PriceSmart Inc (PSMT) 2012 Q4 法說會逐字稿

Please stand by, we're about to begin. Good day and welcome to PriceSmart, Incorporated earnings release conference call for the fourth quarter and full-year fiscal year 2012, the 3 and 12 month period ending on August 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 Wednesday, October 31, 2012. A digital replay of this call will be available through Friday, November 30, 2012 by dialing 888-203-1112, for domestic callers. Or 719-457-0820 for international callers. The passcode is 730-8094. I would now like to turn the conference over to John Heffner. Please go ahead, sir.

Thank you, and welcome to our Q4 and full-year 2012 earnings call. I hope you will find this to be a useful forum to review the information that we've provided in our earnings press release and 10-K filing which we released yesterday, October 30, 2012. You can find both the filing as well as the earnings press release 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, made, should, estimate, and similar expressions.

These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the risks detailed in the Company's annual report on form 10-K for the fiscal year ended August 31, 2012 filed with the Securities Exchange Commission on October 30, 2012. We assume no obligation and expressly disclaim any duty to update any forward-looking statement 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 the fourth quarter and fiscal year 2012 results. We here at PriceSmart have been closely following the events of Hurricane Sandy and the impact that it has, it had on the Northeast. We hope that all of their families and friends who may have been affected by the storm are well, and we would like to send our sincere best wishes for a speedy recovery from the event.

Let me begin with warehouse sales for the fourth quarter. We did $499 million, resulting in a 14.4% total sales growth versus last year. In terms of comparable warehouse sales, the growth for the quarter was 10.1%. Comparable sales exclude to Barrenquilla, Colombia club. The Latin America region show a better performance with a 11.7% comp, and the Caribbean finished with a 7% comp. This has been a trend for a few quarters, which we believe reflects the larger and more diversified economies of the Latin American countries compared to the Caribbean.

The comp sales growth in this last four quarters, at about 10%, is lower than the 13% in Q3, 17% on Q2, or 19% on Q1. We attribute that to general economic conditions in some markets that may be causing a reduction in the growth of consumer spending. In addition, we also believe it is harder to keep growing consistently double digit growth, in some clubs year after year. Even with that growth, we feel it is a good reflection of our growing business in competitive and challenging environments.

Membership accounts in the fourth quarter increased 16%, driven by strong new membership sign-ups in Barrenquilla, Colombia, and our 12-month renewal rate at 88%. I will like now to spend a few minutes with some of the highlights for the fiscal year 2012, that we ended on August 31, 2012. As a Company, we are pleased to report that we accomplish a milestone with our sales result of $2 billion. It was only four years ago in fiscal year 2008 that we passed our $1 billion milestone, and now in 2012, we were able to double that number of sales.

Back in 2008, our average sales per club, was $40 million, and this past fiscal year, the average sales per club is up $68.9 million. That accomplishment has been possible with good merchandise, with growth in our member base that year after year gives us their vote of confidence, either by signing up as a new member or renewing every year.

And, last but not least, the hard work of our team in the offices, distribution centers and warehouse clubs. In terms of membership, we finished the year with more than 965,000 accounts, and membership income of $27 million, an increase of18% compared to fiscal year 2011. During the fourth quarter on June 1, we raise our membership fee in ten of our countries after eight years of not adjustment in fees. In US dollars, we move it from $30 to $35. As a reminder to all of you on the call, the annual membership fees are a fundamental part or our business model, and are applied to margin as a way of reducing prices on merchandise.

In other words, our goal is to channel the fee increase back into lowering prices. We don't believe that the fee increase has had an identifiable impact on our renewal rates at this point. Our members appreciate and recognize our efforts to bring them good value, savings and quality on our merchandise, and we work very hard every day to earn this business and loyalty.

We ended fiscal years 2012 with operating income of $107.9 million, an increase of 21.9% from prior year. Net income for the year was $67.6 million or $2.24 per share. Compared to $61.8 million or $2.07 per share the year before. Now, fiscal year 2013 has started and we have been very busy. On October 19, 2012, we open our second warehouse club in Colombia in the south part of the city of Cali, in an area called Camiyas Gordas. The initial results of that club are encouraging, and indicate to us that the warehouse club model is being accepted in this city, just as it was in Barrenquilla where we recently completed our first year of operation with good results. In the same city of Cali, but in the north, we plan to open our third club in the country in the spring of 2013. Construction is well underway, and we are making good progress to have these new clubs ready in that area.

