PriceSmart Inc (PSMT) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to PriceSmart, Inc.'s earnings release conference call for the second quarter of fiscal year 2013, the three-month period ending on February 28, 2013. 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, April 10, 2013. A digital replay of this call will be available through Tuesday, January (sic - see press release, "April") 30, 2013 by dialing 888-203-1112 for domestic callers or 719-457-0820 for international callers. The passcode is 1318246.

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

Thank you, Lisa, and welcome to our Q2 earnings call for fiscal year 2013. I hope you will find this to be a useful forum to review the information that we provided in our earnings press release and 10-Q filing, which we released yesterday, April 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.

Thank you, John. Good morning to all of you, and thank you for joining us in our conference call for the results of our second quarter of fiscal year 2013. Starting with sales for the quarter, we ended with $592 million in net warehouse sales resulting in a 10.1% total growth versus last year. Comparable sales growth for the 13 weeks ending March 3 was 9.3%.

Latin American markets, which include Central America and Colombia, finished with a 13.2% total growth and the Caribbean region had a growth of 4.2%. No question that, as I explained on other calls, the more diversified and larger Latin American markets reflect better economic conditions, compared to some of the Caribbean countries. In addition, Latin America had the benefit of three months of sales from the opening of our new Cali, Colombia, warehouse club, which opened on October 19, 2012, and the sales figures are part of the whole second quarter.

The second quarter of this year in the countries where we have presence is an important quarter for two reasons. First, obviously December is one of the months of this quarter, and we were very pleased with the performance we had in our seasonal departments, which include not only the food department, but also a lot of the non-food departments. Second, the months of January and February are transition months to new seasons of business in the different countries, from Carnival celebrations that occur in some Caribbean countries and Barranquilla, Colombia, and also Semana Santa celebrations that happened to be at the end of March this year.

But a lot of momentum for those sales starts in the first two months of the calendar year. We are very pleased to see that the sales on the different seasonal categories for those important events were also good, and contributed to our growth of sales during the second quarter.

In terms of membership, membership income for the second quarter, we saw an increase of 30.2% with $8.3 million. Total active accounts for the end of the quarter were more than 1.03 million, showing an increase of 12% over prior year. Our renewal rate for the 12 month period ended on February 28, 2013, was 85%, compared to 88% a year ago. We are seeing a reduction in the renewal rates, primarily in those countries in the Caribbean markets where the economic situation is more challenging for consumers, and no doubt some of our members have been impacted. However, we continue to see good new member sign-ups in nearly all of our markets.

Another important highlight in terms of membership is the fact that during November last year we launched in Costa Rica the new Platinum Membership. The Platinum Membership is a $75 annual membership card, compared with our current $35 card for our Business or Diamond members. Platinum members earn a 2% rebate on their purchases, with a maximum annual rebate of $500. This had a small positive impact on our overall average fee, and added to membership income in the current quarter.

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. We have not yet made a decision yet -- the decision to roll out this membership type in the rest of the markets, but it is encouraging to see the initial rate of acceptance in Costa Rica. And we like offering our members this opportunity to save more in return for being loyal consumers with us.

One area of the business that we have had some questions about in the past is our internet or e-commerce business. We currently offer an additional line of items, all nonfood imports that the members can buy from the convenience of their home or office using PriceSmart.com and selecting the country where they live. The merchandise is sent through our Miami distribution center and the member picks up the item at his or her selected club. All the items as mentioned above are in addition to our in-club items, so that our members can find more variety. But more important, it is the fact that we apply our same value proposition of offering savings to our members on their dot.com purchases.

More than 3,300 orders were processed during the second quarter of our fiscal year. And while this is not a significant part of our sales, we believe that going forward the e-commerce business will become more and more important for our retailers. And we therefore want to be ready to serve our members through this platform as well.

Now I would like to give you also a quick update on March sales. We finished March with sales of $192.3 million, representing a total growth of 11.5%, and a comparable sales for the four-week period ending March 31 of 7.9%. Easter was one week earlier in the calendar this year compared to last year. We estimate that this had a small negative impact on the comp growth in March this year. Aligning the same four-week period ending on Easter Sunday last year with this year, the comps would have been 8.6%.

