PriceSmart Inc (PSMT) 2002 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your PriceSmart 2002 third-quarter financial results conference call. At this time, all parties have been placed on a listen-only mode and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your host and CFO of PriceSmart, Mr. Allan Youngberg. Sir, the floor is yours.

Okay. Thank you. And 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 third quarter and year-to-date ended May 31, 2002.

I would 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. PriceSmart has achieved significant improvement in revenues, operating income, and earnings. For the quarter and year to date.

We've successfully opened two stores in Asia during the third quarter, our third store in the Philippines, and our first store in Guam. Third-quarter revenues are up 36% over last year.

We are on track to reach our revenue goal of $650 million, even with opening two less stores than originally planned.

Earnings to date before nonrecurring items increased to 81 cents a share compared to 26 cents a share for the same time last year.

We plan to open 8 stores in fiscal 2003, including 4 stores in Mexico. 3 stores are currently under construction in Mexico, and we are on track to open two stores in Mexico before Christmas.

Two stores are currently under construction in the Philippines, as is our first store in Jamaica.

I'd also like to note that as of late last week, we entered into an agreement to acquire an additional 30% of our Aruba subsidiary, bringing our equity interest in Aruba to 90%.

We have also just agreed, as of yesterday, to acquire our joint venturer's 49% interest in Barbados, making Barbados a wholly owned subsidiary.

Over the last three years, PriceSmart has successfully opened 24 stores in 12 international markets. We have proven our ability to quickly grow in foreign markets. We have demonstrated that our store model is highly efficient and portable even in difficult times. We continue to explore new markets and are confidence that we can continue to grow this business for many years to come.

I would now like to turn the presentation over to Bill Naylon, who can discuss our operating results in more detail. Bill?

Thanks, Gil. I'm going to comment on our store performance in Latin America, our new market in the Caribbean and Asia and finally, distribution and merchandising opportunities. When we embarked on our expansion, we stated that our store operating income goal was 6.5% at store maturity or third year of operations.

Although our 17 stores in Latin America have an average life of 31 months, store operating income during the third quarter reached 7% of sales.

When our Latin American stores averaged one year maturity, operating income was approximately 3.7%, with several stores performing well below the average. By focusing on poor-performing stores and overall merchandising and operating improvements, we significantly and quickly improved performance.

Our recent experience in the Philippines mirrored our first-year performance in Latin America.

Four of our five new Caribbean island stores are performing well, with first-year store operating income of almost 5%. However, our new store in St. Thomas has been our biggest problem, with the year-to-date store operating loss of $1.9 million or 14.6% of sales.

However, total company gross margins are in line with last year, based on the strength of our membership income and other revenues.

Over the last 30 days, we identified the corrective action and set up a team that is specifically focused on St. Thomas. Sales and margins are already improving.

We have been through this drill before, and are confident that not only will St. Thomas be a successful store by next fiscal year, but that the lessons learned will help improve store performance in other markets as well.

Over the past six months, we have been actively pursuing direct purchasing relationships on goods manufactured in Asia. The cost savings we have negotiated have been significant, and we are now in the process of opening a distribution center in Hong Kong to consolidate these items and ship them directly to our stores in time for the holiday season.

In addition, and in conjunction with our Mexico expansion, we will be opening a buying office and distribution center in Mexico City that will not only serve our Mexican locations but will focus on sourcing and shipping Mexican products for export to our other locations.

With the quality and value of Mexican made products, coupled with free trade agreements that many of our markets have with Mexico, we anticipate this to play a significant role in accelerating sales growth this upcoming year.

Finally, I'm very pleased with the team we have assembled. I spend a good portion of my time visiting our stores, and I continue to be impressed with the operational standards, employee enthusiasm, and genuine commitment to improving the quality of our members' lives and delivering solid financial results. Allan will now discuss our financial performance in more detail.

Okay. Thanks, Bill.

Net income increased significantly to 956,000 in the third quarter compared to a loss of 431,000 for third quarter last year.

(inaudible) increased year-to-date to 3.7 million compared to 2.9 million.

Earnings per share for the third quarter increased 14 cents from a loss of 7 cents, and increased year-to-date to 55 cents from 44 cents.

Prior to the legal settlement costs this year and property gains last year, net income on a comparative basis increased to 5.4 million compared to 1.8 million, or an increase of 81 cents from 26 cents per share.

