PriceSmart Inc (PSMT) 2013 Q1 法說會逐字稿

Good day, and welcome to PriceSmart, Inc.'s earnings release conference call for the first quarter of fiscal year 2013, the three-month period ending on November 30, 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 Thursday, January 10, 2013. A digital replay of this call will be available through Thursday, January 31, 2013, by dialing 888-203-1112. For domestic callers -- I'm sorry, that was for domestic callers. For international callers, it's 719-457-0820. The passcode is 4470837. I'd now like to turn the conference over to John Heffner. Please go ahead, sir.

Thank you, and welcome to our Q1 earnings call for fiscal year 2013. I hope will you find this to be a useful form to review the information that we provided in our earnings press release and 10-Q filing, which we released yesterday, January 9, 2013. 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, may, 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 and 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 results of our first quarter fiscal year 2013. Today we're actually taking this call, this earnings call, from our Miami DC. So you may hear some forklifts on the background. That's just regular business hours here in Miami. Shouldn't be any interruption to our call. But just in case you hear the forklifts somewhere in the background.

As I always do, I want to start with the report on sales performance. We did $523 million in net warehouse sales, resulting in 11.8% total growth versus last year. And in comparable sales the growth was 8.3%. Same than in other quarters of last fiscal year 2012, we have a different growth rate on sales in our regions, with Latin American markets growing 15% for the quarter and 5.8% for the Caribbean region. The more diversified and larger Latin American markets reflect better economic conditions compared to the Caribbean countries. In addition, Latin America had the benefit of nearly 1.5 months of sales from the opening of our new Cali, Colombia warehouse club, which opened on October 19, 2012.

In terms of membership income, for the first quarter, we saw an increase of 21.2%, with $7.7 million. Total active accounts for the end of the quarter were 999,000, showing an increase of 14% over prior year. Our renewal rate for the quarter was 86%. While I speak about membership, I would like to confirm that, as we announced on our last earnings call, we successfully launched our new type of membership, the Platinum membership, 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, the Platinum membership can provide more savings and value to PriceSmart's highest volume shoppers, thereby building greater member loyalty, and hopefully incentivizing these members to increase their purchases. At this time we're limiting the Platinum membership to our Costa Rica market in order to assess the effectiveness of this membership category before introducing it into our other markets. We are very encouraged with the initial results and acceptance of this new membership in Costa Rica. It shows that our members are willing to invest in the additional fee to get the 2% reward on the purchases with PriceSmart.

During first quarter, we opened our new location in Cali, Colombia in the south of the city, our second warehouse in Colombia. The initial results are positive, not only on sales but also on the acceptance of the membership concept and our business model. Colombia is a competitive market. But we believe we bring a lot of excitement with our merchandise selection and our low price. We continue on a schedule with our plans to open our second location in Cali in the northern part of the city. Construction is well under progress. And we are expecting an opening during the third quarter of this fiscal year, likely May 2013.

Before I turn it to John Heffner for his additional comments, I would like to give you all some quick update on December sales. We finished the month of December with sales of $253.7 million, representing a total growth of 11.6% and comparable sales of 13.7%. The comparable sales period equated to the four weeks ending Sunday, December 30, 2012. Last year, the same four-week period ended on Sunday, January 1, New Year's day when all our warehouses were closed. Consequently, our four-week comp period this year had one more day of sales compared to last year four-week period. This had an approximate 3% positive impact on our comp growth. We will see the opposite effect in our four-week January period.

I am pleased with the way we finished our holiday season between the accomplishment of the first quarter and December. During December, we saw good performance in different departments of food, fresh, and non-foods. Our seasonal food program had a very good year compared to last year and the members were able to enjoy a lot of novelty items from our selection of candies and chocolates from the US and Europe. Electronics had a good performance for the month, with LED TVs being the main drivers of good sales growth. For computers, as it is happening in the US, tablets are becoming a very important item in our selection. Our bakery business also reported good growth versus last year. And every year we keep seeing how our members enjoy our cakes, and especially some signature items that we bring for the season, like fruitcakes, which are very popular in our markets. The transition to new merchandise for the spring season, which we are now approaching, is going well.

We achieved another Company milestone in December as we surpassed 1 million membership accounts. We're looking forward to continuing to serve these members as we now move into the new calendar year 2013. And the last comment I would like to add is regarding expansion plans. We continue to pursue the necessary permits for our sixth club in Costa Rica and we hope we can get that completed in the next few weeks so that we can open this club during fall 2013. At the same time, we're busy looking for more opportunities to add additional sites in existing markets including Colombia where we will have three clubs by the end of this fiscal year.

