PRICESMART INC - Annual Report: 2020 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended August 31, 2020

OR

For the transition period from ______ to 

COMMISSION FILE NUMBER 000-22793

PriceSmart, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (858) 404-8800

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes     No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.             Yes     No 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes     No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         Yes     No 

The aggregate market value of the Registrant’s voting and non-voting common equity held by non-affiliates of the Registrant as of the last day of the Registrant's most recently completed second fiscal quarter was $1,308,770,913 based on the last reported sale price of $55.69 per share on the NASDAQ Global Select Market on February 29, 2020.

As of October 19, 2020, 30,670,643 shares of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on February 4, 2021 are incorporated by reference into Part III of this Form 10-K. 

PRICESMART, INC.

ANNUAL REPORT ON FORM 10-K FOR

THE FISCAL YEAR ENDED August 31, 2020

TABLE OF CONTENTS

Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements concerning PriceSmart, Inc.'s ("PriceSmart", the "Company" or "we") anticipated future revenues and earnings, adequacy of future cash flows, omni-channel initiatives, proposed warehouse club openings, the Company's performance relative to competitors and related matters. These forward-looking statements include, but are not limited to, statements containing the words “expect,” “believe,” “will,” “may,” “should,” “project,” “estimate,” “anticipated,” “scheduled,” and like expressions, and the negative thereof. These statements are subject to risks and uncertainties that could cause actual results to differ materially including, but not limited to: adverse changes in economic conditions in the Company’s markets, natural disasters, compliance risks, volatility in currency exchange rates, competition, consumer and small business spending patterns, political instability, increased costs associated with the integration of online commerce with our traditional business, whether the Company can successfully execute strategic initiatives, breaches of security or privacy of member or business information, cost increases from product and service providers, interruption of supply chains, COVID-19 related factors and challenges, including among others, the duration of the pandemic, the unknown long-term economic impact, the impact of government policies and restrictions that have limited access for our members, and shifts in demand away from discretionary or higher priced products to lower priced products, exposure to product liability claims and product recalls, recoverability of moneys owed to PriceSmart from governments, and other important factors detailed in this Annual Report on Form 10-K under the heading Part I. “Item 1A. Risk Factors.” 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. 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.

PART I

Item 1. Business

General

PriceSmart began operations in 1996 in San Diego, California. We own and operate U.S. style membership shopping warehouse clubs in Central America, the Caribbean and Colombia. We also function as a wholesale supplier to a retailer in the Philippines. We sell high quality brand name and private label consumer products and provide services such as optical and tires at low prices to individuals and businesses. Historically, our typical warehouse buildings have ranged in sales floor size from approximately 40,000 to 60,000 square feet and are located primarily in and around the major cities in our markets to take advantage of dense populations and relatively higher levels of disposable income. Additionally, starting in fiscal year 2019, we also began opening smaller format clubs, with sales floors ranging from approximately 30,000 to 40,000 square feet. These smaller format clubs are intended to serve markets where the population is likely to support a smaller club or densely populated urban areas where it is challenging to secure sufficient real estate at a reasonable cost for a larger club. We believe this smaller format has the potential to expand our geographic reach in existing markets and provide more convenience for our members. We continue to invest in improving the in-club experience for our members, as well as in technology to increase efficiencies and to enhance the member shopping experience with omni-channel capabilities, including e-commerce online shopping. During the third quarter of fiscal 2020, the Company launched its Click & Go™ online order and curbside pickup service that provides contactless shopping in all 13 of our markets. We began adding delivery options to this service in the fourth quarter of fiscal 2020 that were available in six of our 13 markets as of August 31, 2020 and expanded into further markets in early fiscal 2021.

As warehouse club operators, we believe that our business success depends on our ability to be the low-cost, high-quality operators in our markets and, in turn, to offer the best value on attractive products and services in our markets.  We believe that lower prices on products and services drive sales volume, which increases the Company’s buying leverage, which in turn leads to better pricing that we can then offer to our members, validating the annual membership investment that our customers make.  In fiscal year 2020, our average net merchandise sales were approximately $1,400 per square foot of sales floor space.

Logistics and distribution efficiencies are fundamental to delivering high quality merchandise at low prices to our members. We continue to explore ways to deliver value, improve efficiency, reduce costs and ensure a flow of high quality, curated merchandise to our warehouse clubs.

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 real estate ownership provides a number of advantages as compared to leasing, including lower operating expenses, flexibility to expand or otherwise enhance our buildings, long-term control over the use of the property and the residual value that the real estate may have in future years. While our preference is to own rather than lease real estate, we have entered into real estate leases in certain cases and will likely continue to do so in the future.

Our warehouse clubs currently operate in emerging markets that historically have had higher growth rates and lower warehouse club market penetration than the U.S. market. In the countries in which we operate, we do not currently face direct competition from U.S. membership warehouse club operators. However, we do face competition from various retail formats such as hypermarkets, supermarkets, cash and carry, home improvement centers, electronic retailers, specialty stores, convenience stores, traditional wholesale distribution and growing online sales.

The number of warehouse clubs in operation for each country or territory were as follows:

Our warehouse clubs and local distribution centers are located in Latin America and the Caribbean, and our corporate headquarters, U.S. buying operations and regional distribution centers are located primarily in the United States. Our operating segments are the United States, Central America, the Caribbean and Colombia. We opened our 46th warehouse club in Liberia, Costa Rica in June 2020. The new Liberia club is a smaller warehouse club located approximately 130 miles from the nearest PriceSmart club and three hours from the capital city of San José. We are also currently constructing and expect to open our third warehouse club in Bogota, Colombia in December 2020.

We launched our Click & Go™ service in the latter half of fiscal 2020, which including curbside pickup and delivery, providing a safe minimal contact service during the pandemic and beyond. Our e-commerce sales contributed approximately 3.6% of total net merchandise sales for the fiscal fourth quarter ended August 31, 2020. We continue to invest in technology to increase efficiencies, enhance our member experience by enabling omni-channel capabilities, and find new ways to generate value and benefits for our members and the Company. We have also identified opportunities to increase sales and enhance member value because of the interplay between our brick and mortar and online capabilities.

We also operate a legacy business (casillero and marketplace) under the “Aeropost” banner in 38 countries in Latin America and the Caribbean, many of which overlap with markets where we operate warehouse clubs.

Due to the uncertainty created from the outbreak of COVID-19 and the unknown potential social and economic impacts in the markets where we operate, we closely monitor operating results and cash flows in an effort to ensure optimal timing of future investments and warehouse club openings. For information regarding actions we have taken in response to the COVID-19 pandemic, please see Part II. “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition - Factors Affecting the Business - COVID-19 Updates.”

Developments Regarding, and Actions Taken in Response to, COVID-19

The COVID-19 pandemic resulted in significant challenges across our 13 markets in the third and fourth quarters of fiscal 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 are permitted to be open, restrictions on segments of the population permitted to shop or circulate on particular days, and limits on the number of people permitted to be in the club at the same time. We have also experienced product mix shifts due to changing consumer habits, decreases in purchases by many business

members, particularly restaurants and hotels, as well as sporadic supply chain challenges, which can impact inventory levels. In response, early in calendar year 2020 we identified four main priorities:

Protect the safety and well-being of our employees and our members. We remain vigilant and continue to take proactive measures to provide a safe environment for our employees and our members. We are closely tracking numerous decrees and government mandates and are following all local guidelines. We have taken preventative measures that include frequent and enhanced cleaning and sanitizing protocols, providing personal protective equipment, installing protective barriers for the cashiers and in other member-facing areas, implementing social distancing measures, metering the number of customers in a club at any one time, requiring masks to be worn by members in the club (where legally permitted), taking temperatures of employees at the beginning of shifts, quickly identifying and cooperating with local health officials about confirmed cases, promptly implementing contact tracing protocols and mapping of potentially exposed employees who are then immediately quarantined while continuing to be paid, directing employees whose functions could be performed remotely to work off site, offering vulnerable employees with underlying health conditions, employees over 60 and pregnant employees paid leave and vigilantly educating our employees about safe practices and enforcing best practices of good hygiene. We have also expanded our efforts to educate family members of employees about safe practices and to provide them with masks and sanitizing materials. We have modified our sick leave policy to make sure that sick people can take paid time off. We have built reserve teams of employees who do not overlap with each other so that they can step in as needed. In the initial months of the pandemic, we reduced or eliminated in-club food service and food sampling; however, later in the fiscal year as infection rates decreased and restrictions eased, we resumed some limited seating and capacity in-club food service in some of our markets and we have begun to reintroduce sampling incrementally using hygienic methods.

Take proactive measures to protect our supply chain. We are working closely with our suppliers to make sure that we have essential items available for our members. This includes increasing the use of our regional and local distribution centers and merchandise vendors to provide additional flexibility and reduce the risk of interruption of the flow of merchandise to our markets. We have also placed limits on the quantity of certain key items that members can purchase, such as cleaning supplies, paper products and core shelf-stable groceries. We have also activated alternative distribution systems and routing to ensure optionality in the event of outbreak or restrictions on mobility in certain geographic areas.

Expand technology-enabled shopping. During the third fiscal quarter of 2020, we launched our Click & Go™ curbside pickup service to allow for a contactless way for our members to shop. As of August 31, 2020, we offered the Click & Go™ curbside pickup service in all 13 of our markets. Early in our fourth fiscal quarter, we also added delivery to our Click & Go™ service, which was available in six of our 13 markets as of August 31, 2020 and expanded into further markets in early fiscal 2021. These services provide an alternative and convenient way for our members to shop, while reducing physical contact. Our Click & Go™ service enables members to use our e-commerce platform to identify and select merchandise, order and pay online, and then have their orders placed in their cars at their chosen clubs or delivered to their homes or place of business. We continue to work on improving and expanding our online initiatives, including order fulfillment, in conjunction with optimizing our club operations to allow members to shop safely, quickly and efficiently.

Manage cash and capital resources. Given the uncertainty surrounding the potential impact of the outbreak on our results of operations and cash flows, we are taking steps to secure and preserve available cash. Initially, we suspended most of our capital projects and discretionary spending. As we closely monitored and better understood the risks and opportunities of operating in this climate, we restarted several of our previously postponed investments. We opened our smaller format warehouse club in Liberia, Costa Rica in June 2020, and we have resumed construction on our third club in the greater metropolitan area of Bogota, the eighth in Colombia, which is expected to open in December 2020. We continue to evaluate whether and when to restart previously announced construction of future warehouse clubs on land that we acquired in Bucaramanga, Colombia and in Jamaica, as well as other capital projects. In the third quarter of fiscal 2020, we initially furloughed approximately 80 employees in the United States and implemented temporary salary reductions for employees and executives above a certain income level on a tiered basis increasing from 10% to 30% based on compensation level. Additionally, the Board of Directors waived their cash compensation for the calendar quarter ended June 30, 2020. In late fourth quarter of fiscal 2020, we ended the furloughs and discontinued the temporary salary reductions. Based on Company performance, at the end of the fourth quarter we paid a special bonus for all employees up to and including Senior Vice Presidents who had their salaries reduced. In addition, in the first quarter of fiscal year 2021, the Board approved the restoration of their compensation for the quarter for which they had previously waived it. Furthermore, we initially negotiated extended payments with our vendors, but since then we have begun to return to more normal payment term arrangements. Lastly, we have taken advantage of tax deferral arrangements where available. In the current environment, we believe cash flows from operations, our current cash position and access to capital markets will continue to be sufficient to meet our anticipated operating cash needs, which include any deferred liabilities, funding seasonal buildups in merchandise inventories and funding our capital expenditures, dividend payments and other financing requirements. Refer to Part II. “Item 7. Management’s Discussion and Analysis - Liquidity and Capital Resources” for additional information.

We expect continued uncertainty and opportunities in the economies of our markets because of the unpredictability of the duration and intensity of the COVID–19 pandemic and the length and impact of stay-at-home orders and other restrictions;

volatility in employment trends and consumer confidence; volatility in foreign currency exchange rates and commodity prices; and possible fiscal austerity measures taken by governments in our markets, which will likely impact our results in the near future.

Merchandising

Our strategy is to make available to our members high quality merchandise sourced from around the world at exceptional values, by providing a curated selection of products and services, with lower margins than traditional retail stores.

