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Annual Report 4Col Annual Report1998 The Right Way To Shop To The Right Way Business Member Business Table of Contents Letter From the Chairman 4 Letter From the President 5 Merchandising History 7 San Diego Corporate Headquarters A New Concept in Emerging Markets 10 Financial Information 13 Latin Selected Financial Data 14 Management’s Discussion and Analysis 15 Financial Statements 20 Online Information www.pricesmart.com www.psvacations.com 2 Asia America 3 Chairman’s Letter Dear Stockholder: PriceSmart Inc. recently completed its first year of operations as an indepen- dent publicly traded company. The sepa- President’s Letter ration from Price Enterprises Inc. which occurred on August 29, 1997, has Dear Stockholder: encouraged all of us to focus energy and In addition to being the first annual attention on building a successful inter- report for PriceSmart Inc., this report national merchandising business. As you also marks the first eight months of my will read in the accompanying letter from tenure as its President and CEO. I firmly PriceSmart’s President, Gil Partida, many believe that our value proposition of good things have happened during the delivering quality goods and services at past 12 months. low prices transcends language and cul- On behalf of your Board of Directors, tural barriers. With the strength of our I want to tell you what I think are the two balance sheet, management talent and most important decisions we made dur- the soundness of our concept, I believe ing this past fiscal year. One was to the Company is well positioned for adopt a strategic plan for the roll-out of future growth. warehouse club stores, primarily in Latin The following summarizes our 1998 America. The implementation stage for results. Revenues for fiscal year 1998 this strategy is well under way. The other were $97.2 million which included $83.8 Board action occurred in December 1997, million from the Company’s international with the announcement that Gil Partida business, $5.8 million from its travel had been appointed President and CEO business and $7.6 million from other of PriceSmart Inc. Since joining the businesses. Net income for the year was Company in January 1998, Gil has $3 million or $.50 per diluted share. worked tirelessly to build a talented and Income resulted from the travel and auto effective management team, completing programs profits, investment income joint venture agreements and positioning from cash balances, marketable securi- PriceSmart Inc. for future growth. ties and notes receivable, and non-reoc- As a stockholder and Chairman of curring gains on the sale of properties. the Board of PriceSmart, I take great Income was reduced by international pride and pleasure in working with Gil, business losses and losses from the ser- with PriceSmart’s employees and with vice center pilot program with Ralphs PriceSmart’s Board members. I look for- Grocery Company. ward to fiscal year 1999 as a year of con- Our business strategy is simple. tinued growth and improvement. Grow the international membership mer- chandising business in markets that (i) are receptive to U.S. quality goods and services and (ii) permit majority foreign Robert E. Price, ownership in the retail sector. It is our Chairman of the Board belief that an equity model, where PriceSmart employees control the man- agement of the stores, will provide more Board of Directors long-term, substantial earnings to our stockholders. The Latin American consumer market is receptive to U.S. goods, and commer- cial statutes generally allow foreign own- ership in the retail sector. Therefore, it is our primary international target market. Our strategy, set at our April 20, 1998 Board meeting, was to have deals for two stores in Latin American countries by August 1998 and deals for ten stores 4 Robert E. Price, Chairman; Directors: Lawrence B. Krause, Gilbert A. Partida, Leon C. Janks, Katherine L. Hensley, by May 1999. In early July 1998, we new businesses in Panama – a tire center announced an agreement with and an affinity auto insurance program. Guatemalan-headquartered Grupo Solid to We are committed to developing new form a new joint venture company that businesses and services that provide addi- will open two stores in Guatemala City. In tional value for our member-customers. early September 1998, we entered into an Focusing on our core business has agreement with PSC, S.A. to form a joint caused us to rethink some areas. In May venture company which plans to open 1998, we allowed our agreement with nine stores in Costa Rica, the Dominican Ralphs Grocery Company to expire. While Gilbert A. Partida Republic, El Salvador, Honduras and the concept was popular with customers, President and CEO Nicaragua. it did not generate sufficient volume to be The Asian