Sales increased 36% in the third quarter to 157.1 million, and increased year-to-date to 469.2 million. Comparable warehouse sales decreased 1.4% during the third quarter, and increased .5% year-to-date.

We do expect comps to continue to be soft over the next couple months. It is important to understand two things about our comp sales. First, our strategy as we enter new markets is rapidly surround a metro area with PriceSmart stores. This strategy has proven to be sound. We have delivered both significant top-line sales growth and significant operating income growth. However, this strategy does negatively impact our comps.

As more of our Metro markets complete the full-year cycle from the last store opening in their market, the drag on comp sales is reduced. The two markets that have not cycled through a full year from the last opening are in Guatemala and Trinidad. When the three stores in these two markets are excluded, comp sales increased in the third quarter 3.1% and increased year-to-date 4.2.

Second, we report comp sales after converting foreign sales to U.S. dollars. Approximately 60% of our sales are in markets where the local currency historically is devalued against the U.S. dollar. For the nine months ended May 31, 2002, foreign currencies in these markets have devalued against the U.S. dollar an average of 6%.

We report U.S. dollars, as we believe it provides more conservative presentations and expectations of future U.S. dollar sales growth.

Membership and our revenues increased to 3.6% from 3.2% in the third quarter, and increased to 3.2% from 3% year-to-date.

Other revenue improvements from demos, rental incomes, ad revenues, from our (inaudible) magazine, and increased royalties from our China licensee for the new store growth in China contributed to the increase. Merchandise margins did decline in the third quarter to 14% from 14.4% primarily from lower margins at our St. Thomas store, but offset by the increase in membership and other revenues as noted above.

Merchandise margins remain constant year-to-date at 14.3%.

Combined margins for merchandise, membership and other revenues as a percent of sales in the third quarter remained constant at 17.6%, and increased year-to-date to 17-and-a-half percent from 17.3%.

(inaudible) corporate expenses remain constant at 15.2% in the third quarter, and decreased year-to-date to fourteen four from fourteen five. Warehouse costs in the third quarter increased to 12.1% from 11.3%, and increased year-to-date 11.5% to 10.6%.

The increase is a result of higher first-year operating costs in the Caribbean markets and higher central costs in both the Caribbean and Asian markets, where the nine stores average life is nine months.

Central costs were leveraged down with increased store openings in the Philippines.

As discussed last quarter, we are working to reduce overall central costs by centralizing regional back offices in both Central America and Caribbean. We expect to begin this process in the second half of fiscal 2003, with improvements showing by fiscal 2004.

Warehouse costs for our 17 Latin American stores declined to 9.9% year-to-date compared to 10.2% in 2001 and 11.2% in fiscal 2000.

Year-to-date warehouse costs for our nine Caribbean and Asia stores were 15.6%. General and administrative expenses in the third quarter declined to 3.1% from 3.8%, and decreased year-to-date to 2.9% from 3.8%, primarily due to (inaudible) and increased sales. G and A costs year over year by only 262,000 while sales increased 37%.

Total operating income before settlement costs increased to 12.4 million from 5.5 million, and increased to 2.7% of warehouse sales from 1.6%. Store operating income year-to-date increased 23% to 27.2 million from 22 million, but declined to 5.8% from 6.4% as a percent of sales.

Year-to-date, we have incurred capital expenditures of 28 million and increased bank borrowings by 5 million.

During the fourth quarter, we plan to spend another 10 million for capital expenditures toward new stores that will open in fiscal 2003, and plan to increase bank borrowings by 8 million.

During the third quarter, we completed a 22-and-a-half million dollars financing package with a lending arm of the world bank, the International Finance Corporation, including 10 million of PriceSmart common stock.

This increases the total financing to date from the IFC to 54.5 million, making PriceSmart the IFC's largest retail-based customer in the world.

We contributed 10 million to our Mexico joint venture in the third quarter. We plan to contribute another 2-and-a-half million before our fiscal year ends. The funds are being used to acquire land, construct stores and fund pre-opening costs in Mexico. As a 50% owner in the joint venture, PriceSmart will report the operating results of PriceSmart Mexico under the equity method of accounting.

Gil, would you like to close?

