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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 remainvigilant 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

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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 & GoTM curbside pickup service to allow for a contactless way for our members to shop. As of August 31, 2020, we offered the Click & GoTM curbside pickup service in all 13 of our markets. Early in our fourth fiscal quarter, we also added delivery to our Click & GoTM 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 & GoTM 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

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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.

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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 & GoTM 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.

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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 1⁄2

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 1⁄2

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

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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.

Years Ended

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.

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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.

Currency Exchange Rate Fluctuations for the

Twelve Months Ended

Amount % change

Net merchandise sales $ (61,934) (2.1) %

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.

Years Ended August 31,

Foods & Sundries 52 % 51 %

Softlines 4 5

Other Business 4 5

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.

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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 1⁄2 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 1⁄2 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.

Fifty-Two Weeks Ended

Central America (3.2) % (2.0) %

Consolidated comparable net merchandise sales (1.5) % (0.6) %

Comparison of Fifty-Two Week Periods Ended August 30, 2020 and September 1, 2019

Comparable net merchandise sales for those warehouse clubs that were open for at least 13 1⁄2 months for some or all of the fifty-two week period ended August 30, 2020 decreased 1.5%.

Comparable net merchandise sales in our Central America segment decreased 3.2% for the fifty-two week period ended August 30, 2020. This decrease contributed approximately 190 basis points (1.9%) of the decrease in total comparable merchandise sales.

For the fifty-two weeks ended August 30, 2020, decreases in comparable net merchandise sales in Guatemala, Honduras and Panama contributed approximately 310 basis points (3.1%) of the decrease, which was partially offset by a 120 basis point (1.2%) increase in Costa Rica, El Salvador, and Nicaragua. The decreases in Guatemala, Honduras, and Panama are primarily related to periodic club closures and other government-mandated restrictions in response to the coronavirus outbreak, which also include travel restrictions, “shelter in place” advisories, curfews, and social distancing measures. Many of these government policies and restrictions in response to the coronavirus outbreak have resulted in limiting access for our members and impacted our club operations. These include temporary club closures, limits on the number of days during the week and hours per day our clubs can be open, restrictions on segments of the population permitted to shop on particular days, and limits on the number of people that can be in a club. We believe comparable net merchandise sales in the segment were also adversely affected by transfers of sales from existing clubs included in the calculation of comparable net merchandise sales to newly opened clubs not included in the calculation, with one in Panama and one in Guatemala. These decreases were partially offset by significant foreign currency appreciation within our Costa Rica market as well as strong performance in our El Salvador and Nicaragua markets.

Comparable net merchandise sales in our Caribbean segment increased 3.8% for the fifty-two week period ended August 30, 2020. This increase contributed approximately 120 basis points (1.2%) of positive impact in total comparable merchandise sales.

For the fifty-two week period ended August 30, 2020, all markets in our Caribbean segment, with the exception of the U.S. Virgin Islands and Aruba, showed strong growth compared to the same period in the prior year. Investments we made in our Jamaica market resulted in 10.2% growth in comparable net merchandise sales for the fifty-two week period ended August 30, 2020. The Dominican Republic also had strong comparable sales of 7.1% despite the transfer of sales to our new club in that market. In our U.S. Virgin Islands market, comparable net merchandise sales declined when compared to the same period in the prior year. Hurricanes Irma and Maria had a severe impact on the infrastructure of the islands in the fall of calendar year 2017. From that time until the end the first quarter of fiscal 2020, the Company benefitted from the difficulty other retailers had in becoming fully operational, but those same retailers have rebuilt, contributing to increased competition in that market.

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Comparable net merchandise sales in our Colombia segment decreased 6.4% for the fifty-two week period ended August 30, 2020. This decrease contributed approximately 80 basis points (0.8%) of the decrease in total comparable merchandise sales. These declines were largely due to the devaluation of the Colombian peso relative to the U.S. dollar and government restrictions imposed in response to the coronavirus outbreak.

The following table illustrates the impact that changes in foreign currency exchange rates had on our comparable merchandise sales in dollars and as a percentage of comparable merchandise sales for the fifty-two week period ended August 30, 2020.

Fifty-Two Weeks Ended

Amount % change

Consolidated comparable net merchandise sales $ (59,344) (1.9) %

Overall, the mix of currency fluctuations within our markets had an approximate $59.4 million, or 190 basis point (1.9%), negative impact on comparable net merchandise for the fifty-two week period ended August 30, 2020.

Currency fluctuations within our Central America segment accounted for approximately 40 basis points (0.4%) of the positive impact on total comparable merchandise sales for the fifty-two week period ended August 30, 2020. This is primarily the result of significant appreciation in the Costa Rica Colón against the U.S. dollar during the current periods compared to the same periods a year ago.

Currency fluctuations within our Caribbean segment accounted for approximately 90 basis points (0.9%) of negative impact on total comparable merchandise for the fifty-two week period ended August 30, 2020. Our Dominican Republic and Jamaica markets experienced currency devaluation when compared to the same period last year.

Currency fluctuations within our Colombia segment accounted for approximately 140 basis points (1.4%) of negative impact on total comparable merchandise sales for the fifty-two week period ended August 30, 2020. This reflects the devaluation of the Colombia peso when compared to the same period a year ago.

Membership Income

Membership income is recognized ratably over the one-year life of the membership.

Years Ended

August 31, August 31,

Comparison of 2020 to 2019

The number of member accounts at the end of fiscal 2020 was 4.7% lower than the prior year period. Membership income increased 4.5% compared to the comparable prior-year period.

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The growth in membership income during fiscal 2020 in our Central America segment is primarily the result of the opening of three new warehouse clubs – Metropark in Panama, San Cristobal in Guatemala, and Liberia in Costa Rica. The launch of Platinum membership in two Central American markets in calendar year 2019 also contributed to the increase in membership income for fiscal year 2020 compared to the prior year. Despite the new clubs in the segment, the membership base has declined for two consecutive quarters due to the in-club traffic decline because of COVID-19, which will have a negative impact on membership income in the segment in future reporting periods.

In our Caribbean market, membership income growth was primarily attributable to the opening of the new Bolivar warehouse club in the Dominican Republic in June 2019. The launch of Platinum membership in three Caribbean markets in calendar year 2019 also contributed to the increase in membership income for the twelve-month period.

Membership income in Colombia declined slightly in fiscal 2020 due to the decline in total Colombia membership accounts because of restrictions on in-club traffic from COVID-19 when most members renew or sign-up.

We began offering our Platinum membership program in Colombia in June 2020 and we intend to expand our Platinum membership program to the remaining two markets that do not currently offer platinum membership. The annual fee for a Platinum membership in most markets is approximately $75. The Platinum membership program provides members with a 2% rebate on most items, up to an annual maximum of $500. We record the 2% rebate as a reduction on net merchandise sales at the time of the sales transaction.

