PRICESMART, INC. The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. Forward -looking statements concerningPriceSmart, Inc.'s ("PriceSmart", the "Company" or "we") anticipated future revenues and earnings, adequacy of future cash flows, omni-channel initiatives, proposed warehouse club openings, COVID-19 related factors and challenges, and 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. Forward-looking 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 this Annual Report on Form 10-K under the heading Part I. "Item 1A. Risk Factors." 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 theU.S. , as well as other risks that are not presently known to the Company or that the Company currently considers to be immaterial. OverviewPriceSmart , headquartered inSan Diego, California , owns and operatesU.S. -style membership shopping warehouse clubs inLatin America and theCaribbean , selling high quality merchandise and services at low prices to our Members. We operate 47 warehouse clubs in 12 countries and oneU.S. territory (eight each inCosta Rica andColombia ; seven inPanama ; five in theDominican Republic , four inTrinidad andGuatemala ; three inHonduras ; two each inEl Salvador andNicaragua ; and one each inAruba ,Barbados ,Jamaica and theUnited States Virgin Islands ). The Company also plans to open new warehouse clubs inGuatemala City ,Guatemala in lateOctober 2021 , inBucaramanga, Colombia inNovember 2021 , and in Portmore,Jamaica in the spring of 2022. Once these three new clubs are open, the Company will operate 50 warehouse clubs. Our corporate headquarters,U.S. buying operations and regional distribution centers are located primarily inthe United States . Our operating segments arethe United States ,Central America , theCaribbean andColombia . All intercompany balances and transactions have been eliminated in consolidation.
Factors Affecting the Business
The COVID-19 pandemic has resulted in significant challenges across our 13 markets sinceMarch 2020 . Many markets imposed limitations, varying by market and in frequency, on access to the Company's clubs and on the Company's club operations, including in some cases frequent temporary club closures, a reduction in the number of days during the week and hours per day the Company's clubs were permitted to be open, restrictions on segments of the population permitted to shop or circulate on particular days, and significant limits on the number of people permitted to be in the club at the same time. We also experienced product mix shifts due to changing consumer habits and/or government imposed limitations on many non-food categories, decreases in purchases by many business Members, particularly restaurants and hotels, and sporadic supply chain challenges, which can impact inventory levels.
We are currently focused on these four main priorities:
?Protect the safety and well-being of our employees and our Members.
?Take proactive measures to protect, expand and create optionality for our supply chain options.
?Expand technology-related shopping and convenience for the Member.
?Apply data analytics to identify opportunities for improvement, growth and targeted marketing
We remain vigilant in adapting to the ever-evolving consumer demands emerging
from the COVID experience and the apparent desire of consumers to satisfy their
shopping and service needs in one location. The COVID-19 pandemic remains
unpredictable in duration and intensity in our markets, and we continue to see
periodic reinstatements of stay-at-home orders and other restrictions. In
addition, we expect continued uncertainty in the economies of our markets as a
result of the COVID-19 pandemic and expect volatility in employment trends,
industry and consumer confidence and demand; volatility and liquidity of foreign
currency exchange rates; volatility of commodity prices; and possible fiscal
austerity measures taken by governments in our markets, which will likely impact
our results for the foreseeable future. For additional information, refer to the
risk factors discussed in Part I. "Item 1A. Risk Factors."
23--------------------------------------------------------------------------------
Table of Contents
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. The global and local travel restrictions and general slow-down in global economic activity, as a result of COVID-19, have significantly impacted and may continue to impact the economies in our markets causing significant declines in GDP and employment and devaluations of local currencies against theU.S. dollar. In general, positive conditions in the broader economy promote Member spending in our warehouse clubs, while economic weakness, which generally results in a reduction of customer spending, may negatively impact spending at our clubs. During the last half of fiscal year 2021 and continuing into fiscal 2022, we saw several factors pressuring supply chains, including container shortages, port delays, and truck and driver shortages. These disruptions and shortages are impacting the timing of deliveries and leading to higher freight costs. Despite all these issues, we continue to work in a variety of different ways to hold down and/or mitigate the price increases passed on to the Members and maintain sufficient inventory. One key mitigating factor has been our expanded network of distribution centers, which has facilitated alternative routings of shipments, increased throughput, and provided flexibility to more effectively mitigate these challenges. In addition, we have made strategic investments in inventory and worked with our local vendors to source alternative products, in order to reduce future out-of-stocks on high demand items that have been impacted by these disruptions or that have been affected by electronic part shortages. We expect these conditions to continue throughout fiscal 2022, and we continue to employ these and various other strategies to maintain as much in-stock inventory and limit cost increases as much as possible. Delays in deliveries and increases in cost of delivered merchandise could impact supply of and demand for, the merchandise we sell, which could impact our sales. Currency fluctuation can be a significant variable 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 fiscal 2021, approximately 78% of our net merchandise sales were in currencies other than theU.S. dollar. Of those sales, 48% were comprised of sales of products we purchased inU.S. dollars. A devaluation of local currency reduces the value of sales and membership income that is generated in that country when translated toU.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. Information about the effect of local currency devaluations is discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Net Merchandise Sales and Comparable Sales." Our capture of total retail and wholesale sales can vary from market to market due to competition and the availability of other shopping options for our Members. Demographic characteristics within each of our markets can affect both the overall level of sales and future sales growth opportunities. Certain island markets, such asAruba ,Barbados and theU.S. Virgin Islands offer us limited upside for sales growth given their overall market size. Political and other factors in each of our markets may have significant effects on our business. For example, the civil unrest inColombia paralyzed significant portions of the country's infrastructure as roadblocks and riots disrupted normal economic activity during the third quarter of fiscal 2021. Austerity and tax reform measures forColombia and other Latin American countries with high national debt levels and income disparity pose a risk for political instability. Similar unrest happened inNicaragua andHonduras in 2018 and 2019, respectively;Costa Rica also had a general strike against tax reform measures that significantly impeded regular economic activity in 2018. Events of this sort have, and may continue to have, an adverse effect on our business. Our operations are subject to volatile weather conditions and natural disasters. InNovember 2020 , Hurricanes Eta and Iota brought severe rainfall, winds, and flooding to a significant portion ofCentral America , especiallyHonduras , 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, these natural disasters could adversely impact our overall sales, costs and profit performance in the future. 24
--------------------------------------------------------------------------------
Table of Contents