We offer merchandise in the following categories:

Foods & Sundries consists primarily of our grocery, cleaning supplies, health & beauty, and canned foods products and constituted approximately 52% of net merchandise sales for fiscal 2020.

Fresh Foods consists primarily of our meat, produce, deli, seafood, and poultry products and constituted approximately 29% of net merchandise sales for fiscal 2020.

Hardlines consists primarily of our electronics, appliances, hardware, sporting goods, and toy products and constituted approximately 11% of net merchandise sales for fiscal 2020.

Softlines consists primarily of apparel, domestics, and furniture products and constituted approximately 4% of our net merchandise sales for fiscal 2020.

Other Business consists primarily of our food service, optical, tire center and other ancillary services and constituted approximately 4% of net merchandise sales for fiscal 2020.

Across various categories, we offer exciting and unique seasonal merchandise and rotational programs that offer unique value throughout the year.

Competitive Strengths

Low Operating Costs. Our format is designed to move merchandise from our suppliers to our members at a lower expense ratio than our competitors. We strive to achieve efficiencies in product distribution, minimizing the labor required to stock and display merchandise, limiting non-payroll operating expenses and maintaining low occupancy costs. For example, we offer a limited number of stock keeping units (SKUs) with large pack sizes, which allows us to keep shelves stocked with less labor cost than competitors that offer a greater number of SKUs. More recently, we also have opened distribution centers in certain of our high volume markets to improve efficiency and in-stock rate, reduce lead times on high volume products, and mitigate risks of supply chain disruption. Our focus on driving down operating costs allows us to offer better value and lower prices to our members, which we believe helps generate member loyalty and renewals, which in turn leads to increased sales.

Worldwide Sourcing.  Approximately 48.2% of our sales come from merchandise sourced in the U.S., Asia and Europe.  One of the primary advantages we have compared to most of our competitors is our United States-based buying team that sources merchandise from suppliers in the U.S. and around the world.  Our U.S.-based buyers identify and purchase new and exciting items, including our own Member’s Selection private label products.  Many of these branded products are available only at PriceSmart in the markets in which we operate.

Membership. Membership has been a basic operating characteristic in the warehouse club industry beginning over 44 years ago at Price Club, the first warehouse club. Membership fees contribute to our ability to operate our business on lower margins than conventional retailers and wholesalers and represented approximately 1.7% of net merchandise sales in fiscal 2020. In addition, membership allows us to connect more closely with our members and to promote customer loyalty. Since 2019, we have offered members the ability to sign up for and renew their memberships online.

Our membership represents a desirable demographic concentration with strong purchasing power in our markets. During fiscal 2020, we continued our expansion of our Platinum Membership rewards program into additional countries in our Central America, Colombia and Caribbean segments. Similarly, we continue to expand our product and services offerings to members, including co-branded credit card benefits, optical departments and Click & Go™ shopping and other services. We believe that untapped opportunities exist to further enhance the value of our membership in various areas. We continue to explore opportunities to provide our members with products and services that are particularly attractive to our unique membership base.

Business Members. Our product selection, marketing and general business focus are directed to both business and retail consumers. Our business members include a broad cross section of businesses such as restaurants, institutions including schools, and other businesses that purchase products for resale or use in their operations. These business members represent a significant source of sales and profit and provide purchasing volume that gives us better prices from our suppliers.

Innovation. The warehouse club industry has been operating for over forty years, following the founding of Price Club in 1976. The world of merchandising has evolved during this period, particularly with respect to how technology impacts

operational efficiencies and how consumers shop. We have developed expertise and are gaining more knowledge on how to use technology to enhance our worldwide sourcing of products and make them available in our developing and emerging countries in a manner that meets current consumer preferences. We operate effectively in multiple markets, many of which are relatively small, with different legal requirements, local buying opportunities, cultural norms, unique distribution and logistical challenges and member preferences that require our unique ability to source the correct mix of local versus imported merchandise. We believe that our future success is highly dependent on our capacity to continue to adapt and innovate to meet the needs of our current and future members. While not yet as prevalent as in the U.S., online sales penetration is increasing in the markets where we operate, especially as a result of the mobility restrictions imposed as a result of the COVID-19 pandemic. We successfully launched our Click & Go™ service in the third quarter of fiscal 2020, which allows our members to order online and pickup their orders curbside at our warehouse club locations or, in six of 13 markets, have it delivered to their home or place of business. We have also developed better in-bound and outbound online communication channels, so that we can develop a better understanding of our members’ preferences.

Experienced Management Team. We are making investments in talent to support our technology development and other administrative functions. In January 2019, Sherry S. Bahrambeygui was named PriceSmart’s Chief Executive Officer after having been instrumental to the evolution of the Company’s governance and other strategic initiatives for over 17 years, including as a member of the Board of Directors for the past eight years. In April 2020, Michael L. McCleary was promoted to Executive Vice President and Chief Financial Officer. Mr. McCleary joined the Company in 2003 and has over 30 years of international finance, tax and accounting experience. In addition to Ms. Bahrambeygui and Mr. McCleary, the other members of our management team have extensive career experience in the warehouse club business.  Many of our executives learned the warehouse club business from their time at Price Club. The executive team that joined us when we acquired Aeropost in March 2018 is experienced in developing online technology and marketing for e-commerce and logistics in the Latin America marketplace. Effective September 1, 2020, Juan I. Biehl was promoted to a newly created position for the Company, Executive Vice President, Digital Experience and Chief Technology Officer. Prior to this promotion Mr. Biehl served as the Chief Technology Officer of Aeropost, Inc. and was previously Senior Vice President of Digital Experience at PriceSmart. Since joining PriceSmart, Mr. Biehl has overseen the creation of key technology capabilities that lead to the launch of our Click & Go™ service and accelerated the continued development of pricesmart.com.

Growth Strategy

Our Board of Directors has approved a growth strategy that includes the following elements:

Increasing same “store” sales.  We believe that there is a number of ways to increase same store sales. We are committed to increasing same store sales by increasing the number of member transactions and by increasing the average ticket. We also plan to expand sales floor space and increase parking space in some of our high traffic clubs in fiscal 2021 to improve the shopping experience for our members. Additionally, we plan to continue our development and expansion of our omni-channel member experience by continuing to scale our Click & Go™ curbside and delivery service and use enhanced analytics to help us better understand our members and improve the PriceSmart experience. We believe that the use of technologies to identify member shopping patterns will help us to design targeted marketing campaigns, which will further drive sales. Additionally, we believe that continuing to enhance the member value proposition by expanding our portfolio of products and services to include more fresh foods, offering new services, such as optical and affinity programs for external services like travel and insurance, will help to drive member loyalty and overall sales. Lastly, we believe our private label has strong brand recognition in our markets and we believe that significant opportunity exists for us to grow our private label by extending into additional merchandise categories and enhance the “Treasure Hunt” experience, helping to differentiate us from our competitors.

Adding New Warehouse Clubs in Existing Markets. We currently operate in 13 countries/territories, with the largest in terms of population and gross domestic product being Colombia. There is uncertainty surrounding the continuing potential impact of the novel coronavirus outbreak (COVID-19) on our results of operations and cash flows. Thus, we currently have announced one additional club to open in Colombia in December 2020. We will continue to monitor the impact of COVID-19 on our results of operation and cash flows throughout fiscal 2021 as we make decisions about where and when to add new warehouse clubs, as well as the appropriate formats and facilities for these new clubs.

New Markets. While we continue to focus on opportunities to expand in Colombia, a market where our membership concept has proven to be well-received and holds significant potential to grow our business, we continue to evaluate potential opportunities for future expansion into new markets in South America.

Omni-channel Shopping and Other Services. We are currently focusing our investment in digital transformation and omni-channel capabilities on the following strategic opportunities:

1. Convenience: Consumers increasingly are requesting home delivery or store pick up for larger items, as well as for their everyday basic shopping needs, such as consumable merchandise. We intend to continue scaling and enhancing the efficiency of our Click & Go™ curbside pickup and delivery service in most of our markets in fiscal 2021, which includes products ranging from fresh groceries to large appliances.

2. Smaller Club Format:  Supplementing warehouse club sales with online shopping opportunities is essential to the success of our urban and secondary city club formats. These smaller clubs may have a reduced selection of non-food products, but we plan to enable members to order online any products typically available at our larger format clubs. We continue to look for locations for smaller format clubs where we believe a new club will expand our geographic reach in an existing market and/or provide more convenience for our members.

3. Direct to Consumer: In fiscal 2020, we added the capability for our members to have certain large ticket products delivered directly from one of our distribution centers, warehouse clubs, or direct from our vendors. Thus, our members can order these products online and have them shipped directly to their home or business or in most cases they can also pick up their order at one of our clubs. In fiscal 2021, we will continue to increase the offerings of products that can be purchased through this channel and invest in automation and process improvements to reduce fulfillment costs.

4. Cross-border shopping: Using the sourcing expertise and buying power of PriceSmart, we intend to extend the range of products that our members can purchase online. For now, these new products are being sourced in the U.S., fulfilled through our Aeropost distribution center in Miami or forward deployed to regional or domestic distribution centers and shipped to our members. Members are able to receive orders at their homes or businesses and at Aeropost locations in countries where we operate clubs.

5. Additional expansion opportunities: We have begun to combine PriceSmart’s purchasing power with Aeropost’s wider geographic presence and online capabilities to sell merchandise in markets where PriceSmart does not currently have a presence. We also benefit from Aeropost’s international logistics capabilities as an alternative to deliver products to our markets, as appropriate.

Distribution Efficiency.  Since our inception, we have consistently believed that distribution efficiency is fundamental for success in selling merchandise in our traditional clubs, and in today’s world, this principle holds true for purchases made online.  Because PriceSmart sources merchandise from all over the world and especially in the United States, and because we are doing business in countries where infrastructure—roads and ports—is not as developed as in the United States, distribution efficiency is even more significant for us.  Our ability to move products efficiently and in a timely manner from the suppliers to our members is key to the cost structure of our business and, consequentially, to how low we can price our products for our members.

Historically, our international suppliers and especially our U.S. suppliers have generally shipped their products to our Miami distribution facility where they are received and assigned to various containers for direct shipment to our locations.  Regional and in-country suppliers have shipped directly to our locations.  As our location sales volumes have grown, we have begun to route more of our products from both international, regional and local suppliers to major regional distribution centers in order to improve in-stocks, reduce inventory weeks of supply and reduce expense inefficiencies and improve working capital, all with the goal of giving better prices to our members.

In 2018, we opened our first regional distribution center, which is located in Costa Rica within the metropolitan area of San Jose. This 165,000 square foot building is designed to receive, store and ship dry, refrigerated and frozen products to clubs in Central America. This regional distribution center has the capacity to ship products such as major appliances and online products directly to our members or to convenient pick-up locations, including our clubs.  We are considering other strategic locations for distribution centers to drive efficiencies and expand omni-channel offerings.

As part of our efforts to source additional high quality and healthy fresh products, and expand on our Direct Farm Program, we opened two produce distribution centers in fiscal 2020. We believe that our Direct Farm Program reduces expenses, waste and prices on items of higher quality, while simultaneously supporting local farmers and industry. Our produce distribution centers allow us to get high-quality produce from farm-to-table quicker and more efficiency. We expect to continue to expand this program and build additional distribution centers as we expand into more of our markets.

Operating Efficiency. As with distribution efficiency, operating efficiently is a key tenet of our business model. We are constantly seeking to improve operating efficiencies, including investments in technology, centralizing back-office capabilities and facilities for processing and producing products, such as meat and bakery.

Our Membership Policy

We offer three types of memberships: Diamond, Business and Platinum.

The Diamond membership is targeted at individuals and families. The annual fee for a Diamond membership in most markets is approximately $35 (entitling members to two cards). In Colombia, the Diamond membership fee has been 90,000 (COP) (including VAT) since April 2019, providing a converted membership price of approximately $24.

Only businesses can qualify for a Business membership. We promote Business membership through our marketing programs by offering certain merchandise targeted primarily to businesses such as restaurants, hotels, convenience stores, offices and institutions. Business members pay an annual membership fee of approximately $35 for a primary and secondary membership card and approximately $10 for additional add-on membership cards.