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. I hope you all have had a chance to access our earnings release and 10-Q, both of which were made available yesterday. Let me highlight a few items in our financial results specific to the first quarter before we take your questions.

Let me begin by calling your attention to a change we have made with respect to product demonstrations which occur in our warehouse clubs. In the past, we have treated the cash consideration received from vendors for these product demonstrations as other income on our P&L, which flows to total revenues. Other income is not a component of warehouse sales. The expenses associated with these demos were in our cost of goods sold and warehouse operating expenses. Beginning with this quarter we have reclassified that income, reduced by the associated expenses, as a reduction in cost of goods sold. This will have the effect of reducing other income and total revenue by $1.1 million to $1.3 million on a quarterly basis and increase warehouse gross profit margin as a percent of sales by 10 to 13 basis points. It will also reduce warehouse operations expense as a percent of sales by 11 to 17 basis points. It had a very small impact on warehouse sales, which related to the supplies we used in these demonstrations, but that is a very negligible amount. There is no impact on operating income or net income from this change. Prior periods have been adjusted to reflect this, and with a full disclosure of that change in our 10-Q for the past four quarters.

Warehouse gross profit margins as a percent of sales were up from Q1 of last year by 43 basis points at 15%. 14 basis points of that improvement related to additional costs we incurred last year in Q1 in our initial importation of merchandise into Colombia. These costs are no longer being incurred. The remainder of the increase related to end cap income, vendor promotions, reduced shrink, and fewer markdowns.

Warehouse club operations expense for the quarter were 8.76% of sales, a 19-basis-point improvement from Q1 of last year, as most cost factors showed leverage, particularly depreciation, utilities, and repair and maintenance. The opening of the Cali warehouse club, and the sales growth of the Barranquilla warehouse club, had a positive impact on the expenses we have in place for our country headquarters in Colombia. We incurred some pre-opening expense in the quarter related to the Cali warehouse club opening and we will likely have a similar expense spread over Q2 and Q3 as we ready the Cali North club for opening.

Operating income grew $5.5 million over the first quarter of last year to $29.8 million. Foreign exchange translation gains or losses had a negligible impact in the quarter, whereas last year we had a $1.2 million loss. And the tax rate of 30.5% benefited from a decrease in the taxable loss in Colombia, among a few other things which we've detailed in our 10-Q. All of this resulted in an earnings per share for the quarter of $0.66 compared to $0.47 last year. We ended the quarter with $84 million in consolidated cash and equivalents, having a net use of cash in the quarter of nearly $7 million related to our annual build-up of merchandise inventory in advance of December holidays. And $15 million of capital investment, primarily related to our two Cali warehouse clubs.

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

(Operator Instructions)

Dave King with ROTH Capital.

First off, for December, it was a pretty good re-acceleration of comps there. Strongest growth in nine months or so. Maybe can you talk about what you think is driving that, in your opinion? And whether it's local economic factors, any specific countries within what it sounds like is Latin America showing the most strength, et cetera?

Your question is what is driving that, Dave, you said?

Yes. You had comps over the last -- I don't know if you can hear me okay -- I'm on the road right now -- but it sounds like, or it looks like over the last nine months you had comps that were slower, in the high single digits, and then you just had a re-acceleration to 13.7% or so. It sounds like 3% of that you quantified. It's still better than it had been, to some extent. So I was wondering if there was anything else to help drive that.

I will say that, from our perspective, we really prepare a good holiday season. The first quarter in December we were really looking at a good holiday season and the preparation obviously showed that we were able to deliver those kind of results. That would be my additional comment, Dave. And I mention specifically, some departments where we saw pretty good performance. One of them, as I mentioned, electronics. Some of those areas in computers. And there were obviously a lot of good categories in the food area, food and fresh areas. So a combination. It's basically a combination of different categories where we were better prepared. And I think our members enjoyed the shopping experience during December with us.

Okay, that's fair. And then on membership activity, it looked like new member growth slowed a bit, even with the opening of the Cali store. Maybe can you talk about what's driving that? Then also just renewal rates I think were a little bit lower than what we've seen in awhile. Do you think that has to do with the fee increase, or is there something else? How do you better tell -- if that's the case, how do you better tell the customers -- help tell them the story about the value proposition provided?

