PriceSmart Inc (PSMT) 2012 Q3 法說會逐字稿

Good day and welcome to the PriceSmart, Inc. Earnings Release conference call for the third quarter of fiscal year 2012, the three-month period ending on May 31, 2012. All participants are currently in a listen-only mode. After remarks from Jose Luis Laparte, PriceSmart's President and Chief Executive Officer, and John Heffner, PriceSmart's Executive Vice President and Chief Financial Officer, you will be given an opportunity to ask questions as time permits. (Operator Instructions) As a reminder, this conference call is being recorded on Tuesday, July 10, 2012. A digital replay of the call will be available through Tuesday, July 31, 2012 by dialing 888-203-1112 for domestic callers or 719-457-0820 for international callers. The pass code is 6547874.

I would now like to turn the conference over to John Heffner. Please go ahead, sir.

Thank you and welcome to our Q3 earnings call. I hope you'll find this to be a useful forum to review the information that we provided in our 10-Q filing which we released yesterday, July 9, 2012. You can find that filing, as well as the earnings press release which was also released yesterday, on our website, www.PriceSmart.com.

Please note that statements made during this call may contain forward-looking statements concerning the Company's anticipated future plans, revenues, and related matters. These forward-looking statements include, but are not limited to, statements containing the words expect, believe, will, may, should, estimate, and similar expressions. These statements are subject to risks and uncertainties that can cause actual results to differ materially, including the risks detailed in the Company's annual report on Form 10-K/A for the fiscal year ended August 31, 2011, filed with the Securities and Exchange Commission on January 9, 2012. We assume no obligation, and expressly disclaim any duty to update any forward-looking statements to reflect the occurrence of events or circumstances which may arise after the date of this call.

Now, I will turn this over to Jose Luis Laparte, PriceSmart's President and Chief Executive Officer.

Good morning, everyone, and thank you for joining us in our conference call for our fiscal third quarter, which includes the months of March, April, and May 2012. Let me begin by talking about our sales performance for the quarter. Q3 sales were $494.8 million. This resulted in a 17.4% total growth over last year, and comparable sales growth of 12.9%. If we look at the numbers in more detail, our sales in the region of Latin America that includes Colombia and all Central America were up 21.8%, influenced by Barranquilla, which has not yet reached its 12-month anniversary, and it is therefore not in our measurement of comparable sales. That compares with a 9.7% growth in the Caribbean region. We continue to see a stronger performance in the Latin America region that reflects improved economic conditions given those more diversified and larger markets.

The third quarter included the Easter period, which in a lot of our markets is a season for vacations. And we saw good sales performance in the different departments that align with that season. The food categories and the fresh area had strong sales. And our different nonfood programs such as patio sets, grills, beach chairs and towels also saw strong sales in the quarter. We finished those seasonal programs with clean inventories as we transitioned to the new programs which are in our clubs now.

A lot of our countries celebrate Mother's Day during the month of May, except for Panama and Costa Rica. And we saw very good sales in areas that capture a lot of that business. One example will be our bakery department that reported a growth of 28% for the quarter. I will say that through the year, our reputation in this area has been growing. And we keep seeing good growth as a result of the good quality items that our clubs offer. Doughnuts, ring cakes, birthday cakes, et cetera.

For the quarter, we have more than 6.1 million transactions in our clubs, and that represents a growth versus last year of more than 17%. Transaction growth was the primary contributor to our overall sales growth. And it's tracking with the growth in our membership base, which is the next subject that I would like to give an update on.

During the quarter, we added 32,808 new accounts. And we finished the quarter with 949,000 total accounts as a Company. Our renewal rate is at 89%. On June 1, 2012, we made the decision to increase our membership fee in 10 of our countries, but will remain with the same fee in three of the countries for various reasons. For example, in Colombia, we just started operations last year in August 2011. The annual membership fees are a fundamental part of our business model and are applied to margin as a way of reducing the price. The goal is to channel the fee increase back into lowering prices.

It has been more than eight years since our last adjustment in fees. In US dollars we moved our fee from $30 to $35. During the first month after the increase in fees, our renewal rates remained high, indicating the acceptance of our loyal members to this change. We believe our members appreciate and recognize our efforts on bringing them good value on quality, on exciting merchandise and the great member service that they have come to expect from PriceSmart in the different countries. We also truly appreciate their support and we work to earn their business and loyalty every day.