We are very pleased with our third quarter, and the overall operating results of the company for the first nine months of this year. We remain on target to meet our fiscal 2002 revenue goals, and we will now take questions.

Thank you very much, sir. The floor is now open for questions. If you have a question or a comment at this time, you may press 1 followed by 4 on your touch-tone phone. If it at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Our first question is coming from Francisco Chavez of Salomon Smith Barney.

Hey, guys, good morning. I missed part of the presentation. We got disconnected. So I hope you haven't talked about this before, but could you talk about how the - the plants are going in Mexico? Are you still on schedule to open the new stores before year end, calendar year end? And what kind of environment are you seeing there? Are you still encouraged by the outlook and how the consumer is behaving down there?

Francisco, this is Bill.

Hi, Bill.

We are currently at three stores under construction and they're all going very well. We have also signed a lease on a fourth property in Mexico City and we expect construction to start on that sometime within the next few months.

We still are very optimistic about our business potential in Mexico. The club format in Mexico continues to be probably the best-performing sector in the retail market, and we feel that the format that we're going to be operating and some of the changes that we've got in mind is going to really position us well to be successful in the locations we've chosen.

So how many stores do you think you'll have open by Christmas?

We'll have at least two stores open by Christmas.

Okay. So - and the other two will come in in -

The third store should open in the second quarter, and the fourth store would open in the fourth quarter.

Okay. You know, another question on the - on the ex-Mexico operations. Seeing that now you're getting to a level of sales, basically a critical mass where I think we should start - we should not see any more red in the future. We have now a base that allows you to absorb your SG and A, your pre-opening expenses without going into the red. Is that correct?

Francisco, this is Gil Partida. God willing.

Thanks, Gil.

I mean we've had four quarters of profitability. We continue to see, you know, overall improvement in revenues and in command cash flows which is, you know, the name of the game. So if we maintain a consistent sales growth and consistent growth in store openings, then we should pretty well positioned right now. We're about where we want to be at this point in time.

Okay.

One big differential, as you know, is when we started this year we were initially thinking about bringing on an additional two stores. (inaudible) we held back because we wanted to see what the climate and the impact would be, particularly in the Caribbean, and, you know, as you're aware, we still were able to meet our revenue target, so overall we're pretty pleased with the way this business performs, even in, you know, these types of environments.

The SG and A, the sales margin in the third quarter in particular, was at 12.8, which is a nice improvement from a year ago. Do you think, you know, something around, I don't know, 11 - I guess 12% would be a good long-term target for this number? Maybe, you know, two or three years down the road.

Yeah. When we're - we've always talked about when we approach the - certainly the billion dollar level, that our ability to pull our G and A costs down considerably from where we even are today, which has been a significant improvement from the last couple years is there, and, you know, as our island stores, Caribbean and Asia, mature, we'll continue to see improvements in the warehouse costs just as we saw in Central America during the last three years that those stores have matured.

We've taken warehouse costs in those markets from over 11% to nine nine, and we see the same opportunities in the markets we're in now, combined with centralizing our leverage costs.

What about that project, the centralizing your back office and all that? Do you think like you can have - you can give us some idea what kind of savings you think you can get out of that?

I can give you kind of a general idea that in terms of what we're spending right - you know, we're spending in the neighborhood of a couple of percentages out of the total warehouse costs, which represents, oh, say 15% of the total towards central costs. And to be able to centralize that out of one location, you know, we think that we could - in, say, Central America alone safe close to, you know, 25, 30 percent of that, if not more.

Great, great.

So that would take - that would take nearly, what, seven-tenths of a percent off your warehouse costs in those regions.

Excellent.

Francisco, this is Bill. (inaudible) bigger opportunities actually in the Caribbean region, you know, and starting to - just to learn from, you know our operating experiences there. You know, we went ahead and took a model that was geared towards, you know, a Latin American (inaudible) market with a large population base and we're realizing that in some of these markets where you just don't have the need for the overall infrastructure, particularly on the buying side, they can be handled more on a regional basis, you really have the opportunity to make some movement on the Caribbean and that's really where we think our first focus is going to be.

Great, great. And that's probably the area where the savings would be - since they're the more expensive stores -

Correct. That's where we needed to start attacking and cutting costs out of the equation because central is running higher than we would like it to be as a percent of total operating costs, particularly with Caribbean.

