis point (1.1%), positive impact on net merchandise sales in our Caribbean segment for the quarter and nine-months ended May 31, 2023. These currency fluctuations contributed approximately 10 basis points (0.1%) and 30 basis points (0.3%) of positive impact on total net merchandise sales, respectively. This positive impact was primarily driven by the appreciation of the Dominican Peso as compared to the same three-month and nine-month period a year ago.
Currency fluctuations had a $19.7 million and $64.8 million, or 1,630 basis point (16.3%) and 1,820 basis point (18.2%), negative impact on net merchandise sales in our Colombia segment for the quarter and nine-months ended May 31, 2023. These currency fluctuations contributed approximately 200 basis points (2.0%) and 230 basis points (2.3%) of the total negative impact on total net merchandise sales for the quarter and nine-months ended May 31, 2023.
Comparable Merchandise Sales
We report comparable net merchandise sales on a “same week” basis with 13 weeks in each quarter beginning on a Monday and ending on a Sunday. The periods are established at the beginning of the fiscal year to provide as close of a match as possible to the calendar month and quarter that is used for financial reporting purposes. This approach equalizes the number of weekend days and weekdays in each period for improved sales comparison, as we experience higher merchandise club sales on the weekends. Each of the warehouse clubs used in the calculations was open for at least 13 ½ calendar months before its results for the current period were compared with its results for the prior period. As a result, sales related to one of our warehouse clubs opened during fiscal year 2022 and one of our warehouse clubs opened during fiscal year 2023 will not be used in the calculation of comparable sales until the applicable warehouse club has been open for at least 13 ½ months. Therefore, comparable net merchandise sales includes 49 warehouse clubs for the thirteen and thirty-nine week periods ended June 4, 2023.
43
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 and thirty-nine week periods ended June 4, 2023 and May 29, 2022 compared to the prior year:
Thirteen Weeks Ended | |||||||||||
June 4, 2023 | May 29, 2022 | ||||||||||
| % Increase/(Decrease) in Comparable Net Merchandise Sales | % Increase in Comparable Net Merchandise Sales | ||||||||||
| Central America | 11.0 | % | 9.7 | % | |||||||
| Caribbean | 4.2 | 17.4 | |||||||||
| Colombia | (15.2) | 18.1 | |||||||||
| Consolidated comparable net merchandise sales | 5.8 | % | 12.8 | % | |||||||
Thirty-Nine Weeks Ended | |||||||||||
June 4, 2023 | May 29, 2022 | ||||||||||
| % Increase/(Decrease) in Comparable Net Merchandise Sales | % Increase in Comparable Net Merchandise Sales | ||||||||||
| Central America | 10.7 | % | 11.4 | % | |||||||
| Caribbean | 5.9 | 11.7 | |||||||||
| Colombia | (13.0) | 5.5 | |||||||||
| Consolidated comparable net merchandise sales | 6.5 | % | 10.8 | % | |||||||
Comparison of Thirteen and Thirty-Nine-Week Periods Ended June 4, 2023 and May 29, 2022
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 June 4, 2023 increased 5.8%. Comparable net merchandise sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the thirty-nine week period ended June 4, 2023 increased 6.5%.
Comparable net merchandise sales in our Central America segment increased 11.0% and 10.7% for the thirteen-week and thirty-nine week periods ended June 4, 2023, respectively. All of our markets in Central America had positive comparable net merchandise sales growth for the thirteen-week and thirty-nine week periods ended June 4, 2023. The positive comparable net merchandise sales growth for our Central America segment contributed approximately 650 basis points (6.5%) and 640 basis points (6.4%) of positive impact in total comparable merchandise sales for the thirteen-week and thirty-nine week periods ended June 4, 2023, respectively.
Comparable net merchandise sales in our Caribbean segment increased 4.2% and 5.9% for the thirteen-week and thirty-nine week periods ended June 4, 2023. These increases contributed approximately 120 basis points (1.2%) and 170 basis points (1.7%) of positive impact on total comparable merchandise sales for the thirteen-week and thirty-nine week periods ended June 4, 2023, respectively.
Our Dominican Republic market continued its strong performance in the thirteen-week and thirty-nine week periods ended June 4, 2023, with 9.3% and 14.3% comparable net merchandise sales growth, respectively. This strong performance was offset by our Jamaica market, which decreased 3.8% for the thirty-nine week periods ended June 4, 2023, respectively, due to sales transfers from the existing club included in the comparable net merchandise sales calculation to the new club not included in the calculation.
44
Comparable net merchandise sales in our Colombia segment decreased 15.2% and 13.0% for the thirteen-week and thirty-nine week periods ended June 4, 2023, respectively. These decreases contributed approximately 190 basis points (1.9%) and 160 basis points (1.6%) of negative impact in total comparable merchandise sales for the thirteen-week and thirty-nine week periods ended June 4, 2023, respectively. The decrease in Colombia during the thirteen-week and thirty-nine week period was primarily due to the foreign currency devaluation.
When we use the term "comparable net merchandise sales - constant currency", it means that we have translated current year comparable net merchandise sales at prior year monthly average exchanges rates. Comparable net merchandise sales - constant currency results exclude the effects of foreign currency translation. Impact of foreign currency is the effect of currency fluctuations on our comparable net merchandise sales. The following tables illustrate the comparable net merchandise sales - constant currency percentage growth and the impact that changes in foreign currency exchange rates had on our comparable merchandise sales percentage growth for the thirteen-week and thirty-nine week periods ended June 4, 2023:
Thirteen Weeks Ended June 4, 2023 | ||||||||||||||||||||
| Comparable Net Merchandise Sales Growth | Comparable Net Merchandise Sales - Constant Currency Growth | % Impact of Foreign Currency Exchange | ||||||||||||||||||
| Central America | 11.0 | % | 5.3 | % | 5.7 | % | ||||||||||||||
| Caribbean | 4.2 | 3.8 | 0.4 | |||||||||||||||||
| Colombia | (15.2) | 0.7 | (15.9) | |||||||||||||||||
| Consolidated comparable net merchandise sales | 5.8 | % | 4.3 | % | 1.5 | % | ||||||||||||||
Thirty-Nine Weeks Ended June 4, 2023 | ||||||||||||||||||||
| Comparable Net Merchandise Sales Growth | Comparable Net Merchandise Sales - Constant Currency Growth | % Impact of Foreign Currency Exchange | ||||||||||||||||||
| Central America | 10.7 | % | 7.9 | % | 2.8 | % | ||||||||||||||
| Caribbean | 5.9 | 4.9 | 1.0 | |||||||||||||||||
| Colombia | (13.0) | 4.9 | (17.9) | |||||||||||||||||
| Consolidated comparable net merchandise sales | 6.5 | % | 6.7 | % | (0.2) | % | ||||||||||||||
Overall, the mix of currency fluctuations within our markets had a 150 basis point (1.5%) positive impact and 20 basis point (0.2%) negative impact on comparable net merchandise sales for the thirteen and thirty-nine week periods ended June 4, 2023.
Currency fluctuations within our Central America segment accounted for approximately 330 basis points (3.3%) and 150 basis points (1.5%) of positive impact on total comparable merchandise sales for the thirteen and thirty-nine week period, respectively. Our Costa Rica market was the main contributor as the market experienced currency appreciation when compared to the same periods last year.
Currency fluctuations within our Caribbean segment accounted for approximately 10 basis points (0.1%) and 30 basis points (0.3%) of positive impact on total comparable merchandise sales for the thirteen and thirty-nine week period, respectively. Our Dominican Republic, Jamaica, and Trinidad markets all experienced currency appreciation.
Currency fluctuations within our Colombia segment accounted for approximately 190 basis points (1.9%) and 200 basis points (2.0%) of negative impact on total comparable merchandise sales for the thirteen and thirty-nine week period, respectively. This reflects the devaluation of the Colombian peso when compared to the same periods a year ago.