Our trailing twelve-month renewal rate was 80.5% and 85.7% for the periods ended August 31, 2020 and August 31, 2019, respectively. We believe the renewal rate decline is driven by a significant decline of in-club traffic in some of our markets due to governmental COVID-19 movement restrictions on their respective general populaces. Historically, membership renewals have primarily been transacted in the club at the time of purchase of merchandise or services when a membership has expired. Since COVID-19 and the notable increase of online traffic due to our new online catalogue and Click & GoTM services, sign-ups and renewals completed online have been increasing.

Other Revenue

Other revenue primarily consists of non-merchandise revenue from freight and handling fees generated from our marketplace and casillero operations, interest-generating portfolio from our co-branded credit cards, and rental income from operating leases where the Company is the lessor.

Years Ended

Amount Increase/(Decrease) from‎prior year % Change Amount

Comparison of 2020 to 2019

Other revenue for the year ended August 31, 2020 includes non-merchandise revenue generated by the marketplace and casillero operations of a company we acquired in March 2018, primarily from freight and handlings charges for online orders placed from customers in Latin America to retailers in the United States and delivered to locations throughout Latin America. The $1.4 million increase in non-merchandise revenue compared to the prior year represents higher package volume in the business we acquired in March 2018 during the current year. For the year ended August 31, 2020, the net decrease of $1.5 million in Miscellaneous income was primarily due to $3.1 million of non-recurring income from credit card vendors in the prior year. In the current year we had an increase of $0.9 million on our interest generating portfolio (“IGP”) from our co-branded credit cards and an increase of $0.4 million from Platinum membership rebate compared to the prior year. For the year ended August 31, 2020, the net decrease of $0.5 million in rental income was due to tenants not continuing to lease our excess real estate and concessions we granted to our lessees in response to the COVID-19 pandemic.

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Results of Operations

Results of Operations Consolidated

(Amounts in thousands, except percentages and number of warehouse clubs)

Years Ended

Results of Operations Consolidated August 31, 2020 August 31, 2019

Net merchandise sales

Total gross margin percentage 14.7 % 14.3 %

Revenues

Percentage change from prior period 3.3 % 1.8 %

Comparable merchandise sales

Total comparable merchandise sales increase (decrease) (1.5) % (0.6) %

Total revenue margin

Total revenue margin percentage 16.7 % 16.4 %

Selling, general and administrative

Selling, general and administrative percentage of total revenues 13.0 % 12.8 %

Years Ended

Operating income- by segment

Warehouse clubs

Warehouse clubs at period end 46 43

Warehouse club sales square feet at period end 2,270 2,158

(1)The reconciling items reflect the amount eliminated on consolidation of intersegment transactions.

The following table summarizes the selling, general and administrative expense for the periods disclosed.

Years Ended

August 31, 2020 % of Total ‎Revenue August 31, 2019 % of Total ‎Revenue

Selling, general and administrative detail:

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Comparison of 2020 to 2019

Total gross margin is derived from our Revenue – Net merchandise sales less our Cost of goods sold – Net merchandise sales and represents our sales and cost of sales generated from the business activities of our warehouse clubs. We express our Total gross margin percentage as a percentage of our Net merchandise sales.

On a consolidated basis, total gross margin for fiscal 2020was 14.7%, 40 basis points (0.4%) higher than fiscal 2019. This improvement is attributable to more focused merchandising strategies and inventory management. Net merchandise margins increased across all segments with the Central America segment contributing 20 basis points (0.2%), the Caribbean segment contributing 10 basis points (0.1%), and the Colombia segment contributing 10 basis points (0.1%) to the overall increase.

Total revenue margin is derived from Total revenues, which includes our Net merchandise sales, Membership income, Export sales, and Other revenue and income less our Cost of goods sold for net merchandise sales, Export sales, and Non-merchandise revenues. We express our Total revenue margin as percentage of Total revenues.

Total revenue margin increased 30 basis points (0.3%) for the twelve months ended August 31, 2020 primarily due to improved total gross margins of 40 basis points (0.4%). These total revenue margin improvements were offset by the non-recurring reimbursement payment from one of our credit card vendors in the prior year, which resulted in a 10 basis point (0.1%) decline in total revenue margins.

Selling, general and administrative expenses consist of warehouse club and other operations, general and administrative expenses, pre-opening expenses, and loss on disposal of assets. In total, selling, general and administrative expenses increased $18.4 million to 13.0% of total revenues for the twelve month period ended August 31, 2020 compared to 12.8% for the same period during fiscal year 2019.

Warehouse club and other operations expense increased to 9.7% of total revenues compared to 9.5% for the twelve-month period ended August 31, 2020. The increase is due to operating an additional three warehouse clubs compared to the prior year period. These thee clubs along with two other new clubs that were opened late in fiscal 2019 have not reached sales maturity as of August 31, 2020, thus increasing operational expenses by 20 basis points (0.2%) as a percentage of total revenues.

General and administrative expenses, as a percentage of total revenues, remained flat at 3.2% for the twelve-month periods ended August 31, 2020 and August 31, 2019. The increase in general and administrative expenses of $5.3 million (net of the non-recurring fiscal 2019 charges mentioned below) is primarily due to our investments to support our technology development, talent acquisition, and employee development in fiscal 2020.

In the twelve months, ended August 31, 2019, two non-recurring transactions contributed to general and administrative expenses. First was a $3.8 million charge for separation and other related termination benefits for our former Chief Executive Officer and President who resigned in October 2018 by mutual agreement with the Board of Directors. The second was the final $2.3 million of the amortization of post-combination compensation expense related to the Aeropost business that we acquired in March 2018.

Pre-opening expense remained flat at (0.1%) of total revenues for fiscal 2020 and 2019. The decrease in overall expense is attributable to fewer non-recurring costs associated with our current new club pipeline than we incurred to open our five new clubs in the past 15 months.

Operating income for the twelve months ended August 31, 2020, increased to $123.0 million, (3.7% of total revenue) compared to $115.2 million (3.6% of total revenue) for the same period last year. Higher total gross margins as a percent of total revenue and margin dollars, partially offset by incrementally higher general and administrative expenses, were the primary factors for the overall 10 basis point (0.1%) increase in operating income.

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Interest Expense

Years Ended

August 31, August 31,

Amount Increase/‎(decrease)‎from prior‎year Amount

Interest expense related to hedging activity 2,416 1,905 511

Net interest expense reflects borrowings by PriceSmart, Inc. and our wholly owned foreign subsidiaries to finance new land acquisition and construction for new warehouse clubs, warehouse club expansions and distribution centers, the capital requirements of warehouse club and other operations and ongoing working capital requirements.