The Company currently offers the Platinum membership program in eleven of its thirteen markets. The annual fee for a Platinum membership in most markets is approximately $75. The Platinum membership provides members with a 2% rebate on most items, up to an annual maximum of $500.  Platinum members can apply this rebate to future purchases at the warehouse club at the end of the annual membership period.  The rebate is issued annually to Platinum members on March 1 and expires August 31.  Any rebate amount not redeemed by August 31 is recognized as breakage revenue. We launched our Platinum membership in Nicaragua in October 2020, and we expect to expand Platinum membership to our one remaining market in fiscal 2021.

We recognize membership income over the 12-month term of the membership.  Deferred membership income was $23.1 million and $24.9 million as of August 31, 2020 and August 31, 2019, respectively.  Our membership agreements provide that if our members cancel their membership in the first 60 days, they will receive a full refund. After the initial 60 day period, members may receive a refund for the prorated share of their remaining membership fee if they so request.  

Our Intellectual Property Rights

It is our policy to obtain appropriate proprietary rights protection for trademarks by filing applications for registration of eligible trademarks with the U.S. Patent and Trademark Office and in certain foreign countries. We rely on copyright and trade secret laws to protect our proprietary rights. We attempt to protect our trade secrets and other proprietary information through agreements with our employees, consultants and suppliers and other similar measures. There can be no assurance, however, that we will be successful in protecting our proprietary rights. While management believes that our trademarks, copyrights and other proprietary know how have significant value, changing technology and the competitive marketplace make our future success dependent principally upon our employees’ technical competence and creative skills for continuing innovation.

Our Competition

Our international merchandising business competes with a wide range of international, regional, national and local retailers, and traditional wholesale distributors.  We compete in a variety of ways, including the prices at which we sell our merchandise, merchandise selection and availability, services offered to customers, location, store hours and the shopping convenience and overall shopping experience we offer.  Some of our competitors may have greater resources, buying power and name recognition.  In the countries in which we operate, we do not currently face direct competition from U.S. membership warehouse club operators.  However, we do face competition from various retail formats such as hypermarkets, supermarkets, convenience stores, cash and carry, home improvement centers, electronic retailers and specialty stores, including those within Latin America that are owned and operated by large U.S. and international retailers, including Walmart, Inc. in Central America and Grupo Éxito and Cencosud in Colombia.  We have competed effectively in our markets in the past and expect to continue to do so in the future due to the unique nature of the membership warehouse club format.  We have noted that certain retailers within our markets are making investments in upgrading their locations and/or experimenting with different formats.  These actions may result in increased competition within our markets.  Further, it is possible that additional U.S. warehouse club operators may decide to enter our markets and compete more directly with us in a similar warehouse club format. We also face competition from online retailers, such as Amazon.com, Inc. in Colombia, and last-mile delivery services that serve our markets, and we expect that this type of competition will grow and intensify in the future.

Our Employees

As of August 31, 2020, we had approximately 9,500 employees. Approximately 93% of our employees were employed outside of the United States, and unions represent approximately 1,500 employees. Our policy is to provide employees with good wages relative to the competition in the markets in which they work and to provide a safe working environment and good benefits which often exceed the legal requirements for countries in which we do business.  We believe that investing in the education,

growth and well-being of our employees, treating them as partners in our business and providing opportunities for career advancement lead to long-serving, loyal employees, which in turn creates efficiencies in operations and results in better service to our members. We consider our employee relations to be very good.

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 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.

Other Information

PriceSmart, Inc. was incorporated in the State of Delaware in 1994.  Our principal executive offices are located at 9740 Scranton Road, San Diego, California 92121.  Our telephone number is (858) 404-8800.  Our website home page on the Internet is www.pricesmart.com.  We make our website content available for information purposes only.  It should not be relied upon for investment purposes, nor is it incorporated by reference into this Form 10-K.

Available Information

The PriceSmart, Inc. investor relations website or internet address is https://investors.pricesmart.com. On this website we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, and the annual report to the stockholders as soon as reasonably practicable after electronically filing such material with or furnishing it to the U.S. Securities and Exchange Commission (SEC). Our SEC reports can be accessed through the investor relations section of our website under “SEC Filings.” Additionally, the SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.  We will make available our annual report on Form 10-K and our annual Proxy Statement for the fiscal year 2020 at the internet address http://materials.proxyvote.com/741511 as soon as reasonably practicable after electronically filing such material with or furnishing it to the SEC.

Item 1A. Risk Factors

In evaluating the Company’s business, you should consider the following discussion of risk factors, in addition to other information contained in this report and in the Company’s other public filings with the U.S. Securities and Exchange Commission. Any such risks could materially and adversely affect our business, financial condition, results of operations, cash flow and prospects. However, the risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition, results of operations, cash flow and prospects.

External Factors that Could Adversely Affect Us

The ongoing global COVID-19 pandemic had and may continue to have an adverse effect our business, results of operations, financial condition, and liquidity.

The ongoing COVID-19 pandemic has negatively impacted the world economy, caused widespread unemployment, significantly impacted global supply chains, and disrupted financial markets, all of which have negatively affected, and continue to create challenges in our markets. In addition to measures we have taken voluntarily, the government authorities in our markets have taken actions to mitigate the spread of COVID-19, including travel restrictions, border closings, restrictions on public gatherings, stay-at-home orders and other quarantine and isolation measures. They also have imposed business limitations such as mandatory temporary closures, required reduced operating hours, restrictions on segments of the population permitted to shop on particular days, customer occupancy limits and restrictions on sales of “non-essential” merchandise. Many of these policies and restrictions have resulted in limiting access for our members and have adversely impacted our club operations.

Our business depends heavily on the uninterrupted operation of our distribution facilities located in Miami, Florida and San Jose, Costa Rica, our warehouse clubs located in Colombia, Central America and the Caribbean, and our headquarters and buying operations in San Diego, California. The operation of all of our facilities is highly dependent on our employees who staff these locations, and the coronavirus could directly threaten the health of our employees. Additionally, in an effort to protect our employees, we have trained our in-club and distribution center employees about and enforced social distancing, and we have

during this time shifted substantially all of our work force at our San Diego headquarters, our management and administrative personnel in Miami, and office support personnel in the countries where we operate to remote work. Finally, we continue to identify alternative distribution channels in the case of closure of one or more of our distribution facilities or upstream and downstream disruption to our supply chain. Events such as these complicate and/or threaten the way we execute and the performance of our business and could have a material adverse effect or our business and operating results.

Operating during the pandemic has increased our costs of operations. Among other things, we provide personal protective equipment to our employees, have employed additional cleaning and sanitizing procedures at our warehouse clubs and distribution facilities and provide transportation to employees in areas where public transportation is not currently available or is considered unsafe. We also have implemented robust protocols for screening, contact tracing, mapping and quarantining as preventative and mitigating measures. We also have additional payroll expenses associated with maintaining reserve teams of employees who remain ready if necessary to replace employees who become sick or who are required to quarantine and for employees who are in high risk groups or who are subject to quarantine. We believe these costs will continue as long as the pandemic is ongoing.

In addition, as a result of COVID-19 and the measures designed to contain the spread of the virus, we have faced and may continue to face delays or difficulty sourcing products, which could negatively affect our business and financial results. Certain of our suppliers have had their manufacturing operations disrupted by the coronavirus outbreak, and even where goods have been completed, they have been subject to weeks-long shipping delays. If our third-party suppliers’ operations continue to be curtailed, or transportation systems continue to be disrupted, we may need to seek alternate sources of supply, which may be more expensive. The duration and degree of production and supply chain disruption, and related financial impact, cannot be estimated at this time. Should the production and distribution closures continue or increase for an extended period of time, the impact on our supply chain could have a material adverse effect on our results of operations and cash flows.

Negative economic conditions created or exacerbated by the recent outbreak of the novel coronavirus (COVID-19) could adversely impact our business in various respects.

A slowdown in the economies of one or more of the countries in which we operate or adverse changes in economic conditions affecting discretionary consumer spending could adversely affect consumer demand for the products we sell, change the mix of products we sell to a mix with a lower average gross margin, cause a slowdown in discretionary purchases of goods, adversely affect our net sales and result in slower inventory turnover and greater markdowns of inventory, or otherwise materially adversely affect our operating results. Any prolonged outbreak of the coronavirus could result in the imposition of quarantines or closures of retailer locations, office spaces, manufacturing facilities, travel and transportation restrictions and/or import and export restrictions, any of which could contribute to a general slowdown in the global economy and the economies of the markets in which we operate. A significant decline in the economies of the countries in which our warehouse clubs are located may lead to decreased sales and profitability, increased governmental ownership or regulation of the economy, higher interest rates and increased barriers to entry such as higher tariffs and taxes. The economic factors that affect our operations also may adversely affect the operations of our suppliers, which can result in an increase in the cost to us of the goods we sell to our customers or, in more extreme cases, in certain suppliers not producing goods in the volume typically available for sale to us.

Employment laws and regulations in the countries in which we operate may limit our ability to effect a reduction in force to reduce our labor expenses in line with declining revenues. In some of the countries in which we operate, before we could effect a reduction in force, we would need to negotiate with labor unions, demonstrate evidence of hardship or force majeure or obtain prior government approval, which may not be given in a timely manner or at all.

Our financial performance is dependent on international operations, which exposes us to various risks.

Our international operations account for nearly all of our total revenues. Our financial performance is subject to risks inherent in operating and expanding our international membership warehouse club business, which include:

changes in, and inconsistent enforcement of, laws and regulations, including those related to tariffs and taxes;

the imposition of foreign and domestic governmental controls, including expropriation risks;

natural disasters;

trade restrictions, including import-export quotas and general restrictions on importation;

difficulty and costs associated with international sales and the administration of an international merchandising business;

crime and security concerns, which can adversely affect the economies of the countries in which we operate and which require us to incur additional costs to provide additional security at our warehouse clubs;

political instability, such as the protests and civil unrest in Honduras, and Nicaragua in 2019 and a general strike in Costa Rica led by public-sector unions that disrupted normal commerce in September 2018;

product registration, permitting and regulatory compliance;

volatility in foreign currency exchange rates;

general economic and business conditions; and

interruption of our supply chain.

These risks may result in disruption to our sales, banking transactions, operations and merchandise shipments, any of which could have a material adverse effect on our business and results of operations.

In 2018, U.S. legislation was approved to restrict U.S. aid to Nicaragua. In 2019, the U.S. State Department has announced varying strategies regarding if, when and how it would authorize disbursement of foreign aid, that had been previously approved by the U.S. Congress, to Guatemala, Honduras and El Salvador. In 2020, the U.S. State Department informed the U.S. Congress of the Administration’s intent to continue additional targeted U.S. foreign assistance for Guatemala, Honduras, and El Salvador. Changes in U.S. policies regarding financial assistance could cause political or financial instability in the countries we serve.

We face significant competition.

Our international warehouse club business competes with exporters, importers, wholesalers, local retailers and trading companies in various international markets. Some of our competitors have greater resources, buying power and name recognition than we have.  We also face competition from online retailers who serve our markets, and we expect that this type of competition will grow and intensify in the future.

In the countries in which we operate, we do not currently face direct competition from U.S. membership warehouse club operators. However, we do face competition from various retail formats such as hypermarkets, supermarkets, cash and carry, home improvement centers, electronic retailers and specialty stores, including those within Latin America that are owned and operated by large U.S. and international retailers, including Walmart Inc. in Central America and Grupo Éxito and Cencosud in Colombia. We have noted that certain retailers are making investments in upgrading their locations which may result in increased competition. Further, it is possible that current U.S. warehouse club operators may decide to enter our markets and compete more directly with us in a similar warehouse club format.  Our ability to operate profitably in our markets, particularly small markets, may be adversely affected by the existence or entry of competing warehouse clubs or discount retailers.

We compete in a variety of ways, including the value and prices at which we sell our merchandise, merchandise selection and availability, services offered to members, location, store hours, safety protocols and the shopping convenience and overall shopping experience we offer. We may be required to implement price reductions to remain competitive if any of our competitors reduce prices in any of our markets. In response to the increasing threat associated with online retailers, we are making technology investments, which may result in increases in the use of cash and reduced profitability in the near term.

Our sales could be adversely affected if one or more major international online retailers were to enter our markets or if other competitors were to offer a superior online experience. 