As we begin the fourth quarter of fiscal year 2012 we have a lot of different activities in place to be ready for the beginning of fiscal year 2013 and a busy holiday season in our clubs. As part of that preparation, we're now working on the expansion of two of our warehouse clubs. One in David, Panama where we will be adding more than 5,000 square feet of sales floor space, 2,000 square feet of receiving area, and at the same time relocation and expansion of the current bakery production area. The city of David in Panama continues to be one of the fastest-growing areas in Panama. And we believe we need to make this expansion to better serve our members' needs in this community. We also started expansion of our warehouse in Barbados where we are adding 2,700 square feet of sales floor space, giving this club an additional 232 pallet positions to support the good sales growth we have seen. This club was originally opened with a footprint that is approximately 25% smaller than our standard club.

An unusual event happened last month in one of our Costa Rica clubs. A pallet fell from the steel and injured a member. This is a very rare and unfortunate event. We view the safety of our members and our employees as our number one responsibility. We're providing support to the injured member, and as a result of this incident we have made changes to certain operating procedures within our clubs relating to how we store and handle our merchandise.

During the third quarter, we made a lot of progress in the construction of our second club in Colombia, in the south part of the city of Cali in an area called Canasgordas. Two weeks ago we started our membership sales in this market and initial results are positive. We're looking at opening in October 2012. As I talk about Colombia, I also want to share with you that we will begin during this month of July the construction of our third club, also in Cali. This one in the north part of the city. Opening is planned for spring 2013 for this club.

In terms of expansion in existing countries, we continue to pursue the necessary permits and approvals for us to close on the land we have identified for our sixth warehouse club in Costa Rica. That process is taking a little longer than we had hoped, and we now project that this new club will be open in the fall of 2013. At the same time, we continue to look for other opportunities to add additional sites in existing markets.

As many of you may know, a few years ago we launched our e-commerce operation in our countries. It is now in place everywhere except Colombia. And during the last quarter we had 2,500 transactions from members taking advantage of our offering of more than 2,000 SKUs of nonfood that are not available in our everyday assortment in the clubs. That represents a growth in transactions of more than 24%, compared to the same quarter last year. While this is still a very small part of our overall sales, we believe this is only the beginning of something that will keep growing as people in our markets get more familiar with the world of e-commerce, which is not as developed yet as it is in the US and other markets. In addition, e-commerce provides another avenue of value and convenience for our members and we believe that our sales will increase in this area as we continue to improve our knowledge of the e-commerce business.

As we're getting to the final quarter of this fiscal year, we're keeping our focus on growing sales and executing our merchandise plans. At the same time, we recognize how important low operating expenses are to the success of our business model. As many other retailers, we face important challenges on payroll expense, utility costs, credit card costs, maintenance and repairs, et cetera. We have actions in place to leverage our operating expenses as we keep growing our business in the different PriceSmart countries, delivering good service to our loyal members and providing good wages for our employees that work so hard to make our members' experience a good one.

Before we take your questions, let me turn things back to John Heffner for a few additional comments about the financial results.

Thank you, Jose Luis. You all have the numbers from our release and filing yesterday so I will not go over them in detail. However, I would like to touch on a couple of items and perhaps in doing so I will have anticipated some of your questions.

As Jose Luis mentioned, net warehouse sales grew 17.4% in the quarter, and comparable warehouse club sales for the 13 weeks ending June 3, 2012 grew 12.9%. There was no change in the number of warehouse clubs used in the comp calculation during the 13-week period, with 28 of our 29 warehouse clubs in the comps. Warehouse gross profit margins were even with last year, and up 28 basis points from the first six months of the year, in part due to improved importation costs for goods coming into Colombia. Membership income in the quarter grew 19.2% on 19.6% growth in member accounts. As was the case in Q2, the difference in membership account growth compared to the income growth relates to the timing of when accounts were added, which was not even over the course of the 12-month period. In Q2 we spoke of a one-time correction to member income we recorded in that period totaling $323,000. While this would impact the nine-month comparison to the same nine months last year, it had no impact in the current quarter.