45
Membership Income
Membership income is recognized ratably over the one-year life of the membership.
| Three Months Ended | |||||||||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||||||||||||||
| Amount | Increase/ (Decrease) from prior year | % Change | Membership income % to net merchandise club sales | Amount | |||||||||||||||||||||||||
| Membership income - Central America | $ | 10,126 | $ | 1,056 | 11.6 | % | 1.5 | % | $ | 9,070 | |||||||||||||||||||
| Membership income - Caribbean | 4,431 | 301 | 7.3 | 1.4 | 4,130 | ||||||||||||||||||||||||
| Membership income - Colombia | 2,178 | (62) | (2.8) | 2.1 | 2,240 | ||||||||||||||||||||||||
| Membership income - Total | $ | 16,735 | $ | 1,295 | 8.4 | % | 1.6 | % | $ | 15,440 | |||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||||||||||||||
| Amount | Increase/ (Decrease) from prior year | % Change | Membership income % to net merchandise club sales | Amount | |||||||||||||||||||||||||
| Membership income - Central America | $ | 29,504 | $ | 2,680 | 10.0 | % | 1.5 | % | $ | 26,824 | |||||||||||||||||||
| Membership income - Caribbean | 13,184 | 1,087 | 9.0 | 1.4 | 12,097 | ||||||||||||||||||||||||
| Membership income - Colombia | 6,118 | (263) | (4.1) | 1.9 | 6,381 | ||||||||||||||||||||||||
| Membership income - Total | $ | 48,806 | $ | 3,504 | 7.7 | % | 1.5 | % | $ | 45,302 | |||||||||||||||||||
| Number of accounts - Central America | 987,025 | 44,929 | 4.8 | % | 942,096 | ||||||||||||||||||||||||
| Number of accounts - Caribbean | 462,634 | 12,540 | 2.8 | 450,094 | |||||||||||||||||||||||||
| Number of accounts - Colombia | 336,171 | (18,882) | (5.3) | 355,053 | |||||||||||||||||||||||||
| Number of accounts - Total | 1,785,830 | 38,587 | 2.2 | % | 1,747,243 | ||||||||||||||||||||||||
Comparison of Three and Nine Months Ended May 31, 2023
The number of member accounts as of May 31, 2023 was 2.2% higher than the number of accounts as of May 31, 2022. Membership income increased 8.4% and 7.7% over the three and nine-month periods ended May 31, 2023, respectively, compared to the same prior-year periods.
Membership income increased in our Central America and Caribbean segments and decreased in our Colombia segment in the three and nine-month periods ended May 31, 2023. The consolidated increase in membership income is due to an increase in the membership base since the comparable prior year period. 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. Inflation and significant foreign currency devaluation have adversely impacted our Members in that market.
We 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 8.6% of our total membership base as of May 31, 2023, an increase from 7.1% as of May 31, 2022. Platinum Members tend to have higher renewal rates than our Diamond Members.
46
Our trailing twelve-month renewal rate was 87.1% and 88.9% for the periods ended May 31, 2023 and May 31, 2022, respectively.
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, our interest-generating portfolio from our co-branded credit cards, and rental income from operating leases where the Company is the lessor.
| Three Months Ended | |||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||||||||
| Amount | Increase/ (Decrease) from prior year | % Change | Amount | ||||||||||||||||||||
| Miscellaneous income | $ | 2,754 | $ | 395 | 16.7 | $ | 2,359 | ||||||||||||||||
| Rental income | 555 | (49) | (8.1) | 604 | |||||||||||||||||||
| Other revenue | $ | 3,309 | $ | 346 | 11.7 | % | $ | 2,963 | |||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||||||||
| Amount | Increase/ (Decrease) from prior year | % Change | Amount | ||||||||||||||||||||
| Non-merchandise revenue | $ | — | $ | (3,307) | (100.0) | % | $ | 3,307 | |||||||||||||||
| Miscellaneous income | 7,771 | 1,096 | 16.4 | 6,675 | |||||||||||||||||||
| Rental income | 1,660 | (225) | (11.9) | 1,885 | |||||||||||||||||||
| Other revenue | $ | 9,431 | $ | (2,436) | (20.5) | % | $ | 11,867 | |||||||||||||||
Comparison of Three and Nine Months Ended May 31, 2023 and May 31, 2022
The primary driver of the decrease in other revenue for the nine-months ended May 31, 2023 was the sale of our Aeropost subsidiary and its marketplace and casillero operations on October 1, 2021.
47
Results of Operations
| Three Months Ended | |||||||||||||||||
| Results of Operations Consolidated | May 31, 2023 | May 31, 2022 | Increase/ (Decrease) | ||||||||||||||
| (Amounts in thousands, except percentages) | |||||||||||||||||
| Net merchandise sales | |||||||||||||||||
| Net merchandise sales | $ | 1,070,263 | $ | 999,011 | $ | 71,252 | |||||||||||
| Total gross margin | $ | 163,650 | $ | 142,199 | $ | 21,451 | |||||||||||
| Total gross margin percentage | 15.3% | 14.2% | 1.1% | ||||||||||||||
| Revenues | |||||||||||||||||
| Total revenues | $ | 1,096,654 | $ | 1,030,810 | $ | 65,844 | |||||||||||
| Percentage change from prior period | 6.4% | ||||||||||||||||
| Comparable net merchandise sales | |||||||||||||||||
| Total comparable net merchandise sales increase/(decrease) | 5.8% | 12.8% | (7.0)% | ||||||||||||||
| Total revenue margin | |||||||||||||||||
| Total revenue margin | $ | 184,060 | $ | 161,193 | $ | 22,867 | |||||||||||
| Total revenue margin percentage | 16.8% | 15.6% | 1.2% | ||||||||||||||
| Selling, general and administrative | |||||||||||||||||
| Selling, general and administrative | $ | 141,008 | $ | 127,431 | $ | 13,577 | |||||||||||
| Selling, general and administrative percentage of total revenues | 12.9% | 12.4% | 0.5 | % | |||||||||||||
| Operational data | |||||||||||||||||
Adjusted EBITDA (1) | $ | 63,192 | $ | 51,337 | $ | 11,855 | |||||||||||
(1) See “Item 2. Management’s Discussion & Analysis – Non - GAAP Financial Measures” for the definition of Adjusted EBITDA and a reconciliation to GAAP net income attributable to PriceSmart as reported.
| Three Months Ended | |||||||||||||||||||||||
| Results of Operations Consolidated | May 31, 2023 | % of Total Revenue | May 31, 2022 | % of Total Revenue | |||||||||||||||||||
| Operating income- by segment | |||||||||||||||||||||||
| Central America | $ | 46,023 | 4.2 | % | $ | 39,458 | 3.8 | % | |||||||||||||||
| Caribbean | 21,184 | 1.9 | 19,163 | 1.9 | |||||||||||||||||||
| Colombia | 2,961 | 0.3 | 4,652 | 0.4 | |||||||||||||||||||
| United States | 4,066 | 0.4 | 2,821 | 0.3 | |||||||||||||||||||
Reconciling Items (1) | (31,182) | (2.9) | (32,332) | (3.1) | |||||||||||||||||||
| Operating income - Total | $ | 43,052 | 3.9 | % | $ | 33,762 | 3.3 | % | |||||||||||||||
(1)The reconciling items reflect the amount eliminated upon consolidation of intersegment transactions.
48
| Nine Months Ended | |||||||||||||||||
| Results of Operations Consolidated | May 31, 2023 | May 31, 2022 | Increase/ (Decrease) | ||||||||||||||
| (Amounts in thousands, except percentages and number of warehouse clubs) | |||||||||||||||||
| Net merchandise sales | |||||||||||||||||
| Net merchandise sales | $ | 3,211,725 | $ | 2,954,950 | $ | 256,775 | |||||||||||
| Total gross margin | $ | 508,582 | $ | 451,312 | $ | 57,270 | |||||||||||
| Total gross margin percentage | 15.8% | 15.3% | 0.5% | ||||||||||||||
| Revenues | |||||||||||||||||
| Total revenues | $ | 3,293,649 | $ | 3,044,723 | $ | 248,926 | |||||||||||
| Percentage change from comparable period | 8.2% | ||||||||||||||||
| Comparable net merchandise sales | |||||||||||||||||
| Total comparable net merchandise sales increase/(decrease) | 6.5% | 10.8% | (4.3)% | ||||||||||||||
| Total revenue margin | |||||||||||||||||
| Total revenue margin | $ | 567,973 | $ | 508,189 | $ | 59,784 | |||||||||||
| Total revenue margin percentage | 17.2% | 16.7% | 0.5% | ||||||||||||||
| Selling, general and administrative | |||||||||||||||||
| Selling, general and administrative | $ | 415,594 | $ | 380,088 | $ | 35,506 | |||||||||||
| Selling, general and administrative percentage of total revenues | 12.6% | 12.5% | 0.1 | % | |||||||||||||
| Operational data | |||||||||||||||||
Adjusted EBITDA (1) | $ | 215,636 | $ | 178,334 | $ | 37,302 | |||||||||||
| Warehouse clubs at period end | 51 | 50 | 1 | ||||||||||||||
| Warehouse club sales floor square feet at period end | 2,642 | 2,484 | 158 | ||||||||||||||
(1) See “Item 2. Management’s Discussion & Analysis – Non - GAAP Financial Measures” for the definition of Adjusted EBITDA and a reconciliation to GAAP net income attributable to PriceSmart as reported.