Although online sales are currently a smaller proportion of total sales in our markets for the types of merchandise we offer than in the U.S., online shopping is becoming more prevalent in our markets as we and our competitors begin to offer more opportunities for online shopping and as delivery systems in our markets improve. COVID-19 has accelerated the growth of online sales in our markets due to government-imposed restrictions on shopping and changes in consumer preferences. While major international online retailers have not established a significant penetration in any of our markets yet, Amazon.com, Inc. continues to expand its online marketplace and make additional investments to bolster its presence in the countries where we

operate. Also, it is possible that Amazon.com, Inc. or smaller regional companies will increase the penetration of online shopping in our markets, especially given the importance of e-commerce during the COVID-19 pandemic.

We continue to invest in our websites and systems with the long-term objective of offering our members a seamless omnichannel experience. We currently offer our Click & Go™ online shopping, which includes both curbside pickup and delivery. Curbside pickup is available in all markets and delivery was available in six markets as of end of fiscal year 2020 and we have expanded into further markets in early fiscal 2021. Operating an e-commerce platform and fulfilment of online orders, is a complex undertaking, and there is no guarantee that the resources we have applied to this effort will result in increased revenues or improved operating performance. If we do not maintain a successful and relevant omnichannel experience for our members, our ability to compete and our results of operations could be adversely affected.

We are exposed to significant weather events and other natural disaster risks that might not be adequately compensated by insurance.

Our operations are subject to volatile weather conditions and natural disasters, such as earthquakes, hurricanes and volcanic activity, which are encountered periodically in the regions in which our warehouse clubs are located. Natural disasters could result in many days of lost sales at our warehouse clubs or adversely affect our distribution chain. For example, in early fiscal year 2018, operations at our USVI warehouse club were adversely affected by Hurricanes Irma and Maria. The warehouse club was closed for nine days, and after re-opening, the warehouse club operated with limited hours for 16 days due to a government-imposed curfew. Damaged and destroyed roads restricted traffic flow, adversely affecting customer access for some time after the hurricane. Future losses from business interruption may not be adequately compensated by insurance and could have a material adverse effect on our business, financial condition and results of operations.

We face difficulties in the shipment of, and risks inherent in the importation of, merchandise to our warehouse clubs.

Our warehouse clubs typically import nearly half or more of the merchandise that they sell. This merchandise originates from various countries and is transported over long distances, over water and land, which results in:

substantial lead times needed between the procurement and delivery of product, thus complicating merchandising and inventory controls;

the possible loss of product due to theft or potential damage to, or destruction of, ships or containers delivering goods;

product markdowns due to the prohibitive cost of returning merchandise upon importation;

product registration, tariffs, customs and shipping regulation issues in the locations we ship to and from;

ocean freight and duty costs; and

possible governmental restrictions on the importation of merchandise.

Civil unrest in certain countries in which we operate may adversely affect the flow of goods through those countries. For example, in September 2018, protestors in Costa Rica blocked major highways around the country and impeded access to Costa Rica’s main commerce ports and fuel distribution sites. In 2019, political and civil unrest in Honduras and Nicaragua resulted in roadblocks in many portions of these countries. Any restriction in the movement of goods through Costa Rica’s ports or over Honduras and Nicaragua’s highways could impair our ability to supply warehouse clubs not just in those countries, but in countries throughout the region as well.

Moreover, each country in which we operate has different governmental rules and regulations regarding the importation of foreign products. Changes to the rules and regulations governing the importation of merchandise may result in additional delays, costs or barriers in our deliveries of products to our warehouse clubs or may affect the type of products we select to import. In addition, only a limited number of transportation companies service our regions. The inability or failure of one or more key transportation companies to provide transportation services to us, any collusion among the transportation companies regarding shipping prices or terms, changes in the regulations that govern shipping tariffs or the importation of products, or any other disruption to our ability to import our merchandise could have a material adverse effect on our business and results of operations.

We are subject to payment related risks, including risks to the security of payment card information.

We accept payments using an increasing variety of methods, including cash, checks, wire transfers, our co-branded credit cards and a variety of other credit and debit cards. Our operations, like those of most retailers, requires the transmission of information permitting cashless payments. As we offer new payment options to our members, we may be subject to additional rules, regulations and compliance requirements, along with the risk of higher fraud losses. For certain payment methods, we pay interchange and other related card acceptance fees, along with additional transaction processing fees. We rely on third parties to provide secure and reliable payment transaction processing services, including the processing of credit and debit cards, and our

co-branded credit cards, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association and network operating rules, including data security rules, certification requirements and rules governing electronic funds transfers, which could change over time. If we fail to comply with these rules or transaction processing requirements, we may not be able to accept certain payment methods. In addition, if our internal systems are breached or compromised, we may be liable for banks’ compromised card re-issuance costs, we may be subject to fines and higher transaction fees and lose our ability to accept credit and/or debit card payments from our members, and our business and operating results could be adversely affected. Failures or disruptions in data communication and transfer services also could significantly impact our ability to transact payments to vendors and process credit and debit card transactions. Lastly, we or our customers may experience “spoofing” transactions, particularly with respect to wire transfers, which could cause us to make payments to impostor vendors or result in our not receiving timely payment from customers for merchandise we have sold.

We face the possibility of operational interruptions related to union work stoppages.

We currently have labor unions in three of our subsidiaries (Trinidad, Barbados and Panama). A work stoppage or other limitation on operations from union or other labor-related matters could occur for any number of reasons, including as a result of disputes under existing collective bargaining agreements with labor unions or in connection with negotiation of new collective bargaining agreements. A lengthy work stoppage or significant limitation on operations could have a substantial adverse effect on our financial condition and results of operations.

Risks Associated with Our Business Strategy and Operations

Any failure by us to manage our widely dispersed operations could adversely affect our business.

As of August 31, 2020, we had 46 warehouse clubs in operation, located in 12 countries and one U.S. territory (eight in Costa Rica; seven each in Colombia and Panama; five in the Dominican Republic, four in Trinidad and Guatemala; three in Honduras; two each in El Salvador and Nicaragua; and one each in Aruba, Barbados, Jamaica and the United States Virgin Islands), and we expect to open one new club in Colombia in December 2020. We will need to continually evaluate the adequacy of our existing infrastructure, systems and procedures, financial controls, inventory and safety controls and make upgrades from time to time. Moreover, we will be required to continually analyze the sufficiency of our inventory distribution channels and systems and may require additional or expanded facilities in order to support our operations. We may not adequately anticipate all the changing demands that will be imposed on these systems. Any inability to effectively update our internal systems or procedures as required could have a material adverse effect on our business, financial condition and results of operations.

We might not identify in a timely manner or effectively respond to changes in consumer preferences for merchandise, which could adversely affect our relationship with members, demand for our products and market share.  

Our success depends, in part, on our ability to identify and respond to trends in demographics and changes in consumer preferences for merchandise. It is difficult to consistently and successfully predict the products and services our members will demand. Failure to timely identify or respond effectively to changing consumer tastes, preferences or spending patterns could adversely affect our relationship with our members, the demand for our products and our market share. If we are not successful at predicting sales trends and adjusting purchases accordingly, we might have too much or too little inventory of certain products. If we buy too much of a product, we might be required to reduce prices or otherwise liquidate the excess inventory, which could have an adverse effect on margins (net sales less merchandise costs) and operating income. If we do not have sufficient quantities of a popular product, we might lose sales and profits we otherwise could have made.

Future sales growth depends, in part, on our ability to successfully open new warehouse clubs in our existing and new markets.

Sales growth at the existing warehouse clubs can be impacted by, among other things, the physical limitations of the warehouse clubs, which restrict the amount of merchandise that can be safely stored and displayed in the warehouse clubs and the number of members that can be accommodated during business hours. As a result, sales growth will depend, in part, upon our acquiring suitable sites for additional warehouse clubs. Land for purchase or lease, or buildings to be leased, in the size and locations in those markets that would be suitable for new PriceSmart warehouse clubs may be limited in number or not be available or financially feasible. In this regard, we compete with other retailers and businesses for suitable locations. Additionally, local land use, environmental and other regulations restricting the construction and operation of our warehouse clubs may impact our ability to find suitable locations, and increase the cost of constructing, leasing and operating our warehouse clubs. We have experienced these limitations in Colombia and in some of our other existing markets, which has negatively affected our growth rates in those markets. Limitations on the availability of appropriate sites for new warehouse clubs in the areas targeted by us could have a material adverse effect on the future growth of PriceSmart.

In some cases, we have more than one warehouse club in a single metropolitan area, and we may open new warehouse clubs in certain areas where we already have warehouse clubs. A new warehouse club in an area already served by existing warehouse clubs may draw members away from existing warehouse clubs and adversely affect comparable store sales performance. We experienced this adverse effect on comparable sales for existing warehouse clubs recently within our Panamanian and Guatemalan markets when we opened new warehouse clubs in each of these markets in areas that already had an existing warehouse club.

We operate in relatively small markets. Given the growth of our sales over the past few years, market saturation could impact the rate of future sales growth.

We might open warehouse clubs in new markets in the future. The risks associated with entering a new market include potential difficulties in attracting members due to a lack of familiarity with us and our lack of familiarity with local member preferences. In addition, entry into new markets may bring us into competition with new competitors or with existing competitors with a large, established market presence. As a result, our new warehouse clubs might not be successful in new markets.

Failure to grow our e-commerce business through the efficient integration of physical and digital retail channels and the investments we are making to develop a robust e-commerce platform that also supports and enhances brick and mortar sales and services could materially adversely affect our market position, net sales and/or financial performance.

The retail business is quickly evolving and consumers are increasingly embracing shopping online and through mobile commerce applications. As a result, the portion of total consumer expenditures with all retailers and wholesale clubs occurring online and through mobile commerce applications is increasing and the pace of this increase could accelerate. As demonstrated by our recent acquisition of Aeropost, launch of our Click & Go™ curbside pickup and delivery service, and other ongoing investments, we are increasing our investments in e-commerce, technology and other customer initiatives. The success of our e-commerce initiative continues to depend in large measure on our ability to build and deliver a seamless shopping experience across the physical and digital retail channels. If we fail to successfully implement our e-commerce initiative, our market position, net sales and financial performance could be adversely affected. In addition, a greater concentration of e-commerce sales could result in a reduction in the amount of traffic in our warehouse clubs, which would, in turn, reduce the opportunities for cross-club sales of merchandise that such traffic creates and could reduce our sales within our clubs and materially adversely affect the financial performance of the physical retail side of our operations. In addition, our investment in e-commerce and technology initiatives will adversely impact our short-term financial performance and could adversely impact our financial performance over the longer term.

Our profitability is vulnerable to cost increases.

Future increases in costs, such as the cost of merchandise, wage and benefits costs, shipping rates, freight costs, fuel costs, utilities and other store occupancy costs, may reduce our profitability. We seek to adjust our product sales pricing, operate more efficiently, and increase our comparable store net sales to offset currency rate changes, changes in tax rates or in the methods used to calculate or collect taxes on our sales or income, inflation and other factors that can increase costs. We might not be able to adjust prices, operate more efficiently or increase our comparable store net sales in the future to a great enough extent to offset increased costs. In fiscal 2020, we launched our Click & Go™ service, including curbside pickup and delivery. This service, together with our planned omnichannel services, introduces additional fulfillment and technology costs. Any failure by us to achieve the appropriate scale or realize cost efficiencies or price increases to offset these costs may reduce future profitability. Please see Part II. “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-K for further discussion of the effect of currency rate changes, inflation and other economic factors on our operations.

We are subject to risks associated with our dependence on third-party suppliers and service providers, and we have no assurances of continued supply, pricing or access to new merchandise.

We have important ongoing relationships with various third-party suppliers of services and merchandise. These include, but are not limited to, local, regional, and international merchandise suppliers, information technology suppliers, equipment suppliers, financial institutions, credit card issuers and processors, and lessors. Significant changes in the relationships or the agreements that govern the terms through which business is conducted could have a material adverse effect on our business, financial condition and results of operations. We have no assurances of continued supply, pricing or access to new merchandise, and any supplier could at any time change the terms upon which it sells to us or discontinue selling to us. One of our significant suppliers operates a warehouse club business and may in the future seek to compete with us in some of our markets. In addition, the manner in which we acquire merchandise, either directly from the supplier’s parent company or through a local subsidiary or distributor, is subject to change from time to time based on changes initiated by the supplier and for reasons beyond our control. Significant changes or disruptions in how we acquire merchandise from these suppliers could negatively affect our access to such

merchandise, as well as the cost of merchandise to us and hence our members, which could have a material adverse effect on our business and results of operations.