Warehouse club operations expenses grew 19%, resulting in a 12 basis point increase as a percentage of sales, 9.33% versus 9.21%. The infrastructure investment we are making in Colombia as we grow the sales contributed about 2 basis points of the increase. However, the more significant item affecting this line in the P&L was a one-time $777,000 expense taken in the quarter, related to our central American third-party credit card processor having erroneously underbilled the Company for certain debit card transactions during a period of approximately four years. The processor has been correctly charging the Company for these debit card transactions since December 2011. This item negatively impacted operating expenses by 16 basis points in the current quarter.

Operating income grew $3.5 million or 16.1%, slightly less than the sales, largely as a result of the prior period debit card charge we took. Two items below operating income negatively impacted the current quarter net income and EPS when comparing to the year-ago quarter. The first item was currency. Currency, which we no longer report in gross margin but in other income and expense, had a rather significant year-on-year impact in the quarter. For the current quarter, we recorded a $449,000 currency loss. In Q3 last year, we realized a $1.2 million gain. To put this in EPS terms, this alone accounted for nearly $0.04 in comparing the current quarter to Q3 of last year.

The second item. In Q3 of fiscal year 2011, so last year, we received a gain from two real estate transactions in Panama. We sold our Los Pueblos site and we sold another parcel of land in Panama. Together, we recorded a $1.2 million net income gain which added $0.04 per share to last year's Q3 results. The effective tax rate for the quarter was 33.9%, compared to 30.6% last year. Most of the increase was due to changes in applicable foreign statutory tax rates. However, the prior period charge for debit card processing fees, for which the Company did not recognize a tax benefit, contributed about 1%. Colombia had a minimal impact on the change in tax rate from the prior year in the quarter.

From a balance sheet perspective, we ended the quarter with $105 million in consolidated cash and equivalents. For the first nine months, we have generated $76 million in cash from operations. We have used $36 million in capital additions including land purchases, mostly in Colombia. And we made a $9 million dividend payment at the end of February.

With that, Jose Luis and I would be happy to take your questions. Operator?

(Operator Instructions) Dave King with Roth Capital.

Maybe just kicking it off a bit here, understanding that your long-term strategy is to pass along efficiency benefits, et cetera, and generate lower prices and higher volume. With that in mind, could you talk a bit about your target gross margins? I notice margins were up in the quarter. And it sounds like some of that was from the importation costs into Colombia. But I'm just trying to think about that in the context of being at the lower end of historical levels. And how should we think about that versus long-term targets and the potential for further improvement in coming quarters?

I think you correctly stated our model, as that's to continue to reduce prices. And it is our business model as we can leverage our operating expenses below gross margin to pass that back in lower prices, which results in lower gross margins. So I think on a go-forward basis, our intent is to continue to lower prices, get the expense leverage, our operating expenses, as we grow sales, and we would probably see lower margin percent going forward. But I don't think I have a specific target in mind. We tend to focus more on operating margin. So gross margin could come down as we get that leverage in operating expenses.

Okay, that's helpful. Maybe then switching a little bit then for the operating margin. On the SG&A side, you talked about that. You talked about the factors that drove the increase this quarter. But it generally seems to bounce around a lot as we move over the course of the year, with a pretty material impact on earnings. Is there a target there that you manage to? And how should we think about that as far as how it changes seasonally, if at all?

I think the bigger impact to earnings in the current quarter were things that happened below operating income, not operating income itself. I think operating income was about 5.1%, operating margin was 5.2% a year ago. I think we took that charge here in the quarter which, other than that, we would have actually seen, I think, an increase in our operating margin percent. But I think we're in the range of where we expect to be, where we are right now. I think our margin might have been a little higher in Q2. We have the holiday seasons and significantly more sales at that point.

Okay. Thank you. And then another question. You typically adjust prices to maintain a target margin, like you talked about. Given what we've seen in terms of maybe recent dollar appreciation, but then also in the context of declining oil prices, shipping costs, et cetera, how do you feel about the need to raise prices at this point? And did we see any of that in the quarter at all or in the month of June?