Okay. Great. Thanks, guys.

Okay. Thank you.

Thank you. Our next question is coming from Michael Exteen of CSFC.

Hi, good morning. Actually, this is Jenn (inaudible) speaking for Michael. Just some more follow-up questions on Mexico.

We were wondering if you can just kind of generally sketch out what your strategy for the Mexico market is, the particular markets that you'll try and penetrate, perhaps the total number of stores potentially, and two other questions on Mexico.

To what extent do you expect your management commitment to be in the region?

And also, what will your criteria be to judge your success in the area?

Okay. To answer your first question, our strategy is going to be open. Our size format locations and similar to what we've done in Latin America, to be able to penetrate some of the medium-sized cities as well as be able to enter the larger cities on small pieces of property and maybe some of our large competitors won't be able to to do it. We will continue to execute on a strategy to go after both the retail consumer as well as the wholesale consumer, focusing again on our fresh foods, which has been a big plus for us in Latin America and the Caribbean.

As far as our management commitment, we have dedicated one of our executive vice presidents who has over 20 years of experience in the warehouse club business to exclusively focus on Mexico. In addition, we have also relocated two vice presidents of operations who collectively have over 20 years experience in the warehouse club business to Mexico. So we have - along with the fact that we've been able to hire some very, very high-quality Mexican employees who are familiar with the club business.

In addition, our partner, Grupo (inaudible) is, you know, very well entrenched in Mexicoy. They're going to be helping us immensely with merchandising and logistics. And so we feel that along with the team that PriceSmart has put on the ground, as far as with our partners, that we have got a good deal of experience there, we're well positioned in this venture.

And on the market question, we only talk about markets or places that we've actually been to, looked at, kicked the tires, talked to people, and somewhere in the neighborhood of, you know, 15 to 20 locations are the locations that we've actually seen and said there's a potential to put a PriceSmart type format there. And I'll just echo one of Bill's comments, our strategy in Mexico is not only geared toward the Mexican market but we believe our format has the ability to penetrate a lower - a person of a lower socioeconomic means and that's one of the things that we have learned over the past, you know, few years in operating this business is that there is the ability and the desire to service a community group in that sector.

I'd also like to note that the work that's been going on with our partner has been very, very helpful in launching this business. The relationship with Grupo (inaudible) working with neurosenior executives and the commitment they've made to this business, as well as placing one of their key executives once again to fully focus on the PriceSmart project tells me that there is a lot of executive commitment that's coming not only from the PriceSmart side of the house but from the (inaudible) side of the house, and so we've been very pleased with our ability to work with (inaudible), to begin to understand the intricacies of the logistics (inaudible) there and to benefit from the buying power that they already have as an entrenched, you know, significant player in the retail market.

All of those things have - I think have played so well in giving us, you know, positive signals as to our ability to focus on that market.

Okay. Thanks for - thanks for going over that.

Also, my last - one last question, what criteria will you use to measure your success there?

By winning. It's the same criteria that we use, you know, everywhere else. I mean, I'm going to be facetious, but can we make money there and can we make money that's in line with what we've tried to obtain in other markets. I mean, that's the simplest way to look at answering that question.

Okay. All right. Thanks.

Thank you. Our next question is coming from Rich Whitman of Palisades Capital.

Yeah, Gil, I'm going to ask the same question I asked on the last call. When are we going to address, you know, getting some additional capital onto the - onto the balance sheet?

Allan, would you like to answer that.

Well, let me cover part of that for you, Rich, and Gil can backfill.

As far as addressing getting additional capital, we have through our growth next year impacted - we've contributed well on our way to reach the contributions that are necessary for the Mexico operations to get those four stores open. The four stores for our other PriceSmart stores, certainly in terms of taking mortgages on half the construction costs and using PriceSmart's cash flow gets us through next year.

The issue of when should we raise additional capital would be largely due to how fast we want to accelerate our expansion, as well as taking a look at our external resources - or internal resources to take a look at where additional capital is locked up in some of our properties.

So we're taking a look at it. I think in terms of whether we go out to the market to raise any more equity isn't something that we've decided to do at this time.