Our failure to maintain our brand and reputation could adversely affect our results of operations.

Our success depends on our ability to continue to preserve and enhance our brand and reputation. Damage to the PriceSmart brand could adversely impact merchandise club sales, diminish member trust, reduce member renewal rates and impair our ability to add new members. A failure to maintain and enhance our reputation also could lead to loss of new opportunities or employee retention and recruiting difficulties. Negative incidents, such as a data breach or product recall, can quickly erode trust and confidence, particularly if they result in adverse mainstream publicity, governmental investigations or litigation. In particular, the propagation of negative publicity on social media, whether merited or not, can have a damaging effect on our business in one or more markets. In addition, we sell many products under our private label Member’s Selection brand. If we do not maintain consistent product quality of our Member’s Selection products, which generally carry higher margins than national brand products carried in our warehouse clubs, our net warehouse sales and gross margin results could be adversely affected and member loyalty could be harmed.

We face the risk of exposure to product liability claims, a product recall and adverse publicity.

If our merchandise, such as food and prepared food products for human consumption, drugs, children's products, pet products and durable goods, do not meet or are perceived not to meet applicable safety standards or our members’ expectations regarding safety, we could experience lost sales, increased costs, litigation or reputational harm. The sale of these items exposes us to the risk of product liability claims, a product recall and adverse publicity. We may inadvertently redistribute food products or prepare food products that are contaminated, which may result in illness, injury or death if the contaminants are not eliminated by processing at the food service or consumer level. As we begin to package and market fresh produce products within our markets, we may be exposed to additional risk of product liability and adverse publicity if those fresh food products are contaminated, which may result in illness, injury or death if the contaminants are not eliminated by processing at our packaging service centers.

We generally seek contractual indemnification and proof of insurance from our major suppliers and carry product liability insurance for all products we sell to or package for our members. However, if we do not have adequate insurance or contractual indemnification available, product liability claims relating to products that are contaminated or otherwise harmful could have a material adverse effect on our ability to successfully market our products and on our financial condition and results of operations. In addition, even if a product liability claim is not successful or is not fully pursued, the negative publicity surrounding a product recall or any assertion that our products caused illness or injury could have a material adverse effect on our reputation with existing and potential members and on our business, financial condition and results of operations.

We rely extensively on computer systems to process transactions, summarize results and manage our business. Failure to adequately maintain our systems and disruptions in our systems could harm our business and adversely affect our results of operations.

Given the high number of individual transactions we have each year, we seek to maintain uninterrupted operation of our business-critical computer systems. Our computer systems, including back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes and hurricanes, and errors by our employees. If our computer systems and back-up systems are damaged or cease to function properly, we may have to make significant investments to fix or replace them, and we may suffer interruptions in our operations in the interim. Any material interruption in our computer systems could have a material adverse effect on our business or results of operations.

From time to time, we make technology investments to improve or replace our information processes and systems that are key to managing our business. The risk of system disruption is increased when system changes are undertaken. Targeting the wrong opportunities, failing to make the right investments or making an investment commitment significantly above or below our needs could result in the loss of our competitive position and adversely impact our financial condition and results of operations. Additionally, the potential problems and interruptions associated with implementing technology initiatives could disrupt or reduce the efficiency of our operations in the short term. These initiatives might not provide the anticipated benefits or may provide them on a delayed schedule or at a higher cost.

In 2017, we began evaluating options to replace our existing Enterprise Resource Planning (ERP) system. However, due to the rapidly evolving retail landscape and technological resources, as well as our acquisition of Aeropost and the expertise that came with it, we have delayed this project as originally contemplated in order to more holistically assess our overall IT landscape and strategy. Subsequent to that assessment, we will reconsider the need, timing, scope and approach to our ERP replacement project. Not updating our systems on a timely basis could leave us at a disadvantage with respect to operational capabilities of

our competitors. Our current ERP system is not supported by the developer of the software, which could increase the risk of a system disruption. In addition, there are newer versions available from the vendors of some of our other internal systems offering greater functionality and reliability, which we have not yet implemented. We also continue to rely on other systems we developed internally a number of years ago, which will require us to migrate to more industry-standard technologies. We are in the process of evaluating the state of all such systems and establishing a transition plan to newer technologies. Any failure by us to seamlessly transition these systems may adversely affect operations, member satisfaction or sales.

Any failure by us to maintain the security of the information that we hold relating to our company, members, employees and vendors, could damage our reputation with members, employees, vendors and others, could disrupt our operations, could cause us to incur substantial additional costs and to become subject to litigation and could materially adversely affect our operating results.

We receive, retain, and transmit personal information about our members and employees and entrust that information to third-party business associates, including cloud service-providers that perform activities for us. We also utilize third-party service providers for a variety of reasons, including, without limitation, cloud services, back-office support, and other functions. In addition, our online operations and our websites in our Aeropost operations and in certain of our warehouse club foreign markets depend upon the secure transmission of confidential information over public networks, including information permitting cashless payments. Each year, computer hackers, cyber terrorists, and others make numerous attempts to access the information stored in companies’ information systems.

The use of data by our business and our business associates is regulated in all of our operating countries. Privacy and information-security laws and regulations change, and compliance with them may result in cost increases due to, among other things, systems changes and the development of new processes. If we or those with whom we share information fail to comply with these laws and regulations, we could be subjected to legal risk as a result of non-compliance.

We or our third-party service providers may be unable to anticipate one or more of the rapidly evolving and increasingly sophisticated means by which computer hackers, cyber terrorists and others may attempt to defeat our security measures or those of our third-party service providers and breach our or our third party service providers' information systems. Cyber threats are rapidly evolving and are becoming increasingly sophisticated. As cyber threats evolve and become more difficult to detect and successfully defend against, one or more hackers, cyber terrorists or others might defeat our security measures or those of our third-party service providers in the future and obtain the personal information of members, employees and vendors that we hold or to which our third-party service providers have access, and we or our third-party service providers may not discover any security breach and loss of information for a significant period of time after the security breach occurs. We or one of our third-party service providers also may be subject to a ransomware or cyber-extortion attack, which could significantly disrupt our operations. In the enterprise context, ransomware attacks involve restricting access to computer systems or vital data until a ransom is paid. Associate error or malfeasance, faulty password management or other irregularities may result in a defeat of our or our third-party service providers’ security measures and breach our or our third-party service providers’ information systems (whether digital or otherwise).

Any breach of our security measures or those of our third-party service providers and loss of our confidential information, which could be undetected for a period of time, or any failure by us to comply with applicable privacy and information security laws and regulations, could cause us to incur significant costs to protect any members and/or employees whose personal data was compromised and to restore member and employee confidence in us and to make changes to our information systems and administrative processes to address security issues and compliance with applicable laws and regulations.

In addition, such events could have a material adverse effect on our reputation with our members, employees, vendors and stockholders, as well as our operations, results of operations, financial condition and liquidity, could result in the release to the public of confidential information about our operations and financial condition and performance and could result in litigation against us or the imposition of penalties or liabilities. Moreover, a security breach could require us to devote significant management resources to address the problems created by the security breach and to expend significant additional resources to upgrade further the security measures that we employ to guard such important personal information against cyberattacks and other attempts to access such information, resulting in a disruption of our operations.

Business acquisitions and new business initiatives could adversely impact the Company’s performance.

From time to time we may consider acquisition opportunities and new business initiatives. During fiscal year 2018, we acquired Aeropost, Inc. (“Aeropost”).  Located in Miami, Aeropost is a cross border casillero (package forwarding) business that also operates an online marketplace. Aeropost provides logistics, payment, and e-commerce services in Latin America and the Caribbean and currently serves customers in 38 countries with Costa Rica, Trinidad and Jamaica as its largest markets. We are leveraging Aeropost’s technology, its management’s experience in developing software and systems for e-commerce and logistics, and its distribution and logistics systems to advance PriceSmart’s development of an omni-channel shopping experience

for our members. Acquisitions and new business initiatives involve certain inherent risks, including the failure to retain key personnel from an acquired business; undisclosed or subsequently arising liabilities or accounting, internal control, regulatory or compliance issues associated with an acquired business; challenges in the successful integration of operations, and alignment of standards, policies and systems; future developments that may impair the value of our purchased goodwill or intangible assets; and the potential diversion of management resources from existing operations to respond to unforeseen issues arising in the context of the integration of a new business or initiative.

Failure to attract and retain qualified employees could materially adversely affect our financial performance.

Our success depends to a significant degree on the continued contributions of members of our senior management and other key operations, merchandising and administrative personnel, and the loss of any such persons could have a material adverse effect on our business. We must attract, develop and retain a growing number of qualified employees, while controlling related labor costs and maintaining our core values. We compete with other retail and non-retail businesses for these employees and invest significant resources in training and motivating them. There is no assurance that we will be able to adequately attract, develop and retain highly qualified employees in the future, or to replace retiring key executives which could have a material adverse effect on our business, financial condition and results of operations. We do not maintain life or disability insurance for our key executives.

Legal and Compliance Risks

We face compliance risks related to our international operations.

In the United States and within the international markets where we operate, there are multiple laws and regulations that relate to our business and operations. These laws and regulations are subject to change, and any failure by us to effectively manage our operations and reporting obligations as required by the various laws and regulations can result in our incurring significant legal costs and fines as well as disruptions to our business and operations. Such failure could also result in investors’ loss of confidence in us, which could have a material adverse effect on our stock price.

In foreign countries in which we have operations, a risk exists that our employees, contractors or agents could, in contravention of our policies, engage in business practices prohibited by U.S. laws and regulations applicable to us, such as the Foreign Corrupt Practices Act and the laws and regulations of other countries. We maintain policies prohibiting such business practices and have in place global anti-corruption compliance programs designed to ensure compliance with these laws and regulations. Nevertheless, we remain subject to the risk that one or more of our employees, contractors or agents, including those based in or from countries where practices that violate such U.S. laws and regulations or the laws and regulations of other countries may be customary, will engage in business practices that are prohibited by our policies or circumvent our compliance programs and, by doing so, violate such laws and regulations. Our Aeropost subsidiary operates as a package forwarder, dealing with local customs officials in many jurisdictions in which we have not previously operated. In some countries, Aeropost operates through agents. Aeropost has been integrated into our compliance program; however, we have limited control over actions by Aeropost’s agents. Any violations of anti-corruption laws, even if prohibited by our internal policies, could adversely affect our reputation, business or financial performance.

We could be subject to additional tax liabilities or subject to reserves on the recoverability of tax receivables.

We compute our income tax based on enacted tax rates in the countries in which we operate. As the tax rates vary among countries, a change in earnings attributable to the various jurisdictions in which we operate could result in an unfavorable change in our overall taxes. Changes in tax laws, increases in the enacted tax rates, adverse outcomes in connection with tax audits in any jurisdiction, or any change in the pronouncements relating to accounting for income taxes could have a material adverse effect on our financial condition and results of operations. In two countries, there have been changes in the method of computing minimum tax payments, under which the governments have sought to require the Company to pay taxes based on a percentage of sales rather than income. As a result, the Company has made and may continue to make income tax payments substantially in excess of those it would expect to pay based on taxable income, and there are no clear rules that allow the Company to obtain refunds or to offset payments that are substantially in excess of taxes payable based on taxable income. Additionally, in one country the government has alleged in the past that there is not a clearly defined process in the laws and regulations to allow the tax authorities to refund Value Added Tax (“VAT”) receivables. We, together with our tax and legal advisers, are currently appealing these interpretations. However, if we do not prevail in these efforts, we may be required to establish a valuation reserve against these tax receivables and take an accompanying charge, which would adversely affect our financial condition and results of operations. In the meantime, we are taking other actions to recover excess taxes paid or withheld and to limit further increases in these receivables, including the possibility that we might choose in one of the jurisdictions to make income tax payments using the original computation based on a percentage of taxable income in advance of a favorable court ruling.

We 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 us to interpret the applicable tax laws and regulations in effect in such jurisdictions, which affects the amount of tax we pay. We, in consultation with our tax advisors, base our tax returns on interpretations that we believe to be reasonable under the prevailing circumstances. However, our tax returns are subject to routine reviews by the various taxing authorities in the jurisdictions in which we file our 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.