| Nine Months Ended | |||||||||||||||||||||||
| Results of Operations Consolidated | May 31, 2023 | % of Total Revenue | May 31, 2022 | % of Total Revenue | |||||||||||||||||||
| Operating income- by segment | |||||||||||||||||||||||
| Central America | $ | 152,786 | 4.6 | % | $ | 128,889 | 4.2 | % | |||||||||||||||
| Caribbean | 71,161 | 2.2 | 60,796 | 2.0 | |||||||||||||||||||
| Colombia | 12,491 | 0.4 | 17,154 | 0.6 | |||||||||||||||||||
| United States | 24,622 | 0.7 | 17,377 | 0.6 | |||||||||||||||||||
Reconciling Items (1) | (108,681) | (3.3) | (96,115) | (3.2) | |||||||||||||||||||
| Operating income - Total | $ | 152,379 | 4.6 | % | $ | 128,101 | 4.2 | % | |||||||||||||||
(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:
49
Three Months Ended | |||||||||||||||||||||||
| May 31, 2023 | % of Total Revenue | May 31, 2022 | % of Total Revenue | ||||||||||||||||||||
| Warehouse club and other operations | $ | 106,172 | 9.7 | % | $ | 96,081 | 9.3 | % | |||||||||||||||
| General and administrative | 34,343 | 3.1 | 30,887 | 3.0 | |||||||||||||||||||
| Pre-opening expenses | 495 | 0.1 | 306 | 0.1 | |||||||||||||||||||
| Loss (gain) on disposal of assets | (2) | — | 157 | — | |||||||||||||||||||
| Total Selling, general and administrative | $ | 141,008 | 12.9 | % | $ | 127,431 | 12.4 | % | |||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||
| May 31, 2023 | % of Total Revenue | May 31, 2022 | % of Total Revenue | ||||||||||||||||||||
| Warehouse club and other operations | $ | 306,694 | 9.3 | % | $ | 281,270 | 9.3 | % | |||||||||||||||
| General and administrative | 100,274 | 3.0 | 96,531 | 3.2 | |||||||||||||||||||
| Separation costs associated with Chief Executive Officer departure | 7,747 | 0.3 | — | — | |||||||||||||||||||
| Pre-opening expenses | 584 | — | 1,406 | — | |||||||||||||||||||
| Loss on disposal of assets | 295 | — | 881 | — | |||||||||||||||||||
| Total Selling, general and administrative | $ | 415,594 | 12.6 | % | $ | 380,088 | 12.5 | % | |||||||||||||||
Comparison of Three and Nine Months Ended May 31, 2023 and May 31, 2022
Total gross margin is derived from our Revenue – Net merchandise sales less our Cost of goods sold – Net merchandise sales and represents our sales and cost of sales generated from the business activities of our warehouse clubs. We express our Total gross margin percentage as a percentage of our Net merchandise sales.
On a consolidated basis, total gross margin as a percent of net merchandise sales for the three and nine months ended May 31, 2023 was 15.3% and 15.8%, 110 basis points (1.1%) and 50 basis points (0.5%) higher than the comparable prior year period, respectively. This increase was primarily due to significant markdowns we took in the third quarter of fiscal year 2022 when we had excessive amounts of slow-moving inventory because of changing consumer preferences as they began to resume more normal buying patterns similar to our pre-pandemic sales mix. In addition, supply chain disruptions lead to out-of-season merchandise because of shipping delays in the prior year period that had to be liquidated to free up sales floor space for the past holiday season.
Total Gross Margin rate in the third quarter decreased compared to the first two quarters of fiscal year 2023. This decrease is primarily due to the elimination of our COVID premium, reduction in our Trinidad foreign currency exchange premium and a margin decrease in our Colombia market due to pricing actions taken by management based on the deteriorating conditions in that market. In Colombia we have determined to strategically decrease sales prices on select items across all of our imported merchandise categories in an effort to reduce the cost burden to our Members in this market during this period of exceptionally high inflation and significant devaluation of the Colombian Peso. In addition, we took pricing actions across all of our markets in response to increasingly challenging economic conditions in those markets and to alleviate some economic burden on our Members. We will further reduce our Trinidad foreign currency exchange premium in the fourth quarter.
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 a percentage of Total revenues.
Total revenue margin increased 120 basis points (1.2%) for the three months ended May 31, 2023 compared to the prior-year period, which is primarily the result of the higher total gross margin percentage of 110 basis points (1.1%). Total revenue margin increased 50 basis points (0.5%) for the nine months ended May 31, 2023 compared to the prior-year period, which is primarily the result of higher total gross margin percentage of 50 basis points (0.5%).
50
Selling, general, and administrative expenses consist of warehouse club and other operations, general and administrative expenses, separation costs associated with the Chief Executive Officer departure, pre-opening expenses, and loss (gain) on disposal of assets. In total, Selling, general and administrative expenses increased $13.6 million compared to the prior year, and increased as a percentage of total revenue, increasing by 50 basis points (0.5%) to 12.9% of total revenue for the third quarter of fiscal year 2023 compared to 12.4% of total revenues for the third quarter of fiscal year 2022. Selling, general and administrative expenses increased $35.5 million compared to the prior year and increased as a percentage of total revenue, increasing 10 basis points (0.1%) to 12.6% of total revenue for the first nine months of fiscal year 2023 compared to 12.5% of total revenues for the first nine months of fiscal year 2022 offset, in part, by our Interim Chief Executive Officer's election not to receive compensation.
Warehouse club and other operations expenses increased to 9.7% of total revenues for the first three months of fiscal year 2023 compared to 9.3% for the prior-year period. This was primarily due to our Costa Rica market which increased 30 basis points (0.30%) and our Jamaica market which increased 10 basis points (0.10%) as a percentage of revenue year over year due to the appreciation of the Costa Rica colón and the Jamaican dollar, and a 20 basis points (0.20%) increase due to a VAT receivable write-off, partially offset by our Colombia market which decreased 20 basis points (0.20%) as a percentage of revenue year over year due to the devaluation of the Colombian peso.
Warehouse club and other operations expenses remained unchanged as 9.3% of total revenues for the first nine months of fiscal year 2023 and 2022.
General and administrative expenses increased to 3.1% of total revenues for the third quarter of fiscal year 2023 compared to 3.0% for the third quarter of fiscal year 2022. The 10 basis point (0.1%) increase is primarily due to increased compensation costs and travel along with certain non-recurring expenses related to severance and professional fees.
General and administrative expenses decreased to 3.0% of total revenues for the first nine months of fiscal year 2023 compared to 3.2% for the first nine months of fiscal year 2022. The 20 basis point (0.2%) decrease is primarily due to the leveraging of general and administrative expenses.
In the second quarter of fiscal year 2023, we recorded $7.7 million for separation and other related termination benefits for our former Chief Executive Officer who resigned effective February 3, 2023. Of this amount $4.2 million in net charges related to adjustments to non-cash stock-based compensation. We substantially fulfilled all payment obligations by the end of the second quarter of fiscal year 2023; however, some vesting of PSUs will occur in the first quarter of fiscal year 2024.
On a go-forward basis, our Interim Chief Executive Officer has declined to receive compensation for his services during his term; therefore, we expect Selling, general and administrative expenses will be positively impacted by $2.5 million of savings each quarter during his term, reduced by salary increases for other executives related to the change in leadership.
Operating income in the third quarter of fiscal year 2023 increased to $43.1 million (3.9% of total revenue) compared to $33.8 million (3.3% of total revenue) for the same period last year. This reflects the increase in total revenue margin of 120 basis points (1.2%), partially offset by a 50 basis point (0.5%) decrease due to the deleveraging of selling, general and administrative expenses over the comparable prior-year period.
Operating income for the nine months ended May 31, 2023 increased to $152.4 million (4.6% of total revenue) compared to $128.1 million (4.2% of total revenue) for the same period last year.
51
Interest Income
Net interest income represents the earnings generated from interest-bearing assets held by PriceSmart, Inc. and our wholly owned foreign subsidiaries. These assets include investments in fixed income securities and deposits held with financial institutions. The interest income is derived from the interest payments received on these assets, which serve to enhance our overall financial returns. This contributes to the financial strength and liquidity of PriceSmart, Inc. and supports various operations such as funding new ventures, meeting working capital needs, and ensuring adequate U.S. dollar liquidity in our Trinidad subsidiary.
| Three Months Ended | |||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||
| Amount | Change | Amount | |||||||||||||||
| Interest income | $ | 3,161 | $ | 2,688 | $ | 473 | |||||||||||
| Nine Months Ended | |||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||
| Amount | Change | Amount | |||||||||||||||
| Interest income | $ | 6,260 | $ | 4,720 | $ | 1,540 | |||||||||||
Comparison of Three and Nine Months Ended May 31, 2023 and May 31, 2022
Net interest income increased for the three and nine-month period ended May 31, 2023 primarily due to an increase in investments at higher yields when compared to 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 and distribution centers, warehouse club expansions, the capital requirements of warehouse clubs and other operations, increase U.S. dollar liquidity in our Trinidad subsidiary and ongoing working capital requirements.
| Three Months Ended | |||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||
| Amount | Change | Amount | |||||||||||||||
| Interest expense on loans | $ | 3,152 | $ | 992 | $ | 2,160 | |||||||||||
| Interest expense related to hedging activity | 209 | (662) | 871 | ||||||||||||||
| Less: Capitalized interest | (614) | (379) | (235) | ||||||||||||||
| Net interest expense | $ | 2,747 | $ | (49) | $ | 2,796 | |||||||||||
52
| Nine Months Ended | |||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||
| Amount | Change | Amount | |||||||||||||||
| Interest expense on loans | $ | 8,870 | $ | 3,570 | $ | 5,300 | |||||||||||
| Interest expense related to hedging activity | 746 | (1,882) | 2,628 | ||||||||||||||
| Less: Capitalized interest | (1,306) | (202) | (1,104) | ||||||||||||||
| Net interest expense | $ | 8,310 | $ | 1,486 | $ | 6,824 | |||||||||||
Comparison of Three and Nine Months Ended May 31, 2023 and May 31, 2022
Net interest expense increased for the nine-month period ended May 31, 2023 primarily due to higher interest rates on short-term borrowings and higher long-term borrowings outstanding when compared to the comparable prior year period.
Other Expense, Net
Other expense, net consists of currency gains or losses, as well as net benefit costs related to our defined benefit plans and other items considered to be non-operating in nature.
| Three Months Ended | |||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||||||||
| Amount | Change | % Change | Amount | ||||||||||||||||||||
| Other expense, net | $ | (1,885) | $ | 538 | (22.2) | % | $ | (2,423) | |||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||||||||
| Amount | Change | % Change | Amount | ||||||||||||||||||||
| Other expense, net | $ | (11,795) | $ | (9,962) | 543.5% | $ | (1,833) | ||||||||||||||||
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 and Nine Months Ended May 31, 2023 and 2022
For the three and nine-months ended May 31, 2023 the primary driver of Other expense, net included $1.0 million and $8.3 million of losses, respectively, due to revaluation of monetary assets and liabilities (primarily U.S. dollars) in several of our markets. Of those amounts, Costa Rica contributed a $477,000 and $3.3 million revaluation loss, respectively, due to the impact of the appreciation of the Costa Rican Colón on our U.S. dollar monetary net assets in Costa Rica. In addition, we had transaction costs of $1.1 million and $3.8 million during the quarter and nine months ended May 31, 2023, respectively, associated with converting Trinidad dollars into available tradable currencies, such as euros or Canadian dollars, before converting them to U.S. dollars.
53
Provision for Income Taxes
| Three Months Ended | |||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||
| Amount | Change | Amount | |||||||||||||||
| Provision for income taxes | $ | 12,019 | $ | 2,243 | $ | 9,776 | |||||||||||
| Effective tax rate | 28.9% | 33.7% | |||||||||||||||
| Nine Months Ended | |||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||
| Amount | Change | Amount | |||||||||||||||
| Provision for income taxes | $ | 44,647 | $ | 4,918 | $ | 39,729 | |||||||||||
| Effective tax rate | 32.2% | 32.8% | |||||||||||||||
Comparison of Three and Nine Months Ended May 31, 2023 and May 31, 2022
For the three months ended May 31, 2023, the effective tax rate was 28.9% compared to 33.7% for the prior year period. The decrease in the effective tax rate versus the prior year was primarily attributable to the following factors:
•A comparably favorable net tax impact from recurring items of 6.5%, primarily resulting from the expected cost savings for CEO compensation; and
•A comparably unfavorable net tax impact from non-recurring items of 1.7%, primarily related to foreign exchange and assets written down.
For the nine months ended May 31, 2023, the effective tax rate was 32.2% compared to 32.8% for the prior year period. The decrease in the effective tax rate versus the prior year was primarily attributable to the following factors:
•A comparably favorable net tax impact from recurring items of 1.8%, primarily resulting from valuation allowances we took with respect to deferred tax assets from foreign tax credits that are no longer deemed recoverable; and
•A comparably unfavorable net tax from non-recurring items of 1.2%, primarily related to assets written down.
On a go-forward basis, we estimate an annualized effective tax rate of approximately 32% to 33%.
54
Other Comprehensive Income (Loss)
| Three Months Ended | |||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||||||||
| Amount | Change | % Change | Amount | ||||||||||||||||||||
| Other Comprehensive Income (Loss) | $ | 14,100 | $ | 22,835 | 261.4 | % | $ | (8,735) | |||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||
| May 31, 2023 | May 31, 2022 | ||||||||||||||||||||||
| Amount | Change | % Change | Amount | ||||||||||||||||||||
| Other Comprehensive Income (Loss) | $ | 25,983 | $ | 36,623 | 344.2% | $ | (10,640) | ||||||||||||||||
Comparison of Three and Nine Months Ended May 31, 2023 and May 31, 2022
Our other comprehensive income of approximately $14.1 million for the third quarter of fiscal year 2023 resulted primarily from the comprehensive gain of approximately $15.3 million from foreign currency translation adjustments related to assets and liabilities and the translation of revenue, costs and expenses on the statements of income of our subsidiaries whose functional currency is not the U.S. dollar, offset by approximately $1.2 million related to unrealized losses on changes in our derivative obligations. Other comprehensive income for the nine-months ended May 31, 2023 of approximately $26.0 million was primarily the result of the comprehensive gain of $26.6 million from foreign currency translation adjustments along with approximately $0.6 million related to unrealized losses on changes in the fair value of our derivative obligations. For the quarter, the largest translation adjustments were related to the appreciation of the local currency against the U.S. dollar for our Costa Rica subsidiary. For the nine-month period, the largest translation adjustments were related to the appreciation of the local currency against the U.S. dollar of our Costa Rica subsidiary, partially offset by the devaluation of the local currencies against the U.S. dollar for our Dominican Republic and Colombia subsidiaries.
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 consists 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 for certain jurisdictions. Should we decide to repatriate cash through the payment of a cash dividend by our foreign subsidiaries to our domestic operations, we will accrue taxes if and when appropriate.
55
The following table summarizes the cash and cash equivalents, including restricted cash, held by our foreign subsidiaries and domestically (in thousands):
| May 31, 2023 | August 31, 2022 | ||||||||||
| Amounts held by foreign subsidiaries | $ | 194,562 | $ | 203,952 | |||||||
| Amounts held domestically | 41,810 | 47,421 | |||||||||
| Total cash and cash equivalents, including restricted cash | $ | 236,372 | $ | 251,373 | |||||||
The following table summarizes the short-term investments held by our foreign subsidiaries and domestically (in thousands):
| May 31, 2023 | August 31, 2022 | ||||||||||
| Amounts held by foreign subsidiaries | $ | 60,842 | $ | 11,160 | |||||||
| Amounts held domestically | 51,787 | — | |||||||||
| Total short-term investments | $ | 112,629 | $ | 11,160 | |||||||
As of May 31, 2023 and August 31, 2022, there were no certificates of deposit with a maturity of over a year held by our foreign subsidiaries or 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 year 2017, we have experienced this situation in Trinidad and have been unable to source a sufficient level of tradable currencies. We are working with our banks in Trinidad and government officials to convert all of our Trinidad dollars into tradable currencies. During the third quarter of fiscal year 2023, the Honduran Central Bank began limiting the availability and controlling the allocation of U.S. dollars for the conversion from Honduran lempiras to U.S. dollars. We are actively working with our banking partners and government authorities to address this situation. We have and continue to take additional actions in this 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):
| Nine Months Ended | |||||||||||||||||
| May 31, 2023 | May 31, 2022 | Change | |||||||||||||||
| Net cash provided by operating activities | $ | 184,681 | $ | 64,311 | $ | 120,370 | |||||||||||
| Net cash used in investing activities | (197,814) | (61,404) | (136,410) | ||||||||||||||
| Net cash provided by (used in) financing activities | (13,051) | 11,365 | (24,416) | ||||||||||||||
| Effect of exchange rates | 11,183 | (7,034) | 18,217 | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | $ | (15,001) | $ | 7,238 | $ | (22,239) | |||||||||||
Net cash provided by operating activities totaled $184.7 million and $64.3 million for the nine months ended May 31, 2023 and May 31, 2022, respectively. For the nine-months ended May 31, 2023, cash provided by operating activities increased primarily due to shifts in working capital generated from changes in our merchandise inventory and accounts payable positions, which contributed $91.1 million, a positive net change in our other various operating assets and liabilities and from higher net income when compared to the nine-months ended May 31, 2022.
56
Net cash used in investing activities totaled $197.8 million and $61.4 million for the nine months ended May 31, 2023 and May 31, 2022, respectively. The $136.4 million increase in cash used in investing activities is primarily the result of a net decrease in proceeds from settlements of short-term investments and an increase in purchases of short-term investments, primarily in the U.S., compared to the same nine-month period a year-ago. The decrease in proceeds from settlements is primarily due to the overall net decrease of short-term investments in Trinidad as fewer of those investments settled comparatively and we are investing our excess U.S. dollar balances in that market in shorter dated certificates of deposits or other liquid investments classified as cash or cash equivalents.
Net cash used in financing activities totaled $13.1 million and net cash provided by financing activities totaled $11.4 million for the nine months ended May 31, 2023 and May 31, 2022, 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 $24.4 million shift from cash provided by, to cash used in, financing activities is primarily the result of a net decrease of proceeds from short-term borrowings compared to the same nine-month period a year-ago.
The following table summarizes the dividends declared and paid during fiscal years 2023 and 2022 (amounts are per share):
| First Payment | Second Payment | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Declared | Amount | Record Date | Date Paid | Date Payable | Amount | Record Date | Date Paid | Date Payable | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| 2/3/2023 | $ | 0.92 | 2/16/2023 | 2/28/2023 | N/A | $ | 0.46 | 8/15/2023 | N/A | 8/31/2023 | $ | 0.46 | ||||||||||||||||||||||||||||||||||||||||||||
| 2/3/2022 | $ | 0.86 | 2/15/2022 | 2/28/2022 | N/A | $ | 0.43 | 8/15/2022 | 8/31/2022 | N/A | $ | 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, dividends 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.
Shares of common stock repurchased by us are recorded at cost as treasury stock and result in the reduction of stockholders’ equity in our consolidated balance sheets. We may reissue these treasury shares in the future.
We have reissued treasury shares as part of our stock-based compensation programs. During the nine-months ended May 31, 2023, we reissued approximately 7,000 treasury shares.
57
Repurchases of Common Stock
The Board of Directors authorized a program to repurchase up to $75 million of our common stock (the "Stock Buyback Program"). Under the Stock Buyback Program, shares of common stock may be repurchased from time to time on a discretionary basis through open market repurchases, privately negotiated transactions, block purchases, or other means, and will be structured to occur in compliance with applicable securities laws. In addition, open market repurchases of common stock could be made pursuant to trading plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which would permit common stock to be repurchased at a time that we might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The Stock Buyback Program does not obligate us to acquire any specific number of shares.
The timing and actual number of shares repurchased will depend on a variety of factors, including the common stock price, trading volume, market conditions, our cash flow and liquidity profile, the capital needs of the business, and other considerations. Repurchases are funded with existing cash on hand. The Stock Buyback Program has no expiration date and may be modified, suspended or terminated at any time by the Board of Directors at its discretion.
During the three and nine-months ended May 31, 2023, no repurchases were made under the Stock Buyback Program.
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) 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 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.
58
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 likelihood of being sustained. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as appropriate. There were no material changes in our uncertain income tax positions for the period ended on May 31, 2023.
Tax Receivables
We pay Value Added Tax (“VAT”) or similar taxes, income taxes, and other taxes within the normal course of our business in most of the countries in which we operate related to the procurement of merchandise and/or services we acquire and/or on sales and taxable income. VAT is a form of indirect tax applied to the value added at each stage of production (primary, manufacturing, wholesale and retail). This tax is similar to, but operates somewhat differently than, sales tax paid in the United States. We generally collect VAT from our Members upon sale of goods and services and pay VAT to our vendors upon purchase of goods and services. Periodically, we submit VAT reports to governmental agencies and reconcile the VAT paid and VAT received. The net overpaid VAT may be refunded or applied to subsequent returns, and the net underpaid VAT must be remitted to the government.
With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due this creates an income tax receivable. In most countries where we operate, the governments have implemented additional collection procedures, such as requiring credit card processors to remit a portion of sales processed via credit and debit cards directly to the government as advance payments of VAT and/or income tax. This collection mechanism generally leaves us with net VAT and/or income tax receivables, forcing us to process significant refund claims on a recurring basis. These refund or offset processes can take anywhere from several months to several years to complete.
In two 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 $11.3 million and $11.0 million as of May 31, 2023 and August 31, 2022, respectively, and deferred tax assets of $3.6 million and $3.5 million as of May 31, 2023 and August 31, 2022, respectively, in these countries.
In one of the countries with a significant VAT receivable balance, the Company received unfavorable rulings at the supreme court level of that country denying a portion of the Company’s appeals for refund of over-withholdings of VAT. After evaluating the merits of the Company’s arguments, the court’s decision, and probability that the other related refund appeals would receive the same judgment, the Company concluded that a total of $2.3 million of related VAT receivable would not be recoverable and this amount was written-off in the third quarter of fiscal year 2023. These charges were recorded in the Warehouse club and other expenses line item under the Selling, general and administrative caption within the consolidated statements of income.
The Company’s various outstanding VAT receivables and/or income tax receivables are based on cases or appeals with their own set of facts and circumstances. The Company consults and evaluates with legal and tax advisors regularly to understand the strength of its legal arguments and probability of successful outcomes in addition to its own experience handling these complex tax issues. 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 the remaining 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.
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.
59
•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, requiring an adjustment of these assets to their then-current fair market value. 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 third 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 $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.
60
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in interest rates and changes in currency exchange rates. There have been no material changes in our market risk factors at May 31, 2023 compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended August 31, 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 and to otherwise redeploy these funds in our Company. Since fiscal year 2017, we have experienced this situation in Trinidad and have been unable to source a sufficient level of tradable currencies. We are working with our banks in Trinidad to source tradable currencies. During the third quarter of fiscal year 2023, the Honduran Central Bank began limiting the availability and controlling the allocation of U.S. dollars for the conversion from Honduran lempiras to U.S. dollars. We are actively working with our banking partners and government authorities to address this situation. Refer to “Item 2. Management’s Discussion & Analysis – Factors Affecting Our Business” and “Item 2. Management’s Discussion & Analysis – Liquidity: Financial Position and Cash Flow” for our quantitative analysis and discussion.
Information about the financial impact of foreign currency exchange rate fluctuations for the three and nine-month periods ended May 31, 2023 is disclosed in “Item 2. Management’s Discussion & Analysis – Other Expense, net”.
Information about the change in the fair value of our hedges and the financial impact thereof for the three and nine-month periods ended May 31, 2023 is disclosed in “Item 1. Financial Statements: Notes to Consolidated Financial Statements, Note 8 – Derivative Instruments and Hedging Activities.”
Information about the movements in currency exchange rates and the related impact on the translation of the balance sheets of our subsidiaries whose functional currency is not the U.S. dollar for the three and nine-month period ended May 31, 2023 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.
61
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.
62
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 following 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 fiscal year ended August 31, 2022.
We may not successfully manage the transition associated with the resignation of our Chief Executive Officer, which could have an adverse impact on the Company.
On December 9, 2022, the Company announced that Sherry Bahrambeygui would resign 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. As a result, Robert Price, a Company founder and Chairman of the Board, became Interim Chief Executive Officer, John Hildebrandt was promoted to President and Chief Operating Officer and David Price was promoted to Executive Vice President, initially serving as Chief of Staff to the Chairman and currently as Chief of Staff to the Interim Chief Executive Officer.
Ms. Bahrambeygui will continue serving stockholders as a member of the Board of Directors of the Company. Prior to her tenure as Chief Executive Officer, she served on the Company’s Board as a director for eight years, including having served as Vice Chair and Chair of the Compensation Committee. She has agreed to make herself available at the Company’s request for up to 100 hours of transition support during the 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.
63
Upon vesting of restricted stock awarded by the Company to employees, the Company repurchases shares and withholds the amount of the repurchase payment to cover employees’ tax withholding obligations. As set forth in the table below, during the quarter ended May 31, 2023, the Company repurchased 2,394 shares in the indicated months. These were the only repurchases of equity securities made by the Company during the third quarter of fiscal year 2023.
| Period | (a) Total Number of Shares Purchased | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||||||||||||
| March 1, 2023 - March 31, 2023 | 774 | $ | 70.15 | — | — | |||||||||||||||||||||
| April 1, 2023 - April 30, 2023 | 526 | 74.90 | — | — | ||||||||||||||||||||||
| May 1, 2023 - May 31, 2023 | 1,094 | 73.52 | — | — | ||||||||||||||||||||||
| Total | 2,394 | $ | 72.73 | — | — | |||||||||||||||||||||
(1) The Board of Directors authorized a $75 million share repurchase program of our common stock. The shares may be purchased on a discretionary basis from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. However, no repurchases were made under this plan during the quarter ended May 31, 2023.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
64
ITEM 6. EXHIBITS
(a)Exhibits:
3.1(1) | |||||
3.2(2) | |||||
3.3(3) | |||||
3.4(4) | |||||
3.5(5) | |||||
| 101.INS | Inline XBRL Instance Document | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | ||||
* Identifies management contract or compensatory plan or arrangement.
** These certifications are being furnished solely to accompany this Report pursuant to 18 U.S.C. 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of PriceSmart, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.
(1)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 1997 filed with the Commission on November 26, 1997.
(2)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2004 filed with the Commission on April 14, 2004.
(3)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2004 filed with the Commission on November 24, 2004.
(4)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Commission on July 17, 2015.
(5)Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Commission on December 9, 2022.
65
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: | July 10, 2023 | By: | /s/ ROBERT E. PRICE | ||||||||
| Robert E. Price | |||||||||||
| Interim Chief Executive Officer | |||||||||||
| (Principal Executive Officer) | |||||||||||
| Date: | July 10, 2023 | By: | /s/ MICHAEL L. MCCLEARY | ||||||||
| Michael L. McCleary | |||||||||||
| Executive Vice President and Chief Financial Officer | |||||||||||
| (Principal Financial Officer and Principal Accounting Officer) | |||||||||||
66
CONFIDENTIAL SEPARATION AGREEMENT AND GENERAL RELEASE OR ALL CLAIMS
This Confidential Separation Agreement and General Release of All Claims (“Agreement”) is made by and between Nicolas E. Maslowski (“Employee”) and PriceSmart, Inc. (the “Company”) (collectively referred to as the “Parties” or individually referred to as a “Party”).
RECITALS
A. Employee was employed in an executive capacity by the Company under a series of employment agreements (the “NM Employment Agreements”);
B. By mutual agreement, in lieu of any and all rights under the NM Employment Agreements, the Parties have agreed that Employee’s employment with the Company will terminate effective June 15, 2023 (the “Termination Date”); and
C. The Parties wish to resolve any and all disputes, claims, complaints, grievances, charges, actions, petitions, and demands that the Employee may have against the Company and any of the Released Parties (as defined below), including, but not limited to, any and all claims arising out of or in any way related to Employee’s employment with or separation from the Company, including any claims arising from or related to the NM Employment Agreements which are, with the execution of this Agreement, rendered null and void and superseded by this Agreement in their entirety.
In consideration of the mutual promises made herein, the Company and Employee hereby agree as follows:
1. Duties in transition and Termination Date. During the period between April 15, 2023 and April 30, Employee will continue to perform the functions of the Company’s Executive Vice President-Member Experience and Strategic Analytics, with a focus on transitioning any ongoing projects in an effective way. During the period between May 1, 2023, and the Termination Date of June 15, 2023, Employee will be available to consult as requested, but no longer be required to perform day to day executive functions. The period between April 15, 2023, and the Termination Date shall be referred to as the Transition Period. During the Transition Period Employee will continue to receive his normal period salary payments and be covered by such Company health and welfare benefits as he currently enjoys. Employee’s employment will end by mutual agreement on June 15, 2023. As of that date Employee will be paid his final Salary installment and paid for any accrued but unused vacation or PTO.
2. Consideration upon Termination.
a. Severance payment on or after Termination Date. Within ten business days after the Termination Date Company will pay to Employee a Severance Payment in an amount equal to $450,000, which is equivalent to nine (9) months’ salary at Employee’s current level of salary, less applicable state, federal or other mandated payroll deductions.
b. COBRA Reimbursement. As further consideration for Employee’s releases, covenant not to sue and other promises set forth below, Company agrees to reimburse Employee for his anticipated COBRA costs (not to exceed the amount that Company currently pays for his coverage monthly) for a period of up to twelve months following his Termination Date (“COBRA Reimbursement Monthly Payments”). It is not intended that the COBRA Reimbursement Monthly Payments will be taxable, provided proper documentation is supplied by Employee to demonstrate actual payment under a qualified plan of the Company. The
1
Company has no obligation to begin to pay the COBRA Reimbursement Monthly Payments until after the Effective Date of this Agreement. In the event that Employee begins health care coverage under another employer’s plan and therefore no longer needs COBRA, the Company’s obligations to provide COBRA Reimbursement Monthly Payments will cease.
c. Severance Bonus. Employee shall be eligible to receive an annual cash incentive
award for fiscal year 2023. Such payment shall be made at the time all other bonuses are paid pursuant to the Company’s annual cash incentive award program, subject to achievement of performance metrics previously established with respect to corporate performance for fiscal year 2023. No portion of the annual cash incentive will be based on individual performance, and Employee shall be eligible for any over-achievement payment associated with corporate performance above target.
d. Stock or equity. The aforementioned payments represent the complete entitlement of Employee to any economic payments or value under this Agreement or as a result of the termination of his employment or under the NM Employment Agreements. Employee shall be entitled to keep any vested equity previously awarded to him, but shall not be eligible for any further grant of stock or equity by the Company under any Company stock or equity program.
3. Benefits. Employee’s health insurance benefits shall cease on the last day of June, 2023, subject to Employee’s right to continue his health insurance under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. Employee’s participation in all benefits and incidents of employment, including, but not limited to, vesting in equity awards and the accrual of bonuses, vacation, and paid time off, ceased as of the Termination Date.
4. Payment of Salary and Receipt of All Benefits. The Employee agrees that with the payment of salary up until the Termination Date he has been paid: (i) the full amount of earned but unused vacation pay or PTO to which he is entitled and that he is not owed any amounts as reimbursement for expenses incurred during the course of his employment; and (ii) all other compensation due to him, including but not limited to all salary, bonuses, deferred compensation, incentives and all other compensation of any nature whatsoever.
5. General Release. As a material inducement to the Company to enter into this Agreement and in consideration of the payments to be made by the Company to the Employee in accordance with Section 2 above and other promises and covenants contained herein, the Employee, on behalf of himself, his representatives, agents, estate, heirs, successors and assigns, and with full understanding of the contents and legal effect of this Agreement and having the right and opportunity to consult with his counsel, releases and discharges the Company, its stockholders, officers, directors, supervisors, members, managers, employees, agents, representatives, attorneys, insurers, divisions, subsidiaries, affiliates, and all employee benefit plans sponsored by or contributed to by the Company (including any fiduciaries thereof), and all related entities of any kind or nature, and its and their predecessors, successors, heirs, executors, administrators, and assigns (collectively, the “Released Parties”) from any and all claims, actions, causes of action, grievances, suits, charges, or complaints of any kind or nature whatsoever, that he ever had or now has, whether fixed or contingent, liquidated or unliquidated, known or unknown, suspected or unsuspected, and whether arising in tort, contract, statute, or equity, before any federal, state, local, or private court, agency, arbitrator, mediator, or other entity, regardless of the relief or remedy. Without limiting the generality of the foregoing, it being the intention of the parties to make this Agreement as broad and as general as the law permits, this Agreement specifically includes, but is not limited to, and is intended to explicitly release, any and all subject matter and claims arising from or in connection with any alleged violation by any of the Released Parties under the Age Discrimination in Employment Act of 1967 (the “ADEA”), as amended; the Fair Labor Standards Act; Title VII of the Civil Rights Act
2
of 1964, as amended; the Civil Rights Act of 1866, as amended by the Civil Rights Act of 1991 (42 U.S.C. § 1981); the Rehabilitation Act of 1973, as amended; the Employee Retirement Income Security Act of 1974, as amended (whether such subject matter or claims are brought on an individual basis, a class representative basis, or otherwise on behalf of an employee benefit plan or trust); the Americans with Disabilities Act; the Family and Medical Leave Act; the Genetic Information Nondiscrimination Act of 2008; the Worker Adjustment and Retraining Notification Act; the Equal Pay Act; Executive Order 11246; Executive Order 11141; California Fair Employment and Housing Act (FEHA), California Whistleblower Protection Act (CWA), the NM Employment Agreements, and any other statutory claim, tort claim, employment or other contract or implied contract claim, or common law claim for wrongful discharge, breach of an implied covenant of good faith and fair dealing, defamation, invasion of privacy, or any other claim, arising out of or in connection with or involving his employment with the Company, the termination of his employment with the Company, or involving any other matter, including but not limited to the continuing effects of his employment with the Company or termination of employment with the Company. This release is not applicable to workers’ compensation claims, unemployment insurance claims, claims concerning reimbursement for business expenses incurred prior to the Termination Date in accordance with any Company business expense policies (as applicable), claims concerning any employee benefit or compensation plan or program in which Employee participates (or participated), Employee’s right to be indemnified for all claims or proceedings, or threatened claims or proceedings that arise out of or relate to his service as an officer or employee of the Company, including attorneys’ fees, and claims arising after the Effective Date of this Separation Agreement not otherwise released herein or which otherwise cannot be waived as a matter of law.
As a material inducement to Employee to enter into this Agreement and in consideration of the commitments to be made by Employee to the Company in accordance with this Agreement and other promises and covenants contained herein, the Company, on behalf of itself, its stockholders, officers, directors, members, agents, representatives, attorneys, insurers, divisions, subsidiaries, and affiliates, and with full understanding of the contents and legal effect of this Agreement and having the right and opportunity to consult with its counsel, releases and discharges Employee from any and all claims, actions, causes of action, grievances, suits, charges, or complaints of any kind or nature whatsoever concerning any conduct by Employee occurring before this Agreement becomes effective arising out of the good-faith performance of Employee’s duties and obligations under the Employment Agreements
6. Covenant Not to Sue. The Employee, for himself, his heirs, executors, administrators, successors and assigns agrees not to bring, file, claim, sue or cause, assist, or permit to be brought, filed, or claimed any action, cause of action or proceeding regarding or in any way related to any of the claims described in Section 5, and further agrees that this Agreement is, will constitute and may be pleaded as, a bar to any such claim, action, cause of action or proceeding. If the Employee files a charge or participates in an investigative proceeding of the Equal Employment Opportunity Commission, the California Office of Civil Rights, or another governmental agency, or is otherwise made a party to any proceedings described in Section 5, the Employee will not seek and will not accept any personal equitable or monetary relief in connection with such charge or investigative or other proceeding; provided, however, that this Agreement does not limit the Employee’s right to receive an award for information provided to any governmental agencies under any whistleblower program. The Employee further understands that this Agreement does not limit his ability to communicate with any governmental agencies or otherwise participate in any investigation or proceeding that may be conducted by any governmental agencies, including providing documents or other information, without notice to the Company.
7. No Disparaging, Untrue or Misleading Statements. The Employee represents that he has not made, and agrees that he will not make, to any third party any disparaging, untrue, or
3
misleading written or oral statements about or relating to the Released Parties or their products or services (or about or relating to any officer, director, agent, employee, or other person acting on the Released Parties’ behalf). Neither this provision nor anything else in this Agreement bars the Employee from communicating with, directly or indirectly, or sharing truthful information with any governmental agency. In addition, nothing in this Agreement is intended to suppress or limit Employee’s right to testify in any administrative, legislative or judicial forum about alleged criminal conduct or sexual harassment, or to prevent the disclosure of factual information related to claims filed in a civil or administrative action regarding sexual assault, sexual harassment or other forms of sex-based workplace harassment, discrimination or retaliation, to the extent such communications are expressly protected by law. The Company’s directors and officers represent that they have not made, and agree that they will not make, to any third party any disparaging, untrue, or misleading written or oral statements about or relating to Employee. Neither this provision nor anything else in this Agreement bars the Company’s directors and officers from communicating with, directly or indirectly, or sharing truthful information with any governmental agency.
8. Acknowledgment of Waiver of Claims under ADEA. Employee acknowledges that he is waiving and releasing any rights he may have under the ADEA, and that this waiver and release is knowing and voluntary. Employee agrees that this waiver and release does not apply to any rights or claims that may arise under the ADEA after the Effective Date of this Agreement. Employee acknowledges that the consideration given for this waiver and release is in addition to anything of value to which Employee was already entitled. Employee further acknowledges that he has been advised by this writing that: (a) he should consult with an attorney prior to executing this Agreement; (b) he has twenty-one (21) days within which to consider this Agreement; (c) he has seven (7) days following his execution of this Agreement to revoke this Agreement; (d) this Agreement shall not be effective until the day after the revocation period has expired (the “Effective Date”); and (e) nothing in this Agreement prevents or precludes Employee from challenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent, penalties, or costs for doing so, unless specifically authorized by federal law. In the event Employee signs this Agreement and returns it to the Company in less than the 21-day period identified above, Employee hereby acknowledges that he has freely and voluntarily chosen to waive the time period allotted for considering this Agreement. Employee acknowledges and understands that revocation must be accomplished by a written notification to the person executing this Agreement on the Company’s behalf that is received prior to the Effective Date. The parties agree that changes, whether material or immaterial, do not restart the running of the 21-day period.
9. Unknown and known claims. Employee acknowledges that he has been advised to consult with legal counsel and has been advised concerning any laws with respect to unknown claims, and being so advised agrees that this Release shall extend to all claims, known or unknown, so that the Parties may effectuate a complete release.
10. No Pending Claims. Employee represents that he has no lawsuits, claims, or actions pending in his name, or on behalf of any other person or entity, against the Company or any of the other Released Parties. Employee further represents that he has not suffered any workplace injury and there are no facts or circumstances that could support a claim by him for worker’s compensation benefits.
11. Confidentiality. Employee agrees to maintain in complete confidence the existence of this Agreement, the contents and terms of this Agreement, and the consideration for this Agreement (hereinafter collectively referred to as “Separation Information”). Except as required by law or permitted under this Agreement, Employee may disclose Separation Information only to his immediate family members, the court in any proceedings to enforce the terms of this
4
Agreement, Employee’s attorney(s), and Employee’s accountant and any professional tax advisor to the extent that they need to know the Separation Information in order to provide advice on tax treatment or to prepare tax returns, and must prevent disclosure of any Separation Information to all other third parties. Employee agrees that he will not publicize, directly or indirectly, any Separation Information.
12. Trade Secrets and Confidential Information/Company Property. Employee reaffirms and agrees to observe and abide by the terms of the Company’s Policy(ies) With Respect to Handling of Confidential Information, specifically including the provisions therein regarding nondisclosure of the Company’s trade secrets and confidential and proprietary information. Employee’s signature below constitutes his certification under penalty of perjury that he has returned all documents and other items provided to Employee by the Company, developed or obtained by Employee in connection with his employment with the Company, or otherwise belonging to the Company.
13. No Cooperation. Except as provided in Section 6, Employee agrees that he will not knowingly encourage, counsel, or assist any attorneys or their clients in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints by any third party against any of the Released Parties, unless under a subpoena or other court order to do so or as related directly to the ADEA waiver in this Agreement. Employee agrees both to immediately notify the Company upon receipt of any such subpoena or court order, and to furnish, within three (3) business days of its receipt, a copy of such subpoena or other court order.
14. Breach. In addition to the rights provided in the “Attorneys’ Fees” section below, Employee acknowledges and agrees that any material breach of this Agreement, unless such breach constitutes a legal action by Employee challenging or seeking a determination in good faith of the validity of the waiver herein under the ADEA shall entitle the Company immediately to recover and/or cease providing the consideration provided to Employee under this Agreement, except as provided by law, as liquidated damages for his breach. Employee agrees that this sum represents fair and reasonable liquidated damages since the amount of actual damages to the Company in the event of such breach is uncertain.
15. No Admission of Liability. Employee and the Company understands and acknowledges that this Agreement constitutes a compromise and settlement of any and all actual or potential disputed claims by Employee. No action taken by the Company or Employee hereto, either previously or in connection with this Agreement, shall be deemed or construed to be (a) an admission of the truth or falsity of any actual or potential claims or (b) an acknowledgment or admission by the Company or Employee of any fault or liability whatsoever to Employee, to the Company or to any third party.
16. Costs and Fees. The Parties shall each bear their own costs, attorneys’ fees, and other fees incurred in connection with the negotiation and preparation of this Agreement.
17. Arbitration.
a.All disputes between Employee (and Employee’s attorneys, successors, and assigns) and the Company (and its affiliates, subsidiaries, shareholders, directors, officers, employees, agents, successors, attorneys, and assigns) relating in any manner to Employee’s employment or the termination of Employee’s employment, including, without limitation, all disputes arising under this Agreement (“Arbitrable Claims”), shall be resolved by final and binding arbitration to the fullest extent permitted by law. Arbitrable Claims shall include, but are not limited to, contract (express or implied) and tort claims of all kinds, as well as all claims based on any federal, state, or local law, statute, or regulation, excepting only claims under applicable workers’ compensation law and unemployment insurance claims. Arbitration shall be
5
final and binding upon the Parties and shall be the exclusive remedy for all Arbitrable Claims, except that the Parties may seek interim injunctive relief and other provisional remedies in court as set forth in this Agreement. The Parties hereby waive any rights they may have to trial by jury or any other form of administrative hearing or procedure in regard to the Arbitrable Claims.
b.Claims shall be arbitrated in accordance with the then-existing National Rules for the Resolution of Employment Disputes of the American Arbitration Association (“AAA Employment Rules”), as augmented by this Agreement. Arbitration shall be initiated as provided by the AAA Employment Rules, although the written notice to the other Party initiating arbitration shall also include a statement of the claims asserted and all the facts upon which the claims are based. Either Party may bring an action in court to compel arbitration under this Agreement and to enforce an arbitration award. Otherwise, neither Party shall initiate or prosecute any lawsuit or administrative action in any way related to any Arbitrable Claim. All arbitration hearings under this Agreement shall be conducted at the AAA office located nearest to Miami, Florida. The Federal Arbitration Act shall govern the interpretation and enforcement of this Section.
c.All disputes involving Arbitrable Claims shall be decided by a single arbitrator. The arbitrator shall be selected by mutual agreement of the Parties within thirty (30) days of the effective date of the notice initiating the arbitration. If the Parties cannot agree on an arbitrator, then the complaining Party shall notify the AAA and request selection of an arbitrator in accordance with the AAA Employment Rules. The arbitrator shall have only such authority to award equitable relief, damages, costs, and fees as a court would have for the particular claims asserted and any action of the arbitrator in contravention of this limitation may be the subject of court appeal by the aggrieved Party. No other aspect of any ruling by the arbitrator shall be appealable, and all other aspects of the arbitrator’s ruling shall be final and non-appealable. The arbitrator shall have the authority to compel adequate discovery for the resolution of the dispute and to award such relief as would otherwise be permitted by law. The arbitrator shall be required to issue a written arbitration decision, including the arbitrator’s essential findings, conclusions and a statement of award. The Company shall pay all arbitration fees in excess of what the Employee would have to pay if the dispute were decided in a court of law. The arbitrator shall have exclusive authority to resolve all Arbitrable Claims, including, but not limited to, whether any particular claim is arbitrable and whether all or any part of this Agreement is void or unenforceable.
d.Notwithstanding the foregoing, in order to provide for interim relief pending the finalization of arbitration proceedings hereunder, nothing in this Section 17 shall prohibit the Parties from pursuing a claim for interim injunctive relief, for other applicable provisional remedies, and/or for related attorneys’ fees in a court of competent jurisdiction in order to prevent irreparable harm pending the conclusion of the arbitration. In the event of any alleged breach or threatened breach of this Agreement, the Employee hereby consents and submits to jurisdiction in the State of Florida.
e.If for any reason all or part of this arbitration provision is held to be invalid, illegal, or unenforceable in any respect under any applicable law or regulation in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other part of this arbitration provision or any other jurisdiction, but this provision shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable part or parts of this arbitration provision had never been contained herein, consistent with the general intent of the Parties, as evidenced herein, insofar as possible.
18. Cooperation. Employee agrees that he shall, without any additional compensation, respond to reasonable requests for information from the Company regarding matters that may arise in the Company’s business. Employee agrees that he will respond to any such requests
6
from the Company promptly. Employee further agrees to fully and completely cooperate with the Company, its advisors and its legal counsel with respect to any litigation or claims that are pending against the Company and any claim or action that may be filed against the Company in the future. Such cooperation shall include making himself available at reasonable times and places for interviews, reviewing documents, testifying in a deposition or a legal or administrative proceeding, and providing advice to the Company in preparing defenses to any pending or potential future claims against the Company. The Company agrees to pay/reimburse Employee for any approved travel expenses incurred as a result of his cooperation with the Company.
19. Tax Consequences. The Company makes no representations or warranties with respect to the tax consequences of the payments and any other consideration provided to Employee or made on his behalf under the terms of this Agreement. Employee agrees and understands that he is responsible for payment, if any, of local, state, and/or federal taxes on the payments and any other consideration provided hereunder by the Company and any penalties or assessments thereon. Employee further agrees to indemnify and hold the Company harmless from any claims, demands, deficiencies, penalties, interest, assessments, executions, judgments, or recoveries by any government agency against the Company for any amounts claimed due on account of (a) Employee’s failure to pay or delayed payment of federal or state taxes, or (b) damages sustained by the Company by reason of any such claims, including attorneys’ fees and costs.
20. Section 409A. It is intended that this Agreement comply with, or be exempt from, Code Section 409A and the final regulations and official guidance thereunder (“Section 409A”) and any ambiguities herein will be interpreted to so comply and/or be exempt from Section 409A. Each payment and benefit to be paid or provided under this Agreement is intended to constitute a series of separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations. In no event will the Company reimburse Employee for any taxes that may be imposed on Employee as a result of Section 409A.
21. Authority. The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this Agreement. Employee represents and warrants that he has the capacity to act on his own behalf and on behalf of all who might claim through him to bind them to the terms and conditions of this Agreement. Each Party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein.
22. No Representations. Employee represents that he has had an opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Employee has not relied upon any representations or statements made by the Company that are not specifically set forth in this Agreement.
23. Severability. In the event that any provision or any portion of any provision hereof or any surviving agreement made a part hereof becomes or is declared by a court of competent jurisdiction or arbitrator to be illegal, unenforceable, or void, this Agreement shall continue in full force and effect without said provision or portion of provision.
24. Attorneys’ Fees. Except with regard to a legal action challenging or seeking a determination in good faith of the validity of the waiver herein under the ADEA, in the event that either Party brings an action to enforce or effect its rights under this Agreement, the prevailing Party shall be entitled to recover its costs and expenses, including the costs of mediation, arbitration, litigation, court fees, and reasonable attorneys’ fees incurred in connection with such an action.
7
25. Entire Agreement. This Agreement represents the entire agreement and understanding between the Company and Employee concerning the subject matter of this Agreement and Employee’s employment with and separation from the Company and the events leading thereto and associated therewith, and supersedes and replaces any and all prior agreements and understandings concerning the subject matter of this Agreement and Employee’s relationship with the Company
26. No Oral Modification. This Agreement may only be amended in a writing signed by Employee and the Company’s Chief Employee Officer.
27. Governing Law. This Agreement shall be governed by the laws of the State of Florida, without regard for choice-of-law provisions. Employee consents to personal and exclusive jurisdiction and venue in the State of Florida.
28. Effective Date. Employee understands that this Agreement shall be null and void if not executed by him within twenty-one (21) days of its tender to him. Employee has seven (7) days after he signs this Agreement to revoke it. This Agreement will become effective (the “Effective Date”) on the eighth (8th) day after Employee signed this Agreement, so long as it has been signed by the Parties and has not been revoked by Employee before that date.
29. Counterparts. This Agreement may be executed in counterparts and by facsimile, and each counterpart and facsimile shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned.
30. Voluntary Execution of Agreement. Employee understands and agrees that he executed this Agreement voluntarily, without any duress or undue influence on the part or behalf of the Company or any third party, with the full intent of releasing all of his claims against the Company and any of the other Releasees. Employee acknowledges that:
(a) he has read this Agreement;
(b) he has been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of his own choice or has elected not to retain legal counsel;
(c) he understands the terms and consequences of this Agreement and of the releases it contains; and
(d) he is fully aware of the legal and binding effect of this Agreement.
IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below.
NICOLAS E. MASLOWSKI, an individual
Dated: April 18, 2023 /s/ Nicolas E. Masklowski
Nicolas E. Masklowski
PRICESMART, INC.
8
Dated: April 18, 2023 /s/ Francisco Velasco
Name: Francisco Velasco
Title: EVP, General Counsel
9
Exhibit 31.1
Certification
I, Robert E. Price, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of PriceSmart, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | July 10, 2023 | /s/ ROBERT E. PRICE | ||||||
| Robert E. Price Interim Chief Executive Officer (Principal Executive Officer) | ||||||||
Exhibit 31.2
Certification
I, Michael L. McCleary, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of PriceSmart, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | July 10, 2023 | /s/ MICHAEL L. MCCLEARY | ||||||
| Michael L. McCleary Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||||||||
Exhibit 32.1
Certification of Chief Executive Officer
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of PriceSmart, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:
(i) the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended May 31, 2023 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: | July 10, 2023 | /s/ ROBERT E. PRICE | ||||||
| Robert E. Price Interim Chief Executive Officer (Principal Executive Officer) | ||||||||
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification of Chief Financial Officer
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of PriceSmart, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:
(i) the accompanying Quarterly Report on Form 10-Q of the Company for the quarterly period ended May 31, 2023 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: | July 10, 2023 | /s/ MICHAEL L. MCCLEARY | ||||||
| Michael L. McCleary Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||||||||
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.