Another important event to highlight, for this fiscal year, is that tomorrow, November 1, we will launch for the very first time a new type of membership in our Costa Rica market. This will be called a platinum membership. Our new platinum membership is a $75 annual membership card compared, with our current $35 card for our business and diamond members. Platinum members will earn a 2% rebate on their purchases, with a maximum annual rebate of $500.

Similar to Costco's executive membership, Platinum membership will provide more savings to PriceSmart highest volume members, thereby building greater member loyalty and, hopefully, incentivizing these members to increase their purchases. Combined with our [core] brand PriceSmart credit card rewards program that offers a 2% rebate on PriceSmart credit card purchases, our members in Costa Rica will now have the opportunity to earn up to 4% rebate on their purchases. At this time, we are limiting the Platinum membership to our Costa Rica market in order to assess the effectiveness of this membership category before introducing it to our other markets.

Just to finish, we are looking forward to the holiday season. Our clubs are ready for what we expect to be a busy holiday season, and our buyers did a good job on finding a lot of exciting merchandise, to be able to serve the needs of our members in all the different countries.

Thanks again for joining us today, and 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 highlight a few items in our financial results specific to the fourth quarter. Warehouse gross profit margins were up from Q4 of last year by 67 basis points, and up sequentially from the third quarter by 44 basis points. We realized efficiencies in our distribution of imported merchandise in the period, and we also benefited from vendor rebates and promotional income which we apply as a reduction to cost of sales.

As you know, our general practice is to utilize cost reductions to lower prices, and these results provide a good opportunity for us to do so going forward. For the full year, warehouse gross profit margins were 16 basis points below fiscal year 2011. About 1/3 of that decrease related to incremental importation costs for merchandise in our first six months of operation in Colombia. We did not experience any similar issue with the importation of merchandise for our new Cali club.

Warehouse club operations expenses for the quarter were 9.48% of sales, a 52 basis point improvement from Q4 of last year. Nearly all of that reduction can be attributed to a $2.3 million depreciation charge we took in Q4 of last year, to correct an error to accumulated depreciation for warehouse clubs in certain countries. The costs associated with our country headquarters, related to our Colombia expansion, continue to have an impact on the Company's total warehouse club operations cost as a percent of sales, by about 20 basis points. But this is improved somewhat with the sales we now have in Barrenquilla, and will continue to do so through the year with the new warehouse club in Cali, that we opened on October 19. And with the addition of Colombia club planned for opening later this fiscal year.

Operating income grew $10.2 million over the fourth quarter of last year to $26.9 million. Operating profit grew 57%, and net income grew 40%. Two items of note. Currency, which we no longer report in gross margin but in other income and expense, had a smaller impact in the quarter than in the recent past, and we recorded a net gain in the fourth quarter of $210,000. However, this is $953,000 less than the benefit we took in the fourth quarter of last year. In Q4 of last fiscal year, we recorded a one-time tax benefit of $3.1 million reducing the effective tax rate in that period to below 30 %. In the current period, we have a more normalized tax rate of 34%, resulting in a tax provision increase year-over-year of $4.1 million in the quarter.

From a balance sheet perspective, we ended the quarter with $91 million in consolidated cash and equivalents. Inventory ended the year at $201 million and is expected to grow through the quarter in advance of the holidays. For the fiscal year, we generated $89 million in cash from operations, and have used $53 million for capital additions, including land purchases, mostly in Colombia. And we made two $9 million dividend payments, one at the end of February, and the other on October 31st.

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

Thank you.

(Operator Instructions)

We will go first to Dave King with Roth Capital.

Thanks. Good morning, guys. First off, on the gross margin this quarter, can you provide some color around how those different things that you cited, John, benefited the gross margin this quarter in terms of basis points between distribution, efficiencies, vendor rebates, et cetera?

Dave, I'm not going to break down the pieces of it. Those are -- I don't have that information here, and I don't want to go into that level of detail. But, rest assured that the Company is always reducing prices to provide value to our members. And in the current period, we did get some cost benefits in a couple of areas, some, as I mentioned distribution efficiencies. We did see some good endcap and promotional activities from our vendors. I think our strategy -- so we got the benefit in Q4. Our strategy is to push those benefits and lower prices. And I would expect to do that as we go forward.