Sure. Let me address that, Dave. I think with respect to the renewal rates, our renewal rate has dropped slightly from 88% to 86% over the past year. I think the jury is out a little bit as what you could specifically attribute that to. I don't think we can attribute it specifically to the fee increase. In some markets where we increased the fee have seen no change in renewal rate. And others, including where we did not change the fee, have seen some small reduction. So I would not attribute it specifically to the fee increase. And we should probably continue to study that, for that small change from 88% to 86% over the past 12 months. Economic factors could be in play there, as we've seen in some of our smaller markets. But we'll have to do some more study on that.

Okay. And then just on the new member growth, was there anything there to highlight?

I don't think so. I think our membership growth is fairly constant. But the numbers are getting bigger so I think percent of -- the denominator is getting bigger for the numerator to have to create the same percentage.

Right, absolutely. All right, thanks so much, guys.

Mark Litwin with Remington Partners.

Good job, folks. Can you tell me or us which countries have had the highest year-to-year growth in stores, same stores? And which countries had the lowest?

We don't provide individual information on that, Mark. But as you look at our segments, our Latin American countries are stronger than our Caribbean. And particularly I think the smaller markets in the Caribbean are the ones that are not having as strong a growth rate as some of our larger markets in Central America.

Okay, thank you.

Greg Garner with Singular Research.

Nice quarter. It looks like you continue to execute well. A question on the gross margin. Last quarter it was abnormally high due to some distribution issues. This quarter, I think, John, you mentioned vendor promotions, lack of shrinkage. Is this a new level that we can expect here? Or is this, again, would you still consider this more, a bit of an anomaly on the high side?

I think sequentially we're down from Q4 to Q1.

Yes, I understand that. I mean what this quarter was. It seems to be a little bit higher than what you are targeting in the long term. So is this an anomaly, is my main question.

The Company's strategy is to push the benefit of lower cost back into lower prices for our members going forward. And to the degree that we operate and execute well in any given quarter, provides an opportunity for us to take those costs and move them back to lower prices going forward.

Okay. But do you think there will still be these vendor promotions? Lack of shrinkage -- that can change quarter to quarter. Lack of markdowns, I suppose, is more of a -- coincide with the positive comps. I'm actually thinking December there. So back to the November quarter. I'm just trying to get a sense, is this something that can repeat itself? Or should we really look at that 14.5% as a target still for gross margin?

I'm not sure we have a specific target in a specific sense, that same way. But I would say that our intent is to continue to be as operationally efficient and take costs out as much as we can. And push that back into lower prices that may have an impact on margin percent as we go forward.

Okay. In the Barranquilla store, was that included in comps in November? Was November the first month or was December the first month?

November was the first month that Barranquilla started in the comps.

Okay. So even with that, there was still a good step up in comps from November to December. Okay. Question on -- I guess you did address some of the membership, but is the primary membership weakness, would that also be in the Caribbean markets that you're finding are lower same-store sales? Was that a proper way of looking at things?

Yes, I think that's probably fair. I don't have the data in front of me but I think that's probably fair that our membership focus --.

Yes, it's a little bit more slower, obviously, in those Caribbean markets compared to the bigger markets, Latin American markets where there is also more population, more people to pull from. So there's a little bit of correlation for sure, Greg, on that.

Okay. And the increase in the electronics, was that any change? For December now, that was such a good sale item, apparently, that you mentioned a couple of times. Do you see that as a significant change either from a sequential month, or is it really more of a holiday situation that you see even was greater than last year?

I will say that we were better prepared to get more business during the holiday season, as obviously we were looking when we would travel during the holiday time we were in very good shape in electronics. Good inventories. We were expecting a good holiday season, and we prepared for that. So, as a result of, obviously, preparation. And I think electronics has always been a good department for us, not only during the holiday time, but in general it's a good department where we have a good reputation on low prices, good quality items and good brands. So it's just good execution, I will say, from the perspective of the buying on the operations to accomplish good results. And especially in a month like December.

Okay. And just one last question, and I will get back into the queue. Can you tell us anything about the new store or land acquisition process in Colombia for potential new stores, say, into fiscal year '14? Since it takes about 12 months, it seems like, approximately, from the time of closing on the land until the new store opening, can you tell us that you have anything, that you're looking at several properties, you're coming close, you think you might have something to say in a few quarters? Anything along those lines?

