PriceSmart Inc (PSMT) 2004 Q2 法說會逐字稿

I am John Hefner, Chief Financial Officer for PriceSmart for the second quarter of PriceSmart's 2004 fiscal year which ended February 29th, 2004. Joining me for this presentation is Robert Price, the company's Chairman, President and Interim Chief Executive Officer. Before we begin, 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 would encourage you to review the section factors that may affect future performance in the company's 10 k report filed with the sec on April 14th, 2004 for additional information concerning risk factors that could cause differences from any projected performance stated today. I will speak specifically to the financial results for the three and six-month period ending February 29th, 2004, and then Robert Price will provide his comments on the business. Following that, we will address specific questions that were sent to us that may not have been addressed in our prepared remarks. My presentation for the financial results for the second quarter of fiscal year 2004 will primarily use the comparative quarter of fiscal year 2003 as the basis for comparison. This financial data, including consolidated income statement, balance sheet and cash flow statement can be found in the company's 10 q report filed on April 14 or in the second quarter earnings press release posted on our web site at www.pricesmart.com. For the second quarter of fiscal year 2004, PriceSmart recorded a net loss to common stockholders of 4.5 million or 61 cents per diluted share compared to net income of 1 million or 14 cents per diluted share recorded in the second quarter of fiscal year 2003. For the six-month period, the company had a net loss to common stockholders of 11.5 million or $1.59 per diluted share compared to a year earlier net income of 2 million or 29 cents per diluted share. Consolidated net warehouse sales from the 25 warehouse clubs and operations from the second quarter fiscal 2004 decreased 9% to 161.5 million from 177.4 million from 27 warehouse clubs last year. Excluding 3.9 million in Philippine wholesale telephone card sales, which began in September 2002 and were discontinued in May 2003, net warehouse sales decreased 6.9% from the comparable period sales of 153.2 million. Management believes net warehouse sales excluding wholesale telephone card sales provides a better measure of ongoing operations and a more meaningful comparison of past and present operating results that be total warehouse sales because wholesale telephone card sales were only for a limited time were discontinued in May 2003 and fell outside of the company's core business of operating international membership warehouse clubs. For the six-month period, net warehouse sales were 305.2 million in fiscal 2004 as compared to 335.4 million in fiscal 2003. December sales historically the largest sales month of the year were below last year by 10.1 million, primarily due to limited levels of merchandise many in many locations and two fewer ware louse clubs compared to last year. The company's Guam warehouse was closed in December after selling its remaining merchandise at reduced prices. On a comparable store basis, that is sales for warehouse clubs that were open at least 12 full months, sales decline .4% in December but only 2% in January and 2.7% in February excluding Philippine phone card sales. Year to year sales comparisons were negatively impacted by currency devaluations in many of our markets. On a constant dollar basis, comp sales would have been down slightly in December and registered growth of 12% and 10% in January and February respectively. Membership income was $2.2 million for the quarter, up from $2.1 million in Q2 last year. As of the end of February, PriceSmart had approximately 475,000 membership accounts, a reduction of 23,463 accounts from February 2003. The year on year reduction is largely attributable to two fewer warehouse clubs and discounted memberships sold in fiscal 2003 inman pan that in the pill feigns. These discounted memberships did not generate warehouse sales and they their nonrenewal on warehouse sales. Since the beginning of the fiscal year, the company has been experiencing positive membership growth in several of its markets including Costa Rico, Honduras, El Salvador, Nicaragua, Aruba and Jamaica. The average membership fee increased over $5 as compared to the same period last year. PriceSmart recognizes membership income ratably over the one-year life of the membership. As a result, changes in membership fees are not immediately seen in the company's income. Export sales represent merchandise exported to the company's licensee warehouse operating in Cypan and direct sales to third parties distribution centers including shipments to PriceSmart Mexico an unconsolidated affiliate. Export sales declined year-over-year primarily as a result to decreased sales to unrelated third parties and reduction of export sales to PriceSmart Mexico and Saipan. Export sells gross margin was as certain beef products intended for shipment were sold below costs directly from the distribution centers due to import restrictions associated with mad cow disease in some of the companies in which we operate. Warehouse gross private -- gross profit margins in the second quarter of fiscal 2004 were 14.0% of net warehouse sales compared to 14.4% in the