Okay. So what I'm really trying to get at is how we should think about the gross margin on a go forward basis, and how different it will be from the fourth quarter number as you look out over the next couple quarters? (multiple speakers)

I think generally speaking, over the last few quarters, our margins are in the mid-14%. I think that's the target margins that we operate to. We got some benefits here in this fourth quarter, but our approach is to operate in what I think you've seen in the recent past quarters.

Okay. That's helpful. And then, it sounds like the results, or the initial results out of South Cali are really encouraging. Could you help us put that in context versus -- if I remember Barranquilla knocks the cover off the ball in terms of productivity right at the outset. Should we expect the same thing out of this store? Is it any different than that? Maybe you can just compare and contrast, at least based on everything you've seen early on today?

Yes, Dave, this is Jose Luis. And, yes, obviously, we are happy with the opening of Cali. We do not provide individual warehouse club information, but we hope to continue seeing positive results in this second club in Colombia. Definitely, we are encouraged with the first two weeks, as I've mentioned in my comments. The results are very similar to what we saw in Barranquilla to start. We are definitely up for a good start and we feel very positive about the acceptance of our warehouse club concept in a new city like this one in Cali. And obviously, you all know we are ready for Spring 2013 to open the one in the north. Cali is a big city, and we believe there is market for those two warehouses. We don't have anything else on the -- announce as far as other openings right now in Colombia, although being a big country, we have always said that there is a good opportunity for multiple club locations in a country with 40 million, 45 million people.

Absolutely. All right, thanks so much.

Thank you, Dave.

David Strassor, Janney Capital Market.

Thank you very much. I appreciate it. I just wanted to touch base on the renewal rates. You said that the price increase didn't really impact them at all. It dropped a little bit, but I want to make sure I understand it because, you said -- it said 12-month renewal rates had dropped from 89% to 88%. Would that mean that the average or the most recent quarter would be lower than that, would be mid-80%s if the math is right, or am I thinking about that correct?

I'm not sure we do it that way. It is a 12-month renewal rate, David. You are right. 88% is where we ended. The comment about the fee increase, is we didn't increase the fee in every market, as we mentioned. It was, I think, 10 markets.

10 markets.

So it wasn't in every location. And we've done a study to see did the renewal rate have a different profile in those markets where we did raise the fee versus the ones we didn't. We didn't see a distinction on that basis. So that was the basis for that. So the 88% is our renewal rate. And, I'm not sure the math that you just referred to holds.

All right, so what you're saying though, is that you saw that the price went up and you didn't really see anything that changed renewal-rate-wise from consumers?

We've been in for three months now, so yes.

Fair enough. Okay, that's cool. I appreciate it. Thank you.

Ronald Bookbinder, the Benchmark Company.

Good afternoon and congratulations on another quarter of strong execution. On the gross margin, you had one quarter of these great distribution efficiencies and vendor rebates. Why not hold onto that before you pass it onto the consumers to make sure that it is a trend and it's not any sort of one-time event?

Well that's not our model, Ron, as we operate at some target margins, and as we get those efficiencies, we will pass them through the lower prices.

That's just -- that concept of the business model. We keep looking at opportunities of lowering our prices. Distribution is a big piece, and we will continue looking for efficiencies on distribution. And, as we find them, obviously, we want to be more competitive. We want to keep lowering our prices. As a result of that, we hope we will see increase in sales. It's just the cycle that we have in this business model, for the warehouse clubs.

So in other words, you are confident that these distribution efficiencies will carry forward and vendor rebates?

Yes. We would expect them to.

Okay. On SG&A, you talked last quarter about that your payroll costs had been running higher than you would've liked, and you were looking to control a lot of SG&A costs a little bit better and getting some leverage on SG&A. How is that proceeding?

Well, certainly our plans, it is a big focus of the Company to do that. Our operators are very focused in that area, and how they operate the warehouse clubs. And, our plans going forward is to be on track with the type of leverage that this business can generate, should generate. So, I would say we are on track with our plans to see leverage going forward, but we will see as the results go forward.