In the past, we have experienced a lack of availability ofU.S. dollars in certain markets (U.S. dollar illiquidity), particularly inTrinidad . This can and has impeded our ability to convert local currencies obtained through merchandise sales intoU.S. dollars to settle theU.S. dollar liabilities associated with our imported products and to otherwise redeploy these funds in our Company and increases our foreign exchange exposure to any devaluation of the local currency relative to theU.S. dollar. We continued to experience significant limitations on our ability to convertTrinidad dollars toU.S. dollars or other tradeable currencies during fiscal 2020, with a further deterioration and the problem becoming more acute inAugust 2020 . ThisU.S. dollar illiquidity situation persisted throughout fiscal 2021 and we expect the situation to continue. As liquidity conditions have tightened, we have methodically raised prices on imported goods inTrinidad due to increased costs of conversion ofTrinidad dollars toU.S. dollars and risks associated with continued illiquidity. We have also sought to shift the purchase of certain goods to local sources where appropriate, and we are actively seeking to exchangeTrinidad dollars for tradeable currencies in order to manage our exposure to any potential devaluation. Due to the illiquidity of theTrinidad dollars, in the first quarter of fiscal 2021, we began limiting shipments of goods from theU.S. toTrinidad , and subsequently, we further limited shipments late in the third quarter of fiscal 2021 and for most of the fourth quarter due to the government's general prohibition on sales on most non-food or non-essential items. However, inmid-August 2021 , this prohibition was rescinded, and we were allowed to resume sales of these items; therefore, we began increasing our merchandise shipments toTrinidad at the end of fiscal 2021. We continue to explore and execute several options to increase our ability to generate more reliable sources ofU.S. dollars inTrinidad . These options include, but are not limited to, sourcing locally produced goods inTrinidad dollars and/or producing goods locally and exporting these items to our clubs and/or third parties in other countries in exchange forU.S. dollars. While these initiatives are being developed, we are exploring ways to finance additional imports, even if a higher level of imports exceeds the amount ofU.S. dollars we are able to source inTrinidad . Alternatives we are considering include newU.S. dollar denominated loans, foreign currency exchange forwards, investing in financial instruments, and purchase and sales of commodities, which could create immediateU.S. dollar liquidity and/or fix the exchange rate ofTrinidad dollars toU.S. dollars. During fiscal year 2021, we have executed approximately$17.6 million ofU.S. dollar and other tradeable currency denominated loans. Some of these alternatives may not mitigate the resulting increase in exposure to a potential devaluation of theTrinidad dollar and could result in our being required to take a discount on the amount ofU.S. dollars we accept in exchange forTrinidad dollars relative to what we would receive upon exchange in accordance with the official exchange rate and/or incur additional financing costs. As ofAugust 31, 2021 , ourTrinidad subsidiary hadTrinidad dollar denominated cash and cash equivalents and short and long-term investments measured inU.S. dollars of approximately$52.9 million , a decrease of$26.7 million fromAugust 31, 2020 when these same balances were approximately$79.6 million . TheTrinidad central bank manages the exchange rate of theTrinidad dollar with theU.S. dollar. While theTrinidad government has publicly stated it has no intention to devalue theTrinidad dollar, it could in the future decide to devalue the currency to improve market liquidity, resulting in a devaluation in theU.S. dollar value of these cash and investments balances. If, for example, a hypothetical 20% devaluation of theTrinidad dollar were to occur, the value of ourTrinidad dollar cash and investments position, measured inU.S. dollars, would decrease by approximately$10.6 million , with a corresponding increase in Accumulated other comprehensive loss reflected on our consolidated balance sheet. Separate from theTrinidad dollar denominated cash and investments balances described above, as ofAugust 31, 2021 , we had aU.S. dollar denominated monetary asset position of approximately$26.6 million inTrinidad (net ofU.S. dollar denominated liabilities), which would produce a gain from a potential devaluation ofTrinidad dollars. If, for example, a hypothetical 20% devaluation of theTrinidad dollar occurred, the net effect on Other income (expense), net on our consolidated statement of operations of revaluing theseU.S. dollar denominated net monetary assets would be an approximate$5.3 million gain. While we may pay premiums or enter into financial transactions at a discount from the official government rate to convert ourTrinidad dollars intoU.S. dollars, we use the official exchange rate published by theCentral Bank of Trinidad and Tobago to measure theU.S. dollar equivalent ofTrinidad dollar-based revenues, expenses, assets and liabilities and theTrinidad dollar equivalent ofU.S. dollar-based monetary assets and liabilities for financial reporting purposes, as there are no other reliable references available to translate or remeasure our revenues, expenses, assets and liabilities. OurBarbados subsidiary also recently began facing aU.S. dollar illiquidity situation in fiscal year 2020. TheBarbados dollar has a conventional fixed-peg currency arrangement, in which theBarbados dollar exchange rate is fixed to theU.S. dollar. Thus, we do not expect a devaluation of this currency at this time. However, as ofAugust 31, 2021 , ourBarbados subsidiary hadBarbados dollar denominated cash and cash equivalents measured inU.S. dollars of approximately$12.4 million , which cannot be readily converted toU.S. dollars for general use within the Company. 25
--------------------------------------------------------------------------------
Table of Contents
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 safeU.S. style clubs and through PriceSmart.com. We prioritize the well-being and safety of our Members and employees. We provide good jobs, fair wages and benefits and the opportunity for growth. We strive to treat our suppliers right and empower them when we can. We conduct ourselves in a socially responsible manner as we endeavor to improve the quality of the lives of our Members and their businesses, while respecting the environment and the laws of all the countries in which we operate. The annual membership fee enables us to operate our business with lower margins than traditional retail stores. As we are increasing technological capabilities and expanding our omni-channel shopping experience, we believe we can realize greater efficiencies in the supply chain, enhance our ability to satisfy our Members' shopping expectations, and play a greater role in their lives. We believe we are well-positioned to blend the excitement and appeal of our brick and mortar business with the convenience and additional benefits of online shopping and services.
Growth
We measure our growth primarily by the amount of the period-over-period activity in our net merchandise sales, our comparable club net merchandise sales, total membership, income and total revenues. Our investments are geared toward enhancing Member experience while creating greater efficiencies, which enable us to offer lower prices, more services, and convenience. We believe these efforts will support membership renewals and sustained growth for the Company. However, these investments can impact near-term results, such as when we invest in technology and talent that are expected to yield long-term benefits or when we incur fixed costs in advance of achieving full projected sales, negatively impacting near-term operating profit and net income. When we open a new warehouse club in an existing market, which may reduce reported comparable net merchandise sales due to the transfer of sales from existing warehouse clubs, we do so to enhance the Member experience, grow membership and support long-term sales growth and profitability.
Financial highlights for the fourth quarter of fiscal year 2021 included:
?Total revenues increased 12.2% over the comparable prior year period.
?Net merchandise sales increased 12.7% over the comparable prior year period. We ended the quarter with 47 warehouse clubs compared to 46 warehouse clubs at the end of the fourth quarter of fiscal 2020. Foreign currency exchange rate fluctuations impacted net merchandise sales negatively by 1.3% versus the same three-month period.
?Comparable net merchandise sales (that is, sales in the 45 warehouse clubs that have been open for greater than 13 ½
calendar months) for the 13 weeks endedAugust 29, 2021 increased 10.3%. Foreign currency exchange rate fluctuations impacted comparable net merchandise sales negatively by 1.1%.