second quarter of fiscal 2003. PriceSmart has improved its merchandise mix with U.S. merchandise accounting for 45% of sales in the quarter up from 41% last year. The company in order to improve its competitive position and to increase value to our members has reduced target margins with resulting lower prices on its merchandise compared to fiscal 2003. Gross profit margins for Q2 management expectations in nearly all merchandise categories. Warehouse club operating expenses increased to 20.4 million dollars, 12.6% of net warehouse sales in the quarter from 20.0 million or 11.3% of net warehouse sales in fiscal 2003. The increase in these expenses is largely attributable to an increase in utilities, repairs and maintenance, increased wage rates and certain club locations and the increasing costs associated with credit card usage and fees. The company continues to identify additional areas for potential cost savings including the reduction of credit card processing fees and improved productivity. General and administrative expenses, the costs associated with PriceSmart's U.S.-based corporate activities increased to 5. -- $5.9 million from $4.8 million a year ago. The current quarter expenses include approximately $450,000 in costs for outside professional services attributable to legal proceedings arising from the company's restatement of financial results for fiscal year 2002 and the first three quarters of fiscal 2003. The company expects to incur additional costs for these services in the upcoming fiscal quarters. In addition, the company recognized one-time expenses of approximately 330,000 in the quarter associated with severance costs including those resulting in the consolidation of substantially all of the company's U.S. buying programs into San Diego from Miami. We expect a less than one-year payback in operating cost savings. Stock compensation expands in the quarter was $126,000, and increased insurance costs related to worker's compensation and director and officer insures liability were $184,000. Closure costs in the second quarter of fiscal year 2004 total $1.5 million. Costs associated with the closure of the Guam warehouse on December 24th, 2003 were $1.2 million and includes severance costs and an estimate of a fair value of the continuing obligation for the lease of the related facility. Preopening expenses in the quarter were associated with the company's planned opening in early June of the Azianna warehouse club in the Philippines. PriceSmart's share of the unconsolidated Mexico joint venture was a loss of $377,000 compared to a $648,000 loss in the prior year. The company accrued $840,000 in dividend expense for the series a and series b preferred stock which accrue at 8% per annum. There are no current plans to pay these dividends in cash. Last year, the company had dividend Spence of $400,000 associated only with the series a preferred stock. As of February 29th, the company had accrued dividends of $2.2 million classified as other accrued expenses on the balance sheet along with the current portion of closure costs accrued interest and that payable. Turning briefly to the balance sheet and cash flow, the company ended the quarter with a consolidated balance of 20.0 million in cash and cash equivalence, an increase of $2.3 million from the end of fiscal year 2003, that is August 31, 2003. An increase of $1.1 million from the end of Q1. During the quarter, the company had positive cash flow from operating activities of 10.4 million, largely as a result of improved inventory turns. For the six months net cash flows from operating activities were $8.8 million compared to $10.1 million for the same six-month period in fiscal 2003. Net cash was used in financing activities of .9 million dollars in the first six months of fiscal 2004 compared to the first six months of fiscal 2003 when financing activities provided an additional $5.3 million to the company. The change of approximately $6.2 million resulted primarily from the company's net repayment of $9.7 million of Bank borrowings during the first six months of 2004 compared to $9.7 million of net borrowings from Banks in the first six months of fiscal 2003. A reduction of redistricted cash in 2004 compared to restricted cash use of 9.1 million in 2003. A net 2.4 million more in proceeds common stock compared to 2003. 2.6 million from contributions in minority shareholders in 2003 as well as the payment of $800,000 in preferred dividends in the first six-month period of 2003. As of February 29, 2004, the company through its majority or wholly owned subsidiaries had $21.8 million outstanding in short-term borrowings through 12 separate facilities. Each of the facilities expires during the year and typically is renewed. As of February 29, the company had $12.9 million available on these facilities. The company believes that it has sufficient financial resources to meet its working capital and capital expenditure requirements by borrowing under its current and future credit facilities together with its own sources of liquidity including the agreement with the Saul and Helen price Trust described in the company's 10 q filing. As indicated in the earnings press release, the company continues to examine various alternatives to improve its capital structure and liquidity. Now I will turn the presentation over to Robert Price.

Thank you very much, John and hello, everyone. It's a pleasure to be able to talk with you today. It has been approximately one year since I was appointed interim CEO of PriceSmart, and it's been a real fun year. We've had many challenges in the company, as you can imagine. And I think we've made some real improvements. The following remarks will provide a perspective on the last 12 months as well as the most recent quarter. One of the most important accomplishments during the past year has been improvements in personnel practices. Our employees are well compensated. The atmosphere of the PriceSmart locations and the central offices is positive and enthusiastic, and important progress has been made in employee productivity. Our buildings and equipment are being maintained to higher standards which has caused some extra funding in the short term but over the time we believe this investment will pay back many times over. Concerning merchandise, pricing is more competitive. Quality has been improved and old and otherwise poor merchandise has been largely disposed of, though there remains pockets of slow selling products. We have also stabilized gross margins and now are generally obtaining the targeted gross margin goals. The bulk merchandise segment of our business continues to grow with the introduction of new products and the expansion of the program to nearly all PriceSmart locations. In the most recent quarter, we finalized staffing of our financial department, which has resulted in an excellent team of people. Also during the second quarter, we made the decision to consolidate most of the U.S. buying in San Diego. This consolidation has now taken place with positive results both in expense savings and a more effective buying organization. During the second quarter, we signed a lease for a new corporate headquarters office. We have now moved into these offices and expect to realize expense savings and improve morale. One of our major areas of focus during this past quarter has been distribution and Logistics. We made the decision to discontinue using the Sacramento distribution center for shipments to the Philippines. In order to lower expenses and speed delivery of products, we plan to discontinue the use of our Hong Kong distribution center and open a new distribution point in Panama . Further efforts to streamline the distribution function are being reviewed. Sales trends compared to a year ago have been improving but there is still much to do to achieve the levels that we believe are possible. In particular, our company is still not fully functioning in through -- in the traditional warehouse club styles. The product selection and marketing for small businesses needs lots of work. In addition there have been improvements in nonfood purchasing but there is much more that needs to be done to create merchandise excitement day-to-day in our locations. Membership accounts are steady at approximately 475,000 while the average membership fee has increased about $5 as reported a few moments ago by John. We have had fee attrition in certain market where's currency depreciation occurs such as the Dominican republic and Costa creek -- Costa Rica. Expenses remain a challenge and an opportunity at the locations we have identified -- at the locations we have identified two major expense savings opportunities. Credit card fees and pa roll productivity. At the central offices, we believe that the buying consolidation will result in savings while more effective use of technology may offer other ways to reduce expenses. Regarding Mexico, sales have been improving, however, the bottom line still shows losses. Our partners Gantty is the next step in validating the PriceSmart many Mexico. We hope to open a Mexico city site before the end of the calendar year. Competition remains fierce in Mexico but we remain positive in thinking there is a initial for PriceSmart in the Mexico market. We have identified a number of challenges which represent the highest priority in terms of focus for PriceSmart's management team. First, the company's capital structure needs to be strengthened. During this past year, we have struggled to maintain proper cash levels, spending much time chasing funds. Times which could have been better used attending to the nuts and bolts of the business. We believe that our real estate may be the most effective source to satisfy PriceSmart's cash needs. Although we cannot provide specific numbers for how much we are seeking to raise, in general, our goal is to secure sufficient funds to permit PriceSmart to operate effectively and to relieve the financial pressure related to interest payments and debt amortization. The second challenge is to finalize the hiring of a new President. The CEO and chairman responsibilities will remain with me but the day-to-day responsibilities for operating the company will be in the hands of the President. We believe that we are close to filling the President's position. Third is mentioned earlier there's much work needed to increase sales. This will be the number one goal for the new President. Although there are some markets that are doing reasonably well, such as Trinidad and Costa Rica, our business can be improved by better buying improved distribution, better merchandising. These are company-wide issues and all markets are affected by how well we handle these issues. For the Philippines and Virgin Island are losing money and our negative cash flow markets because of the operating losses and heavy debt obligations. We are making efforts to find the right answers for both of these markets. In addition, we are now planning to open a fourth location in the Manila market which we call the Azianna location during the first week of June of this year. Finally, we are attempting to lease or expose locations we closed during the past year. In closing, I want to thank you for taking the time to list ton the presentation. A number of you have submitted questions and I have attempted to integrate the answers into the remarks that you have just listened to. However, a few questions didn't fit neatly into the prepared remarks so I will attempt to answer those questions now. The first question is, what is the weighting of fruit items and parishables in your stores and will it change in it seems like your stores have only a small exposure to food items. Wouldn't it make more sense to increase this waiting to attract more traffic? In fact, approximately 75% of our sales are derived from consumables which includes food and food related products. As I mentioned a few minutes ago, our biggest short fall is not consumer purchases but the business purchases, and I think in that regard we should be looking to increase absolute sales in consumable products but primarily if we can do that with our business clientele because we think there is a great opportunity there. Also, we have identified the bakery component as being particularly weak. We recently hired a gentleman who has expertise in that field that we expect he can help us improve the performance of the bakery department. We are being affected significantly by the -- our inability to export U.S. beef to our locations due to the mad cow disease problem. I think once that gets corrected that that will help us. Another question, the 10 q referred to a $10 million sales short fall in December '03, "primarily due to limited levels of merchandise in stock in many locations." Was this unforeseen strength and demand was there logistic or execution problem? I think probably there are a number of reasons that we didn't do as well as we had planned. One is that the plan itself given the recent trends in the fall of '03 was probably too aggressive. The cash pressures that we were under constrained us in keeping levels of stock at the -- as high as we wanted in addition to which in that time period at least there were some vendors who held off some shipments which we were not experiencing that problem now but we did at that time. And then I think there was a, within the regional markets there was poor planning on some of the seasonal consumables. I identify liquor as a particular problem where we didn't have adequate stock levels and didn't really set our floors properly to take advantage of what is normally a very large sales opportunity with liquor. I just think it was probably more than anything a failure of execution and I think we have to do better. The final question that I'd like to address is please comment on current competition in your marketplace. Well, as you already know, Mexico is really very highly competitive market with Costco, Sam's and variety of competitors. It's a very, very tough market. The Philippines is also a tough market in a different way because there are two very aggressive local chains that sell both food and nonfood and operate on very, very tough margins as far as the products that is acquired within the market. Our advantage in the Philippines will be primarily the import product where they cannot necessarily take advantage of the same sourcing opportunities that we can. In central America, we face two kinds of competition. One is what would be I guess described as hypermarkets. The two dominant chains in central America, which are primarily gross related chains, also operate hypermarkets, which sell both food and nonfood. They are significant competition. In addition, in Guatemala and Panama, two of the grocery chains have opened club type operations that compete directly with us and although they are not doing a large amount of business, they do represent another element in the marketplace that we have to contend with. So I think that pretty well covers, I think, the questions that you've asked as far as I can answer. Now I'd like to turn things back to John so he can finish up with some of the questions he will respond to.

Thank you, Robert. There were a few that I will address that didn't -- that I did not address in my remarks. First one relates to the Asia segment and sales in that area as you noted in the 10 q, the revenue declines from $59 million a year ago to $36 million this year. Reduction of $23 million. Clear the contributor there as we have less -- two less warehouse clubs in operation. We closed our Guam operation as I indicated and we had four locations in the Philippines operating last year and only three this year. On a comp sales basis, there was a reduction of about 7% to 8% on a same-store basis in that region as well. Second area I'd like to address is a comment about same-store sales in the Philippines and Dominican republic. For the quarter, we've seen reduction of about 4% for the Philippines, 7% to 8% I referred to was the six-month period for the Philippines. Dominican republic we've seen a reduction of about 17% and as Robert has mentioned, that was an area we've seen some very significant currency devaluation on a year on year basis which would impact the comp sales as measured in U.S. dollars. Finally, there was a question on the status of wavers for loan covenants that we were not in compliance with as of the end of Q2. We had received wavers or agreements to amend the covenants where we are not in compliance in all but two of our loans as of April 20th. The two remaining wavers are expected to be received but have not been received as of yet. I would also add that in some cases where we have reached agreement to amend the covenants, we have not yet formally finalized these amendments in a written legal document. I think that wraps up the questions that we have, and I would like to at this point conclude the conference. Thank you for your participation.