Comparison of 2020 to 2019

Net interest expense increased $3.7 million for the year ended August 31. 2020. Interest expense related to loans increased $1.9 million primarily due to higher average long-term loan balances to fund our capital projects and recent drawdowns on short-term lines of credit as part of our COVID-19 related efforts to secure cash. Interest expense related to hedging activity increased $1.9 million due to an increase in hedging activity as we seek to mitigate our foreign currency exposure risk on our loan agreements entered into during fiscal 2020 to finance construction of future anticipated warehouse clubs.

Other Income (Expense), net

Other income (expense), net consists of currency gains or losses, as well as net benefit costs related to our defined benefit plans and the one time settlement of a business combination escrow account.

Years Ended

August 31, August 31,

Amount Increase‎from‎prior year Amount

Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses) are recorded as currency gains or losses. Additionally, gains or losses from transactions denominated in currencies other than the functional currency of the respective entity also generate currency gains or losses.

Comparison of 2020 to 2019

For the twelve-month period ended August 31, 2020 the primary driver of Other income (expense), net included a $1.4 million loss associated with foreign currency transactions and the revaluation of monetary assets and liabilities in several of our markets. The foreign currency gains and losses resulted from the revaluation of net U.S. dollar assets and liabilities in markets where the local functional currency revalued or devalued against the U.S. dollar, and from exchange transactions, net of any exchange reserve movements. There were also $169,000 of expenses recorded for our defined benefit plans. These net expenses were partially offset by a $705,000 gain resulting from a settlement payment we received with respect to outstanding claims we made related to the acquisition of the business that we purchased in March of 2018.

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Provision for Income Taxes

The tables below summarize the effective tax rate for the periods reported:

Years Ended

August 31, August 31,

Amount Increase/‎(decrease)‎ from‎prior year Amount

Effective tax rate 32.5 % 33.8 %

Comparison of 2020 to 2019

For fiscal 2020, the effective tax rate was 32.5%. The decrease in the effective rate versus the prior year was primarily attributable to the following factors:

1.The comparably unfavorable impact of 1.3% due to the prior year’s one-time reversal of valuation allowances on net deferred tax assets in the Company’s Colombia subsidiary.

2.The comparably unfavorable impact of 1.3% resulting from valuation allowances on deferred tax assets from foreign tax credits that, incidental to U.S. Tax Reform, are no longer deemed recoverable.

3.The comparably favorable impact of 1.2% resulting from changes in income tax liabilities from uncertain tax position for which the applicable statutes of limitations have expired.

4.The comparably favorable impact of 1.1% resulting from the effect of the change in foreign currency value and related adjustments.

5.The comparably favorable impact of 0.4% due to a greater portion of income falling into lower tax jurisdictions.

6.The comparably favorable impact of 0.7% resulting from nonrecurrence of non-deductible severance compensation for our former Chief Executive Officer.

Other Comprehensive Loss

Other comprehensive loss for fiscal years 2020 and 2019 resulted primarily from foreign currency translation adjustments related to the assets and liabilities and the translation of the statements of income related to revenue, costs and expenses of our subsidiaries whose functional currency is not the U.S. dollar. When the functional currency in our international subsidiaries is the local currency and not U.S. dollars, the assets and liabilities of such subsidiaries are translated to U.S. dollars at the exchange rate on the balance sheet date, and revenue, costs and expenses are translated at average rates of exchange in effect during the period. The corresponding translation gains and losses are recorded as a component of accumulated other comprehensive income or loss. These adjustments will not affect net income until the sale or liquidation of the underlying investment. The reported other comprehensive income or loss reflects the unrealized increase or decrease in the value in U.S. dollars of the net assets of the subsidiaries as of the date of the balance sheet, which will vary from period to period as exchange rates fluctuate.

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Other Comprehensive Loss

Years Ended

August 31, August 31,

Comparison of 2020 to 2019

Our other comprehensive loss of approximately $32.5 million for fiscal 2020 resulted primarily from the comprehensive loss of approximately $29.4 million from foreign currency translation adjustments related to assets and liabilities and the translation of revenue, costs and expenses on the statements of income of our subsidiaries whose functional currency is not the U.S. dollar. During fiscal 2020, the largest translation adjustments were related to the devaluation of the local currencies against the U.S. dollar for our Colombia, Dominican Republic and Jamaica subsidiaries, partially offset by the translation adjustment for the appreciation of the local currency against the U.S. dollar of our Costa Rica subsidiary. Additional losses of approximately $3.1 million related to unrealized losses on changes in our derivative obligations.

LIQUIDITY AND CAPITAL RESOURCES

Financial Position and Cash Flow

Our operations have historically supplied us with a significant source of liquidity. Our cash flows provided by operating activities, supplemented with our long-term debt and short-term borrowings, have generally been sufficient to fund our operations while allowing us to invest in activities that support the long-term growth of our operations and to pay dividends on our common stock. We evaluate our funding requirements on a regular basis to cover any shortfall in our ability to generate sufficient cash from operations to meet our capital requirements. We may consider funding alternatives to provide additional liquidity if necessary. There is some uncertainty surrounding the continuing potential impact of the novel coronavirus outbreak (COVID-19) on our results of operations and cash flows. As a result, we have taken steps to increase cash available on-hand, including, but not limited to, drawing funds on our short-term facilities and lengthening vendor payment terms. Refer to Part II. “Item 8. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements, Note 11 - Debt” for additional information regarding our drawdown on our short-term facilities and long-term borrowings.

Repatriation of cash and cash equivalents held by foreign subsidiaries may require us to accrue and pay taxes. We have no plans at this time to repatriate cash through the payment of cash dividends by our foreign subsidiaries to our domestic operations and, therefore, have not accrued taxes that would be due from repatriation.

The following table summarizes the cash and cash equivalents, including restricted cash, held by our foreign subsidiaries and domestically (in thousands).

August 31, August 31,

Total cash and cash equivalents, including restricted cash $ 303,771 $ 106,236

The following table summarizes the short-term investments held by our foreign subsidiaries and domestically (in thousands).

August 31, August 31,

Amounts held by foreign subsidiaries $ 46,509 $ 17,045

Amounts held domestically — —

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As of August 31, 2020, certificates of deposits with a maturity of over a year held by our foreign subsidiaries and domestically were $1.5 million. There were no certificates of deposits with a maturity of over a year held by our foreign subsidiaries or domestically as of August 31, 2019.