?Membership income for the fourth quarter of fiscal 2021 increased 11.2% to
?Total gross margins (net merchandise sales less associated cost of goods sold) increased 18.7% over the prior-year period, and merchandise gross profits as a percent of net merchandise sales were 15.9%, an increase of 80 basis points (0.8%) from the same period in the prior year. ?Operating income for the fourth quarter of fiscal 2021 was$32.5 million , an increase of 12.0%, or$3.5 million , compared to the fourth quarter of fiscal 2020. ?We recorded a$1.4 million net currency loss from currency transactions in the fourth quarter of fiscal 2021 compared to a$1.1 million net currency gain in the same period last year. ?Our effective tax rate increased in the fourth quarter of fiscal 2021 to 35.5% from 28.2% in the fourth quarter of fiscal 2020. The increase in the effective tax rate is primarily related to recognition timing for the loss of benefit of foreign tax credits, which are no longer deemed recoverable. ?Net income attributable toPriceSmart for the fourth quarter of fiscal 2021 was$19.5 million , or$0.63 per diluted share, compared to$20.1 million , or$0.65 per diluted share, in the fourth quarter of fiscal 2020. 26
--------------------------------------------------------------------------------
Table of Contents
Financial highlights for fiscal year 2021 included:
?Total revenues increased 8.7% over the prior year.
?Net merchandise sales increased 8.6% over the prior year. We ended the year with 47 warehouse clubs compared to 46 warehouse clubs at the end of the fiscal 2020. Foreign currency exchange rate fluctuations impacted net merchandise sales negatively by 2.4%.
?Comparable net merchandise sales (that is, sales in the 45 warehouse clubs that have been open for greater than 13 ½
?calendar months) for the 52 weeks endedAugust 29, 2021 increased 5.8%. Foreign currency exchange rate fluctuations impacted comparable net merchandise sales negatively by 2.3%.
?Membership income for fiscal 2021 increased 2.8% to
?Total gross margins (net merchandise sales less associated cost of goods sold) increased 18.2% over the prior year, and merchandise gross profits as a percent of net merchandise sales were 16.0%, an increase of 130 basis points (1.3%) from the prior year.
?Operating income for fiscal 2021 was
?We recorded a
?The effective tax rate for fiscal 2021 was 33.3% as compared to the effective tax rate for fiscal 2020 of 32.5%. The increase is primarily driven by the comparably less favorable impact of non-recurring changes to uncertain tax positions.
?Net income attributable to
Comparison of Fiscal Year 2021 to 2020
The following discussion and analysis compares the results of operations for each of the three fiscal years endedAugust 31, 2021 , 2020 and 2019 and should be read in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this report. For a comparison of the fiscal years endedAugust 31, 2020 and 2019, please see Part II. "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Company's Annual Report on Form 10-K for the fiscal year endedAugust 31, 2020 filed with theSEC onOctober 30, 2020 . Unless otherwise noted, all tables presentU.S. dollar amounts in thousands. Certain percentages presented are calculated using actual results prior to rounding. Our operations consist of four reportable segments:Central America , theCaribbean ,Colombia andthe United States . The Company's reportable segments are based on management's organization of these locations into operating segments by general geographic location, which are used by management and the Company's chief operating decision maker in setting up management lines of responsibility, providing support services, and making operational decisions and assessments of financial performance. Segment amounts are presented after converting toU.S. dollars and consolidating eliminations. From time to time, we revise the measurement of each segment's operating income, including certain corporate overhead allocations, and other measures as determined by the information regularly reviewed by our chief operating decision maker. When we do so, the previous period amounts and balances are reclassified to conform to the current period's presentation. Net Merchandise Sales The following tables indicate the net merchandise club sales in the reportable segments in which we operate and the percentage growth in net merchandise sales by segment during fiscal years 2021 and 2020. Years Ended August 31, 2021 August 31, 2020 Increase % of net from % of net Amount ?sales prior year Change Amount ?sales Central America$ 2,064,553 59.6 %$ 209,015 11.3 %$ 1,855,538 58.1 % Caribbean 988,468 28.5 10,447 1.1 978,021 30.7 Colombia 412,421 11.9 54,218 15.1 358,203 11.2 Net merchandise sales$ 3,465,442 100.0 %$ 273,680 8.6 %$ 3,191,762 100.0 % 27
--------------------------------------------------------------------------------
Table of Contents
Comparison of 2021 and 2020
Overall, net merchandise sales grew by 8.6% for fiscal year 2021 compared to fiscal year 2020, driven by a 4.8% increase in average ticket and a 3.6% increase in transactions. Transactions represent the total number of visits our Members make to our warehouse clubs plus the number of Click & Go™ curbside pickup and delivery service transactions. Average ticket represents the amount our Members spend on each visit or Click & Go™ order. We had 47 clubs in operation as ofAugust 31, 2021 compared to 46 clubs as ofAugust 31, 2020 . Net merchandise sales in ourCentral America segment increased 11.3% during fiscal year 2021. This increase had a 660 basis point (6.6%) positive impact on total net merchandise sales growth. All markets within this segment showed increased net merchandise sales for the twelve-month period endedAugust 31, 2021 . Our eighth club inCosta Rica , which opened inJune 2020 , had a full year of sales in fiscal 2021 compared to three-months of sales in fiscal year 2020, which contributed to the increase year-over-year in our Central American segment. Net merchandise sales in ourCaribbean segment increased 1.1% during fiscal year 2021. This increase had a 30 basis point (0.3%) positive impact on total net merchandise sales growth. OurDominican Republic market continued its strong performance this year, despite experiencing a significant foreign currency devaluation, with 15.3% growth. This strong performance was offset by ourTrinidad market which had a significant decline in net merchandise sales.Trinidad sales were adversely affected during most of fiscal year 2021 because we began limiting merchandise shipments to the market due to the ongoingU.S. dollar illiquidity situation and due to significant COVID-19 restrictions that were put in place in the later part of fiscal 2021.Trinidad saw a significant rise in COVID-19 cases during the second half of the fiscal year, and the government responded by shutting down all non-essential business and activities.PriceSmart was allowed to continue selling food and other essential goods, but the government prohibited sales of most non-foods/non-essential items byPriceSmart and other local retailers. As a result, we reduced shipments ofU.S. imports until the restrictions were eased. Partial lockdowns and other restrictions are still in place; however, sincemid-August 2021 we have been allowed to start selling the non-foods/non-essential items again. As we currently have no restrictions on the types of merchandise we can sell inTrinidad , we began increasing imports again towards the end of August. However, we generally continue to link our imports based on the amounts ofU.S. dollars we expect to source inTrinidad . Net merchandise sales forTrinidad have improved thus far during the first quarter of fiscal year 2022 compared to fourth quarter of fiscal 2021. Refer to "Management's Discussion & Analysis - Factors Affecting Our Business" for more discussion on theTrinidad liquidity situation.Aruba also had soft sales due to this market's ongoing economic slowdown caused by the COVID-19 pandemic due primarily to a reduction in tourism. Net merchandise sales in ourColombia segment increased 15.1% during fiscal year 2021. This increase had a 170 basis point (1.7%) positive impact on total net merchandise sales growth. The primary driver of the increased revenue for the year was due to the additional club added to the segment when compared to the comparable prior year period. We opened our eighth club inColombia inDecember 2020 . The following table indicates the impact that currency exchange rates had on our net merchandise sales in dollars and as a percentage of net merchandise sales for the year endedAugust 31, 2021 . Currency Exchange Rate Fluctuations for the Twelve Months Ended August 31, 2021 Amount % change Central America $ (38,477) (2.1) % Caribbean (27,069) (2.7) Colombia (10,784) (3.0) Net merchandise sales $ (76,330) (2.4) %
Overall, the effects of currency fluctuations within our markets had an
approximately
Currency fluctuations had a$38.5 million , or 210 basis point (2.1%), negative impact on net merchandise sales in ourCentral America segment for the twelve months endedAugust 31, 2021 . These currency fluctuations contributed approximately 120 basis points (1.2%) of the total negative impact on total net merchandise sales for the current fiscal year period. The Costa Rica Colón depreciated significantly against the dollar as compared to the same period a year ago, and was a significant factor in the contribution to the unfavorable currency fluctuations in this segment. 28
--------------------------------------------------------------------------------
Table of Contents
Currency fluctuations had a$27.1 million , or 270 basis point (2.7%), negative impact on net merchandise sales in ourCaribbean segment for the twelve months endedAugust 31, 2021 . These currency fluctuations contributed approximately 90 basis points (0.9%) of the total negative impact on total net merchandise sales for the current fiscal year period.Jamaica and theDominican Republic markets both experienced currency devaluation when compared to the same periods last year. Currency fluctuations had a$10.8 million , or 300 basis point (3.0%), negative impact on net merchandise sales in ourColombia segment for the twelve months endedAugust 31, 2021 . These currency fluctuations contributed approximately 30 basis points (0.3%) of the total negative impact on total net merchandise sales for the current fiscal year period.