markets, while presenting viable. In August 1998, we entered into an attractive opportunities, generally restrict agreement to sell our auto referral pro- foreign ownership in the retail sector. As a gram, effective November 1, 1999. The result, our business in Asia is operated program was sold for a net gain of $.4 mil- through licensees. With the unfolding of lion. The travel business remains prof- the Asian political and economic crisis, itable. We will continue to grow it and our strategy was to provide the necessary determine the best approach to maximize management and technical support to stockholder value. Finally, we are actively help our licensees, but to nonetheless engaged in selling our remaining real carefully manage political, economic and estate holdings. The value of property cur- credit risk. As a necessary, but unfortunate rently held for sale is $4.9 million. result of the Asian crisis, (i) we terminated Our people management model is our license agreements for the Philippines built on alignment of vision, management and Indonesia and (ii) our licensee in the goals and compensation. Through an Mariana Islands closed its Guam store. As intensive strategic planning process, this a result of closely managing economic, has been achieved. The Board further political and credit risk, PriceSmart suf- adopted, subject to stockholder approval, fered little economic loss from its Asian the "1998 Equity Participation Plan" ("1998 exposure. However, we remain committed Plan") to further align the interests of the to the right opportunities in Asia, especial- employees and shareholders. Under the ly joint venture arrangements. Although 1998 Plan, management invested in such equity opportunities would require PriceSmart stock, showing its commitment laws to be changed, we are hopeful that and confidence in our business. The Board could very well happen in some attractive also authorized a 700,000 share stock markets in the near term. repurchase program so that the 1998 Plan The success of our business is based would not dilute the ownership interest of on each store’s performance. Accordingly, our current stockholders; it also increased learning from our Panama experience, our the Company’s book value per share. job is to focus on profitability at the store I would like to thank Robert and the level. With two stores open in Panama in Board for allowing me to assume this 1998, our intent was to develop a model exciting leadership position. I would also and determine if a 50,000 square foot like to personally thank the 150 employees store could achieve the sales necessary to who make this business work every day. become a profitable business. (Based on our pro forma model, the target sales level per store was set at U.S.$25 million.) Currently, combined sales for both stores Gilbert A. Partida are annualizing at approximately U.S.$60 President & CEO million. We have also implemented two 5 PriceSmart… The Company Values… is an international membership shopping concept • Honesty and Integrity modeled after the first membership merchandising • Fairness chain in the United States, Price Club. The concept is • Talent and Passion to deliver significant value to the member-customer • Entrepreneurialism through an effective and efficient pipeline that • Teamwork and Communication leverages economies of scale in aggressive buying, • Accountability (to mission) low-cost distribution and streamlined operations. Vision Mission A strategically focused volume-driven and To become part of our members’ quality of life. entrepreneurial membership merchandise and services leader delivering quality, value and low prices to the rapidly emerging consumer class in Latin America and Asia. 6 Our History 1954 - Sol Price launches FedMart discount History of a store concept Merchandising Concept 1976 - Pioneers of the membership warehouse shopping concept, In 1976, Sol and Robert Price developed the membership Sol and Robert Price launch merchandising concept and founded Price Club, where mem- The Price Club ber-customers could take advantage of high-volume, low-cost operations to obtain the best possible prices on a wide array of 1980 - The Price Company goes public - merchandise. Today, we continue to maintain our pioneering generates sales of $148 million commitment to provide quality, value and low prices for member-customers of PriceSmart, the newest generation of 1993 - The Price Company merges with warehouse clubs. Costco Inc. - generating 15.2 billion Sol Price created the discount store industry in the United in combined sales States by launching FedMart in 1954. Over the last forty-four years, the evolution of the industry in the United States has Membership merchandise concept launches created more than 26 million card holders shopping
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