From time to time, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products. Since fiscal 2017, we have experienced this situation in Trinidad and have been unable to source a sufficient level of tradeable currencies. We are working with our banks in Trinidad to source tradeable currencies. We expect the illiquid market conditions in Trinidad to continue. Refer to Part II. “Item 7. Management’s Discussion & Analysis – Factors Affecting Our Business” for our quantitative analysis and discussion.

The following table summarizes our significant sources and uses of cash and cash equivalents:

Years Ended

August 31, August 31,

Net cash provided by operating activities $ 259,268 $ 170,332

Net cash provided by (used in) financing activities 75,563 (31,955)

Net increase in cash and cash equivalents $ 197,535 $ 9,322

Net cash provided by operating activities totaled $259.3 million and $170.3 million for the twelve months ended August 31, 2020 and 2019, respectively. Our cash flow provided by operations is primarily derived from net merchandise sales and membership fees. Cash flows used in operations generally consists of payments to our merchandise vendors, warehouse operating costs (including payroll, employee benefits and utilities), as well as payments for income taxes. The $89.0 million increase in net cash provided by operating activities was primarily due to a net increase of $78.9 million in operating assets and liabilities and a net increase of $10.1 million from changes in non-cash reconciling items. The $78.9 million increase in operating assets and liabilities is primarily due to net working capital improvements of $96.9 million, which resulted from a $32.0 million decrease in merchandise inventories and a $64.9 million increase in accounts payable during the twelve-months ended August 31, 2020 compared to the prior year. The decrease in merchandise inventories is primarily the result of lower replenishment of certain items within our non-food categories in response to changes in consumer preferences toward purchases of more essential goods during the ongoing COVID-19 crisis in addition to more focused merchandising strategies and inventory management. The accounts payable increase resulted primarily from temporary extensions of vendor terms negotiated as part of our response to the COVID-19 pandemic. The $96.9 million increase in working capital was offset by a $18.0 million decrease year-over-year in all other balance sheet changes. The balance sheet changes were primarily driven by increases in long-term assets and accounts receivable of $11.7 million and $2.2 million, respectively. The increases in long term assets is driven by the net movements of $5.5 million in long term tax receivables and $5.2 million in net long term derivative assets. In addition, there was a decrease of $4.1 million in deferred membership income due to the decline in our membership base and our 12-month renewal rate. The $10.1 million change in non-cash reconciling items was primarily due to the increase in net income and depreciation for the twelve-month period ended August 31, 2020 compared to the prior year.

Net cash used in investing activities totaled $131.2 million and $124.7 million for the twelve months ended August 31, 2020 and 2019, respectively. Our cash used in investing activities is primarily for the construction of and improvements to our warehouse clubs and management of our cash investments. The $6.5 million increase in cash used in investing activities is primarily the result of a net $46.2 million increase in short-term and long-term certificate of deposit purchases and fewer settlements compared to the same twelve-month period a year-ago. The increase in purchases and fewer settlements is the result of additional Trinidad dollars we have on-hand and that we have invested into certificates of deposit to generate interest income while we actively work to convert those Trinidad dollars into U.S. dollars as availability allows. Refer to Part II. “Item 7. Management’s Discussion and Analysis – Factors Affecting Our Business” for additional information regarding the current U.S. dollar illiquidity we are experiencing in that market. We also had a $39.7 million decrease in construction expenditures due to fewer warehouse clubs currently being constructed compared to the same twelve-month period a year ago.

Net cash provided by financing activities totaled $75.6 million versus net cash used in financing activities of $32.0 million for the twelve months ended August 31, 2020 and 2019, respectively. Our cash flows provided by or used in financing activities are used primarily to fund our working capital needs and our warehouse club expansions and investments. The $107.6 million increase in cash provided by financing activities is primarily the result of a net increase of proceeds from long-term borrowings of $55.7 million compared to a year ago and a net $50.6 million increase in cash provided by additional short-term borrowings, compared to the same twelve-month period a year ago. We have increased our short-term borrowings to increase

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available cash on hand to meet current and any future potential operational cash needs as a result of COVID-19. We may pay down these short-term borrowings in the future should we determine we have sufficient cash availability.

Short-Term Borrowings and Long-Term Debt

Our financing strategy is to ensure liquidity and access to capital markets while minimizing our borrowing costs. The proceeds of these borrowings were or will be used for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, acquisitions, and repayment of existing debt. Refer to Part II. “Item 8. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements, Note 11 - Debt.” for further discussion.

Contractual Obligations Payments due in:

Warehouse club construction commitments (3) 5,100 — — — 5,100

(1)Long-term debt includes debt with both fixed and variable interest rates. We have used rates as of August 31, 2020 to calculate future estimated payments related to the variable rate items. For the portion of the loans subject to interest rate swaps and cross-currency interest rate swaps, we have used the fixed interest rate as set by the interest rate swaps.

(2)Operating lease obligations have been reduced by approximately $0.9 million to reflect the amounts net of expected sublease income. Certain obligations under leasing arrangements are collateralized by the underlying asset being leased. Future minimum lease payments include $0.6 million of lease payment obligations for the prior leased Miami distribution center. For the purposes of calculating the minimum lease payments, a reduction is reflected for the actual sub-lease income the Company expects to receive during the remaining lease term. This sub-lease income was also considered, for the purposes of calculating the exit obligation, which was immaterial as of August 31, 2020.

(3)The amounts shown represent contractual obligations for construction services not yet rendered.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on its financial condition or consolidated financial statements.

Repurchase of Equity Securities and Reissuance of Treasury Shares

At the vesting dates for restricted stock awards to our employees, we repurchase a portion of the shares that have vested at the prior day's closing price per share, with the funds used to pay the employees' minimum statutory tax withholding requirements related to the vesting of restricted stock awards. We do not have a stock repurchase program.

Shares of common stock repurchased by us are recorded at cost as treasury stock and result in the reduction of stockholders’ equity in our consolidated balance sheets. We may reissue these treasury shares.

The following table summarizes the shares repurchased during fiscal years 2020, 2019 and 2018:

Years Ended

August 31, August 31, August 31,

Cost of repurchase of shares (in thousands) $ 3,651 $ 4,604 $ 3,183

We reissued 234,400 treasury shares as part of our stock-based compensation programs during fiscal 2020 and 63,000 treasury shares during fiscal 2019, but we did not reissue any treasury shares during fiscal 2018.

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Dividends

Refer to Part II. “Item 8. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements, Note 6 - Stockholders’ Equity” for further discussion.

Derivatives

Refer to Part II. “Item 8. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements, Note 13 - Derivative Instruments and Hedging Activities” for further discussion.

Critical Accounting Estimates

Our financial statements are prepared in accordance with GAAP in the United States. The preparation of our consolidated financial statements requires that management make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require management to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We evaluate our accounting policies and significant estimates on an ongoing basis, including those related to business acquisitions, contingencies and litigation, income taxes, value added taxes, and long-lived assets. We base our estimates on historical experience and on other assumptions that management believes to be reasonable under the present circumstances. Using different estimates could have a material impact on our financial condition and results of operations.