Net Merchandise Sales by Category
The following table indicates the approximate percentage of net sales accounted
for by each major category of items sold during the fiscal years ended
Years Ended August 31,
2021 2020
Foods & Sundries 50 % 52 %
Fresh Foods 29 29
Hardlines 12 11
Softlines 5 4
Other Business 4 4
100 % 100 %
Comparison of 2021 to 2020
During fiscal year 2021, our Members have started purchasing more in our non-food categories of Hardlines and Softlines after their steep decline in the second half of 2020 due to the COVID-19 pandemic. The 200 basis points (2.0%) decline in the Foods & Sundries was distributed fairly equally with 100 basis points (1.0%) to both Hardlines and Softlines. All other categories were consistent with the prior year mix.
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 ourLiberia club inCosta Rica , which opened inJune 2020 and our Usaquen club inColombia , which opened inDecember 2020 , will not be used in the calculation of comparable sales until they have been open for at least 13 ½ months. Therefore, comparable net merchandise sales includes 45 warehouse clubs for the fifty-two week period endedAugust 29, 2021 .
The following tables indicate the comparable net merchandise sales in the
reportable segments in which we operate and the percentage changes in net
merchandise sales by segment during the fifty-two week periods ended
Fifty-Two Weeks Ended
August 29, 2021 August 30, 2020
% Increase % Increase/(decrease)
in comparable in comparable
net merchandise sales net merchandise sales
Central America 8.8 % (3.2) %
Caribbean 1.4 3.8
Colombia 2.4 (6.4)
Consolidated comparable net
merchandise sales 5.8 % (1.5) %
29
--------------------------------------------------------------------------------
Table of Contents
Comparison of Fifty-Two Week Periods Ended
Comparable net merchandise sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the fifty-two week period endedAugust 29, 2021 increased 5.8%. Comparable net merchandise sales in ourCentral America segment increased 8.8% for the fifty-two week period endedAugust 29, 2021 . This increase contributed approximately 510 basis points (5.1%) of the increase in total comparable merchandise sales. For the fifty-two weeks endedAugust 29, 2021 , strong performance in the relatively smaller markets ofGuatemala ,Nicaragua ,Honduras , andEl Salvador , along with our second largest market,Panama , contributed approximately 540 basis points (5.4%) of positive impact on the segment's comparable net merchandise sales. This increase was offset by a 30 basis point (0.3%) negative impact on the segment's comparable net merchandise sales from our largest market,Costa Rica . During the year,Costa Rica experienced foreign currency exchange headwinds, with the Costa Rica Colón devaluing versus the comparable prior year period.
Comparable net merchandise sales in our
OurDominican Republic market continued its strong performance in the fifty-two week period, despite having a foreign currency exchange devaluation with 15.5% comparable sales growth, respectively. This strong performance was offset by ourTrinidad market, which declined in comparable net merchandise sales by 10.9% for the fifty-two week period.Trinidad sales were adversely affected during most of the fiscal year because we limited merchandise shipments to the market due to the ongoingU.S. dollar illiquidity situation and the COVID-19 restrictions. Refer to "Management's Discussion & Analysis - Factors Affecting Our Business" for more discussion on theTrinidad illiquidity situation. Comparable net merchandise sales in ourColombia segment increased 2.4% for the fifty-two week period endedAugust 29, 2021 . This increase contributed approximately 30 basis points (0.3%) of the increase in total comparable merchandise sales. The year-to-date increase is primarily due to year-over-year improvements in sales growth due to the comparably improved COVID-19 situation. Comparable net merchandise sales were also negatively impacted by sales transfers from existing clubs to our recent club that opened inDecember 2020 . The following table illustrates the impact that changes in foreign currency exchange rates had on our comparable merchandise sales in dollars and as a percentage of comparable merchandise sales for the fifty-two week period endedAugust 29, 2021 . Fifty-Two Weeks Ended August 29, 2021 Amount % change Central America$ (36,463) (2.0) % Caribbean (26,834) (2.7) Colombia (10,782) (3.0)
Consolidated comparable net merchandise sales
Overall, the mix of currency fluctuations within our markets had an approximate
Currency fluctuations within ourCentral America segment accounted for approximately 110 basis points (1.1%) of the negative impact on total comparable merchandise sales for the fifty-two week period endedAugust 29, 2021 . This is primarily the result of significant devaluation in the Costa Rica Colón against theU.S. dollar during the current periods compared to the same periods a year ago. Currency fluctuations within ourCaribbean segment accounted for approximately 90 basis points (0.9%) of negative impact on total comparable merchandise for the fifty-two week period endedAugust 29, 2021 . OurDominican Republic andJamaica markets experienced currency devaluation when compared to the same period last year. Currency fluctuations within ourColombia segment accounted for approximately 30 basis points (0.3%) of negative impact on total comparable merchandise sales for the fifty-two week period endedAugust 29, 2021 . This reflects the devaluation of theColombia peso when compared to the same period a year ago. 30
--------------------------------------------------------------------------------
Table of Contents
Membership Income
Membership income is recognized ratably over the one-year life of the
membership.