Yes, I will say, obviously, we have opened two and we have one more under construction. We don't have, Greg, a specific number in mind. But, obviously, given the size of Colombia market, we believe that we can open multiple warehouses in the country if we can secure the right sites. And obviously we continue to experience the success we have been so far. I think, obviously, we keep working on the major cities. It's obvious that Bogota, Medellin -- the major cities are our target to start. We don't have anything official but hopefully very soon we'll be able to share more information on new sites. And you are right, it takes approximately, probably, 12 months, 14 months to get from the time we announce and the time we open one of our warehouses over there. But we don't have anything extra, else to share as far as future growth there, other than the fact that we believe that there's good opportunity.

Okay. And if I could ask one more. I'm just curious about how -- do you see any kind of competitive response to how you have been successful in Colombia? Are some of the local stores making any kind of merchandising change that you're competing with? Or are you not really seeing any change there at all?

We have seen a little bit of change. Not big change, but we have seen a little bit of change in terms of some competitors adding more imports probably to their selection, knowing that one of our strengths is definitely the US merchandise, imported merchandise. But at the end of the day, obviously we compete in Colombia with stronger retailers. No question. Very strong retailers, good companies, running good businesses there. But different formats. I think the warehouse club concept, even with changes that the other guys are doing, I think there's a very good niche for the warehouse club. Very good acceptance of the membership concept.

So we have seen small changes but nothing drastic. And we expected that to happen, obviously. As we opened, we knew that there was going to be a reaction from the other competitors, but I don't think that we have seen anything dramatic in terms of the way they do business. A little bit more aggressive in some prices, probably, in some areas. But nothing that not only -- nothing that doesn't happen anywhere else. It's happened at some point in other Central American, Caribbean countries, and we expected that to happen in Colombia also.

Okay, thank you.

Ronald Bookbinder with The Benchmark Company.

First, I was wondering, you were just talking about the strong imports from the US. And, Jose Luis, you're at the Miami DC. What percentage of your goods are exported out of the Miami DC? And while the container longshoreman's strike has been averted for the time being, what would your plans be if there was a container longshoreman's strike on the East Coast?

I would say probably out of Miami we ship probably --

70% to 80% of our exports.

Yes, I would say most of our exports are coming out of Miami. We have other, nine, DCs, obviously. But, yes, easily 80% of our exports are coming out of this facility here in Miami. Regarding the strike or the problems, at some point we had a plan B, obviously knowing that we had some risk. So even before things were -- we always have a plan B or a contingency plan in case something happens. And it happened in the past in the other coast, on the west coast, where we have our other DC. So there's always a contingency plan that we think we can pull together pretty fast to react to any kind of problem like that. We do realize as we have weather-related things that can happen in this facility, as it happens in Miami. So, in general, we always have contingency plan to be proactive and be able to react given the weight -- we do realize the weight of imports in our business. And we really need these operations to be running pretty much 24 hours a day to be successful in our business.

Okay. And Q1 was the highest operating margin in about a year and a half, such that PriceSmart, you probably could give more margin back to the members. So should we continue to see prices go lower to the members? And would you get even more aggressive than you have been?

I will say that we will continue being aggressive on margins. We are not changing the plan on increasing margin. It happened to be one quarter where we got, obviously, all of these things happening at the same time -- the execution and less markdowns and good holiday season. We got vendor rebate money. But we're not changing at all our direction, Ronald. And we will definitely keep lowering our prices and maintaining our low-margin structure in place. We're not definitely looking at changing that at all.

Okay, thank you. And good luck going forward.

David Strasser with Janney Capital Markets.

This is Darren on for David. I just wanted to clarify on the renewal rates. It seems like you measure them over a 12-month period. They've gone from 89% to 86%, with six months or so with the fee increase in place. Is it safe to assume that current renewal rates on a quarterly basis are running lower than that, somewhere in the 82%-ish percent range, in order to bring it down by that much? And if that's the case, can you just talk a little bit more specifically about the markets where you are having issues, what the push-back is, the types of members maybe that aren't renewing? Thanks.

