PriceSmart Inc (PSMT) 2013 Q3 法說會逐字稿

Good day and welcome to PriceSmart Inc.'s Earnings Release conference call for the third quarter of Fiscal Year 2013; the three-month period ending on May 31, 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 is being recorded on Thursday, July 11, 2013. A digital replay of this call will be available through Wednesday, July 31, 2013, by dialing 888-203-1112 for domestic callers or 719-457-0820 for international callers. The passcode is 9596291. I would now like to turn the conference over to Mr. John Heffner. Please go ahead, sir.

Thank you and welcome to our Q3 call for fiscal year 2013. Jose Luis and I are conducting this call from Costa Rica and we hope the call quality is good. Q3 financial information was provided in our earnings press release and 10-Q filing, which we released yesterday, July 10, 2013. You can find both the filings, 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 31st, 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 statements to reflect the occurrence of events or circumstances which may arise after the date of this call. Now, I'll turn this over to Jose Luis Laparte, PriceSmart's President and Chief Executive Officer.

Good morning to all of you and thank you for joining us in our conference call for the results of our third quarter of fiscal year 2013. Starting with sales for the quarter, we ended with $556 million in net warehouse sales, resulting in 12.3% [total] growth, as compared to this quarter last year. Comparable sales growth for the 13 weeks ending June 2 was 9.2%. That (inaudible) growth of 9.2% compares with 9.3% in Q2 and 8.3% in Q1, giving us a comparable growth of 8.9% for the 39-week period of this fiscal year 2013. Latin American markets, which include Central America and Colombia, finished with [16.4%] total growth and the Caribbean region had a growth of 6.4% compared to the third quarter of fiscal year 2012. Latin America had the benefit of the two clubs which we opened in Cali, Colombia. The Cali south location, which opened in October of 2012, therefore, had sales for the whole third quarter and the Cali north location, which opened at the beginning of May 2013, only the third month of the quarter. Later on, I will talk more about these most recent openings.

In the last two conference calls, I have been making a reference about the fact that the Latin American region reflects better economic conditions compared to some of the Caribbean countries. That statement is still valid; although, this last third quarter, we saw the Caribbean region with an uptick to 6.4% comp growth versus 4.2% in the second quarter and 5.8% in the first quarter of this fiscal year. Hopefully, this is a sign of some improvement in the underlying economic condition. The third quarter in our countries, especially in the Latin America region, includes sales for the Easter season and the Semana Santa celebrations; an important seasonal period for us. With the additional traffic in our warehouse clubs, we saw strong performances in various departments in the third quarter. Some to mention with double-digit growth were liquor, candy, deli, and fresh seafood.

On the non-food departments, we also saw strong growth in housewares, small appliances, electronics, sporting goods, and computers; especially this when we carry a full line of tablets. Finally, our [bakery] and food services businesses both registered double-digit comp growth for the third quarter. Membership income in the third quarter increased 26.4% to $8.8 million. Total active accounts for the end of the quarter were more than 1.061 million, showing an increase of 11.8% over prior year. The average fee per member is currently 12% higher than a year ago at this time, resulting from the now full effect of the fee increase instituted in June 2012. Our renewal rate for the 12-month period ended May 31, 2013 was 84% compared to 89% a year ago. In Q2, we reported the 12-month renewal rate was 85%.

The additional downtick to 84% was impacted by the very high renewal rates that we experienced in May 2012, as some members renewed early in advance of the membership fee increase in June 2012. We have now have cycled through a full 12 months of renewals at the increased membership fee. It is likely that the fee increase did result in some members not renewing their membership during this period, which negatively impacted the current 12-month renewal capture rate compared to the 12-month period preceding the fee increase. We will see what impact this has going forward, as members who are now renewing have already been exposed to a higher fee. Our Platinum Membership program, the $75 annual membership, launched in Costa Rica last November, continues to grow and represents now close to 7% of our membership base in that country. It is still too early to measure the specific results on sales on renewals on this recently launched program, but we're happy with the initial acceptance and reaction of our members to this loyalty program, in which they earn a 2% rebate on their purchases. We have not yet made a decision to roll out this membership type in the rest of the market.