Years Ended
August 31, August 31,
2021 2020
Membership
Increase ?income % to
from ?net merchandise
Amount prior year % Change ?club sales Amount
Membership income -
Central America $ 33,149 $ 324 1.0 % 1.6 % $ 32,825
Membership income -
Caribbean 15,398 584 3.9 1.6 14,814
Membership income -
Colombia 7,483 621 9.0 1.8 6,862
Membership income - Total $ 56,030 $ 1,529 2.8 % 1.6 % $ 54,501
Number of accounts -
Central America 904,577 75,619 9.1 % 828,958
Number of accounts -
Caribbean 429,749 3,366 0.8 426,383
Number of accounts -
Colombia 336,109 33,130 10.9 302,979
Number of accounts - Total 1,670,435 112,115 7.2 % 1,558,320
Comparison of 2021 to 2020
The number of Member accounts at the end of fiscal 2021 was 7.2% higher than the
prior year period, and it has surpassed our pre-COVID peak at the end of the
second quarter of fiscal 2020 of 1,655,875 accounts. Membership income increased
2.8% compared to the comparable prior-year period.
Membership income increased across all operating segments in the twelve months
ended August 31, 2021 . The consolidated increase in membership income is due to
an increasing membership base since the start of fiscal year 2021. Since August
31, 2020 , all segments have increased their membership base. Colombia had the
largest increase in membership base in fiscal year 2021 due to the opening of
its eighth club in December 2020 with 10.9% growth, followed by Central America
with a 9.1% increase and the Caribbean with a 0.8% increase.
We began offering our Platinum membership program in Nicaragua in October 2020
and in El Salvador in March 2021 . We now offer this 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.
Our trailing twelve-month renewal rate was 89.6% and 80.5% for the periods ended
August 31, 2021 and August 31, 2020 , respectively. With our twelve-month renewal
rate at 89.6%, this has increased 200 basis points (2.0%) since the end of the
third quarter and is well above our renewal rate immediately preceding the
COVID-19 pandemic, which we believe is a key indicator of membership
satisfaction and loyalty and demonstrates that our Members recognize the value
we bring. Although we continue to see reductions in in-club traffic resulting
from the COVID-19 pandemic, we have seen increased sign-ups and renewals
completed online with the launch of a new online catalog and our Click & Go™
services. Approximately 16% and 6% of our membership sign-ups were completed
using our online platform for the twelve month period ended August 31, 2021 and
August 31, 2020 , respectively. Our online platform facilitates capturing data
and provides the opportunity for automatic renewal of memberships, as well as
improving our digital connection with our Members.
31--------------------------------------------------------------------------------
Table of Contents
Other Revenue
Other revenue primarily consists of non-merchandise revenue from freight and handling fees generated from our marketplace and casillero operations, interest-generating portfolio from our co-branded credit cards, and rental income from operating leases where the Company is the lessor.
Years Ended
August 31, 2021 August 31, 2020
Increase/(Decrease) from
Amount ?prior year % Change Amount
Non-merchandise revenue $ 46,876 $ 8,605 22.5 % $ 38,271
Miscellaneous income 7,047 (499) (6.6) 7,546
Rental income 2,956 222 8.1 2,734
Other revenue $ 56,879 $ 8,328 17.2 % $ 48,551
Comparison of 2021 to 2020
The primary driver of the increase in other revenue for the period is higher
package volume in our marketplace and casillero operations, which increased due
to the COVID-19 pandemic and the resulting higher ecommerce activity. We sold
our marketplace and casillero operations in October 2021 . Refer to Part II.
"Item 1. Business - General" for further discussion regarding the sale of our
legacy casillero and marketplace operations.
Results of Operations
Results of Operations Consolidated
(Amounts in thousands, except percentages and number of warehouse clubs)
Years Ended
Results of Operations Consolidated August 31, 2021 August 31, 2020
Net merchandise sales
Net merchandise sales $ 3,465,442 $ 3,191,762
Total gross margin $ 552,953 $ 467,820
Total gross margin percentage 16.0 % 14.7 %
Revenues
Total revenues $ 3,619,871 $ 3,329,188
Percentage change from prior period 8.7 % 3.3 %
Comparable merchandise sales Total comparable merchandise sales increase (decrease) 5.8 % (1.5) % Total revenue margin Total revenue margin $ 644,533 $ 554,410 Total revenue margin percentage 17.8 %
16.7 %
Selling, general and administrative Selling, general and administrative $ 486,513 $
431,942
Selling, general and administrative
percentage of total revenues 13.4 % 13.0 %
32
--------------------------------------------------------------------------------
Table of Contents
Years Ended
Results of Operations % of Total % of Total
Consolidated August 31, 2021 ?Revenue August 31, 2020 ?Revenue
Operating income- by
segment
Central America $ 151,933 4.2 % $ 125,351 3.8 %
Caribbean 74,769 2.1 57,217 1.7
Colombia 21,932 0.6 18,071 0.5
United States 12,687 0.4 3,873 0.1
Reconciling items (1) (103,301) (2.9) (82,044) (2.5)
Operating income - Total $ 158,020 4.4 % $ 122,468 3.7 %
Warehouse clubs
Warehouse clubs at period
end 47 46
Warehouse club sales
square feet at period end 2,336 2,270
(1)The reconciling items reflect the amount eliminated on consolidation of intersegment transactions.
The following table summarizes the selling, general and administrative expense
for the periods disclosed.
Years Ended
% of Total % of Total
August 31, 2021 ?Revenue August 31, 2020 ?Revenue
Selling, general and
administrative detail:
Warehouse club and other
operations $ 359,221 9.9 % $ 323,178 9.7 %
General and administrative 125,416 3.5 106,776 3.2
Pre-opening expenses 849 0.0 1,545 0.1
Loss on disposal of assets 1,027 0.0 443 0.0
Total Selling, general and
administrative $ 486,513 13.4 % $ 431,942 13.0 %
Comparison of 2021 to 2020
Total gross margin is derived from our Revenue - Net merchandise sales less our
Cost of goods sold - Net merchandise sales and represents our sales and cost of
sales generated from the business activities of our warehouse clubs. We express
our Total gross margin percentage as a percentage of our Net merchandise sales.
On a consolidated basis, total gross margin for the twelve months ended August
31, 2021 was 16.0%, 130 basis points (1.3%) higher than the comparable prior
year period. Approximately 80 basis points (0.8%) of this increase is due to
certain pricing actions we took to offset foreign currency exchange costs and
COVID-related operating costs. In particular, we substantially increased the
liquidity premium we factor into our sales prices in Trinidad on our imported
merchandise, as we continue to experience a shortage of available U.S. dollars
for exchange in that market. Refer to "Management's Discussion & Analysis -
Factors Affecting Our Business" for additional discussion. Of the remaining
approximately 50 basis points (0.5%), 40 basis points (0.4%) of this improvement
is primarily attributable to returning margin to prior levels on our non-food
inventory and of our other business categories such as food services, tire
center, and optical, which saw decreased demand and/or sales restrictions due to
COVID-19 in the prior-year period. The remaining 10 basis points (0.1%) is the
result of more focused merchandising strategies and inventory management that
primarily resulted from fewer markdowns and spoilage.
Total revenue margin is derived from Total revenues, which includes our Net
merchandise sales, Membership income, Export sales, and Other revenue and income
less our Cost of goods sold for net merchandise sales, Export sales, and
Non-merchandise revenues. We express our Total revenue margin as percentage of
Total revenues.
Total revenue margin increased 110 basis points (1.1%) for the twelve months
ended August 31, 2021 compared to the prior-year period, which is primarily the
result of the higher total gross margins of 130 basis points (1.3%). This
increase was offset by 10 basis points (0.1%) from lower revenue margins from
our casillero and marketplace business in the current year compared to the prior
year and 10 basis points (0.1%) from lower Revenue and other income compared the
prior year.
33
--------------------------------------------------------------------------------
Table of Contents
Selling, general, and administrative expenses consist of warehouse club and other operations, general and administrative expenses, pre-opening expenses, and loss on disposal of assets. In total, selling, general and administrative expenses increased$54.6 million to 13.4% of total revenue for fiscal year 2021 compared to 13.0% of total revenues for fiscal year 2020. Warehouse club and other operations expenses increased to 9.9% of total revenues for fiscal year 2021 compared to 9.7% for fiscal year 2020, primarily due to the opening of new clubs inColombia ,Costa Rica , andGuatemala that had not reached sales maturity as ofAugust 31, 2021 .Honduras experienced currency appreciation during fiscal year 2021 which led to a slight deleveraging of expenses. General and administrative expenses increased to 3.5% of total revenues for the current year compared to 3.2% for the prior fiscal year. The 30 basis point (0.3%) increase is primarily due to our continued investments to support our technology development, talent acquisition, and employee development. Given our strategic initiatives, we anticipate that we will continue to make investments at comparable levels (as a percentage of revenue) to further our omni-channel and technology initiatives. Operating income in fiscal year 2021 increased to$158.0 million (4.4% of total revenue) compared to$122.5 million (3.7% of total revenue) for the same period last year. This reflects the increase in total revenue margin dollars primarily from net merchandise sales of 110 basis points (1.1%), partially offset by a 40 basis point (0.4%) decrease due to deleveraging of selling, general and administrative expenses over the comparable prior-year period. Interest Expense Years Ended August 31, August 31, 2021 2020 Amount Change Amount Interest expense on loans$ 5,836 $ (1,563) $ 7,399
Interest expense related to hedging activity 3,655 1,239 2,416 Less: Capitalized interest
(2,281) (91) (2,190)
Net interest expense $ 7,210 $ (415) $ 7,625
Net interest expense reflects borrowings by PriceSmart, Inc. and our wholly
owned foreign subsidiaries to finance new land acquisition and construction for
new warehouse clubs, warehouse club expansions and distribution centers, the
capital requirements of warehouse club and other operations and ongoing working
capital requirements.
Comparison of 2021 to 2020
Net interest expense decreased for the twelve-month period ended August 31,
2021 , primarily due to lower short-term borrowings compared to the comparable
prior year period. We drew down on short-term lines of credit in the third
quarter of fiscal year 2020 as a part of our efforts to secure adequate cash to
cover contingencies arising from COVID-19 related risks. We repaid all of these
borrowings by the end of the third quarter in fiscal year 2021. These savings
were offset by new loans for our capital projects in Guatemala and U.S. dollar
working capital needs in Trinidad . The increase in interest expense related to
more hedging activity is primarily the result of a full year of interest
recorded on our Colombia swaps entered into in the prior year.
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 the receipt of a one-time indemnification payment from a business combination escrow account.
Years Ended
August 31, August 31,
2021 2020
Increase
?from
Amount ?prior year Amount
Other expense, net $ (5,603) $ (4,769) $ (834)
34
--------------------------------------------------------------------------------
Table of Contents
Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarilyU.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 2021 to 2020
For the twelve-months endedAugust 31, 2021 the primary driver of Other expense, net included losses of$5.4 million associated with foreign currency transactions and the revaluation of monetary assets and liabilities in several of our markets. The foreign currency gains and losses resulted from the revaluation of netU.S. dollar assets and liabilities in markets where the local functional currency revalued or devalued against theU.S. dollar and from exchange transactions. The primary impacts during the twelve-month period were higher transaction costs associated with convertingTrinidad dollars into available tradeable currencies such as Euros or Canadian dollars, before converting them toU.S. dollars. This was partially offset by an appreciation of the Honduran Lempira, which resulted in a gain from our netU.S. dollar liability position in that market.
Provision for Income Taxes
The tables below summarize the effective tax rate for the periods reported:
Years Ended
August 31, August 31,
2021 2020
Increase
from
Amount prior year Amount
Current tax expense $ 52,822 $ 11,654 $ 41,168
Net deferred tax benefit (3,853) (449) (3,404)
Provision for income taxes
33.3 % 32.5 %
Comparison of 2021 to 2020
For fiscal 2021, the effective tax rate was 33.3% compared to 32.5% for fiscal year 2020. The increase in the effective rate versus the prior year was primarily attributable to the following factors:
1.The comparably favorable impact of 2.5% due to a greater portion of income falling into lower tax jurisdictions;
2.The comparably unfavorable impact of 1.8% resulting from the nonrecurrence of changes from prior periods in income tax liabilities from uncertain tax position for which the applicable statutes of limitations had expired;
3.The comparably unfavorable impact of 0.4% resulting from the effect of changes
in foreign currency exchange rates related to the remeasurement of our monetary
assets and liabilities; and
4.The comparably unfavorable impact of 0.4% resulting from valuation allowances
we were required to take with respect to deferred tax assets from foreign tax
credits that are no longer deemed recoverable.
35--------------------------------------------------------------------------------
Table of Contents
Other Comprehensive Loss
Other comprehensive loss for fiscal years 2021 and 2020 resulted primarily from foreign currency translation adjustments related to the assets and liabilities and the translation of the statements of income related to revenue, costs and expenses of our subsidiaries whose functional currency is not theU.S. dollar. When the functional currency in our international subsidiaries is the local currency and notU.S. dollars, the assets and liabilities of such subsidiaries are translated toU.S. dollars at the exchange rate on the balance sheet date, and revenue, costs and expenses are translated at average rates of exchange in effect during the period. The corresponding translation gains and losses are recorded as a component of accumulated other comprehensive income or loss. These adjustments will not affect net income until the sale or liquidation of the underlying investment. The reported other comprehensive income or loss reflects the unrealized increase or decrease in the value inU.S. dollars of the net assets of the subsidiaries as of the date of the balance sheet, which will vary from period to period as exchange rates fluctuate. Other Comprehensive Loss Years Ended August 31, August 31, 2021 2020 Amount Change From Prior Year % Change Amount Other comprehensive loss$ (5,688) $ 26,793 82.5 %$ (32,481) Comparison of 2021 to 2020 Our other comprehensive loss of approximately$5.7 million for fiscal 2021 resulted primarily from the comprehensive loss of approximately$7.8 million from foreign currency translation adjustments related to assets and liabilities and the translation of revenue, costs and expenses on the statements of income of our subsidiaries whose functional currency is not theU.S. dollar. During fiscal 2021, the largest translation adjustments were related to the devaluation of the local currencies against theU.S. dollar for ourColombia ,Costa Rica andJamaica subsidiaries, partially offset by the translation adjustment for the appreciation of the local currency against theU.S. dollar of ourDominican Republic subsidiary. These losses were offset by approximately$2.3 million related to unrealized gains on changes in our derivative obligations.
LIQUIDITY AND CAPITAL RESOURCES
Financial Position and Cash Flow
Our operations have historically supplied us with a significant source of
liquidity. We generate cash from operations primarily through
net merchandise sales and membership fees. Cash used in operations generally
consist of payments to our merchandise vendors, warehouse club and distribution
center operating costs (including payroll, employee benefits and utilities), as
well as payments for income taxes. Our cash flows provided by operating
activities, supplemented with our long-term debt and short-term borrowings, have
generally been sufficient to fund our operations while allowing us to invest in
activities that support the long-term growth of our operations and to pay
dividends on our common stock. We evaluate our funding requirements on a regular
basis to cover any shortfall in our ability to generate sufficient cash from
operations to meet our capital requirements. We may consider funding
alternatives to provide additional liquidity if necessary. Refer to Part II.
"Item 8. Financial Statements and Supplementary Data: Notes to Consolidated
Financial Statements, Note 11 - Debt" for additional information regarding our
drawdown on our short-term facilities and long-term borrowings.
Repatriation of cash and cash equivalents held by foreign subsidiaries may
require us to accrue and pay taxes. We have no plans at this time to repatriate
cash through the payment of cash dividends by our foreign subsidiaries to our
domestic operations and, therefore, have not accrued taxes that would be due
from repatriation.
The following table summarizes the cash and cash equivalents, including
restricted cash, held by our foreign subsidiaries and domestically (in
thousands).
August 31, August 31,
2021 2020
Amounts held by foreign subsidiaries $ 160,808 $ 203,598
Amounts held domestically 54,671
100,173
Total cash and cash equivalents, including restricted cash$ 215,479 $ 303,771 36
--------------------------------------------------------------------------------
Table of Contents
The following table summarizes the short-term investments held by our foreign subsidiaries and domestically (in thousands).
August 31 ,August 31, 2021 2020
Amounts held by foreign subsidiaries
- -
Total short-term investments
As of
From time to time, we have experienced a lack of availability ofU.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through merchandise sales intoU.S. dollars to settle theU.S. dollar liabilities associated with our imported products or otherwise fund our operations. Since fiscal 2017, we have experienced this situation inTrinidad and have been unable to source a sufficient level of tradeable currencies. We are working with our banks inTrinidad and government officials to source tradeable currencies. We expect the illiquid market conditions inTrinidad to continue and are considering various measures to address the adverse effect of this situation on the Company's liquidity. In addition, ourBarbados subsidiary recently began facing a similarU.S. dollar liquidity situation. Refer to "Management's Discussion & Analysis - Factors Affecting Our Business" for our quantitative analysis and discussion. The following table summarizes our significant sources and uses of cash and cash equivalents: Years Ended August 31, August 31, 2021 2020 Change
Net cash provided by operating activities
(116,721) (131,212) 14,491
Net cash provided by (used in) financing activities (95,137) 75,563
(170,700)
Effect of exchange rates (3,600) (6,084)
2,484
Net increase (decrease) in cash and cash equivalents$ (88,292) $ 197,535
Net cash provided by operating activities totaled$127.2 million and$259.3 million for the twelve months endedAugust 31, 2021 and 2020, respectively. The decrease in net cash provided by operating activities was primarily due to the increase in our inventory position and the higher net settlement of accounts payable versus the comparable prior year period, which was partially offset by a significant increase in net income for the year endedAugust 31, 2021 over the prior-year period. Inventory was$389.7 million as ofAugust 31, 2021 , compared with$309.5 million atAugust 31, 2020 . The increase over the balances as ofAugust 31, 2020 reflects our efforts to bring our inventory levels in-line with our sales trends. In addition, the lower balance as ofAugust 31, 2020 reflected the rapid sell-through of merchandise as Members stockpiled items in anticipation of the impacts of the COVID-19 pandemic in the third and fourth fiscal quarter of 2020 and the reduction of certain non-food categories to align with initial consumer preferences at the start of the COVID-19 pandemic. We have made strategic investments in inventory to avoid future out-of-stocks on high volume items that have been impacted from container, commodity, and electronic part shortages. Lastly, we have one additional club in the current year. Accounts payable was$388.8 million as ofAugust 31, 2021 , compared with$373.2 million atAugust 31, 2020 . The increase from the balances as ofAugust 31, 2020 is largely the result of a return to our normal inventory levels compared to the prior year, operating one additional club in the current year, and the expiration of temporary extensions of vendor terms negotiated as part of our response to the COVID-19 pandemic in fiscal 2020. However, although not quite to the same extent, we have been able to permanently extend some of our vendor payment terms. Net cash used in investing activities totaled$116.7 million and$131.2 million , respectively, for the years endedAugust 31, 2021 andAugust 31, 2020 . The decrease is primarily the result of an increase in the net proceeds of short-term and long-term certificate of deposit purchases and settlements, partially offset by an increase in construction expenditures compared to the same period a year-ago. The increase in net proceeds from certificates of deposit is primarily a result of improved sources versus uses ofU.S. dollars inTrinidad during our prior fiscal year, reducing our need to investTrinidad dollars. Refer to "Management's Discussion and Analysis - Factors Affecting Our Business" for additional discussion of the currentU.S. dollar illiquidity we are experiencing in that market. 37
--------------------------------------------------------------------------------
Table of Contents
Net cash used in financing activities totaled$95.1 million and net cash provided by financing activities was$75.6 million for the years endedAugust 31, 2021 andAugust 31, 2020 , respectively. We use cash flows provided by financing activities 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$170.7 million shift from cash provided by to cash used in financing activities is primarily the result of a net decrease of proceeds from long-term borrowings and a net decrease in short-term borrowings compared to the same twelve-month period a year-ago. In the prior year period, we executed long-term loans primarily to finance land purchases and construction of several of our warehouse clubs and increased our short-term borrowings as part of our cash management strategy in the early stages of the COVID-19 pandemic. In the current year, our long-term borrowings were made to increase our ability to borrowU.S. dollars in exchange for payments inTrinidad dollars and to provide additional sources of tradeable currencies to support our working capital needs of that subsidiary. Refer to "Management's Discussion and Analysis - Factors Affecting Our Business" for additional discussion of the currentU.S. dollar illiquidity we are experiencing in that market.
The following table summarizes the dividends declared and paid during fiscal years 2021, 2020 and 2019 (amounts are per share).