This is Jose Luis Laparte. Not at all, actually. Any efficiency we keep finding we just keep lowering prices. We haven't had any specific actual raising them. On the contrary, we keep reacting as aggressive as possible on reducing our prices. Any benefit we can take, we just take it down to lower our merchandise prices.

Okay. Fantastic. Thank you.

David Strasser with Janney Montgomery Scott.

First question is, as you raise the membership fee, how should we be thinking of the flow-through of that through the P&L? Will some of that be reinvested back into pricing? Will a lot of that flow back straight through to the bottom line?

Yes, David. Definitely the principle of raising the membership fees, the fees are a fundamental part of our business model. We apply all that to margin as a way of reducing prices. This was a $5 increase. And as I mentioned in my script, we will channel back into lowering prices for our members. There's not any other concept but just after eight years of not moving anything in our membership, we felt it was the right thing to do. But again, we keep lowering our prices in an effort to keep showing our members the value for that $35 membership.

So I should assume that most of that will be reinvested back into pricing?

Correct, that's our business model for sure.

When you're looking at membership and new members, how do you count membership numbers for clubs not opened yet? Because it looks like spend per member has actually gone down a little bit. I'm just trying to understand the numerator and denominator there.

While we're selling memberships right now for our new club in Cali, we wouldn't count those members until we open the club.

Right now, even though we started two weeks ago, those are not counted in our total count of membership accounts.

So then spend per member has actually gone a little bit negative, or is a little bit lower. Any reason why that's happening?

I'm not sure what you're looking at for that.

Yes, we don't have that same perception. It's actually consistent. If it's not growing at a high rate, we haven't seen that average spending from members really suffering at all. They're actually doing more transactions. We have growth in transactions but we haven't seen any decrease in membership spending at all.

Okay. And a last topic, looking at Colombia, trying to understand, and you may have talked about this a little bit, I'm just trying to understand bigger picture how the expense structure there and how much leverage there is there as you get into clubs two and three on the existing infrastructure in Colombia. Because as you go through the P&L and you try and back out what the strong sales are in Barranquilla, assuming similar type gross margin, you're still seeing some deleverage there. So I imagine a lot of that has to be about infrastructure in the Company that's been built out. And when do you think that becomes a leveraging from a deleveraging on that infrastructure?

Definitely from an operating perspective, the infrastructure we have in place in Colombia is equivalent to what we will have in countries with three or four clubs. Obviously, depending on a number of factors, including the growth of sales in the new clubs once they open, the pace of adding new clubs and the cost of those new clubs, we will see different profitability level within Colombia. But we definitely have the infrastructure in place for our future growth, for adding more clubs. And we're going to start seeing some good leverage as we open the second one in this fall and the third one early in spring 2013.

But there's no reason that Colombia should be a less profitable business than the rest of the businesses. If anything, with the volumes, at least it could be more?

There's not any reason at all that we see Colombia behaving different from the other markets. The indications with the performance of the first one is that could be as good performing as the other countries.

Okay. Thank you very much. Appreciate it.

Jon Braatz with Kansas City Capital.

John, did you say that you're taking new memberships for the Cali store at this time?

Yes, we are.

Okay. Is there any way to get an early read on the membership rolls there compared to what you saw in Barranquilla early on?

John, this is Jose Luis. We don't really disclose that. I will say that it's a positive start, as we saw it with Barranquilla. But we're not ready to disclose the numbers. We just started two weeks ago. We're still probably three months away. So it will only get better but we don't have any numbers to disclose at this point.

And Jose Luis, you said despite the increase in the membership fee, that the renewal rates were still good in June. Were they still at the 89% rate that you've been seeing?

Yes. We haven't seen any slowdown. Again, it's only one month. But I think at this point the members are appreciating the value. And reality is, after eight years of no increase at all, I think they didn't really mind the $5 increase that we had. Indication is good. Even the comments at the clubs, we don't really get a lot of comments from members or surprise from members. We made a good job explaining to them that we raised the membership fee in exchange of lowering our prices. So we're now proving that, and we will keep proving that in the next 12 months in an effort to keep our 89% renewal hopefully through the year.

Okay. John, do you think we'll see, in terms of the pre-opening expenses for the first Cali store, more in the fourth quarter or the first quarter?

I think we'll probably see a little more in the first quarter for opening in October. There will be certainly some in Q4 but probably be a little more in Q1.

Are the level of pre-opening expenses similar to what you might see in other stores?

I think it's similar to more what we did in Barranquilla as opposed to existing markets.

Yes. It is going to be more similar to Barranquilla. Cali is a city, obviously completely separate from Barranquilla so it's like opening a new country in some respects, because we are opening miles away from the other one. So there is a little bit more but very consistent with what we experienced in Barranquilla, for sure.

Last year at this time you said that you were really being very careful about opening the Barranquilla store, and probably overdoing it with some expenses just to make sure that it's done right and there's no problems. And you incurred probably some expenses that might have been above normal for a new store opening last year. Will we see anything like that associated with the Cali stores?

John, this is Jose Luis. I would say that we learned a lot with Barranquilla. We probably learned the hard way with some things. Obviously it's a new country, a new opening after so many years. We got a lot of things that we learned as we opened. So I think we apply a lot of those learnings and we see a more consistent opening and much more control in terms of expenses in this case of Cali. I think we went through the hard part already.

Okay. It looks like the Barranquilla store is just knocking the cover off the ball. Do you want to make any comment, subjective comment, about how well Barranquilla is doing?

I guess you just said it. It's doing good for us, so we're happy with the business. And the indication of opening a second and third club in Colombia because we like what we have seen in Barranquilla and we believe there is good opportunity in the country, the rest of the country.

All right. Thank you, Jose Luis.

Ronald Bookbinder with The Benchmark Company.

I was wondering why isn't selling, payroll, general, administrative salaries not experiencing leverage with the almost 13% comp? And what comp level would you need to achieve to gain leverage on these items?

I think we did see some leverage if we remove the charge that we took. So I think we did see some leverage if we remove that. But I think there really is room for improvement in leveraging our SG&A costs even further. Because with a 17% growth in sales we probably should do a little better job in that area. We did see some leverage but I think that's a focus for us going forward, to try to achieve more. Jose Luis, do you want to add something?

I will say that definitely we believe there is space for improvement still. As I mentioned, a lot of retailers facing challenges in utilities, credit card costs, different areas. What we need to do, we are doing and we will keep doing fourth quarter and next year is just keep looking for ways to find efficiencies and get more leverage. There is some homework for us for sure. And we have actions in place to keep improving in that area.

Okay. Because I thought the Q said that selling, payroll increased the SG&A by about 8 basis points, which was a surprise, given the comp. Okay. On the membership fees, the last time you raised membership fees eight years ago, did it impact renewal rates, traffic or revenue? And what other markets outside of Colombia are you not increasing the fees?

Eight years ago we probably were at a very different place as a Company eight years ago so I'm not sure it's a comparable view to look at things that could have operated then. I think we need to focus on what we're doing now and the kind of value and the merchandise we have, and I think the role we play in some of these countries. So, we're at a very different place.

Yes. I don't think we have any historic information on that. It was a decent transition but definitely we don't have enough information to talk about that because we really changed a lot of things in the last eight years within the Company. And the other markets besides Colombia where we recently opened and we didn't need to change anything, USVI, we made a slight change in January this year. So there was not any need for another increase. And the other market was Barbados where there was not any change either. In a lot of markets, given the exchange rates, mostly exchange rates, we were already at a $35 price point on membership. So there was no need to make any adjustment.

Okay. And lastly, inventory up about 50% of the sales increase. How should we think about that going forward? Was there something that happened there? Because it really helped drive some terrific cash flow.

Yes, there's been a real effort there in that area with our merchandising group. And so I think we got some benefits of that this period.

And we're going to try to continue that but obviously our focus is to keep driving sales. We're getting into, basically in a few weeks we're going to start seeing some Christmas items in our clubs. So this is the time of the year that we will start for sure building inventory. But we're very focused on inventory turns and try to leverage as much as possible the flow of inventory. Because we also have, obviously, the challenges of the clubs having limitation of space to handle all the merchandise. So there is a good plan in place but for sure we will continue to find leverage on inventory turns as we get ready for a busy holiday season.

Okay. Great. I'll get back into the queue. Thank you.