In terms of new product (inaudible), let me first mention I was delighted to attend the opening of our second warehouse club in Cali, Colombia on May 3, 2013. This one is located in the north of the city and was opened just six months after the opening of the one in the south of the city. We are pleased with the growth in membership in both clubs and initial sales in these new markets. Driving distances can be a challenge in this big city of Cali and while we have seen some cannibalization of sales from the first club with the opening of the second, we believe that having two warehouse clubs in this market allows us to better serve our members in this city over the long run. We now have a total of three warehouse clubs in Colombia.

As we speak on this quarterly conference call, we are in San Jose, Costa Rica this week and yesterday, we had the opportunity to visit the site where our sixth club in this country is being built in the area of La Union, Cartago. The construction is on schedule and we are expecting the opening of this new club for the month of October 2013, just in time for the holiday season. At the same time, we're finishing the details to start the construction of our second club in Tegucigalpa, in the southern area of the city, which will be our third club in the country of Honduras. The site will require the size of 21,200 square meters, has almost been completed. We currently expect to have that club opened during the spring 2014, hopefully before the Easter sales period.

Since I know the question usually comes in the Q&A section of our conference, I would like to remind everyone on the call that we continue to explore the potential for adding new warehouse clubs in our existing markets in Central America and the Caribbean. With respect to Colombia, we're also working on some on-site opportunities, which may result in either land purchases or land leases for other major cities that do not currently have a PriceSmart present, but we believe we can serve more future members in this important and growing country of Colombia. As you know, we typically announce the planned opening of a new warehouse club once we have either completed the purchase of the land or have entered into a definite lease agreement; both of which require that the necessary permits have been completed and any regulatory issues have been satisfied. We are not yet in a position to announce additional warehouse clubs, although we continue to pursue multiple projects; particularly in Colombia.

As I mentioned a few minutes ago, we are now in Costa Rica, spending time with our management team, visiting our warehouse clubs here, and also formalizing some of the plans to have a good ending of this fiscal year; additionally, planning for the beginning of our new fiscal year 2014. As always, I would like to thank all our employees for the commitment they have in making sure that we provide a good service to our members and at the same time, provide them with new and exciting merchandise and great values in each of the markets. 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 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 third quarter before we take your questions. Warehouse gross profit margin as a percent of net warehouse sales declined 55 basis points in the quarter compared to Q3 of last year at 14.4%. Sequentially, merchandise margins have declined 30 basis points from Q1 to Q2 and then again in the current quarter. This planned reduction is consistent with the Company's business model of lowering prices on merchandise as we leverage our operating expenses and thereby providing ongoing value to our members.

The margin reduction is also consistent with our goal to ensure that our members receive increased value, resulting from the increased membership fee. Warehouse club operations expenses for the quarter were 8.9% of sales, a 31 basis point improvement in our expense rate from Q3 last year; despite the addition of expenses related to the two new Cali clubs, one of which was only a partial quarter's worth of expenses. (inaudible) cost factors showed leverage with increases in spending growing at a slower rate than the sales growth. In addition, we experienced a year over year benefit resulting from a charge taken last year related to past debit card fees. Operating income grew 13% over the third quarter of last year to $28.7 million. As percent of sales, operating income was 5.2% of sales. 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 devaluation, particularly in Honduras and Jamaica and Colombia, including hedging costs, contributed to foreign exchange-related losses of $785,000 in the quarter. Last year, the Company recorded a loss of $449,000. The effective tax rate in the quarter was 32.9%. This was a bit of an uptick from Q2's 29.4% rate and reflected the mix of pretax profit within differing tax rate subsidiaries and a 90 basis point difference related to a year-to-date tax adjustment recognized in the quarter. All this resulted in an EPS for the quarter of $0.61, compared to $0.52 last year. We ended the quarter with $92 million in consolidated cash and equivalents, essentially at the same level where we began the fiscal year.

Merchandise inventories at the end of the quarter were $221 million, an increase of 10% from the beginning of the year. Compared to the end of Q3 a year ago, merchandise inventories have increased 23%, reflecting the additional inventory carried within the two additional Colombia clubs, the inventory to support the higher sales levels including the higher proportion of sales of US merchandise, which has lower [turns] compared to our locally sourced merchandise. For the nine month period ending May 31, the Company has generated $67 million in cash from operations, used $50 million in acquisition of land and fixtures and building construction or expansions, and used $14 million in financing activities, including a payment of a $9 million dividend. With that, Jose Luis and I would be happy to take your questions. Operator?