We believe that the accounting policies described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. For further information, refer to Part II. “Item 8. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements, Note 2 - Summary of Significant Accounting Policies.”

Income Taxes

We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized. As of August 31, 2020, we evaluated our deferred tax assets and liabilities and determined that a valuation allowance was necessary for certain deferred tax asset balances, primarily because of the existence of significant negative objective evidence, such as the fact that certain subsidiaries are in a cumulative loss position for the past three years, indicating that certain net operating loss carry-forward periods are not sufficient to realize the related deferred tax assets. We also specifically considered whether foreign tax credit balances could be utilized in the foreseeable future in light of current and future U.S. tax liabilities. We have historically applied foreign tax credits, generated from taxes withheld on certain payments PriceSmart receives from our foreign subsidiaries, to reduce U.S. income tax liabilities. However, as an incidental result of U.S. tax reform, following the reduction of the U.S. corporate income tax rate from 35% to 21%, we expect foreign tax credits generated to exceed U.S. income tax liability for the foreseeable future. Therefore, for the twelve-month period ended August 31, 2020 and August 31, 2019, we have recorded valuation allowance of $8.5 million and $6.7 million against our foreign tax credits.

We are required to file federal and state income tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires us to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by us. We, in consultation with our tax advisors, base our tax returns on interpretations that we believe to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which we file our tax returns. As part of these reviews, a taxing authority may disagree with respect to the interpretations we used to calculate our tax liability and therefore require us to pay additional taxes.

We accrue an amount for our estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has 50% or less likelihood of being sustained. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as appropriate. During fiscal 2020, we released $2.4 million of certain income tax contingency

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accruals due to the expiration of the statute of limitations. There were no material changes in our uncertain income tax positions for the period ended on August 31, 2019.

Tax Receivables

We pay Value Added Tax (“VAT”) or similar taxes, income taxes, and other taxes within the normal course of our business in most of the countries in which we operate related to the procurement of merchandise and/or services we acquire and/or on sales and taxable income. VAT is a form of indirect tax applied to the value added at each stage of production (primary, manufacturing, wholesale and retail). This tax is similar to, but operates somewhat differently than, sales tax paid in the United States. We generally collect VAT from our members upon sale of goods and services and pay VAT to our vendors upon purchase of goods and services. Periodically, we submit VAT reports to governmental agencies and reconcile the VAT paid and VAT received. The net overpaid VAT may be refunded or applied to subsequent returns, and the net underpaid VAT must be remitted to the government. With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due this creates an income tax receivable. In most countries where we operate, the governments have implemented additional collection procedures, such as requiring credit card processors to remit a portion of sales processed via credit and debit cards directly to the government as advance payments of VAT and/or income tax. This collection mechanism generally leaves us with net VAT and/or income tax receivables, forcing us to process significant refund claims on a recurring basis. These refund or offset processes can take anywhere from several months to several years to complete.

In most countries where we operate, there are defined and structured processes to recover VAT receivables via refunds or offsets. However, in one country without a clearly defined refund process, the Company is actively engaged with the local government to recover VAT receivables totaling $7.0 million and $5.1 million as of August 31, 2020 and August 31, 2019, respectively. In addition, in two other countries where the Company operates, there have been changes in the method of computing minimum tax payments, under which the governments have sought to require the Company to pay taxes based on a percentage of sales rather than taxable income. As a result, we have made and may continue to make income tax payments substantially in excess of those we would expect to pay based on taxable income. The Company had income tax receivables of $10.4 million and $7.8 million and deferred tax assets of $2.8 million and $2.7 million as of August 31, 2020 and August 31, 2019, respectively, in these countries. While the rules related to refunds of income tax receivables in these countries are either unclear or complex, the Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets, because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests. Similarly, we have not placed any recoverability allowances on tax receivables that arise from payments we are required to make originating from tax assessments that we are appealing, as we believe it is more likely than not that we will ultimately prevail in the related appeals.

Our policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:

Short-term VAT and Income tax receivables, recorded as Other current assets: This classification is used for any countries where our subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. We also classify as short-term any approved refunds or credit notes to the extent that we expect to receive the refund or use the credit notes within one year.

Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where our subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when we do not expect to eventually prevail in our recovery of such balances. We do not currently have any allowances provided against VAT and income tax receivables.

Long-lived Assets

We periodically evaluate our long-lived assets for indicators of impairment. Indicators that an asset may be impaired are:

the asset's inability to continue to generate income from operations and positive cash flow in future periods;

loss of legal ownership or title to the asset;

significant changes in its strategic business objectives and utilization of the asset(s); and

the impact of significant negative industry or economic trends.

Management's judgments are based on market and operational conditions at the time of the evaluation and can include management's best estimate of future business activity, which in turn drives estimates of future cash flows from these assets. These periodic evaluations could cause management to conclude that impairment factors exist, requiring an adjustment of these assets to their then-current fair market value. Future business conditions and/or activity could differ materially from the

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projections made by management causing the need for additional impairment charges. No impairment charges have been recorded during fiscal 2020 related to the loss of legal ownership or title to assets; significant changes in the Company's strategic business objectives or utilization of assets; or the impact of significant negative industry or economic trends. Loss on disposal of assets recorded during the years reported resulted from improvements to operations and normal preventive maintenance.

Goodwill and Other Indefinite-Lived Intangibles

Goodwill and other indefinite-lived acquired intangible assets are not amortized, but are evaluated for impairment annually or whenever events or changes in circumstances indicate that the value of a certain asset may be impaired. Generally, this evaluation begins with a qualitative assessment to determine whether a quantitative impairment test is necessary. If we determine, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the reporting unit substantially in excess of the carrying amount cannot be assured, then a quantitative impairment test would be performed. The quantitative test for impairment requires management to make judgments relating to future cash flows, growth rates and economic and market conditions. These evaluations are based on determining the fair value of a reporting unit or asset using a valuation method such as discounted cash flow or a relative, market-based approach. Historically, our reporting units and other indefinite-lived acquired intangible assets have generated sufficient returns to recover the cost of goodwill and other indefinite-lived acquired intangible assets. Because of the nature of the factors used in these tests, if different conditions occur in future periods, future operating results could be materially impacted. For approximately $45.2 million of certain acquired indefinite-lived intangible assets, the fair value approximated the carrying value; any deterioration in the fair value may result in an impairment charge.