And rich, let me just follow up by saying as Allan intimated, we have the cash currently within - just (inaudible) capital from operations and what we have in our balance sheet for funding such growth. I think the real question for us next year is going to be based upon the rate of growth that this company is looking to attain on a go-forward basis. Obviously the success of the Mexican operation and our rate of growth there will impact the need for capital.

On the other side of the house, we've got a pretty strong balance sheet, but the question becomes, can we unlock some of that value in order to just, you know, utilize those proceeds a little bit more efficiently, and one of the things that we're just starting to take a look at is, if you look at our balance sheet, we've got a healthy amount of capital tied into restricted cash and that's cash that's been placed, you know - about $9 million of it that's - you know, it's about a $25 million number - has been placed to guarantee some of the loans with the IFC. We have been, you know, fortunate to hit the numbers, but (inaudible) early on, so the relationship has been good and they've continued to (inaudible) fund us. Is there a way to free up, you know, $10 million and move it off the restricted side of - you know, of the balance sheet, we also as the company is now in an earnings position, you know, may be able to, you know, to pick up some additional cash and free up the rest of the cash that we actually placed in back-to-back loans and those are loans that are on the books to service operating stores in, you know the emerging markets and they're pretty effective tax vehicles, so there may be the ability, you know, with the company's earning position and if we enhance the balance sheet, to, you know, free up some of that cash by the use of, you know, LCs to cover those positions. So we're looking at all that because we'd like to continue to strengthen our balance sheet and we think our balance sheet is, you know, is positioned in a manner that although it's pretty healthy right now, there's some, you know, value that's locked up, and we'd like to see if we can get our arms around it.

Okay. Thank you.

Thank you. Our next question is coming from Bobby Melnick of Carrier Partners.

Hi. Good morning. When you look at your company, really it's sort of an amalgam of sort of three different companies. You're the mature sort of central American region, you're the newer Caribbean region, and then you're the Philippines region, and it's difficult as an outsider to get a sense of what potential exists for this company to produce, in terms of return on capital, because you have money-losing stores, like you said, like St. Thomas. Then you had new areas like the Philippines, new areas like Mexico. My question is: Can you give any indication in terms - if we look at a company that now has $165 million in stated equity, 20 million in preferred and a hundred million dollars in debt capital financing this company, you're obviously actually woefully overcapitalized for the amount of returns you're producing, but I suspect - and here's my question, sorry - that the existing central American portion is actually probably producing pretty high returns. I don't know that, though.

Can you give us any indication, so that we could try and ascertain whether Mexico makes sense, whether the Philippines make sense, whether the Caribbean makes sense, by telling us or giving us any feedback in terms of what capital you've invested in Central America and what that capital is currently producing?

I think in terms of giving you that level of detail at this point, I don't have that in front of me, but I can probably - let me know if this answers your question, Bobby, but in terms of taking a look at each market we've entered and the amount of capital that we've contributed, there - they're consistent. And certainly store to store, there are some stores that cost more than others. You have some leases, et cetera, et cetera.

Overall - and we've said this since day one - in the Caribbean, as well as our entry into Asia, that we expect those stores to stay - take the same three-year store mature model characteristics. I.e., they would produce 6-and-a-half to 10 operating income, 8% EBITDA on an average investment of roughly 8 million per store.

And that in like the Latin American stores - which I say Latin America because when we include the Dominican Republic in that, it differentiates it from Central America - that from those 17 stores, we're at 7% operating income at 31-month life.

Now, in the new markets, where we have averaged - if you look at Asia and the Caribbean combined, since they both are kind of rolling out about the same time, you know, we've got our last nine out of 10 store openings have been in those markets, so all those new stores now are flowing into our P and L since - basically since a year ago.

And those new stores are coming out at operating levels that are consistent with where our Latin American stores came out in the first year. And yet it's not like opening up 30 stores in California right away. Each market is different, and you need to set up infrastructure, hire a lot more people than you're really going to need to operate these stores after the first year. You're going to be buying product greenfield - i.e., from brand-new vendors in every country - and setting up purchasing, getting them to recognize what the lowest costs are as your volume increases and driving your merchandise cost down. So all those things come into effect and they take time.

We have been burdened with one store that has had an aberration in their results, as Bill mentioned. The St. Thomas store, you take the $1.9 million loss year-to-date out of the equation and your ratios and everything else pops up quite handsomely.

Okay. Let me - let me modify my question a little bit.