(Operator Instructions) Patricio Danziger, Everest Capital.

I was wondering if you could give guidance on operating margins or EBITDA margins for the next three years. If you can give guidance, if it's going to increase 50 basis points or 100 basis points or you're going to maintain the margin.

Thank you for your question but we don't provide guidance going forward.

Okay. Also looking at margins of retailers in Colombia, I see, for example, Exito having EBITDA margins of around 8%. Do you think you can have EBITDA margins higher in Colombia than in the rest of the region?

I would think Colombia should probably look like -- similar to the other countries that we operate in. We're operating the same business model there as we would operate in the other countries that we're in.

Yes, we don't see Colombia different. Competition -- obviously there is more competition in Colombia in general terms, more presence of retailers. Exito Carrefour, for sure. Olympica. So there is more competition but I don't think we see that any different. We operate with the same margin principles and the same membership concept that we do in any other market. So regardless of what the other guys are doing in retail, we keep operating on the same principle in Colombia. No, we don't do anything different in that market.

Did you have any problem in terms of distribution in Colombia?

No. We have some challenges at the very beginning, just as we were opening our first new club. But now it's pretty much under control. No, we basically operate in the same way. We have a very efficient distribution operation, obviously, from Miami, from Mexico, from both of those DCs and one in LA. We ship the merchandise directly to Barranquilla to the port over there. We're using a different port for Cali. It's very similar, I will say, that distribution process right now in Colombia cities to the other countries.

Thank you very much. You're saying that you're working on leveraging the Company, so trying to increase margins, right? So I suppose I have to assume higher operating margins in the future even though you don't give guidance, right?

You're correct, we don't give guidance.

Okay. Thanks.

Ronald Bookbinder with The Benchmark Company.

Just one last question. Currency translation, you called it out. Was there any abnormal event or was it a simple devaluation of the local currencies versus the US dollar?

It's both currency, pluses and minuses, in our countries against the US dollar depending on if we're in a net asset or net liability position. Last year it was largely driven by a strengthening of the Colombian peso. We got a pretty big bang out of that last year. And this year was spread across a number of different countries that participated in the $449,000 loss we took. But there wasn't a big feature. It was just across a whole number of countries.

Okay. So, like in Colombia, after you first opened, you had a lot of liabilities in US dollars and you had to put those into hedging instruments. And the peso devalued. So there wasn't any event like that? It was just simple run-of-the-mill currency movements in the market?

Generally speaking, yes. We've taken a lot of actions to reduce our exposure, particularly to the Colombian peso which we find moves around a bit more than our other currencies. We've taken some action there, both in terms of hedging instruments and local currency bank loans and things like that. However, the nature of our business is we can't entirely eliminate the gains or losses that might be incurred going forward but we try to minimize our exposures.

Okay. Great. Good luck going forward.

Nitin Saigal, Bridger.

Just want to clarify on expansion. You said Panama, 5,000 square feet of selling space and Barbados, 2,700. Was that it in terms of expansion?

That's expanding the size of our current clubs. That's correct.

And any more on the calendar in terms of expansions?

Not at this point. I think we did pretty much all the ones we were able to do in the last three, four years. We have expanded as many buildings as there was the ability to do it, based on space. So I don't see anything on the calendar or on the radar for the next few months. We were looking more at expansion of adding buildings but as far as expanding current ones, we're not planning anything in particular. We do some small bakery expansions, some other different remodels in our fresh area, but nothing that will be addition of sales floor space in particular as we are doing with these two.

Okay. Great. All the best. Thanks.

Dave King with Roth Capital.

Just one more quick follow-up. As far as the 17.5 -- 17%-plus sales growth in the quarter, how should we think about that in terms of transactions versus average ticket? And then also for the June comp numbers, how should we think about that as transactions versus ticket?

I think it's largely transactions. Had been the case for quite some time, so I think the transactions account for 90%-plus of the sales growth in the quarter. And I think that was true in June, as well.

Yes.

Okay. Just want to make sure. Thank you.

And at this time there are no further questions in the queue.

Okay. I want to thank those on the call. And thank you, Operator, for moderating this. And I wish you all a good day. Bye-bye.

Thank you.

This concludes today's conference. We do thank you for your participation.