Seasonality and Quarterly Fluctuations

Historically, our merchandising businesses have experienced holiday retail seasonality in their markets. In addition to seasonal fluctuations, our operating results fluctuate quarter-to-quarter as a result of economic and political events in markets that we serve, the timing of holidays, weather, the timing of shipments, product mix, and currency effects on the cost 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.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in interest rates, foreign currency exchange rates and commodity price risk. These market risks arise in the normal course of business. We do not engage in speculative trading activities. To manage the risk arising from these exposures, we utilize interest rate swaps, cross-currency interest rate swaps, non-deliverable foreign currency forward contracts and loans denominated in foreign currencies. For a discussion of our accounting policies for derivative instruments and further disclosures, refer to Part II. “Item 8. Financial Statements and Supplementary Data: Notes to Consolidated Financial Statements, Note 13 - Derivative Instruments and Hedging Activities.”

Each market risk sensitivity analysis presented below is based on hypothetical scenarios used to calibrate potential risk and do not represent our view of future market changes. The effect of a change in a particular assumption is calculated without adjusting any other assumption. In reality, however, a change in one factor could cause a change in another factor, which may magnify or negate other sensitivities.

Interest Rate Risk

We are exposed to changes in interest rates as a result of our short-term borrowings and long-term debt borrowings. We have mitigated a portion of our interest rate risk by managing the mix of fixed and variable rate debt and by entering into interest rate swaps and cross-currency interest rate swaps to hedge interest rate risk. The notional amount, interest payment and maturity dates of the swap match the terms of the associated debt.

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The table below provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations, the table represents the principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps, including cross-currency interest rate swaps, the table represents the contractual cash flows and weighted-average interest rates by the contractual maturity date, unless otherwise noted. The notional amounts are used to calculate contractual cash flows to be exchanged under the contracts. The weighted-average variable rates are based upon prevailing market interest rates and the outstanding balances as of August 31, 2020.

Annual maturities of long-term debt and derivatives are as follow (in thousands):

Twelve Months Ended August 31,

(Amounts in thousands)

Long-Term Debt:

Derivatives:

Interest Rate Swaps:

Cross-Currency Interest Rate Swaps:

(1)The Company has disclosed the future annual maturities of long-term debt, for which it has entered into cross-currency interest rate swaps by using the derivative obligation as of August 31, 2020 to estimate the future commitments. Therefore, the total annual commitments reflects these obligations, including the effect of the cross-currency interest rate swaps on the total-long term debt as disclosed on the consolidated balance sheet.

Foreign Currency Risk

We have foreign currency risks related to sales, operating expenses and financing transactions in currencies other than the U.S. dollar. As of August 31, 2020, we had a total of 46 consolidated warehouse clubs operating in 12 foreign countries and one U.S. territory, 36 of which operate under currencies other than the U.S. dollar. Approximately 48.2% of our net merchandise sales are comprised of products we purchased in U.S. dollars and were sold in countries whose currencies were other than the U.S. dollar. Approximately 77.5% of our net merchandise sales are in markets whose functional currency is other than the U.S. dollar. 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.

Currency exchange rate changes either increase or decrease the cost of imported products that we purchase in U.S. dollars and price in local currency. Price changes can impact the demand for those products in the market. Currency exchange rates also affect the reported sales of the consolidated company when local currency-denominated sales are translated to U.S. dollars. In addition, we revalue all U.S. dollar denominated assets and liabilities within those markets that do not use the U.S. dollar as the functional currency. These assets and liabilities include, but are not limited to, excess cash permanently reinvested offshore and the value of items shipped from the U.S. to our foreign markets. The gain or loss associated with this revaluation, net of reserves, is recorded in other income (expense).

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Foreign currencies in most of the countries where we operate have historically devalued against the U.S. dollar and are expected to continue to devalue. The following tables summarize by country, for those countries with functional currencies other than the U.S. dollar, the weakening of the countries' currency against the U.S. dollar (devaluation) or the strengthening of their currencies (revaluation):

Revaluation/(Devaluation)

Twelve Months Ended August 31,

Country % Change % Change

We seek to manage foreign exchange risk by (1) adjusting prices on goods acquired in U.S. dollars on a periodic basis to maintain our target margins after taking into account changes in exchange rates; (2) obtaining local currency loans from banks within certain markets where it is economical to do so and where management believes the risk of devaluation and the level of U.S. dollar denominated liabilities warrants this action; (3) reducing the time between the acquisition of product in U.S. dollars and the settlement of that purchase in local currency; (4) maintaining a balance between assets held in local currency and in U.S. dollars; and (5) by entering into cross-currency interest rate swaps and forward currency derivatives. We have local-currency-denominated long-term loans in Costa Rica and Guatemala; we have cross-currency interest rate swaps in Colombia and Honduras; and we have interest rate swaps in Panama and in the United States. Turbulence in the currency markets can have a significant impact on the value of the foreign currencies within the countries in which we operate. We report the gains or losses associated with the revaluation of these monetary assets and liabilities on our consolidated statements of income under the heading “Other income (expense), net.” Future volatility and uncertainties regarding the currencies in the countries that we operate in could have a material impact on our operations in future periods. However, there is no way to accurately forecast how currencies may trade in the future and, as a result, we cannot accurately project the impact of the change in rates on our future demand for imported products, reported sales, or financial results.

We are exposed to foreign exchange risks related to U.S. dollar-denominated and other foreign-denominated cash, cash equivalents and restricted cash, to U.S. dollar-denominated intercompany debt balances and to other U.S. dollar-denominated debt/asset balances (excluding U.S. dollar-denominated debt obligations for which we hedge a portion of the currency risk inherent in the interest and principal payments), within entities whose functional currency is not the U.S. dollar. As part of the adoption of the new leasing standard, we recorded several monetary liabilities on the consolidated balance sheet that are exposed to foreign exchange movements. These monetary liabilities arise from leases denominated in a currency that is not the functional currency of the Company’s local subsidiary. The monetary liability for these leases 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.

The following table discloses the net effect on other expense, net for U.S. dollar-denominated and other foreign-denominated accounts relative to a hypothetical simultaneous currency revaluation based on balances as of August 31, 2020 (in thousands) including the new lease-related monetary liabilities described above:

(1)Amounts are before consideration of income taxes.

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Information about the financial impact of foreign currency exchange rate fluctuations for the twelve months ended August 31, 2020 is disclosed in Part II. “Item 7. Management’s Discussion and Analysis – Other Expense, net”.

From time to time, we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through merchandise sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products. Since fiscal 2017, we have experienced this situation in Trinidad and have been unable to source a sufficient level of tradeable currencies. We are working with our banks in Trinidad to source tradeable currencies. We expect the illiquid market conditions in Trinidad to continue. Refer to Part II. “Item 7. Management’s Discussion & Analysis – Factors Affecting Our Business” for our quantitative analysis and discussion.