We measure -- the measurement of our renewal rate is a rolling 12 months. So it is -- and from a year ago, it was 88% and is now 86%. So that can change over some time. I think we did some -- we re-validated the approach we were taking on our membership. And I don't think I have a good answer for you. I think we need to do some study. I think it's moved down slightly. I don't think it matches to the math you have there. But I think we need to do some more study as to whether there is really a trend of -- I don't think there is -- of some significance there. It could be members who haven't shopped with us for awhile. It could be members who, when they do renewals, they tend to renew when they come back into the warehouse club, as opposed to renewing when their membership expires. And so we will carry them for a couple more months in terms of -- they won't be carried as members, but if they do renew within three months after their expiration, they will go back into the renewal. But I think it's -- I don't have a specific thing I could point to at this point.

Okay, thank you. On gross margin -- these are somewhat connected -- has your tone changed at all with regard to investing the fee increase back into price? It just seems like gross margin hasn't really changed since the fee increase. Maybe it's just an anomaly. Is there anything going on there that we should be aware of from a benefit standpoint? I know you mentioned you have regional distribution centers going in, in Central America, I believe Costa Rica and Panama. Are they providing tail winds? Are they operated by a third party, I'm assuming?

First of all, on that, we're not -- the DCs, obviously, are operated by us. What we're doing right now in Costa Rica, we have a warehouse established that will be operating as a regional DC, and it is operated by us. We're not doing it through third parties in those markets.

And on the other question on margin, nothing has changed dramatically. As I mentioned before, our margin goals remain the same. The expectation when we did the membership fee was to keep, obviously, lowering our prices and transfer those savings, or transfer the benefits of additional membership income to lower prices. That will continue to be our formula for business. We don't have any plans on changing it at all.

Okay. And then, any other metrics on the Platinum membership pilot in Costa Rica? It seems like that could definitely be a big opportunity for you guys. Any timing plans on when you think it may be rolled out across the chain? And any impacts on comp and gross margin?

Yes, it's probably too early because we just launched it a month, I guess two months ago right now, and I think it's probably too early to know the results. What we know is the initial acceptance is very good and I think members are excited about the opportunity. It proves the loyalty that we can get from those members and, as I mentioned in my script a few minutes ago, we've got to see how that turns into incremental sales, which is the expectation. So it's a little too early to have a better view of this, David, but I believe we are very encouraged to see that the initial acceptance is very -- members got it. Members understand the importance of that.

Thank you. Good luck the rest of the year.

(Operator Instructions)

Jon Braatz with Kansas City Capital.

John, Jose, as I read the 10-Q, I noticed that more of your sales growth came from average price or ticket price versus transaction compared to relative quarters. What might account for that little bit of change?

I think generally speaking, Jon, if I recall the numbers here, the average transaction or the average ticket has always been 2% to 3%. But when transactions were growing 17% or 18%, or 16% or 17%, then it was a smaller portion of the total. So I think the change there is really a reduction in transactions. But I think our average ticket is in the range of our historical activity.

Okay. Secondly, John or Jose, would you like to maybe make a qualitative statement about how the first store in Cali is doing relative to the Barranquilla? It's your second store in Colombia. Are you seeing similar type of membership growth, sales patterns, and so on and so forth? Nothing specific but qualitative.

We don't really provide individual information from an operations perspective. I will say that the acceptance in the city of Cali has been very good, also, from the membership perspective, Jon, to start with. Has been very good. And there are different dynamics in the city of Cali versus Barranquilla. Very similar competition. I will say that the Cali store is, obviously, doing as good as we expected. And to the point that obviously we are excited about opening a second one in the city of Cali. Going forward we don't see any real difference between cities. There will be some variations within each of the cities, as we have them even in the current PriceSmart countries where we're doing business. But in general, without sharing a lot of the detail on the individual performance of Cali, we're very pleased with the results that we have seen in the last three months since we opened. They had a good December month also. And the membership base keeps growing in that market, which is an important thing for us to watch right now in Cali.

Okay, thank you. John, one last question. Your tax rate was a little bit lower in the quarter -- 30.5%. Do you want to guess where it might be going in the future?

No, I don't want to guess where it's going in the future.

All right, thank you.

I think generally our tax rate runs between, on a normalized basis, 32% to 33%, in that range.

All right, thank you.

And at this time there are no other questions in queue. I will turn the call back over to Mr. Heffner.

Thank you, Tim. And on behalf of Jose Luis and maybe the PriceSmart employees here in Miami who are busy moving -- we're seeing a lot of activity out in our warehouse here -- thank you all for participating with us today. And a belated happy new year to you all. Bye-bye.

This concludes today's conference call. We appreciate your participation.