If you look at the published estimate of Francisco, which has been pretty accurate in the past, he's calling for numbers that would produce on your current equity, assuming no incremental equity offerings, about 8% return on $165 million in equity capital, which suggests that you guys still have a long way to go in terms of producing the kind of returns that are commensurate.

My question is not on the operating margin, but on the return side, Alan or Gil, what if he - what is an adequate return on equity capital or equity and preferred, because presumably that will all convert, that you expect to produce on the capital that you've raised so far? Is it 10? Is it 15? Is it 30?

That we expect to produce?

Yes. And to the extent you have expectations, are those being met in your, quote, mature or Latin American stores?

Yeah. In terms - well, if you take a look at the 17 stores in Latin America, where you've got an average investment of 8 million per store, and you're breaking that down on a per-store level, you know, our returns in that market are pretty darned good. I mean, we've got -

Well, what does "pretty darned good" mean.

Well, let me calculate it out then. If you've got an 8 million dollar investment and you're producing a 7% operating income, and your average sales per market are running around, oh, in that market say 20 to 26 million at 8% -

7%.

Yeah. You're running into, what, a little over 2 million store operating income on an 8 million dollar investment.

1.8 EBIT on 8 million is 7% of 26.

Yeah.

EBIT. Okay.

So, I mean, that - in terms of that operating margin, those returns on that operating income to our invested capital, you know, is - is what we've been driving this business on.

Okay. That would be low 20s EBIT margin return - EBIT return on call, operating ROE.

Right. Correct.

And on average, we use about 50% leverage in these markets, so your cash on cash return has actually been pretty healthy -

So when you say 8 million, that's both debt and equity.

That's debt and equity. Yeah.

Okay.

So the cash on cash returns have been pretty healthy.

Your EBITDA returns are in there a little over 30, is what we expect.

Okay. That's very helpful. Thanks.

Yeah.

Thank you. Our next question is coming from Kevin Sowers of Tiger.

Yeah. Three quick questions.

One, could you break out the composition of the prepaid expenses and other current assets on your balance sheet?

Two, a lot of the competitors in Central America to S and B customers offer credit. I presume that you don't. You know, do you plan to in the future.

And then three, more a big-picture question. Could you speak as to maybe your pricing strategy or differentiation strategy with respect to the fact we have a hold now and we have hyper-buys that are both expanding into some of your markets.

Let me ask you. I caught your first question on the composition - composition of the prepaid. What was the second question?

Do you plan to offer credit to any of your S and B customers.

Yeah. We'll just breaking it down. Allan will break down the prepaid expenses, Bill will talk about pricing, and I'll talk about credit.

All right.

A lot of the prepaid represents, in all the different countries that we operate in, especially as you're opening up new, you're prepaying a lot of duties, you're prepaying - oftentimes income taxes are based on a formula where you're having to prepay based on a percent of assets or a percent of sales, and as such, you use those prepayments towards credits against income tax expense in those countries. You have a - those are the predominant ones. And then, of course, you would have your prepaid insurance. Insurance has - in our markets year-over-year, especially subsequent to 9/11 - have increased significantly. Prepaid insurance amounts therefore, you know, are financed and paid for for a full year and booked in advance. So that's primarily what - I don't have a detailed summary in front of me, but I hope that does it for you.

Okay.

Bill, you want to talk about pricing strategy?

Sure. Overall, just to let you know, that we're keenly aware of the competition throughout Central America and we are always out in the market with at least two people at any given time monitoring the competitors' prices, so we stay right on top of what the competition is doing both in terms of prices as well as what they're doing in their overall merchandising.

Again, our focus is being in the core businesses to go through and operate with lower margins and drive volume. The competitors that you mentioned are predominantly in the hypermarket or grocery store business, whose focus is more on an expanded category selection and cannot really operate at the margins that we can.

Again, we continue to focus on very aggressive margins on the food side of the business. We focus on delivering better quality in the fresh foods area, where pricing is not always as sensitive, where quality is more important, and we feel that we do a much better job than our competitors in the fresh food side of the business.