Now before I finish my comments, I would like to spend a few minutes giving an update on our new club activities. As we announced in our press release last month during February, the Company acquired 21,200 square meters of land located in southern Tegucigalpa, Honduras, upon which we plan to construct our third membership warehouse club in that country. We are anticipating that opening in the spring of 2014, as some site work is required before we can start construction.

Our club number six in Costa Rica, in the area of La Union, Cartago is showing good progress on the construction site. We have commenced the installation of the concrete beams, and the steel building will be erected in the next two to three weeks. We are still looking at an opening during fall 2013.

For Colombia, our third warehouse club in the north part of Cali is starting to receive merchandise this week, and we are planning the opening of that building for May 3, 2013, only three weeks from now. As a reminder to some of you, our first location in the city of Cali in the south area was opened last October, and we have seen a good acceptance of the club concept. Moving from the north part of the -- to the south can be problematic for the members given the distance and traffic, and we anticipate this second club in the city and third in the country will also be a successful club for PriceSmart.

And I want to remind everyone that we keep looking for more opportunities in existing markets of Central America and the Caribbean. With respect to Colombia, we are also working on site opportunities, which may result in either land purchases or land leases for the other major cities that do not currently have PriceSmart presence, but where we believe we can be there to serve more future members in this important and growing country.

The last comment I would like to add is that, as I get to travel to our different markets, I am encouraged by the commitment and accomplishments from our many employees in making sure we have exciting merchandise for our members to buy at a great value. During these trips, I hear many positive things from members who recognize what PriceSmart brings in terms of differentiation in merchandise and value. With that, let me turn things back to John Heffner for a few additional comments about the financial results.

Thank you, Jose Luis. I hope you have all 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 second quarter, before we take your questions.

Let me begin by reminding you of a change we made last quarter in Q1, with respect to product demonstrations which occur in our warehouse clubs. Prior to Q1, we had treated the cash consideration received from vendors for these product demonstrations as other income in our P&L, which flows to total revenues. The expenses associated with these demos were in our cost of goods sold and warehouse operating expenses.

Beginning in Q1 and continuing this quarter and beyond, we have reclassified that income, reduced by the associated expenses, as a reduction in cost of sales. This had the effect of reducing other income and total revenue by $1.1 million to $1.3 million on a quarterly basis, and increased warehouse gross profit margin as a percent of sales by 10 to 13 basis points. It also reduced warehouse operations expense as a percentage of sales by 11 to 17 basis points.

There is no impact on operating income or net income from this change. Prior periods have been adjusted to reflect this, with a full disclosure of the change in our 10-Q. I mention this again as a reminder, as it may impact some of the comparisons you may have as you analyze our results.

Jose Luis has already talked about warehouse sales and membership. And I wanted to add one item with respect to the growth in membership income which we recognized in the quarter. Membership income grew 30% from Q2 of last year. While much of that is indeed driven by the growth in accounts over the past 12 months and an increase in the annual fee, these items combined give a 24% increase in membership fees. The remaining 6% growth relates to a $323,000 one-time reduction we took to membership income last year in one of our markets related to revenue net of sales tax.

Warehouse gross profit margin as a percent of sales was essentially unchanged from Q2 a year ago at 14.7%, but down sequentially from Q1 of 15% by 30 basis points, and Q4 before that of 15.4%. Q2 last year contained additional costs associated with our importation of US goods into Colombia, as we were still relatively new to that market at that time. That had the effect of lowering last year's Q2 margin percent by about 6 basis points, from where it would have been without those costs.

Warehouse club operations expense for the quarter was 8.1% of sales, a 37 basis point improvement from Q2 a year ago, despite the addition of expenses related to the new Cali club which opened in October 2012. Nearly all cost factors showed leverage, with increases in spending growing at a slower rate than the sales growth. Warehouse operating expense leverage was evident across nearly all countries, but particularly in Colombia with the opening of the Cali warehouse club and the sales growth of the Barranquilla warehouse club. The pre-opening expense in the quarter related to the Cali north, what we will be calling the Menga warehouse club, planned for an early May opening.