Examples of countries where we have significant U.S. dollar net asset positions subjecting us to exchange rate losses if the local currency strengthens against the U.S. dollar are our Jamaica, Nicaragua, and Costa Rica subsidiaries with balances of $24.4 million, $20.8 million and $20.2 million, respectively as of August 31, 2020. Examples of countries where we have significant U.S. dollar net liability positions subjecting us to exchange rate losses if the local currency weakens against the U.S. dollar are our Dominican Republic and Honduras subsidiaries with balances of $25.0 million and $24.8 million, respectively as of August 31, 2020.

We are also exposed to foreign exchange risks related to local-currency-denominated cash and cash equivalents, to local-currency-denominated debt obligations, to local-currency-denominated current assets and liabilities and to local-currency-denominated long-term assets and liabilities within entities whose functional currency is not the U.S. dollar. The following table discloses the net effect on other comprehensive income (loss) for these local currency denominated accounts relative to hypothetical simultaneous currency devaluation in all the countries listed in the table above, based on balances as of August 31, 2020:

In addition, we are exposed to foreign currency exchange rate fluctuations associated with our U.S. dollar-denominated debt obligations that we hedge. We hedge a portion of the currency risk inherent in the interest and principal payments associated with this debt through the use of cross-currency interest rate swaps. The terms of these swap agreements are commensurate with the underlying debt obligations. The aggregate fair value of these swaps was in a net asset position of approximately $44,000 at August 31, 2020 and approximately $2.0 million at August 31, 2019. A hypothetical 10% increase in the currency exchange rates underlying these swaps from the market rates at August 31, 2020 would have resulted in a further increase in the value of the swaps of approximately $1.6 million. Conversely, a hypothetical 10% decrease in the currency exchange rates underlying these swaps from the market rates at August 31, 2020 would have resulted in a net decrease in the value of the swaps of approximately of $3.1 million.

From time to time we use non-deliverable forward foreign exchange contracts primarily to address exposure to U.S. dollar merchandise inventory expenditures made by our international subsidiaries whose functional currency is other than the U.S. dollar. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting. The market risk related to foreign currency forward contracts would be measured by estimating the potential impact of a 10% change in the value of the U.S. dollar relative to the local currency exchange rates. The net increase or decrease in the fair value of these derivative instruments would be economically offset by the gains or losses on the underlying transactions.

Commodity Price Risk

The increasing price of oil and certain commodities could have a negative effect on our operating costs and sales. Higher oil prices can negatively impact the economic growth of the countries in which we operate, thereby reducing the buying power of our members. Higher oil prices can also increase our operating costs, particularly utilities and distribution expenses. Inflationary pressures on various commodities also may impact consumer spending. We do not currently seek to hedge commodity price risk.

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Item 8. Financial Statements and Supplementary Data

See the list of financial statements filed with this report under Part IV. Item 15 below.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

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Item 9A. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

As of August 31, 2020, under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). These disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by the Company in its periodic reports with the SEC is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that the information is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The design of any disclosure controls and procedures also is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Annual Report on Form 10-K.

(b) Management’s report on internal control over financial reporting.

Internal control over financial reporting refers to the process designed by, or under the supervision of, the Company’s principal executive officer and principal financial officer, and effected by its board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Management is responsible for establishing and maintaining adequate internal control over the Company’s financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision, and with the participation, of the Company’s management, including its principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting. Management has used the 2013 framework set forth in the report entitled “Internal Control-Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of its internal control over financial reporting. Based on its evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of August 31, 2020, the end of its most recent fiscal year.

Ernst & Young LLP, the Company's independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company's internal control over financial reporting as of August 31, 2020, as stated in their report which is included herein.

(c) Changes in internal control over financial reporting.

There have been no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act), during the fiscal year ended August 31, 2020, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as Exhibit 31.1 and 31.2 to this report.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of PriceSmart, Inc.

Opinion on Internal Control over Financial Reporting

We have audited PriceSmart, Inc.’s internal control over financial reporting as of August 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework (the COSO criteria). In our opinion, PriceSmart, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of August 31, 2020, based on the COSO criteria.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCOAB), the consolidated balance sheets of PriceSmart, Inc. as of August 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended August 31, 2020 and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated October 29, 2020, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.



We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.



Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

San Diego, California

October 29, 2020



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Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

PriceSmart has adopted a code of conduct that applies to its principal executive officer, principal financial officer, principal accounting officer, controller, and to all of its other officers, directors, employees and agents. The code of conduct is available on PriceSmart's web site at www.pricesmart.com. PriceSmart intends to disclose on its website future amendments to, or waivers from, certain provisions of its code of conduct within four business days following the date of such amendment or waiver.

The additional information required by Item 10 is incorporated herein by reference from PriceSmart's definitive Proxy Statement for the Annual Meeting of Stockholders under the headings “Proposal 1: Election of Directors,” “Information Regarding the Board of Directors,” “Executive Officers of the Company” and “General – Section 16(a) Beneficial Ownership Reporting Compliance.”

Item 11. Executive Compensation

The information required by Item 11 is incorporated herein by reference from PriceSmart's definitive Proxy Statement for the Annual Meeting of Stockholders under the heading “Executive and Director Compensation.”

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 is incorporated herein by reference from PriceSmart's definitive Proxy Statement for the Annual Meeting of Stockholders under the headings “Securities Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 is incorporated herein by reference from PriceSmart's definitive Proxy Statement for the Annual Meeting of Stockholders under the headings “Certain Transactions” and “Information Regarding the Board of Directors.”

Item 14. Principal Accounting Fees and Services

The information required by Item 14 is incorporated herein by reference from PriceSmart's definitive Proxy Statement for the Annual Meeting of Stockholders under the heading “Proposal 3: Ratification of Selection of Independent Registered Public Accounting Firm.”

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PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) Documents filed as part of this report.

(1) Financial Statements:

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

(2) List of financial statement schedules:

Schedule II – Valuation and Qualifying Accounts

Schedules not listed above have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto.

(3) List of exhibits required by Item 601 of Regulation S-K. See part (b) below.

(b) The following exhibits are filed as a part of this report:

Exhibit

Number Description

3.1(1) Amended and Restated Certificate of Incorporation of the Company.

3.4(19) Second Amended and Restated Bylaws of the Company

4.1(8) Specimen of Common Stock certificate.

4.2* Description of Registrant’s Securities.

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10.26(4)** 2001 Equity Participation Plan of PriceSmart, Inc.

10.28(5)** 2002 Equity Participation Plan of PriceSmart, Inc.

10.30(13)** 2013 Equity Incentive Award Plan of PriceSmart, Inc.