A few of our stockholders own approximately 22.9% of our voting stock as of August 31, 2020, which may make it difficult to complete some corporate transactions without their support and may impede a change in control.

Robert E. Price, the Company’s Chairman of the Board, and affiliates of Mr. Price, including Price Philanthropies, The Price Group, LLC, The Robert & Allison Price Charitable Remainder Trust and various other trusts, collectively beneficially own approximately 22.9% of our outstanding shares of common stock. Of this amount, approximately 76.5% (i.e., 17.5% of our total outstanding shares) is held by charitable entities. As a result of their beneficial ownership, these stockholders have the ability to significantly affect the outcome of all matters submitted to our stockholders for approval, including the election of directors. In addition, this ownership could discourage the acquisition of our common stock by potential investors and could have an anti-takeover effect, possibly depressing the trading price of our common stock. 

Financial and Accounting Risks

We are subject to volatility in foreign currency exchange rates and limits on our ability to convert foreign currencies into U.S. dollars.

As of August 31, 2020, we had a total of 46 warehouse clubs operating in 12 foreign countries and one U.S. territory, 36 of which operate under currencies other than the U.S. dollar. For fiscal year 2020, approximately 77.5% of our net merchandise sales were in foreign currencies. We may enter into additional foreign countries in the future or open additional locations in existing countries, which may increase the percentage of net merchandise sales denominated in foreign currencies.

Our consolidated financial statements are denominated in U.S. dollars, and to prepare those financial statements we must translate the amounts of the assets, liabilities, net sales, other revenues and expenses of our operations outside of the U.S. from foreign currencies into U.S. dollars using exchange rates for the current period. As a result of such translations, fluctuations in currency exchange rates from period-to-period may result in our consolidated financial statements reflecting significant adverse period-over-period changes in our financial performance or reflecting a period-over-period improvement in our financial performance that is not as robust as it would be without such fluctuations in the currency exchange rates.

In addition, devaluing foreign local currencies compared to the U.S. dollar could negatively impact the purchasing power of our members for imported merchandise in those countries. Merchandise imported into our markets is generally purchased by the Company in U.S. dollars and priced and sold in the local currency of that country. If the local currency devalues against the U.S. dollar, we may elect to increase prices in the local currency to maintain our target margins, making the products more expensive for our members. We may also decide to reduce or modify the flow of merchandise into those markets. Depending on the severity of the devaluation and corresponding price increase (as experienced in Colombia in 2015 and 2020), the demand for, and sales of, those products could be negatively impacted.

Finally, the ability of the Company to convert local currency into U.S. dollars to settle U.S. dollar invoices can be impacted in certain markets due to economic factors or government policies creating illiquidity of the local currency. This was the case in Trinidad at the end of 2016, which led us to reduce shipments from the U.S. to Trinidad to amounts that our Trinidad subsidiary could pay for using the amount of tradeable currency that could be sourced in that market, resulting in lost sales. This illiquidity has continued, with periods of greater or lesser availability of U.S. dollars and other currencies. Toward the end of fiscal 2020 and continuing into early fiscal 2021, the Company’s ability to convert Trinidad dollars for U.S. dollars has deteriorated. As of August 31, 2020, our Trinidad subsidiary had Trinidad dollar denominated cash and cash equivalents and short and long-term investments measured in U.S. dollars of approximately $79.6 million, an increase of $54.7 million from August 31, 2019 when these same balances were approximately $24.9 million. The Trinidad central bank manages the exchange rate of the Trinidad dollar with the U.S. dollar. While the recently elected government has publicly stated it has no intention to devalue the Trinidad dollar, the Trinidad government could in the future decide to devalue the currency to improve market liquidity, resulting in a devaluation in the U.S. dollar value of these cash and investments balances. If, for example, a hypothetical 20% devaluation of the Trinidad dollar were to occur, the value of our Trinidad dollar cash and investments position, measured in U.S. dollars, would decrease by approximately $15.9 million, with a corresponding increase in Accumulated other comprehensive loss reflected on our consolidated balance sheet. Separate from the Trinidad dollar balances described above, as of August 31, 2020, we had a U.S dollar denominated monetary asset position of approximately U.S. $4.8 million in Trinidad (net of U.S. dollar denominated monetary liabilities) that would produce a gain from a potential devaluation of Trinidad dollars. If, for example, a hypothetical 20% devaluation of the Trinidad dollar occurred, the net effect on Other income (expense), net on

our consolidated statement of operations of revaluing these U.S. dollar net monetary assets would be an approximate $1.0 million gain. However, following a significant additional decline of U.S. dollar liquidity beginning in August 2020 and continuing into fiscal year 2021, this net monetary asset position has shifted into a liability position in early fiscal 2021, subjecting us to potential losses in the case of a devaluation, which would be recorded in Other income (expense), net on our consolidated statement of operations. We are carefully monitoring the situation and taking steps to mitigate the risks. For example, as liquidity conditions have tightened, we have methodically raised prices, initially on imported goods, and have sought to shift the purchase of goods to local sources, where appropriate. Additionally, we are actively monitoring our ability to exchange Trinidad dollars for tradeable currencies, in order to manage our exposure to any potential devaluation, and in early fiscal 2021 have begun to limit shipments of goods from the U.S. to Trinidad in line with this ability. These actions may result in a decrease in our sales and/or profitability in Trinidad.

Volatility and uncertainty regarding the currencies and economic conditions in the countries where we operate could have a material impact on our operations in future periods.

Changes in accounting standards and assumptions, projections, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations.

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business are highly complex and involve many subjective assumptions, projections, estimates and judgments by our management. These include, but are not limited to assumptions, projections, estimates and judgements related to contingencies and litigation, income taxes, value added taxes, and long-lived assets. Changes in these rules or their interpretation or changes in underlying assumptions, projections, estimates or judgments by our management could significantly change our reported or expected financial performance. For example, because of Accounting Standards Update ASU 2016-02 – Leases (Topic 842), which the Company adopted September 1, 2019, the Company is required to recognize a “Right-of-Use” (ROU) asset and lease liability for each of the Company’s long-term leases. Accounting Standard Codification (ASC) 842 requires that the ROU asset be designated as a non-monetary asset and the lease liability as a monetary liability. Therefore, when accounting for a lease that is denominated in a foreign currency, if remeasurement into the lessee’s functional currency is required, the lease liability is remeasured using the current exchange rate. We have leases in several of our subsidiaries in which the lease payments are denominated in a foreign currency that is not the functional currency of that entity. Therefore, we are subject to additional volatility in foreign currency exchange rates as a result of this accounting standard update. The monetary lease liability subject to revaluation as of August 31, 2020 was $35.5 million. Due to the mix of foreign currency exchange rate fluctuations during fiscal 2020, the impact to the consolidated statements of income of revaluing this liability was immaterial.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

At August 31, 2020, PriceSmart operated 46 membership warehouse clubs, as detailed below:

⁽¹⁾We are currently constructing and plan to open a warehouse club in Bogota, Colombia in December 2020. We own the land and expect to own the building upon its completion.

⁽²⁾We acquired land in Bucaramanga, Colombia, Guatemala City, Guatemala and Portmore, Jamaica. No dates have been set for the start of construction.

Although we have entered into real estate leases in the past and will likely do so in the future, our preference is to own rather than lease real estate. We lease land and in some cases land and buildings when appropriate sites within market areas are not available to purchase. The term on these leases generally run for 20 to 30 years and contain options to renew from 5 to 20 years.  Years before current leases expire, we actively seek to secure lease extensions or find suitable replacement properties. We have successfully negotiated extensions in the past and believe we will continue to be able to do so in the future. As of August 31, 2020, sales floors of the Company’s warehouse club buildings occupied a total of approximately 2,269,814 square feet, of which 416,993 square feet were on leased property.

We operate two large regional distribution centers, one in Miami, Florida and the other in San Jose, Costa Rica, along with several smaller local distribution centers for the consolidation and distribution of merchandise shipments to our warehouse clubs. Our corporate headquarters is located in San Diego, California, and we maintain other regional offices in the U.S. and our international locations. We own our regional distribution center in Miami, Florida, but we otherwise lease most non-warehouse club facilities and expect to continue to lease these types of facilities as we expand. Our leases for non-warehouse club facilities typically provide for initial lease terms between five and ten years, with options to extend. We believe this leasing strategy for non-warehouse club facilities enhances our flexibility to pursue various expansion opportunities resulting from changing market conditions. As current leases expire, we believe that we will be able to obtain lease renewals, if desired, for these present locations, or to obtain leases for equivalent or better locations in the same general area.

Item 3.     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.

On May 22, 2019, a class action complaint was filed against PriceSmart, Inc., as well as certain former and current officers in the United States District Court for the Southern District of California. On October 7, 2019, the Court granted Public Employees Retirement Association of New Mexico’s (PERA’s) Motion for Appointment as Lead Plaintiff. On January 3, 2020, PERA filed a consolidated class action complaint, which alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Company intends to vigorously defend itself against any obligations or liability to the plaintiffs with respect to such claims. The Company believes the claims are without merit. During the third quarter of fiscal 2020, the Company filed a Motion to Dismiss the Plaintiff’s Consolidated Amended Complaint and the Plaintiff filed an Opposition to the Motion to Dismiss. During the fourth quarter of fiscal 2020, the Company filed a Reply to the Opposition. The Court has taken the matter under advisement.

Item 4.    Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company's common stock has been quoted and traded on the NASDAQ Global Select Market under the symbol “PSMT” since September 2, 1997. As of October 19, 2020, there were approximately 20,354 holders of record of the common stock. 

Recent Sales of Unregistered Securities

There were no sales of unregistered securities during the fiscal year ended August 31, 2020.

Dividends

The Company anticipates the ongoing payment of semi-annual dividends in subsequent periods, although the actual declaration of future dividends, the amount of such dividends, and the establishment of record and payment dates is subject to final determination by the Board of Directors at its discretion after its review of the Company’s financial performance and anticipated capital requirements, taking into account all relevant factors, including, but not limited to, the uncertainty surrounding the ongoing effects of the COVID-19 pandemic on our results of operations and cash flows.

Repurchase of Equity Securities

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 fiscal year 2020, the Company repurchased a total of 56,503 shares in the indicated months. These were the only repurchases of equity securities made by the Company during fiscal 2020. The Company does not have a stock repurchase program.

 
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Item 6. Selected Financial Data

The selected consolidated financial data presented below is derived from the Company's consolidated financial statements and accompanying notes. This selected financial data should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes thereto included elsewhere in this report.

⁽¹⁾U.S. Tax Reform in December 2017 resulted in a reduction in the tax rate from 35% to 21% and may have a beneficial impact on the Company in the future. However, in fiscal year 2018, we incurred charges of $12.5 million due to a one time transitional tax on unremitted foreign earnings and of $222,000 to reduce the value of deferred tax assets due to the reduction in U.S. tax rates.  

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⁽¹⁾Effective September 1, 2019, we adopted the requirements of Accounting Standards Update (ASU) 2016-02, "Leases (Topic 842)" (ASC 842) using the modified retrospective approach, under which financial results reported in prior periods were not restated. As a result, the Total Assets as of August 31, 2020 is not comparable with that as of August 31, 2019, August 31, 2018, August 31, 2017, and August 31, 2016.

⁽²⁾On February 6, 2020, January 30, 2019, January 24, 2018, February 1, 2017, and February 3, 2016 the Company declared cash dividends on its common stock.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis and the information under the heading Part II. “Item 6. Selected Financial Data" 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 concerning PriceSmart, Inc.'s ("PriceSmart", the "Company" or "we") anticipated future revenues and earnings, adequacy of future cash flows, omni-channel initiatives, proposed warehouse club openings, the Company's performance relative to competitors and related matters. These forward-looking statements include, but are not limited to, statements containing the words “expect,” “believe,” “will,” “may,” “should,” “project,” “estimate,” “anticipated,” “scheduled,” and like expressions, and the negative thereof. These statements are subject to risks and uncertainties that could cause actual results to differ materially including, but not limited to the risks detailed in this Annual Report on Form 10-K under the heading Part I. “Item 1A. Risk Factors.”  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. In addition, these risks are not the only risks that the Company faces. The Company could also be affected by additional factors that apply to all companies operating globally and in the U.S., as well as other risks that are not presently known to the Company or that the Company currently considers to be immaterial.