In addition, we are able to source products out of the U.S. on a much more direct basis than these competitors are, and which gives us a better - a better first cost and allows us to sell products less expensively than they can at higher margin. And lastly, as we discussed earlier, we are operating opening regional source think in both Asia as well as Mexico that's going to further allow us to reduce our landed costs on products into the central American region while at the same time delivering products that are not in the market. And one of the things that our members like most about PriceSmart is the fact that we bring products that are not in the market right now, and create a lot of excitement.

I'll just go ahead and then -

And how do you go about communicating those type of benefits to the consumer?

They are - I'll go ahead and respond to the credit strategy but if we can just close by talking about the (inaudible) traffic patterns that we have in our customers - I I mean in our stores. One of the reasons why you've seen stores like payless shoes want to associate with us, you know, and collocate with us, banks and other entities s because of the foot traffic we get. I mean, we've got a pretty loyal customer and you look at, you know, in - we joke around, but you have 20,000 feet, you know, walking across, you know, our front door on a given week, our stores are also much smaller than your large warehouse club so you don't get lost. You know, new offerings just immediately jump out at you. And so we now have the reputation and the goodwill in these markets, particularly in what we call Latin America, where the consumer is driven - is driven to our stores. We've done very well there.

Even with the entre of (inaudible) and (inaudible) and other competitors in the market. And I'll tell you some of the toughest competitors are the local competitors because they've been there, they've lived there, and they've understood the consumer, you know, over a long period of time.

Now, moving to the comment on credit, PriceSmart offers on a very, very limited basis - we've done this in the past if we're engaging in some wholesale business to restaurants or hotels, individuals or companies who have had, you know, a relationship with us. It's very, very limited in scope. It's nominal if you look at - at what we're carrying.

The - we do understand that the consumer finance business really has been probably one of the more profitable legs of the retail model. If you look at what Electra has done in Mexico, in Central America, in other Latin American markets, the margins that they make on their consumer finance business are almost usurious, and if you look at what other retailers are doing and you look at their payment strategies, you know, for weekly, monthly, biweekly payments for products, you just see the financing costs that can go - that can be added into their gross margins is pretty significant. In the range between 50 to a hundred percent. So it's pretty large.

We have tried to stay out of that game. What we have done, in order to facilitate consumers being able to purchase larger ticket items, is associated with a regional bank which is, you know, one of our partners. They offer in many locations, you know, credit in the store. You know, that credit, you know, is offered at an attractive rate and they're able to get into purchasing higher-ticket items, whether it's white goods or TVs. So PriceSmart at this point in time has not gotten into the consumer credit business, and we do understand it's one of the - you know, one of the areas where, you know, retailers have made the majority of their money in these markets.

Would you like any follow-up or clarification on that.

No. That's great. Thank you.

Thank you. Our next question is coming from Brett Fileacott of Performance Capital.

Hey, guys. How old is the St. Thomas store?

One year.

And any consideration of cutting it loose or what's going on in that market, particularly, that seems - you know, what's the problem in that market specifically, you think?

We were idiots. I mean, we hate to say it but we really were. The problem that accelerated was 9/11. Immediately after 9/11, we went and looked at all our markets. I mean, we took a really hard trip where we covered - God, it must have been, you know, nine countries in about three days, pounding through in Central America and the Caribbean, what we thought the impact would be. And we've just come back from Asia. And the three markets that we thought would be the most impacted, if you looked at triangulating them, St. Thomas and the Caribbean, Panama and Guatemala. We've seen that play out. That accelerated, you know, the problems that really were self-inflicted.

I'll give you just - we went into the market understanding that we would have to drive the wholesale business. Wholesale would be driven in certain categories. We didn't address those categories, and, you know, we didn't have a facility geared towards delivering on the frozen product, which is very, very important on that island. So we were off on how we initially rolled into that market, and we knew it right away. We already said, hey, this is a business that we've got to be - be right in paper, beverage, and frozen. We didn't do it. We also understood that some some of these markets, there's an issue with control and, you know, theft and shrink, and we didn't attack the market right, and so we took a significant hit in that arena, and if you look at what we're doing right now with our controls over the last few weeks, it's been pretty dramatic. I mean, the way we're now receiving merchandise, we're basically taking a logistics model that we've applied in the U.S. to our U.S. export logistics operations and applying it now in St. Thomas, and that's actually helping maintain the controls on receiving errors. Theft that happens in your back door. You know, things that go up and down. I mean, we would pretend that our doors are, you know, they're vaults and if you keep it open, money is going to flow away. Well, we weren't watching the vault. You know, we've now set up a network of cameras where we've got 36 cameras in the store, you know, looking at all points of exit.