Okay. And just lastly, one more on SG&A. How much SG&A is involved in a store opening, SG&A expense, that is, involved in a store opening, and that you are still planning three store openings this year versus zero last year?

Well, I think the specific question might be -- we do have pre-opening expenses, which we incur before a store opens, and that is the initial hiring of the people and training. It could include the membership activity that we do before a club opens, and some marketing activity, potentially in a new area, like in Cali. I think in our most recent quarter, or in the fourth quarter, which would have contained a fair amount of, certainly, a fair amount of spending associated with Cali, we spent about $360,000. Probably some more that we would spend in Q1 before we opened on October 19th. So I think for Barranquilla, as I recall, it was something in the neighborhood of $700,000 or something like that.

That's correct. $750,000 for pre-opening expenses in a new warehouse club.

Right. But then once it opens, it should -- the expense of operating the warehouse club should be similar to the expense we see in other warehouse clubs.

Okay. And you are still planning three store openings this year versus zero last year?

We just opened Cali South.

We will open Cali North. And that's pretty much the other opening. We have announced, in the past, that we enter an agreement for another site in Costa Rico, but we don't necessarily see that being completed as an opening in this fiscal year 2013, nowhere. We haven't started construction. We haven't finalized the deal. We just enter into an agreement, and we are working on the due diligence at this point.

Okay. So Costa Rica actually might fall into Q1 of next year, is that what you're saying?

That's correct. More likely.

Okay. Thank you very much, and congratulations, once again.

Thank you.

Jon Braatz, Kansas City Capital.

Good morning, gentlemen. Jose, you mentioned in your prepared remarks about a general softening of economic conditions in a couple markets where it might be challenging to sustain your historical growth rates. And you also mentioned that in the 10-K. My question is, how pervasive do you see the quote-unquote softness, and maybe how many of your markets might be a little bit more challenged in terms of keeping those growth rates in the upper -- I mean, in the double-digit area? Can you give us a little color on that?

Yes. Well, I will say that probably the Caribbean is particularly one of the markets where we have seen more economic issues. I would say that in general, the Central America region is a lot more stronger, or at least it was for the past year. Hopefully, the holiday season -- we are very positive about the results that we can see this holiday season. But definitely in terms of highlighting, the Caribbean will be a little softer than the Central America region. There's less activity, economical activity, generally in some of these smaller islands. And Central America is, fortunately, having a good growth in general.

Okay. John, if I'm not mistaken, obviously, the Barranquilla store is doing very well. But the Colombian subsidiary is operating in the red, I believe, still? With the opening of the Cali stores, do you see Colombia moving into the black next year?

Well, Jon, we don't provide individual subsidiary financial information. But from an operating perspective, let me speak to that. Because operating in the black or in the red has a lot of tax implications and intercompany activity transfer pricing things. I really think the focus is on, from an operating perspective -- from an operating perspective, the country headquarters cost we have in place is equivalent to that which we have in countries that have three or four clubs. So, although depending on a number of factors, including the growth of sales in the new clubs once they open, as well as the pace of adding new clubs, and the cost of financing those new clubs, all these things could have an impact on the level of profitability within Colombia in any given period.

Okay. All right. And then, you increased the membership fee in 10 of your markets. How many members would that be? What percent of your membership base might have been affected by that increase?

It's pretty big, I would think.

I would say probably 80%. 80% to 85% probably, Jon.

Okay. And then one last question. If you were to strip out the membership, new memberships in Barranquilla, what would your membership growth have been in, let's say the non-Barranquilla markets? Do you happen to have that handy?

Well if I did that, then you'd know the number of members in Barranquilla, so I'm not going to mention that. (laughter)

All right. I appreciate that, John. Thank you very much.

Patricio Danziger, Everest Capital

Hi, my questions were answered already, so thank you very much.

Thank you, Patricio.

Mark Litwin, Remington Partners.

Good morning. You've touched on the fact that you don't really have any specifics on opening new stores in Colombia, but do you have any projections about the number of stores that Colombia could absorb?

Well, we have opened two and we've got one more under construction.

No, I know, but I mean in a broader kind of projection? Just your thoughts about how big the country really is for you?

Well, the country is 46 million people. It has the economic size in its GDP of all of Central America added together, I think is the order of magnitude. In Central America, we have quite a few number of clubs. So, while we don't know what the exact number is, and if we can secure the right sites and continue experience the kind of success we have seen in Barranquilla, and, hopefully, we're starting to see in Cali, then we will see what that number will allow us to get to.