Overview

PriceSmart, headquartered in San Diego, owns and operates U.S.-style membership shopping warehouse clubs in Latin America and the Caribbean, selling high quality merchandise and services at low prices to our members. We operate 46 warehouse clubs in 12 countries and one U.S. territory (eight in Costa Rica; seven each in Colombia and Panama; five in the Dominican Republic, four in Trinidad and Guatemala; three in Honduras; two each in El Salvador and Nicaragua; and one each in Aruba, Barbados, Jamaica and the United States Virgin Islands). The Company is currently constructing and plans to open a warehouse club in Bogota, Colombia in December 2020. Our corporate headquarters, U.S. buying operations and regional distribution centers are located primarily in the United States. Our operating segments are the United States, Central America, the Caribbean and Colombia. All intercompany balances and transactions have been eliminated in consolidation.

Factors Affecting the Business

COVID-19 Updates

The COVID-19 pandemic resulted in significant challenges across our 13 markets in the third and fourth quarters of fiscal 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 are permitted to be open, restrictions on segments of the population permitted to shop or circulate on particular days, and limits on the number of people permitted to be in the club at the same time. We have also experienced product mix shifts due to changing consumer habits, decreases in purchases by many business members, particularly restaurants and hotels, as well as sporadic supply chain challenges, which can impact inventory levels. In response, early in calendar year 2020 we identified four main priorities:

Protect the safety and well-being of our employees and our members. We remain vigilant and continue to take proactive measures to provide a safe environment for our employees and our members. We are closely tracking numerous decrees and government mandates and are following all local guidelines. We have taken preventative measures that include frequent and enhanced cleaning and sanitizing protocols, providing personal protective equipment, installing protective barriers for the cashiers and in other member-facing areas, implementing social distancing measures, metering the number of customers in a club at any one time, requiring masks to be worn by members in the club (where legally permitted), taking temperatures of employees at the beginning of shifts, quickly identifying and cooperating with local health officials about confirmed cases, promptly implementing contact tracing protocols and mapping of potentially exposed employees who are then immediately quarantined while continuing to be paid, directing employees whose functions could be performed remotely to work off site, offering vulnerable employees with underlying health conditions, employees over 60 and pregnant employees paid leave and vigilantly educating our employees about safe practices and enforcing best practices of good hygiene. We have also expanded our efforts to educate family members of employees about safe practices and to provide them with masks and sanitizing materials. We have modified our sick leave policy to make sure that sick people can take paid time off. We have built reserve teams of employees who do not overlap with each other so that they can step in as needed. In the initial months of the pandemic, we reduced or eliminated in-club food service and food sampling; however, later in the fiscal year as infection rates decreased and restrictions eased, we resumed some limited seating and capacity in-club food service in some of our markets and we have begun to reintroduce sampling incrementally using hygienic methods.

Take proactive measures to protect our supply chain. We are working closely with our suppliers to make sure that we have essential items available for our members. This includes increasing the use of our regional and local distribution centers and

merchandise vendors to provide additional flexibility and reduce the risk of interruption of the flow of merchandise to our markets. We have also placed limits on the quantity of certain key items that members can purchase, such as cleaning supplies, paper products and core shelf-stable groceries. We have also activated alternative distribution systems and routing to ensure optionality in the event of outbreak or restrictions on mobility in certain geographic areas.

Expand technology-enabled shopping. During the third fiscal quarter of 2020, we launched our Click & Go™ curbside pickup service to allow for a contactless way for our members to shop. As of August 31, 2020, we offered the Click & Go™ curbside pickup service in all 13 of our markets. Early in our fourth fiscal quarter, we also added delivery to our Click & Go™ service, which was available in six of our 13 markets as of August 31, 2020 and expanded into further markets in early fiscal 2021. These services provide an alternative and convenient way for our members to shop, while reducing physical contact. Our Click & Go™ service enables members to use our e-commerce platform to identify and select merchandise, order and pay online, and then have their orders placed in their cars at their chosen clubs or delivered to their homes or place of business. We continue to work on improving and expanding our online initiatives, including order fulfillment, in conjunction with optimizing our club operations to allow members to shop safely, quickly and efficiently.

Manage cash and capital resources. Given the uncertainty surrounding the potential impact of the outbreak on our results of operations and cash flows, we are taking steps to secure and preserve available cash. Initially, we suspended most of our capital projects and discretionary spending. As we closely monitored and better understood the risks and opportunities of operating in this climate, we restarted several of our previously postponed investments. We opened our smaller format warehouse club in Liberia, Costa Rica in June 2020, and we have resumed construction on our third club in the greater metropolitan area of Bogota, the eighth in Colombia, which is expected to open in December 2020. We continue to evaluate whether and when to restart previously announced construction of future warehouse clubs on land that we acquired in Bucaramanga, Colombia and in Jamaica, as well as other capital projects. In the third quarter of fiscal 2020, we initially furloughed approximately 80 employees in the United States and implemented temporary salary reductions for employees and executives above a certain income level on a tiered basis increasing from 10% to 30% based on compensation level. Additionally, the Board of Directors waived their cash compensation for the calendar quarter ended June 30, 2020. In late fourth quarter of fiscal 2020, we ended the furloughs and discontinued the temporary salary reductions. Based on Company performance, at the end of the fourth quarter we paid a special bonus for all employees up to and including Senior Vice Presidents who had their salaries reduced. In addition, in the first quarter of fiscal year 2021, the Board approved the restoration of their compensation for the quarter for which they had previously waived it. Furthermore, we initially negotiated extended payments with our vendors, but since then we have begun to return to more normal payment term arrangements. Lastly, we have taken advantage of tax deferral arrangements where available. In the current environment, we believe cash flows from operations, our current cash position and access to capital markets will continue to be sufficient to meet our anticipated operating cash needs, which include any deferred liabilities, funding seasonal buildups in merchandise inventories and funding our capital expenditures, dividend payments and other financing requirements. Refer to Part II. “Item 7. Management’s Discussion and Analysis - Liquidity and Capital Resources” for additional information.

We expect continued uncertainty and opportunities in the economies of our markets because of the unpredictability of the duration and intensity of the COVID–19 pandemic and the length and impact of stay-at-home orders and other restrictions; volatility in employment trends and consumer confidence; volatility in foreign currency exchange rates and commodity prices; and possible fiscal austerity measures taken by governments in our markets, which will likely impact our results in the near future.

Overall economic trends, foreign currency exchange volatility, and other factors impacting the business

Our sales and profits vary from market to market depending on general economic factors, including GDP growth; consumer preferences; foreign currency exchange rates; political policies and social conditions; local demographic characteristics (such 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 result of COVID-19 have significantly impacted and may continue to impact the economies our markets causing significant declines in GDP and employment and devaluations of local currencies against the U.S. dollar. In general, positive conditions in the broader economy promotes member spending in our warehouse clubs, while economic weakness, which generally results in a reduction of customer spending, may have a different or more extreme effect on spending at our clubs.

Currency fluctuations can be one of the largest variables affecting our overall sales and profit performance, as we have experienced in prior fiscal years, because many of our markets are susceptible to foreign currency exchange rate volatility. During fiscal 2020, approximately 77.5% of our net merchandise sales were in currencies other than the U.S. dollar. Of those sales, 48.2% were comprised of sales of products we purchased in U.S. dollars.

A devaluation of local currency reduces the value of sales and membership income that is generated in that country when translated to U.S. dollars for our consolidated results. In addition, when local currency experiences devaluation, we may elect to increase the local currency price of imported merchandise to maintain our target margins, which could impact demand

for the merchandise affected by the price increase. We may also modify the mix of imported versus local merchandise and/or the source of imported merchandise to mitigate the impact of currency fluctuations. Information about the effect of local currency devaluations is discussed in Part II. “Item 7. 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. Island countries such as Aruba, Barbados and the U.S. Virgin Islands offer us limited upside for sales growth given their overall market size. Countries with smaller upper and middle class consumer populations, such as Honduras, El Salvador, Jamaica and Nicaragua, offer growth potential but may have a more limited market opportunity for sales growth as compared to more developed countries with larger or growing upper and middle class consumer populations.

The membership model is a basic and critical operating characteristic in the warehouse club industry that enables us to operate our business on lower margins because of the membership fee income generated. Our twelve-month renewal rate was 80.5% as of August 31, 2020, a decline from our 85.7% renewal rate as of August 31, 2019. The mobility restrictions imposed by the local governments in our markets in response to COVID-19, particularly in our Colombian and Central American markets, significantly reduced in-club visits, which is when most of our membership renewals occur.

Political and other factors in each of our markets may have significant effects on our business. U.S. foreign policy can also have an impact on social and economic stability in the countries where we operate. For example, the U.S. State Department has announced varying strategies regarding if, when and how it would authorize disbursement of foreign aid that had been previously approved by the U.S. Congress to Guatemala, Honduras and El Salvador. Changes in U.S. policies regarding financial assistance could cause political or financial instability in the countries we serve.

In the past, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity), particularly in Trinidad. This can impede 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 redeploy these funds in our Company, increasing our foreign exchange exposure to any devaluation of the local currency relative to the U.S. dollar. We continued to experience limitations on our ability to convert Trinidad dollars to U.S. dollars or other tradeable securities during fiscal 2020, with a further deterioration and the problem becoming more acute in August 2020 and into the first two months of fiscal year 2021. We are working with our banks in Trinidad to source tradeable currencies, but until more U.S. dollars or other tradeable securities become available, this illiquidity condition is likely to continue. As of August 31, 2020, our Trinidad subsidiary had Trinidad dollar denominated cash and cash equivalents and short and long-term investments measured in U.S. dollars of approximately $79.6 million, an increase of $54.7 million from August 31, 2019 when these same balances were approximately $24.9 million. The Trinidad central bank manages the exchange rate of the Trinidad dollar with the U.S. dollar. While the recently elected government has publicly stated it has no intention to devalue the Trinidad dollar, the Trinidad government could in the future decide to devalue the currency to improve market liquidity, resulting in a devaluation in the U.S. dollar value of these cash and investments balances. If, for example, a hypothetical 20% devaluation of the Trinidad dollar were to occur, the value of our Trinidad dollar cash and investments position, measured in U.S. dollars, would decrease by approximately $15.9 million, with a corresponding increase in Accumulated other comprehensive loss reflected on our consolidated balance sheet. Separate from the Trinidad dollar denominated cash and investments balances described above, as of August 31, 2020, we had a U.S. dollar denominated monetary asset position of approximately $4.8 million in Trinidad (net of U.S. dollar denominated liabilities) that would produce a gain from a potential devaluation of Trinidad dollars. If, for example, a hypothetical 20% devaluation of the Trinidad dollar occurred, the net effect on Other income (expense), net on our consolidated statement of operations of revaluing these U.S. dollar denominated net monetary assets would be an approximate $1.0 million gain. However, following a significant additional decline of U.S. dollar liquidity beginning in August 2020 and continuing into fiscal year 2021, this net monetary asset position has shifted into a liability position in early 2021, subjecting us to potential future losses in the case of a devaluation, which would be recorded in Other income (expense), net on our consolidated statement of operations.

We are carefully monitoring the situation and taking steps to mitigate the risks. For example, as liquidity conditions have tightened, we have methodically raised prices, initially on imported goods, and have sought to shift the purchase of goods to local sources, where appropriate. Additionally, we are actively monitoring our ability to exchange Trinidad dollars for tradeable currencies, in order to manage our exposure to any potential devaluation, and in early fiscal 2021 have begun to limit shipments of goods from the U.S. to Trinidad in line with this ability. These actions may result in a decrease in our sales and/or profitability in Trinidad.

Mission and Business Strategy

Our mission is to be a model for how to operate a profitable company that provides a good return to our investors, by serving our members in emerging and developing markets, with safe, clean buildings and equipment, and by providing good jobs, fair wages and benefits, quality merchandise and services at compelling prices that are made accessible to a broader segment of the population, while treating our suppliers right, empowering them where we can, and conducting ourselves responsibly by local norms, and respecting the environment and the laws of all the countries in which we operate. To do this, we make available a wide range of high quality, curated merchandise sourced from around the world at good value. The annual membership fee enables us to operate our business with lower margins than traditional retail stores. Through the use of technology and the development of an omni-channel platform, we are pursuing opportunities to satisfy our members’ shopping expectations, create additional efficiencies in the supply chain and better understand and serve our members’ needs to play greater role in their lives. We strive to establish a relationship with our members that enhances their lives with quality goods and services and offers a shopping experience that blends the excitement and appeal of our brick and mortar business with the convenience 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, membership income and total revenues. Our investments are geared toward creating greater efficiency, which enable us to offer lower prices, better services, enhanced convenience and exciting experiences for our members, which we believe 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.

Current and Future Management Actions

Logistics and distribution efficiencies are fundamental to delivering high quality merchandise at compelling prices to our members. We continue to explore ways to improve efficiency, reduce costs, secure additional high quality sourcing alternatives and ensure a reliable and exciting flow of merchandise to our warehouse clubs. As we continue to refine our logistics and distribution infrastructure, we are exploring ways to improve our supply chain effectiveness through regional distribution centers that maintain our merchandise closer to our members. For example, in fiscal 2020, we opened fresh produce distribution centers in two of our markets that enable us to quickly and efficiently bring high quality and fresh produce from farm-to-table, which also enhances quality, reduces waste and supports local farmers. We plan to search for additional space to expand this concept throughout our markets.

Purchasing land and constructing warehouse clubs is generally our largest ongoing capital investment. Securing land for warehouse club locations is challenging within our markets, because suitable sites at economically feasible prices are difficult to find. We believe real estate ownership provides a number of advantages as compared to leasing, including lower operating expenses, flexibility to expand or otherwise enhance our buildings, long-term control over the use of the property and the residual value that the real estate may have in future years. While our preference is to own rather than lease real estate, we have entered into real estate leases in certain cases and will likely do so in the future. We currently own undeveloped land in Guatemala City, Guatemala, Bucaramanga, Colombia, and in Jamaica. We continue to evaluate the optimal timing to begin warehouse club construction on these sites, given the general economic conditions, our financial position, and feasibility of these projects in light of the uncertainties caused by the COVID-19 pandemic.

In the third and fourth quarter of fiscal 2020, we launched our Click & Go™ service, which enables our members to place orders on our website and decide whether to pick them up curbside at our warehouse clubs or have them delivered. Our curbside service was available in all 13 of our markets and with delivery was available in six as of August 31, 2020 and expanded into further markets in early fiscal 2021. We plan to continue to make investments to scale and create efficiencies for this service while also continuing to invest in other omni-channel capabilities that enable e-commerce, by integrating technology, talent, supply chain and operations to enhance the membership shopping experience, drive efficiencies and fuel sales growth. We are developing and implementing technologies that we believe will enhance customer service, provide greater insight to consumer preferences, facilitate membership sign-ups and renewals, and maximize use of sales floor space in our brick and mortar clubs. Our focus will be on launching these additional omni-channel capabilities in a methodical, phased manner.

Financial highlights for the fourth quarter of fiscal year 2020 included:

Total revenues increased 1.2% over the comparable prior year period.

Net merchandise sales increased 0.5% over the comparable prior year period. We ended the quarter with 46 warehouse clubs compared to 43 warehouse clubs at the end of the fourth quarter of fiscal 2019. Foreign currency exchange rate fluctuations impacted net merchandise sales negatively by 3.6% versus the same three-month period.

Comparable net merchandise sales (that is, sales in the 42 warehouse clubs that have been open for greater than 13 ½

calendar months) for the 13 weeks ended August 30, 2020 decreased 4.0%. Foreign currency exchange rate fluctuations impacted comparable net merchandise sales negatively by 3.6%.

Membership income for the fourth quarter of fiscal 2020 decreased 2.2% to $13.1 million primarily due to the decline in the overall account base because of a decrease in in-club traffic from COVID-19.

Total gross margins (net merchandise sales less associated cost of goods sold) decreased 0.4% over the prior-year period, and merchandise gross profits as a percent of net merchandise sales were 15.1%, a decrease of 10 basis points (0.1%) from the same period in the prior year.

Operating income for the fourth quarter of fiscal 2020 was $29.0 million, a decrease of 9.3%, or $3.0 million, compared to the fourth quarter of fiscal 2019.

We recorded a $1.1 million net currency gain from currency transactions in the fourth quarter of fiscal 2020 compared to a $454,000 net currency gain in the same period last year, primarily due to a favorable foreign currency exchange rate fluctuation in Jamaica.

Our effective tax rate decreased in the fourth quarter of fiscal 2020 to 28.2% from 34.1% in the fourth quarter of fiscal 2019. The decrease in the effective tax rate is primarily related to recognition timing for the loss of benefit of foreign tax credits, which are no longer recoverable as a result of U.S. Tax Reform.

Net income attributable to PriceSmart for the fourth quarter of fiscal 2020 was $20.1 million, or $0.65 per diluted share, compared to $20.7 million, or $0.67 per diluted share, in the fourth quarter of fiscal 2019.

Financial highlights for fiscal year 2020 included:

Total revenues increased 3.3% over the prior year.

Net merchandise sales increased 3.2% over the prior year. We ended the year with 46 warehouse clubs compared to 43 warehouse clubs at the end of the fiscal 2019. Foreign currency exchange rate fluctuations impacted net merchandise sales negatively by 2.1%.

Comparable net merchandise sales (that is, sales in the 42 warehouse clubs that have been open for greater than 13 ½

calendar months) for the 52 weeks ended August 30, 2020 decreased 1.5%. Foreign currency exchange rate fluctuations impacted comparable net merchandise sales negatively by 1.9%.

Membership income for the fiscal 2020 increased 4.5% to $54.5 million primarily due to new club member sign-ups in Panama, Guatemala and Costa Rica. Our expansion of the Platinum Membership program contributed to the increase.

Total gross margins (net merchandise sales less associated cost of goods sold) increased 5.6% over the prior year, and merchandise gross profits as a percent of net merchandise sales were 14.7%, an increase of 40 basis points (0.4%) from the prior year.

Operating income for fiscal 2020 was $122.5 million, an increase of 6.3% or $7.3 million compared to fiscal 2019.

We recorded a $1.4 million net currency loss from currency transactions in the current year compared to a $1.5 million net loss in the prior year.

The effective tax rate for fiscal 2020 was 32.5% as compared to the effective tax rate for fiscal 2019 of 33.8%. The decrease in the effective tax rate is primarily related to the favorable impact from changes in income tax liabilities from uncertain tax positions.

Net income attributable to PriceSmart for fiscal year 2020 was $78.1 million, or $2.55 per diluted share, compared to $73.2 million, or $2.40 per diluted share, in the prior year.

Comparison of Fiscal Year 2020 to 2019

The following discussion and analysis compares the results of operations for each of the three fiscal years ended August 31, 2020, 2019 and 2018 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 ended August 31, 2019 and 2018, 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 ended August 31, 2019 filed with the SEC on October 29, 2019. Unless otherwise noted, all tables present U.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, the Caribbean, Colombia and the 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 to U.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 2020 and 2019.

Comparison of 2020 and 2019

Overall, net merchandise sales grew by 3.2% for fiscal year 2020 compared to fiscal year 2019, resulting from a 9.5% increase in average ticket offset by a 5.7% decrease in transactions. Transactions represent the number of visits our members make to our warehouse clubs and average ticket represents the amount our members spend on each visit.

During the current fiscal year, net merchandise sales were positively impacted by increases in average ticket, which were offset by decreases in transactions due to capacity restrictions and other government restrictions as a result of the COVID-19 pandemic. In the second half of fiscal 2020, governments in our markets imposed restrictions of varying degrees on nearly all businesses, including essential businesses such as ours. These governments have mandated various protocols resulting in limitations on the number of people in our clubs, reduced hours of operation, restrictions on or closure of dining and other services areas, and, in some cases, closure of our clubs intermittently or on certain days of the week. These, in combination with consumer trepidation about the spread of COVID-19 and government restrictions limiting times when consumers can leave their homes, have reduced traffic in our clubs and led to the significant decline in transactions for the twelve month period ended August 31, 2020. In addition, we had 46 clubs in operation as of August 31, 2020 compared to 43 clubs as of August 31, 2019.

Net merchandise sales in our Central America segment increased 3.7% for fiscal 2020 compared to fiscal year 2019. These increases had a 210 basis point (2.1%) positive impact on total net merchandise sales growth. All markets within this segment, with the exception of Honduras, showed increased net merchandise sales year-on-year. Honduras had the most government restrictions with the longest duration during the COVID-19 pandemic, which led to negative sales growth in the year compared to the prior period. We added three new clubs to the segment when compared to the comparable prior period. We opened our seventh club in Panama in October 2019, our fourth club in Guatemala in November 2019 and we opened our eighth club in Costa Rica in June 2020. In addition to the new club in Costa Rica, the market also benefited from a significant foreign currency exchange rate tailwind that contributed to increased U.S. dollar sales. Refer to Part II. “Item 7. Management Discussion & Analysis – Currency Exchange Rate Fluctuations” for more information on the impact of currency movements on net merchandise sales.

Net merchandise sales in our Caribbean segment grew 6.4% for fiscal 2020 when compared to fiscal 2019. This increase had a 190 basis point (1.9%) positive impact on total net merchandise sales growth. Our Dominican Republic and Jamaica markets led the way in this segment, with both having double digit year-over-year growth with 19.0% and 10.3% increases in net merchandise sales, respectively. In the Dominican Republic, we launched our fifth club in June 2019, while Jamaica continued its exceptional sales run with net merchandise sales growth of 10.3%. This is the second straight year for Jamaica having double-digit sales growth. With the exception of our Aruba and USVI markets, all other markets within this segment showed increased net merchandise sales year-on-year.

Net merchandise sales in our Colombia segment decreased 6.3% for fiscal 2020 when compared to fiscal 2019. This decrease had an 80 basis point (0.8%) negative impact on total net merchandise sales growth. The declines during the period are primarily due to significant unfavorable foreign currency devaluation and government restrictions in response to the coronavirus outbreak.

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 ended August 31, 2020.

Overall, the effects of currency fluctuations within our markets had an approximately $61.9 million or 210 basis point (2.1%) negative impact on net merchandise sales for the year ended August 31, 2020.

Currency fluctuations had a $12.3 million or 70 basis point (0.7%) positive impact on net merchandise sales in our Central America segment for the year ended August 31, 2020. The currency fluctuations contributed approximately 40 basis points (0.4%) of the total positive impact on total net merchandise sales. The Costa Rica Colón appreciated significantly against the dollar as compared to a year ago and was a significant factor in the contribution to the favorability of currency exchange rate fluctuations in this segment.

Currency fluctuations had a $30.4 million or 330 basis point (3.3%) negative impact on reported net merchandise sales in our Caribbean segment for the year ended August 31, 2020. The currency fluctuations contributed approximately 100 basis points (1.0%) of the total negative impact on total net merchandise sales. The Dominican Peso and Jamaican Dollar depreciated significantly against the dollar as compared to a year ago and were the driving factors in the contribution to the negative currency exchange rate fluctuations in this segment.

Currency fluctuations had a $43.8 million or 1,150 basis point (11.5%) negative impact on net merchandise sales in our Colombia segment for the year ended August 31, 2020. The currency fluctuations contributed approximately 150 basis points (1.5%) to the total negative impact on total net merchandise sales.

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 August 31, 2020 and 2019.

Comparison of 2020 to 2019

During the second half of fiscal 2020 our member shopping patterns changed significantly in reaction to the COVID-19 pandemic. Across our merchandise categories, sales grew significantly in Food & Sundries and Fresh Foods, while our non-food categories of Hardlines and Softlines declined. The decline in other business is primarily due to restrictions in certain markets that did not permit our food courts and ancillary services, such as optical, to operate during the COVID-19 pandemic. Refer to Part II. “Item 8. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements, Note 3 - Revenue Recognition” for sales by category. In response to these changes, we have taken many actions, including accelerating purchases of certain merchandise in high volume categories and slowing or canceling certain merchandise purchases in lower volume non-food categories.

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 three of our four warehouse clubs opened during calendar year 2019 and the one club opened during calendar year 2020, will not be used in the calculation of comparable sales until they have been open for at least the 13 ½ months. Therefore, comparable net merchandise sales include 42 warehouse clubs for the fifty-two week period ended August 30, 2020.

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 August 30, 2020 and September 1, 2019.