Operating income grew $6.1 million over the second quarter of last year to $36.5 million. As a percent of sales, operating income was 6.2% of sales. The second fiscal quarter is essentially our highest quarter for operating margin percent.

We experienced some year over year positive effect of higher interest income related to the level of cash deposits in some of our foreign subsidiaries. Currency devaluations in Honduras and Jamaica and the cost of hedging the Colombian peso contributed to foreign exchange related losses of $263,000 in the quarter. Last year, the Company recorded a $898,000 gain in Q2.

The effective tax rate of 29.4% was lower than last year, and benefited from the proportion of taxable income being generated in our foreign subs that have an average income tax rate below that of the US. All of this resulted in EPS, earnings per share, for the quarter of $0.82, compared to $0.67 last year.

We ended the quarter with $101 million in consolidated cash and equivalents, up from $84 million at the end of Q1, and $91 million at the beginning of the fiscal year. For the six-month period ending February 28, the Company has generated $61 million in cash from operations, used $39 million in acquisition of land and fixtures and building construction or expansions. An additional $9 million was used in the quarter to pay a $0.30 stockholder dividend in December.

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

Thank you. (Operator Instructions) And our first question today will come from Dave King, ROTH Capital.

Good morning.

Good morning.

First off, good morning. I guess, first off, your export sales were fairly strong this quarter. Can you talk about the relationship you had with that retailer in the Philippines, and how its business is trending? And how we should think about that revenue line item going forward?

Well, David, this is Jose Luis. The only relation we have is a -- it is a sales relation. In the past, those used to be our warehouse clubs. They are now owned and operated completely by this group. And the only thing we do is provide them with I guess warehouse club type of merchandise.

And it has been a growing business; in the last couple of years they have opened additional warehouses. And I am not sure we can determine how much more that is going to grow, because we don't really have any control on their future, as far as how many locations, and how they are doing on sales. So far, our feeling is that they are definitely doing good, because we keep increasing our exports to that market, no? But that is as much control as we really have on those export sales, no?

I would add, Jose Luis and Dave, the margin we get on this business is fairly low, about 5%. So while it might have an impact on our total revenue line as a Company, it doesn't have much impact on our income or profits.

That's correct.

Right. Okay, thanks so much guys (multiple speakers) --

I think though, just in terms of strategically, it does probably help us leverage some costs with our suppliers probably. So that is probably the hidden benefit in this whole thing.

Okay. That's helpful. And then, it looks like the 12 month renewal rate dropped a little bit again this quarter. But not as much as last quarter. And then as we think about it since it is a 12 month number, is it fair to assume then that we are seeing sort of a bottoming in that pace of renewals, after the fee increase you guys had a little while back, or how should we think about that now?

Yes, well, I think as Jose Luis mentioned, let me jump in on this is -- is we tended to -- I think we tend to see the reduction in our renewal rates, really in those markets that are having some economic struggles. And I would sort of highlight Jamaica, Aruba, Honduras that are going through some difficulties, either political or economic. And I think we are seeing that in our renewal rates.

In some of our larger markets in Central America, we are seeing renewal rates of 88% -- 87%, 88% even today. So it is a bit of a mixture. I am not -- so attributing it to the $5 membership increase, while that might have had some impact, I think we see it correlate more towards some of the economic conditions in some of our specific markets.

Okay. Thank you very much.

Thank you, Dave.

Next up we will hear from Greg Garner, Singular Research.

Thank you, and nice quarter, gentlemen. A question on the comment about the same four-week comparison on comp sales for the four weeks leading up to Easter this year versus last year. As I remember last year, Easter was early April. So essentially, I just want to make sure I understand this correctly, are you saying the four weeks last year leading up to that early April versus the four weeks in this year early April or this year in March, were up the 8.6%? I am just trying to make sure I understand that.

Sure. It was the four weeks ending on whenever Easter Sunday was. So -- and essentially it is -- if you take the four-week period that ended on Easter Sunday last year and the four-week period that ended on Easter Sunday this year, which this year happened to be March 31, which was the four-week comp period that we were using, then you get that comparison.

Okay.

So it was just to I think underscore the fact that there is some question always as to the timing of Easter can impact these things. It didn't impact us very much is the, I think, bottom line.

Yes. Okay. Thanks. And another clarification question on your membership growth explanation, being up 30% overall and 6% was related to adjustments to last year's data. Is there anything you can tell us about what was the amount of the membership increase? Is it totally attributed just to the price change of the membership fee?

Well, I think the -- Jose Luis mentioned that our increase in membership accounts was 14%?

Yes, it was 12% over --

12%. I think if you average it -- because membership income, I think it was 12% point-to-point from February 28 or 29 last year, 28 this year. But since membership income sort of is a rolling number -- if you look at the average membership over this 12-month period it is 14%. So I guess, you can back into it and say that would be about 10% membership fee increase.

Okay.

On average.

Okay. I just wanted to make sure my numbers were right, in doing that. And I guess it might be for more Jose or perhaps you, John. So the Colombia store opening here, I mean this amounts to be two in this fiscal year. And then it appears that you are on line to open up two next year. I mean, this is a great, ongoing opening program here, store opening program.

But the next two next year, not have to do with Colombia. So I am just wondering is it difficult to find that next location in Colombia? And if perhaps you were to find it in the next whatever, few months or so, would it be -- do you have the resources to actually put a third store in next fiscal year, fiscal year '14? Or would that have to be pushed out to '15?

Let me tell you, Greg, I guess we didn't highlight it this time -- I believe we mentioned in the last earnings call or two earnings calls ago -- that it has been a challenge definitely to find the good sites in Colombia. That doesn't mean obviously we are not going to find them. We definitely believe there is an opportunity to find the appropriate sites for us, in the major cities where we don't have presence yet. So we are working very hard on doing that.

And as far as the resources, I don't see any reason -- if obviously, if the biggest challenge once you find a site, sometimes in these bigger cities, Greg, is the fact you have to go through permitting and very complicated and slow permitting process. It is hard to say if we would be able to open something in 2013. If we find a site and the permitting process goes fast, we don't have anything else that will limit. I mean, we have the people. We have the construction resources. We have everything that we need to put in place to open as fast as we can, no?

But it will definitely depend on how soon we close on a site, and how soon we get the permitting to get the construction up and running, no? That is our -- that as I mentioned in Colombia, obviously the major cities, Bogota, Medellin, Bucaramanga, where we know members are asking for a PriceSmart, definitely will be the priority -- so are the priorities for us, no?

Okay. Great. Thank you. Appreciate that.

Thank you, Greg.

(Operator Instructions) Up next is Jon Braatz, Kansas City Capital.

Good morning, gentlemen.

Good morning, Jon.

I had a question. Obviously, your operating philosophy is to pass the savings on to the customer. And you have been able to leverage your operating expenses very nicely in the quarter, and last couple quarters. Do you see that being passed on, and for that operating leverage ratio to rise again? How do you look at that?

Jon, definitely we have been experiencing good operating expense leverage. That combined with good membership income obviously provides the opportunity to reduce prices and warehouse margins, consistent obviously with our business model, no? As much as we can keep -- this is kind of a cycle, as much as we can keep reducing our costs and obviously growing in membership income, we are going to continue reducing prices and get much more competitive out there in the market, no?

Okay.

That's the secret of this business of warehouse clubs, no?

Okay. Okay. John, are you still -- on the Platinum card, are you still fully accruing that -- what is that, $500 rebate or something like that?

What we do is we set for any purchases made by a Platinum member -- and this excludes some merchandise, they don't get it on liquor and --

Cigarettes.

And tobacco.

Okay.

But for other items, we set aside 2% of the sales. So we reduce our sales by 2%, and up to a maximum of $500 on an annual basis for that member. So our sales are impacted as a result of that.

Okay. But -- so you are fully accruing it?

Oh, absolutely. No question.

Okay. All right. When do you think you might review? I assume it doesn't have much of an impact at all at this point, but when would you review that?

Review that in what sense, Jon?

Well, would they fully -- I guess they would fully take advantage of that 2% rebate?

Right. Right.

Okay.

We are essentially reducing the price of like -- the rev -- the price by 2% for those individual items.

Okay. Okay. And then lastly, the membership rolls in the South Cali store -- I know it's not open yet but you are taking memberships -- are they sort of tracking consistent with what you saw in North Cali?

Yes. Definitely. It gets a little tricky, because we already have members from the North that are shopping in the South, because it has been open for a while. But as we have seen --

Because the South is open, Jon, just to be clear. The South is open, the North we are opening now.

Yes.

Oh, okay. I am sorry. Okay.

Yes. But again, a lot of the members from the North are already shopping in the South location. And in the last two weeks, obviously, we have seen a growth in the membership sign-ups in the North location. And obviously, the key is the next three weeks.

But so far we feel that it is going to probably behave very similar to the club in the South, no? The acceptance in the city of Cali has been very good for our concept. And we have done that drive, and it is probably 40, 45 minute driving sometimes from one point to the other of the city.

So we believe there is very good separation, and the demographics are as good in both parts of the city. So we don't have any reason to -- not to believe that the performance is going to be as good in the North as it has been in the South of that region.

Okay. All right. Thank you, Jose Luis.

Thank you, Jon.

(Operator Instructions) And our next question is from David Strasser, Janney Capital Markets.

Thank you very much. Can I have two clarifications and one question, if you don't mind. First, on March, when you see the pattern of sales, do you see -- if I am not mistaken, you were closed on Easter Sunday. And you would see a sort of a lift heading into Easter Sunday, and then a lot of that kind of is given back when you are talking about the shift by being closed in this month versus last, versus April?

I would -- let me comment on that. There is actually one day -- probably one of the only the two days of the year, that all of our warehouse clubs are closed, and that is Good Friday.

Good Friday. Yes, it is not Easter Sunday.

So we actually have some clubs open on Easter Sunday. And so when we looked at this comp period, which is offset by one week, what we are looking at is ending a four-week comp period on Easter Sunday. But that included a closed day on Friday. And the year before, that Friday and that weekend before Semana Santa is a pretty big weekend.

So now, that gets offset when you go this year, because -- I mean then -- so we decided to, since we always have these conversations about Easter, they are usually a little further apart than one week, we said, well, there was only one week apart, let's see if we can't normalize it and see if there is a difference. And the result as I indicated is that's not significant in aligning those weeks.

Okay. I just wanted to make sure I understood it. And okay, thank you. And another thing when you look at sort of -- when you talk about the weaker markets, the ones that have the lower renewal rates, are those -- I don't think you raised prices everywhere. Are the weaker markets, the ones that you have talked about, are those the ones that haven't actually seen the price increase as well?

We did raise them in Honduras. We did in Aruba, and we did in Jamaica.

Okay.

So there was an increase in those markets. It was just a -- probably just a perfect storm in some of those markets, no? When obviously, I don't -- we don't really think the $5 increase is --

Okay.

Notice it did not discourage a lot of members to renew. But when you put that together with the economics, it is hard to tell if the reason they are not renewing is because they don't want to pay the $5, or just because the economic conditions are very rough in some of these markets. And there is so much we can do with that. We can keep -- obviously, try to be the best price leader out there in those markets to become even a better player, no?

We know that in difficult situations, the club business is actually one of the best formats, because when people are looking at saving money, that is a place where they want to go, no? So sooner or later, we believe there is going to be some recovery in these markets, and we are going to be there, well positioned to continue serving those members.

Great. Now one other question. I mean, a little bit about distribution in Colombia. As you guys look to probably move inward -- or move inland and add more clubs, at what point do you need to feel the need to build a distribution center?

And also, with the club infrastructure that you have essentially built today, how many clubs do you think you could lever -- you can work off of the current infrastructure before there is any more CapEx?

Okay. First on distribution, I would say that we are already studying that, David. We are trying to determine obviously, where is the best place in the future to try to look at a distribution center in this country. It is a little bit more complex than other countries for sure. It is a much, much bigger country. And we are just at the beginning of making some studies, to really determine where is it that you put it, and what is the impact that will have in the whole operation of Colombia.

So far, obviously for the Cali and the Barranquilla locations, we are working very well with the port in Barranquilla, the port in Buenaventura, on the Pacific Ocean. So those things are well under control right now. But we definitely are looking at what we can do to improve our logistics in that country.

We do have already some experience on things we are doing in other countries in Costa Rica and Panama, where we have more locations, where we are already integrating some of those -- some of that format of -- let's call them kind of regional distribution centers that help obviously serve those countries where we are having incremental volume in just one country, no?

I am not sure I follow the second question. Can you repeat that one again, David?

Yes. I will try and be a little clearer this time too. So the infrastructure that you have built in Colombia, how many clubs do you think that could serve before you probably need to have some more CapEx, or just some more costs to rebuild or increase the infrastructure in the country? So basically, how many clubs before there is another big spend on infrastructure in the country?

Well, we really set up -- I mean, since day one we set up an infrastructure in Colombia to support obviously the size of the country. So we don't really see a lot of additional expenses I guess, once we --

Okay.

-- we add locations. We feel, obviously a little here or there probably adjustments that we will have to do. Colombia is very regulated. And we actually have been doing already some of the adjustments. We started probably even a little lighter, following that concept or the format of other countries. And as we have been operating in Barranquilla and Cali, we have learned that there has been -- there are more regulations. We have been adding a little here, or little there. But again, we don't think it is going to have a huge impact on our expenses in that country.

So the growth from the expense side should be pretty leverageable as you grow, just as more warehouses open?

That is correct. Yes. No question.

Okay. Great. Thank you very much.

No problem.

And next we will go to a follow up from Dave King.

Thanks. Just a couple quick ones if you don't mind. I guess, Jose Luis, you talked bit about e-commerce becoming more important, and you [having served] your customers there. Can you talk about some of the initiatives you have planned along those lines, or what specifically you are looking at doing that is different on the e-commerce side as you move forward?

Well, it is kind of an R&D area, e-commerce for us now. Obviously, we have been operating with e-commerce for more than three years. We started in Costa Rica a couple of years ago, or almost three years ago. And we are pleased with the results. I think there is a lot that still needs to happen in the areas of e-commerce for our business, and even for the countries where we make business to get more used to using e-commerce.

One of the challenges we have of being a retailer that ships merchandise from the US, one of the challenges for sure is delivery time. And we are trying to look, Dave, at different ways to reduce that delivery time, so that the members don't have to wait two or three weeks before they get their merchandise. So that is one challenge that we recognize on our e-commerce business.

The other challenge -- believe it or not, there is still a lot of -- in some of our -- in some of the cultures where we are operating, there is still a lot of fear of providing the credit card information and things like that. So we are looking at different ways to make sure that the members have the confidence to provide, to make e-commerce purchases, no? I think that is going to get better also as the e-commerce starts growing or internet business starts growing in all the different countries. No?

But it has been -- in a few countries it has been a challenge, no? We even have members that go to the club and make a -- they can order there, in-presence, we have a kiosk in some of our buildings, and some members rather go and make the transaction right there in the club. So that they keep kind of keep contact of their credit card information. It is just the cultural challenges.

Other than that, it is just a matter of, obviously, keep improving our merchandise selection. We do believe that the best selection obviously is already there in the clubs with the 2,300, 2,400 items that we carry year-round. But at the end of the day, we are trying to improve the additional selection that we offer on e-commerce, and make it a selection that the members can find obviously exciting merchandise. And a lot of small business members can also find good selection, since we have an area where we focus on business items also, no?

So it is a combined effort of a lot activities that we have to keep doing. We believe that e-commerce is part of the future for all retailers as I mentioned. And we keep learning a lot of good stuff, no? As we have been operating with that.

That's great. Thank you. Very helpful. And then on the operating margin, I think you talked about the second quarter, kind of the highest or strongest quarter seasonally if I heard that correctly. And then, maybe as a follow-up to Jon's question, can you talk about how quickly then we would see that come down? I think it is kind of bumping up at the high end of your 5% to 6% target range. I guess, how quickly should we see that coming back down, as you look to capitalize on your business model of passing that back through to lower prices, et cetera?

Well, I think it -- if you look seasonally at the last year, probably the last two years, we do probably 26% to 27% of our sales in the second quarter and so that certainly has an impact on the leverage of the -- for our operating expenses. And we get the benefit that flows to operating margin when we get that.

So I think it will be consistent with what we have seen in the past, the past years. It is sort of just the nature of the way our sales flow I think, and how our expenses and operating expenses then react to that.

Okay. And then, so is it fair to still kind of assume kind of high 5%s range on operating margin over the course of the year? Or is it -- do you think it is going to come down a little bit from there over time?

Well, we don't provide guidance, as you know (multiple speakers). So we will have to leave that one with you.

(Laughter). That sounds good. And then -- and I wanted to say, be careful to not going to guidance, I guess maybe on the tax rate. Last question, I think, John, you have talked in the past about a 32% to 33% rate just kind of generally. But I know you have had to calibrate single sales factor, changes in recognition methodology, some of those kind of things that have helped benefit in recent quarters.

Is it still fair to assume kind of 32% to 33% rate? Or do you think it is closer to the 30% or below -- or how should we think about that?

Well, I don't think it is going to be below 30% sort of on an ongoing basis. I think generally as we, as our profits grow, our profits tend to grow more in the in -- outside the US than in the US, just by nature of how the Company is set up. And our foreign subsidiaries have generally lower tax rates in the US.

So I think there is probably a, well, 30% or 29.5% we had this period is -- I wouldn't want to suggest that that is what our new reality is. We are probably in the 31% to 32% going forward I would guess, based upon the mix --

All right. Fantastic.

-- that we have, yes. Right.

Okay. Fantastic. Thanks so much, guys.

Up next, we have a question from [Scott Walker], an investor.

I was wondering if you could comment generally about other warehouse club competitors in your market area, specifically the Colombia market? Are they there? Are they coming?

There is not another warehouse club competitor, Scott, with the same nature of our business. With that said, I want to clarify, obviously, we are the only warehouse club in that country with the -- that charges a membership fee. There is a concept called Makro, that they don't have a membership fee, and they probably have a different business model. They carry much more local merchandise. They don't have a lot of selection in imports or imported merchandise. So I don't think there is a direct competitor.

There are very good retailers in Colombia. Part of Grupo Casino Exito has a lot of presence with hypermarkets and smaller market, smaller supermarkets. Carrefour was just sold to a Chilean company and they are operating there more than 90 hypermarkets also in that area.

So there are a lot of hypermarket competitors in that area with department stores. But there is not a club competitor in any of -- in Colombia. And the same applies for Central America. There isn't yet any other club competitor, except for Guatemala where there is a ClubCo which is an initiative from Walmart that is -- has been around for probably more than 10 years also in Guatemala. And we operate in that -- we compete with them in that market. That is the only one where we know.

And last one would be in the Caribbean, in terms of warehouse clubs. There is a similar concept with no membership also, that is Cost-U-Less. It is a company that is owned by a Canadian company now, and they operate in two markets in Barbados and St. Thomas with a similar concept in terms of the warehouse club. But they don't have a membership, and they don't have the same selection that we carry, no? So there is none really right now that we see a direct club competitor, no?

Okay. I was just thinking if there is opportunities, if there were any to -- with the site selection being the big challenge, looking at some of these existing companies and see if they would be potential acquisitions. And if they had good sites already in essence, you were buying the site, and change the format to match what you are doing. But if you have got the infrastructure in place to support more than like the three stores in Colombia, the faster you get to 10 stores, the better.

Yes. That is a good suggestion, but we haven't found anyone like that yet.

Yes.

Got you. Okay. Thank you.

We wish there was someone that we can just find good sites, but it's not there yet, no?

If it was easy, everybody would do it, right?

Absolutely. Absolutely. (Laughter).

Thank you.

Thank you, Scott.

And everyone, at this time, there are no further questions. I will turn the call back to Mr. Heffner for any additional or closing remarks.

Well, I don't really have any closing remarks. So I will leave it with thanking you, Lisa, for your help on our call, and thank you all for participating with us today.

Thank you, everyone. Thank you, Lisa.

Thank you. And, ladies and gentlemen, that does conclude today's conference. Thank you all for your participation, and have a great day.