PriceSmart Inc (PSMT) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the PriceSmart announces fiscal 2002 second quarter results. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Allan Youngberg. Sir, you may begin.

Welcome.

Gil Partida, the company's President and CEO, and Bill Naylon, the company's Chief Operating Officer, will join me in presenting the results of operations for the second quarter and year-to-date ended February 28, 2002.

I'd like to remind listeners that this presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. I encourage you to review the "Factors That May Affect Future Performance" section of our annual report on Form 10-K for additional information concerning risk factors that could cause differences from our actual performance stated today.

Thank you, Allan. Congratulations to our employees for achieving record sales and delivering strong financial results for the first two quarters.

Our goals for fiscal year 2002 were to open up six new stores and achieve revenues of $650 million. Because of this year's global economic slowdown, coupled with the impact of September 11, we decided to limit our store openings to four this fiscal year. As of today's date, four new stores have opened -- two within the last 30 days. We are on track to achieve our revenue goal of $650 million.

For the first six months of the year, operating income increased 47 percent, to $7.5 million, from $5.1 million, even after deducting a $1.7 million charge related to settlement costs in the Philippines. The settlement removes a cloud from what is a very good market for PriceSmart. To date we opened three stores in the Philippines, with two additional stores to be opened in FY '03. We also signed a deal to open stores in Mexico with , one of Mexico's largest grocery and retail store chains. buying power will also allow PriceSmart to immediately be competitive in Mexico. Although the Mexican retail landscape is competitive, the club format is emerging as one of the most successful retail formats in Mexico. With over 100 million consumers, and over half a trillion dollars of GDP, we believe there is a significant market for our format to serve untapped and underserved areas of Mexico.

We appointed Bill Naylon as Chief Operating Officer in January. His 17 years of warehouse clubs experience, including on the ground international experience will serve PriceSmart well. Over the last three years, PriceSmart has successfully opened 24 stores in 12 international markets. Our results to date have validated our business model. And I would now like to turn the presentation over to Bill for his comments.

Thanks Gil. We have completed our store openings this year. The next two quarters will be spent focusing on operations, particularly in our new markets. We believe that there are significant cost savings that can be attained by regionalizing back-office costs, and increasing employee productivity. We have already made great strides in reducing warehouse expenses in Central America and the Dominican Republic, and we will now do so in our other markets. We are also taking advantage of PriceSmart's strong position in our markets. Last year alone, we built and Payless has opened 14 locations next to our stores. The synergies with Payless have been positive for both companies, and will also generate approximately $700,000 in rental income per year, per PriceSmart. We have been working on developing the capability of mining our membership database. We will soon be able to get specific information on the purchasing habits of our members, which will allow us to take advantage of many opportunities this information can provide, for merchandising to developing additional income strains. Finally, I am very pleased with the team we have assembled across the world. We have been fortunate to have hired many of the best and brightest people in the countries we operate in. These people are helping to rapidly develop a culture that believes in and is committed to improving the quality of our members' lives and delivering solid financial results.

Allan will now discuss our financial performance in more detail.

Thanks, Bill.

Net income in the second quarter was 1.6 million or 24 cents per share compared to 2.5 million or 38 cents per share. However, prior to the settlement cost this quarter and non-recurring income last year of 385,000, net income on a comparative basis increased to 3.3 million or 50 cents per share compared to 2.1 million or 32 cents per share.

Net income year-to-date was 2.7 million or 41 cents per share compared to 3.4 million or 50 cents per share. Prior to those settlement costs this year and non-recurring income last year of 1.2 million, net income on a comparative basis increased to 4.4 million or 67 cents per share compared to 2.2 million or 33 cents per share.

Net income earnings per share have been reduced by three cents per share in the second quarter and year-to-date as a result of 191,000 in preferred dividends related to the convertible preferred stock issued in January.

Warehouse sales increased 39 percent in the second quarter to 168.6 million and increased year-to-date 37 percent to 311.4 million. Comparable warehouse sales increased 1.6 percent 1.5 percent 26 weeks ended March 3, the fifth consecutive quarter-over-quarter increase.

Our comparative sales are reported in U.S. dollars and not in foreign currency of a particular country. For example, our two largest markets -- Dominican Republic and Costa Rica -- comparative warehouse sales in local currencies increased thirteen-and-a-half percent and 9.4 percent respectively for the 13 weeks ended March 3.

Membership and other revenues increased to 2.9 percent from 2.8 percent in the second quarter, and increased to three percent from 2.9 percent year-to-date. Total membership accounts now stand at 552,000 or one million cardholders.

Merchandise margins declined in the second quarter to 14.4 percent from 14.6 percent, primarily due to reduction in sales penetration in our 17 Latin America stores of higher margin U.S. non-food items as consumers spent more food necessities. Merchandise margins remained ahead year-to-date at 14.5 percent compared to 14.2 percent. Combined margins from merchandise, membership and other revenues in the second quarter declined to 17.2 percent from 17.4, and increased year-to-date to 17.4 percent from 17.1 percent. Warehouse and corporate expenses decreased in the second quarter to 13.2 percent from 13.6 percent, and decreased year-to-date to 14 percent from 14.1. Warehouse costs in the second quarter increased to 10.7 percent from ten percent, and increased year-to-date to 11.2 percent from 10.3 percent.

The increase is a result of higher operating costs in the New Island markets, and higher central costs in both the New Island and Philippines. We do expect to see quarter over quarter improvements by Q4 from leverage in the Philippines, and efficiencies as these stores mature. For example, warehouse costs from our 17 Latin America stores declined to 9.9 percent year-to-date, which included 1.1 percent of central costs, compared to ten two year-to-date last year, and ten nine year-to-date fiscal 2000. Warehouse costs year-to-date for our seven Island and Philippine stores was 13.8 percent of sales, including 2.4 percent central costs.

General administrative expenses in the second quarter declined to 2.5 percent from 3.6 percent, and decreased year-to-date to 2.8 percent from 3.8 percent, primarily due to leverage on increased sales while reducing G&A costs from the prior year by 193 thousand. As a result, total operating income in the second quarter before settlement costs improved to 3.9 percent from 3.1 percent, and improved year-to-date to three percent from 2.2 percent.

Store operating income declined in the second quarter six and a half percent from seven and a half percent, and declined year-to-date to 6.2 percent from 6.8 percent, primarily from the increase in warehouse costs in the Island and Philippines as discussed previously.

Capital expenditures for land, building and equipment are now expected to total approximately 33 million, and long-term bank borrowings are expected to increase by 14 million in fiscal 2002. Year-to-date we incurred capital expenditures of 20 million, and increased long-term borrowings by four million. In January, we raised 20 million from the sale of convertible preferred stock to fund our four stores in Mexico without debt. Although the preferred dividends will cause a dilution to earnings per share until we attain scale in Mexico, we believe the store model will be as successful in Mexico as it is in other PriceSmart markets. As a 50 percent owner in the joint venture, PriceSmart will report the operating results under the equity method of accounting.

Gil, would you like to ?

Thank you, Allan.

We are very pleased with our second quarter operating results and remain on target to meet our fiscal 2002 revenue goal.

will now take questions.

Thank you, sir. The floor is now open for questions.

If you do have a question, please press the numbers one, then four on your touch-tone phone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question, that you please pick up the handset to provide optimum sound quality.

Once again, that is one, then four on your touch-tone phone at this time. Please hold while we poll for questions.

Thank you. Our first question is coming from . Please state your affiliation.

Hi. Actually, Gil, it's with Salomon.

Wanted to -- well, first, congratulations on a very good quarter. It looks like one of the things that I'm looking at is that the revenue first quarter seems to be increasing on average and, according to my numbers, around $152 per square foot now for the -- just for the quarter. Do you think we can continue to see that kind of improvement in the -- in the productivity of the -- of the stores?

, let me -- let me start by saying where we really, I think, are going to look to achieve productivity increases relate to our new stores. Where we haven't been performing well has been in some of the newer markets where you start off with larger central costs and your productivity rates are lower. We've seen pretty dramatic productivity improvements in our mature stores.

About three years ago, we talked about, you know, achieving store-level economics of about six-and-a-half percent on the operating side, and we're doing that in Central America. We also started out in those markets as well with higher central costs and lower productivity rates. So I think there, we're doing pretty well.

As Bill noted in his comments, we now have opened stores. Some of those stores have one central office and we've regionalizing those central costs so that we could take up some in those markets. Productivity also becomes much more important on the because labor rates are much higher. And that is an important factor for us. I think the third factor we'll be attacking will just be, you know, getting our employees trained and mature so that they can take over the stores, so. One of the advantages that we've had in markets that we've been very quickly, have been able to turn those over to local management. In Central America and the D.R. right now we have, you know, we have two ex-pats. That's it. In Central America there's one. That's a significant reduction in operating cost to the store.

You know, for example, Bill has just, you know, been able to get Aruba off and running with no ex-pat support -- I mean that will improve the performance of that store, you know, by about 150 g's, or you know, and that's a big number for an Island store at 40,000 square feet, so. I think you're going to see continued productivity increases in our newer stores. That I think you will find consistent with what we've done in other markets, and I think you'll naturally see some leverage in the Philippines, just simply because we get to scale much faster. Alan, Bill, would you like to comment?

Yeah, I'll just add another in terms of -- you're specifically referencing two, I believe , on a square foot basis what are our gross revenues, that we're driving from our units. And certainly, with as Bill mentioned the Payless, adding the rental income continues to increase, that we're transition to profitability on our magazine. And Bill had also discussed the -- that and as well as through, not direct -- necessarily direct sales of our membership database that we've have been -- had discussed in the past, but through the revenues streams that that data can provide. As well as other areas that we're looking at driving the top line.

The other thing is also, on the same lines, your EBITDA per square foot is also jumping very nicely. If you exclude the settlement charges, you had a big, big improvement in your EBITDA per square foot as well. So, I think there's probably a lot more room to improve on that if your SG&A continues to come down as a percentage of sales.

Yeah, I think we're at a point -- we always talked about trying to reach last year, the point of half a billion in sales, because that's when leverage and efficiencies started kicking in. We had, you know the efficiencies was starting to really take advantage of your corporate SG&A leverage, and then you start getting some efficiencies in the local countries themselves, which we have seen come out of markets like Central America and the D.R. which were the first stores that we opened up, so. The trends on leverage and efficiencies are helping drive that number.

So, in these markets you're starting to get, I would assume, much better terms from suppliers ...

Yeah.

... and, longer payables.

You're becoming a player. Bill would you like to comment?

Yes, , as long as we're continuing to drive our buying power up, particularly in Central America, and we're buying better regionally, we've been able to negotiate longer terms and higher credit limits with our suppliers. And we're now looking to do that in our island markets, as well.

If I could ask you just one final question on Mexico -- I've been looking at the numbers what Sam's did last year in terms of sales per square foot. They did about $158 per square foot. If you compare that with Costco -- I don't have the final numbers yet, but they're probably around 125.

But if you -- if you do, like, similar numbers to Costco, you would be bringing down your average from what you've done in your other markets. Do you think you can -- you can be near the Sam's numbers in the 150 range?

Well, , let's make sure, first, we're speaking the same language. Are you talking annualized sales per square foot? Or what are you talking about because we're ...

I'm talking annualized and then just, you know, on a per-quarter basis.

OK, on a per-quarter basis -- right, OK. Yes, about 600 bucks a square foot.

Right -- exactly.

Yes, we're -- right now, we're actually doing in the and growing, and that's been improving over the last year.

I think what you're seeing is you're seeing the efficiencies of our format -- square feet. They're -- I think they're just more productive units, and you're able to , you know -- get a little bit better sales in emerging markets . If you look at and you walk our stores, you can see there most of the space that is available is being merchandised. And so you don't have the inefficiencies that you potentially could have in a much .

So I think the sales that we have achieved in Central America and that same -- the same type of productivity we're getting out of, you know, markets like the Philippines or the Caribbean will carry over. You know, the proof is going to be in the pudding when we open up, but we're pretty comfortable that we can do pretty good sales in that market.

And are you on schedule for the openings before the holidays?

We better be.

All right. Thank you.

Thank you, sir. Thank you.

Once again, if you do have a question, you may press the numbers one, then four on your touch-tone phone at this time.

Our next question is coming from . Please state your affiliation.

Yes, this is actually from . I apologize if you already went through this in your opening remarks. and I have waited for about 15 minutes trying to get on the call, and we actually called in a little earlier, so I'm not sure if there's a problem with the conference call company.

But I'm just wondering -- this is a -- purely a cosmetic question, but I think it's important because if you go on Yahoo, for instance, and you put in the PriceSmart ticker, the news release that comes up is that your earnings fell dramatically. But actually if you look through the numbers here, and you go through the math, your EPS, you know, the comparison was great. And I'm just wondering why you chose to, you know, go through the math and take, and take the 1.7 million in settlement expenses out of your operating income -- so you give a true operating income number of six million. Which looks fine, but then when you get to the EPS number, you don't do that. You know, just looking at the math if you the 1.7 million, and add it back you're basically adding 18 cents to the 24 cents -- so your real EPS number is 42 cents, which is a heck of a lot different than 24 cents. So it's cosmetic, but I think it's important and I'm just wondering what the, you know, investor relations decision was, which made you not include that?

Sure, this is Gil Partida and I'll let Allan follow up. There has been so much concern recently with what's happened with Enron, and reporting pro-forma numbers that a decision was made to just put a clean, you know, EPS number at the bottom of the page. You know, we'd go ahead and include, as you saw with our financial numbers in the back, what the pro-forma operating numbers and EBITDA numbers and net income numbers were, and that they've grown pretty dramatically. We've been pleased with them. But we just didn't want to be, you know, shrouded with anything that looked like, you know, a bait-and-switch, or that we were trying to cover earnings by producing or delivering pro-forma numbers, and whether that, you know, that is appropriate or not at these times, we just thought it was appropriate to be conservative as we produced our financial results. Because in aggregate, if anyone reads through the numbers, you can see it's been a pretty good quarter. Our team has done a good job in delivering sales in tough markets, and operating income, you know, has continued to grow, even with the settlement costs by the way. So, we're pretty pleased with our numbers, but like I said we decided to take a conservative approach on presentation. Allan, would you like to comment?

Yeah , for your benefit, and for anybody else that may have had difficulty getting in late onto the call, I can give you the adjusted numbers that I did present in the conference. As well as just to correct an item as well that you mentioned because as it relates to tax affecting these one-time costs. Because the PriceSmart has fully reserved debts, its deferred tax allowance had written them off in prior years, and has continued to not take any tax benefits up until the current year. We have transitioned this year so that our U.S. operations for the first time ever, are profitable. I'm talking about just the operations within the U.S. which excludes any of our stores. So as a result, we are this year for the first time basically releasing and reversing the full allowance in part to cover any tax that we have. So in effect, there is no tax effect on the 1.7 million. It's a full charge. But let me just re-read the introduction on quarter and year-to-date earnings.

Prior to the settlement cost this quarter and non-recurring income last year of 385,000, net income on a comparative basis increased to 3.3 million or 50 cents per share compared to 2.1 million or 32 cents per share. Year-to-date part of the settlement cost this year and non-recurring income last year of 1.2 million, net income on a comparative basis increased to 4.4 million or 67 cents per share compared to 2.2 million or 33 cents per share.

OK. That's great. Sorry for not hearing the ...

No, no we apologize. It was -- it's not your .

Thanks.

Thank you, sir. Thank you, gentlemen.

Once again, if you do have a question, you may press the numbers one, then four on your touch-tone phone.

Our next question is coming from . Please state your affiliation.

Hi -- , , New York.

New to the story, so if I should know this, I apologize in advance for my ignorance. But could you just tell me the store opening schedule if you've given it out for the remainder of 2002 and 2003 -- if there -- if those numbers are available?

2002 -- we're done. We've opened four stores. In the last 30 days, we've opened stores in Guam and in the Philippines. Both of those launched pretty well. We're very pleased with the sales of both of those stores, particularly .

store count?

So that got us to a four-store count for fiscal 2002.

And as we commented early on, our target for this year was six openings. When September 11 hit, we decided to, you know, slow it down a little bit and just watch what happened in the markets. And so that will delay a couple of openings going into, you know, the first -- the first part of fiscal '03.

We have indicated that we'll open up to four stores, you know, prior to the Christmas season. You know, our target is to try to get two open in Mexico, and we're also looking at stores in Jamaica and in the Philippines. So, you know, you'll have up to two stores -- between two and four stores prior to Christmas. And that's been the extent of the rollout that we've announced.

Oh, thank you very much. I appreciate that.

Thank you, sir.

Gentlemen, there are no further questions. I turn the floor back over to you for any closing remarks.

Thank you very much. Thank you, Allan, and thank you, Bill.

It's been a tough six months. It's been a very good six months for PriceSmart. I think what this year and the first two quarters for this year has proven is that we have not only a resilient business format, but very resilient employees who are able to deliver strong financial results. But as Bill indicated, our becoming part of the PriceSmart culture, and that is, this is becoming more than a business, it's becoming a way of life. And I think companies who can reach that level, or have that type of impact on their employees and the communities can deliver better financial results for the shareholders, and make a difference in the places that they live and work. So with that I'd like to thank you for listening. Thank you Bill, and thank you Allan. The call is ended.

Thank you gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time, and have a lovely day.

END