I will only add that, definitely the potential is there with big cities in Colombia, either Bogata, Metagene, Bucaramanga, I mean, we have study a lot of those cities. But the key is going to be finding the right site, not the real estate. It's a very competitive market. We are busy working on that, Mark. The key will be finding, definitely, good sites, good real estate locations. For those markets.

And one other question, apart from Panama and Costa Rica, are you seeing any impact by gang activity in Central America on store sales, store activity?

Not really.

I think we do have -- there is a concern about security in northern Central America, Honduras. Guatemala

Yes, those are the countries I'm alluding to, outside of Panama and Costa Rica.

Things are, normal right now in terms of our business. We haven't really experienced, fortunately, there hasn't been that much activity around our area.

I see.

In those markets.

Okay. Thank you.

Thank you, Mark.

(Operator Instructions)

Ronald Bookbinder, Benchmark Company.

Hi. I was just wondering, do you see the presidential election having an impact one way or another on your business, whether it's the repatriation of capital or taxation or anything?

My perspective, Ron, is I wouldn't want to speculate on either the outcome of the election or tax policy that would follow from there. So, it's not something I'd choose to speculate on.

Okay. Thank you.

Dave King, Roth Capital.

Okay, thanks. Just a quick follow up. Taking a step back and thinking big picture, maybe someone has a follow-up to the prior question on how big Colombia could be? Just given the success you've had there, any thoughts on the pace of store growth going forward, and whether or not that could accelerate somewhat or if you would be willing to accelerate it? I mean, I understand that it takes time to find the right sites and all of those things so you have to be really methodical in your approach, but at the same time, there is advantages to having somewhat of a critical mass. Any help or color around that would be helpful?

David, I will let Jose Luis chime in on this one as well. I think our focus is to find good sites, and that's probably at this point the most, I would say, limiting factor, but the thing that is defining the rate at which we are opening warehouse clubs at this point in Colombia, is finding those good sites and securing those sites.

Yes, I would just add there is a complete relation on our speed, and the obviously, the availability of sites at a reasonable cost for our warehouse club business. But there is, that is a complete relation on those two variables. It's not the speed that we will be opening, and obviously, finding the reasonable cost sites in these big cities.

Right. No, that's fair. Have you thought about putting -- I mean is it a function of also just having more people maybe allocated to -- if Colombia is the opportunity that it seems like it is, is it a the question of allocating more people to doing that, site selection I mean, what is the limiting factor there in that process?

No, it's just a -- I don't think it's a matter of putting more resources, I think. We believe we have the right resources with the attention that that market requires. It's just challenging probably in some respect. We are very pleased with what we have done, finding these three great locations so far, the two that are open and one that we also believe is going to be a good one. We are really trying to find, in these new cities or other cities, the same quality sites to be successful on that. We are actively working on evaluating sites in all these cities to find the right one.

Okay. That's helpful. Thanks again.

Thank you, Dave.

Matthew Handorf, Graham Partners.

Hi. Congratulations on a great quarter. Just one quick question. If I calculate average sales per average member in the last two quarters, it seems to have flattened a bit or maybe even gone slightly negative. So, just trying to understand or any explanations for this? Have you reached any limit in wallet share or spend, any explanation would be great? Thank you.

I'm not sure I have a good answer to that. I think our rate of growth of members, since a member can join in any given period, and they're spending in sales that I think would accrue from that member would happen over a future period. So I think membership might -- number of members might always be the leading indicator of sales, as opposed to a lagging indicator. Or it would be hard to make that connection in a current period. Our membership growth has, I think, been a little higher in the last two quarters than our sales growth. So the math would give you that answer. I haven't drawn any conclusions from that, for the business.

Great. Thank you.

Thank you, Matthew.

And that will conclude today's question and answer session. I'd like to turn the call back over to John Heffner for any additional or closing remarks.

Well, thank you very much for joining us on our call today, and wish you a good day, and especially those of you who might be still feeling the effects of Hurricane Sandy. Best of luck to you and to your families. So that will end our call for today. Thank you.

Thank you.

And that does conclude today's conference. We thank you for your participation.