We're making sure that, you know, if we're doing things and we're not watching, you know, the way - we're ensuring that audits are being done on a continuing - continuous basis, on how we process merchandise at the front register. I mean, so if you look at operational issues, we just didn't watch, you know, our back door and we let it get away from us and, you know, thirdly, we just weren't nice. I mean, there was a strategy in this market where you had to be nice and everybody ganged up against us. I mean we just thought we were a little bit better than we should have been and we're in the store being nice right now. We're inviting everybody into the store and our (inaudible) is taking a very humble approach in the community, you know, helping out with, you know, cleaning up the cemetery on Memorial Day. We had an EVP, you know, doing that. We're involved in PTAs now, we're involved with church groups. I mean PriceSmart has become very, very integrated in that community over the last 30, 45 minutes. It's been nice to see. And the (inaudible) were also just being nice, and I hate to say that but being nice is important.

And so if you look at the impact that we've had in St. Thomas, most of it has been self-inflicted. It's been accelerated by the impact of 9/11, but the way we've been able to move the needle over the last 30 days has been pretty dramatic, so we're pretty comfortable that we'll make that store work. There's a lot of kicking ourselves in the ass for how bad we did, though.

Right. Okay. So that answers the question of closing it. But does the store, in your opinion, eventually hit your - your target numbers or it's just something where you kind of get it straightened out and it - I mean, is there potential there to hit the - (inaudible) the and the store opened very well.

Right, right.

So everything is there for this store to do as well as we've done in other markets and I - I'll put it in PriceSmart's history, okay? When we opened up the DR, we lost a couple million bucks, we got our asses kicked. That's one of our best markets right now.

Right, right. I.

When we opened up (inaudible), we launched and we were running down. I mean we thought we were kings and we opened up with a run rate of 25 million. A couple months later, we were down (inaudible) at about 16 and we could - our margins were down at the 6 - you know, 6% level. Within a year, our run rate was $28 million and margins were running at about 11-and-a-half.

Right. Okay. And would you care to share the terms of the minority purchases?

Sure, Allan, you want to comment on the deals of Aruba and Barbados.

Yeah. I'll just give you some top-line numbers that - and we'll have a press release coming out with a little more detail, but the combined acquisition was 3.7 million. Out of that, we'll be issuing 47,800 shares, 500,000 in cash, and a million three really was a forgiveness of capital costs.

Okay.

And that represents the 3.7 million. And just, you know, just like the acquisition in Trinidad, the previous one and then prior to that, the (inaudible) and Panama which, you know, represents a majority of our store base right now, when we go through those acquisitions, we take a look at what we expect the future cash flows, operating income performance to be, and we discount those at a - typically a 35% discount rate, and then use a multiple at what we believe is in the range of 30 to 40% of what PriceSmart would realize to its - its share value on the multiples of earnings and cash flow.

So - and what I'm saying is we're buying them at a substantial discount to what we'll realize in a public entity multiple.

Right. Okay. And is there any put associated with the shares?

No.

Good work.

No. We learned. We may be idiots, but hopefully we'll only make those mistakes ones.

Progress, not perfection.

Yeah. Guys, we won't make the St. Thomas mistake again, will we.

All right. Good guys. I appreciate T thanks a lot.

You got it.

Mr. Partida, there appear to be no further questions at this time, sir.

Thank you very much. I'd like to thank those who listened. I'd also like to thank our employees for the results that they delivered. You know, we all take for granted that PriceSmart is a very young company and that we started opening stores three months ago and through the process of opening a new business, a new retail format, in emerging markets, we've also dealt with 9/11, a global slowdown, and other exogenous events that impact retail companies.

With all of that, we've been able to deliver some really sound, you know, financial results, and this company continues to grow, and it does so on the strength of its employees, and we frankly believe that this business model has the ability to do well at times when others don't because of the value proposition that we deliver.

So once again, my thank you primarily to the employees that we have around the world that now are continuing to grow in number. Thank you for listening. This ends the call.

Ladies and gentlemen, thank you very much for your participation on today's PriceSmart conference call. You may disconnect your lines at this time and have a wonderful day.