First Payment Second Payment
Record Date Record Date
Declared Amount ?Date ?Paid Amount ?Date ?Paid Amount
2/4/2021 $ 0.70 2/15/2021 2/26/2021 $ 0.35 8/15/2021 8/31/2021 $ 0.35
2/6/2020 $ 0.70 2/15/2020 2/28/2020 $ 0.35 8/15/2020 8/31/2020 $ 0.35
1/30/2019 $ 0.70 2/15/2019 2/28/2019 $ 0.35 8/15/2019 8/30/2019 $ 0.35 Short-Term Borrowings and Long-Term Debt
Our financing strategy is to ensure liquidity and access to capital markets while minimizing our borrowing costs. The proceeds of these borrowings were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, acquisitions, and repayment of existing debt. Refer to Part II. "Item 8. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements, Note 11 - Debt." 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
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, with the funds used to pay the employees' statutory tax
withholding requirements related to the vesting of restricted stock awards. We
do not have a stock repurchase program.
Shares of common stock repurchased by us are recorded at cost as treasury stock
and result in the reduction of stockholders' equity in our consolidated balance
sheets. We may reissue these treasury shares.
The following table summarizes the shares repurchased during fiscal years 2021,
2020 and 2019:
Years Ended
August 31, August 31, August 31,
2021 2020 2019
Shares repurchased 62,282 56,503 75,462
Cost of repurchase of shares (in thousands)
4,604
We reissued 96,400 treasury shares as part of our stock-based compensation programs during fiscal 2021, 234,400 treasury shares during fiscal 2020 and 63,000 treasury shares during fiscal 2019.
Dividends
Refer to Part II. "Item 8. Financial Statements and Supplementary Data: Notes to
Consolidated Financial Statements, Note 6 - Stockholders' Equity" for further
discussion.
38
--------------------------------------------------------------------------------
Table of Contents
Derivatives
Refer to Part II. "Item 8. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements, Note 13 - Derivative Instruments and Hedging Activities" for further discussion.
Critical Accounting Estimates
Our financial statements are prepared in accordance with GAAP inthe United States . The preparation of our consolidated financial statements requires that management make estimates and judgments that affect the reported amounts of assets and liabilities, 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. We evaluate our accounting policies and significant estimates on an ongoing basis, 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. We believe that the accounting policies described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. For further information, refer to Part II. "Item 8. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements, Note 2 - Summary of Significant Accounting Policies."
Income Taxes
We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized. As ofAugust 31, 2021 , we evaluated our deferred tax assets and liabilities and determined that a valuation allowance was necessary for certain deferred tax asset balances, primarily because of the existence of significant negative objective evidence, such as the fact that certain subsidiaries are in a cumulative loss position for the past three years, indicating that certain net operating loss carry-forward periods are not sufficient to realize the related deferred tax assets. We also specifically considered whether foreign tax credit balances could be utilized in the foreseeable future in light of current and futureU.S. tax liabilities. We have historically applied foreign tax credits, generated from taxes withheld on certain paymentsPriceSmart receives from our foreign subsidiaries, to reduceU.S. income tax liabilities. However, as an incidental result ofU.S. tax reform, following the reduction of theU.S. corporate income tax rate from 35% to 21%, we expect foreign tax credits generated to exceedU.S. income tax liability for the foreseeable future. Therefore, for the twelve-month period endedAugust 31, 2021 andAugust 31, 2020 , we have recorded valuation allowances of$11.4 million and$8.5 million against our foreign tax credits, respectively. We are required to file federal and state income tax returns inthe 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. 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 onAugust 31, 2021 . 39
--------------------------------------------------------------------------------
Table of Contents
Tax Receivables
We pay Value Added Tax ("VAT") or similar taxes, income taxes, and other taxes
within the normal course of our business in most of the countries in which we
operate related to the procurement of merchandise and/or services we acquire
and/or on sales and taxable income. VAT is a form of indirect tax applied to the
value added at each stage of production (primary, manufacturing, wholesale and
retail). This tax is similar to, but operates somewhat differently than, sales
tax paid in the United States . We generally collect VAT from our Members upon
sale of goods and services and pay VAT to our vendors upon purchase of goods and
services. Periodically, we submit VAT reports to governmental agencies and
reconcile the VAT paid and VAT received. The net overpaid VAT may be refunded or
applied to subsequent returns, and the net underpaid VAT must be remitted to the
government.
With respect to income taxes paid, if the estimated income taxes paid or
withheld exceed the actual income tax due this creates an income tax receivable.
In most countries where we operate, the governments have implemented additional
collection procedures, such as requiring credit card processors to remit a
portion of sales processed via credit and debit cards directly to the government
as advance payments of VAT and/or income tax. This collection mechanism
generally leaves us with net VAT and/or income tax receivables, forcing us to
process significant refund claims on a recurring basis. These refund or offset
processes can take anywhere from several months to several years to complete.
In most countries where we operate, there are defined and structured processes
to recover VAT receivables via refunds or offsets. However, in one country
without a clearly defined refund process, the Company is actively engaged with
the local government to recover VAT receivables totaling $9.7 million and $7.0
million as of August 31, 2021 and August 31, 2020 , respectively. In addition, in
two other countries where the Company operates, there have been changes in the
method of computing minimum tax payments, under which the governments have
sought to require the Company to pay taxes based on a percentage of sales rather
than taxable income. As a result, we have made and may continue to make income
tax payments substantially in excess of those we would expect to pay based on
taxable income. The Company had income tax receivables of $11.0 million and
$10.4 million and deferred tax assets of $3.3 million and $2.8 million as of
August 31, 2021 and August 31, 2020 , respectively, in these countries. While the
rules related to refunds of income tax receivables in these countries are either
unclear or complex, the Company has not placed any type of allowance on the
recoverability of these tax receivables or deferred tax assets, because the
Company believes that it is more likely than not that it will ultimately succeed
in its refund requests. Similarly, we have not placed any recoverability
allowances on tax receivables that arise from payments we are required to make
originating from tax assessments that we are appealing, as we believe it is more
likely than not that we will ultimately prevail in the related appeals.
Our policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:
?Short-term VAT and Income tax receivables, recorded as Other current assets: This classification is used for any countries where our subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. We also classify as short-term any approved refunds or credit notes to the extent that we expect to receive the refund or use the credit notes within one year. ?Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where our subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when we do not expect to eventually prevail in our recovery of such balances. We do not currently have any allowances provided against VAT and income tax receivables. Long-lived Assets
We periodically evaluate 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.
40--------------------------------------------------------------------------------
Table of Contents
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 fiscal 2021 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 is not amortized, but is evaluated for impairment annually or whenever events or changes in circumstances indicate that the value of a certain asset may be impaired. Generally, this evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is necessary. If we determine, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative impairment test would be performed. The quantitative test for impairment requires management to make judgments relating to future cash flows, growth rates and economic and market conditions. These evaluations are based on determining the fair value of a reporting unit or asset using a valuation method such as discounted cash flow or a relative, market-based approach. Historically, our reporting units have generated sufficient returns to recover the cost of our goodwill. Because of the nature of the factors used in these tests, if different conditions occur in future periods, future operating results could be materially impacted. For approximately$45.1 million of certain acquired goodwill, the fair value was greater than the carrying value; any deterioration in the fair value may result in an impairment charge.
Seasonality and Quarterly Fluctuations
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 ofU.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.
© Edgar Online, source