10.31(28)** Amendment to 2013 Equity Incentive Award Plan of PriceSmart, Inc.

10.47 (34)*** Form of Indemnification Agreement

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21.1* Subsidiaries of the Company.

23.1* Consent of Independent Registered Public Accounting Firm.

101.INS Inline XBRL Instance Document

101.SCH Inline XBRL Taxonomy Extension Schema Document

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith as an exhibit.

(1)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 1997 filed with the Commission on November 26, 1997.

(2)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2001 filed with the Commission on April 16, 2001.

(3)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 1999 filed with the Commission on November 29, 1999.

(4)Incorporated by reference to Exhibit A to the definitive Proxy Statement dated December 7, 2001 for the Company's 2002 Annual Meeting of Stockholders filed with the Commission on December 10, 2001.

(5)Incorporated by reference to Exhibit A to the definitive Proxy Statement dated December 11, 2002 for the Company's 2003 Annual Meeting of Stockholders filed with the Commission on December 11, 2002.

(6)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2004 filed with the Commission on November 24, 2004.

(7)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2004 filed with the Commission on April 14, 2004.

(8)Incorporated by reference to the Company’s Registration Statement on Form S-3 filed with the Commission on December 2, 2004.

(9)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q/A for the quarter ended November 30, 2008 filed with the Commission on January 14, 2009.

(10)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2010 filed with the Commission on April 9, 2010.

(11)Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 2012 filed with the Commission on July 9, 2012.

(12)Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 2012 filed with the Commission on January 9, 2013.

(13)Incorporated by reference to the Company's Registration Statement on Form S-8 filed April 4, 2013.

(14)Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended August 31, 2013 filed with the Commission on October 30, 2013.

(15)Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 2014 filed with the Commission on July 10, 2014.

(16)Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended August 31, 2014 filed with the Commission on October 30, 2014.

(17)Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 2014 filed with the Commission on January 8, 2015.

(18)Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 2015 filed with the Commission on July 9, 2015.

(19)Incorporated by reference to the Company’s Form 8-K Filed with the Commission on July 17, 2015.

(20)Incorporated by reference to the Company’s Form 8-K filed with the Commission on September 2, 2015.

(21)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2015 filed with the Commission on October 29, 2015.

(22)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2015 filed with the Commission on January 7, 2016.

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(23)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2016 filed with the Commission on October 27, 2016.

(24)Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended November 30, 2016 filed with the Commission on January 5, 2017.

(25)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2017 filed with the Commission on April 6, 2017.

(26)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2017 filed with the Commission on July 5, 2017.

(27)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2017 filed with the Commission on October 26, 2017.

(28)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2017 filed with the Commission on January 4, 2018.

(29)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2018 filed with the Commission on April 5, 2018.

(30)Incorporated by reference to the Company’s Form 8-K filed with the Commission on April 6, 2018.

(31)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2018 filed with the Commission on October 25, 2018.

(32)Incorporated by reference to the Company’s Form 8-K/A filed with the Commission on November 27, 2018.

(33)Incorporated by reference to the Company’s Form 8-K/A filed with the Commission on March 7, 2019.

(34)Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2019 filed with the Commission on October 29, 2019.

(35)Incorporated by reference to the Company’s Form 8-K filed with the Commission on October 29, 2019.

(36)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2019 filed with the Commission on January 9, 2020.

(37)Incorporated by reference to the Company’s Form 8-K filed with the Commission on April 7, 2020.

(38)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2020 filed with the Commission on April 8, 2020.

(39)Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2020 filed with the Commission on July 9, 2020.

Item 16. Form 10-K Summary

None.

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SCHEDULE II

PRICESMART, INC.

VALUATION AND QUALIFYING ACCOUNTS

(amounts in thousands)

Balance at Charged to Balance at

Beginning Aeropost Costs and End of

of Period Acquisition Expenses Deductions Period

Allowance for doubtful accounts:

55

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PRICESMART, INC.

Date: October 29, 2020 By: /s/ SHERRY S. BAHRAMBEYGUI

Sherry S. Bahrambeygui

Chief Executive Officer

(Principal Executive Officer)

Date: October 29, 2020 By: /s/ MICHAEL L. MCCLEARY

Michael L. McCleary

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

‎

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POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Sherry S. Bahrambeygui and Michael L. McCleary, and each of them singly, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agents full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature Title Date

Sherry S. Bahrambeygui

Michael L. McCleary

/s/ ROBERT E. PRICE Chairman of the Board October 29, 2020

Robert E. Price

/s/ LEON C. JANKS Director October 29, 2020

Leon C. Janks

/s/ MITCHELL G. LYNN Director October 29, 2020

Mitchell G. Lynn

/s/ EDGAR ZURCHER Director October 29, 2020

Edgar Zurcher

/s/ GORDON H. HANSON Director October 29, 2020

Gordon H. Hanson

/s/ GARY M. MALINO Director October 29, 2020

Gary M. Malino

/s/ BEATRIZ V. INFANTE Director October 29, 2020

Beatriz V. Infante

/s/ JEFFREY R.FISHER Director October 29, 2020

Jeffrey R. Fisher

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PRICESMART, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheets as of August 31, 2020 and 2019 F-4

Notes to Consolidated Financial Statements F-11

‎

F-1

Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of PriceSmart, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of PriceSmart, Inc. as of August 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended August 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a), (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at August 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of August 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated October 29, 2020 expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases effective September 1, 2019, using the modified retrospective approach upon the adoption of Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), and the related amendments.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

F-2

Table of Contents

Tax receivables and contingencies

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1997.

San Diego, California

October 29, 2020

F-3

Table of Contents

PRICESMART, INC.

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

ASSETS

Current Assets:

Short-term restricted cash 185 54

Operating lease right-of-use assets, net 119,533 —

Investment in unconsolidated affiliates 10,602 10,697

LIABILITIES AND EQUITY

Current Liabilities:

Other accrued expenses and other current liabilities 37,731 32,442

Operating lease liabilities, current portion 8,594 —

Long-term portion of deferred rent — 11,198

Long-term income taxes payable, net of current portion 5,132 5,069

Long-term operating lease liabilities 124,181 —

F-4

Table of Contents

Stockholders' Equity:

Tax benefit from stock-based compensation 11,486 11,486

Noncontrolling interest in consolidated subsidiaries 1,013 928

See accompanying notes.

F-5

Table of Contents

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF INCOME

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

Years Ended August 31,

Revenues:

Operating expenses:

Cost of goods sold:

Selling, general and administrative:

Asset impairment — — 1,929

Other income (expense):

Loss of unconsolidated affiliates (95) (61) (8)

Less: net income attributable to noncontrolling interest (72) (298) (75)

Shares used in per share computations: