PriceSmart dives on massive fourth-quarter miss
PriceSmart Inc’s (PSMT) stock price dove 13 per cent last Tuesday from US$71.67 to US$62.49 as its fourth-quarter consolidated net profit dropped 34 per cent from US$23.30 million to US$15.38 million due to US$14.9 million in impairment and tax charges.
The international membership shopping warehouse club recorded a US$5.66-million impairment related to the plans to sell its sustainable packaging plant in Trinidad & Tobago which was opened in January at a cost of US$3.7 million. The eco-friendly plant was meant to facilitate the production of OK Home Compostable products at 5 million units per month.
The facility was meant to serve the four locations in the twin-island republic and export products to its other 46 locations. However, the Nasdaq-listed company is now planning to sell the facility and redeploy assets in its club business while refocusing its efforts on its core competencies as a retailer.
“We had planned to use this plant to increase efficiencies by eliminating intermediaries and manufacturing some of our packaging materials using compostable or recyclable inputs. However, we found that achieving economic feasibility proves challenging,” said PriceSmart Chief Financial Officer Michael L McCleary at the company’s October 31 earnings call.
The company also faced a US$7.18-million AMT (alternative minimum tax) settlement in one of its operating territories as it decided to settle the dispute in order to create certainty on the impact to its business. As part of the AMT settlement, PriceSmart will pay AMT on a go-forward basis which includes US$2 million in the company’s 2023 financial year which ended on August 31.
“To address the inherent risk of operating in a country in which significant tax legislation changes can significantly impact our low-margin business model and limitations on our ability to successfully appeal these burdensome taxes, we have increased prices in this market to offset or partially offset the rise in costs to comply with the annual AMT payment,” PriceSmart said in its 10-K filing (annual report).
These one-off costs dragged PriceSmart’s earnings per share (EPS) for the fourth quarter to US$0.49, a US$0.32 miss off analyst estimates and lower than the US$0.75 recorded in Q4 2022. It was also far from the US$0.95 recorded in the third quarter.
However, PriceSmart noted that its adjusted net income for Q4 would be US$20.36 million with an EPS of US$0.65 without those costs. Its overall net income of US$109.21 million for the full year would be an adjusted amount of US$126.47 million with EPS at US$4.06 without one-off costs during 2023.
PriceSmart’s revenue for 2023 jumped nine per cent to US$4.41 billion largely due to the 12 per cent rise in revenue for its Central American segment which earned US$2.67 billion. Operating profit rose 10 per cent to US$184.52 million despite several one-off costs including the pre-opening costs of its new clubs.
The Caribbean segment experienced a 10 per cent growth in revenue to US$1.27 billion with operating profit rising by the same margin to US$87.22 million. Net profit for the segment grew nine per cent to US$68.64 million with capital expenditure of US$24.23 million during the year.
PriceSmart opened its third club in San Miguel, El Salvador in May with the company’s 52nd club opening in MedellÃn, Colombia during September, which pushed the number of clubs to 10 in the South American country. PriceSmart will be opening its sixth Guatemalan club in Escuintla at the end of this month and its 54th club in Santa Ana, El Salvador in early 2024. The company opened two new recycling centres in El Salvador which complements the three in Honduras and two in Guatemala.
The company will be opening two more pharmacies in Panama and five in Guatemala during 2024. PriceSmart will also be opening audiology centres in Colombia, Jamaica and Trinidad during 2024 and increase beyond the current 24 in operation.
Despite these strong improvements, PriceSmart has had to contend with foreign exchange movements during the year. Due to the foreign currency devaluation of the Colombian peso, it strategically decreased sale prices across imported merchandise categories. It incurred US$8.5 million of losses related to revaluation loss and transaction costs of US$7.6 million in countries with liquidity issues and converting the amounts to tradable currencies.
“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 US dollars for the conversion from Honduran lempiras to US dollars. We are actively working with our banking partners and government authorities to address this situation,” the annual report noted regarding liquidity issues in some markets.
While PriceSmart has been able to decrease its Trinidadian cash balance from a peak of US$100.5 million in November 2020, the amount increased during the fourth quarter from US$13.5 million to US$18.2 million.
PriceSmart incurred US$2.1 million in Aeropost-related write-offs during the first quarter and US$660,000 in receivable write-offs in the third quarter related to the settlement of a claim for indemnification from Click USA Inc.
Total assets are up 11 per cent to US$2.01 billion, with cash and cash equivalents of US$239.98 million. Total liabilities and shareholders’ equity stood at US$898.57 million and US$1.11 billion, respectively.
PriceSmart closed Tuesday at US$67.41 which leaves it up year-to-date with a market capitalisation of US$2.03 billion. PriceSmart repurchased 71,530 shares worth US$5.62 million during the fourth quarter and purchased 1.01 million shares in the first quarter to complete its US$75-million share repurchase programme.
“We remain committed to our people-first culture. We believe that if you take care of your employees and members, success will naturally result from that. This people-first attitude and our commitment to the six rights of merchandising provides the foundation upon which we deliver on the value proposition we promised to our members and has … set the stage for a promising fiscal year 2024,” said founder, chairman, and interim Chief Executive Officer Robert E Price.