(Operator Instructions) David Strasser, Janney Capital Markets.

On the gross margin, it seems that this quarter, there's a bit of a change in strategy and to get more aggressive on pricing; something I think makes a lot of sense. Is that something that we should be modeling in going forward, the lower prices going forward? As you did that were you able to see any pick-up in sales or you how do you think that would manifest itself on the sales line over time? Would it take some time? Is there a lag to seeing that impact sales on a positive way or do you see it right away?

This is Jose. We don't provide any guidance on margins or going forward. We don't really want to set any different expectation. The only thing I will say is we react to whatever competition we have. If there is pressure in any specific market, we have a commitment with our members and that's why you may probably see some variations from quarter to quarter on our margins, depending on which countries we make the changes or which countries we react to those margin conditions. That's our goal at the end of the day, to keep providing good value to the members. It's hard to tell what we can expect going forward.

Because it seemed, though, at least from the verbiage in the Q that, at least this time, you were pretty -- it was across the board, across categories, and across geographies. Is there any differential in thought process in the way that was described with the greater investment in price? Because it just seemed that you were very adamant -- it seemed like a more strategic decision Company-wide this quarter than it had been in the past. Am I misreading that?

Clearly, David, it's our business model to continue to reduce prices, which has, particularly as it relates to when we can leverage our operating expenses, which will have the margin percent impact. As it was also indicated in some of our past quarterly calls when asked about the membership fee increase, that we would expect to move some of that back into lower prices and lower margins as part of the whole value proposition for our members.

Okay. Actually, you're in Costa Rica right now. I know about a year ago or so, you talked about Walmart opening a Sam's Club site in Costa Rica. They weren't as forthcoming about it. It seems that, since then, there's recently been an environmental approval. As you're there, do you see any ground-breaking or anything going on with that site that you had talked about a year ago with respect to that Sam's Club?

To our knowledge, there isn't anything going on. Again, we don't know anything and it seems that it's pretty quiet down here from that perspective.

Okay.

They haven't announced anything officially. I would say so far, things continue as they were last year. There's still a rumor, but that's all we have currently.

Rumors, I know them well. On Colombia, you sounded like you're moving along, you're not ready to give any guidance, but it did sound like you were moving along a bit on a couple of sites in Colombia, just the way you were talking at the beginning of the call. Am I reading too much into that, do you think? You seemed more optimistic than perhaps past calls.

No, I think we have always been optimistic, David. Permitting process can be very complicated in all these countries and we would like to move a little faster sometimes, but we're subject to all the conditions that we need to meet on the permit process. We're pretty optimistic, just because of the fact that we believe there is a good opportunity and the fact that we're not in some of the main cities, like Bogota, Medellin, two examples. Hopefully, very soon, we'll be able to narrow those opportunities and realize some sites for that country.

Thank you very much. Enjoy it down in Costa Rica.

Dave King, Roth Capital.

My main questions have to do with the recent dollar appreciation versus some of the currencies you guys are exposed to and I know, John, you touched on it a little bit in your prepared remarks. I'm just trying to get a better understanding of, as we think about your guys' long-term strategy of trying to keep warehouse club gross margins in, say, that 14% to 14.5% range and to keep prices low for your members, with the dollar appreciating and a good amount of your goods coming from the US, can you just walk me through how that affects your ability to keep prices low? Could you possibly have margins that are below target for a while in order to keep those prices for members or is it where you just can't keep the prices as low as you want and then arguably, that could incrementally hurt unit volumes? Help us better understand that if you can.

Okay, I'll try to explain that, Dave, (inaudible) try to do that with the devaluation, so to speak. There is an impact as we see a devaluation in our prices. It's not a direct impact. It doesn't happen the day after the devaluation, because we have inventory and we don't really adjust that inventory to a new pricing. But as we bring new merchandise, obviously, we make decisions on how to impact that and depending on how big the devaluation is, we will probably have to raise our prices.

It happens [approximately] or everybody who imports merchandise will have the same effect, so I guess we're all into this game of increasing sometimes the prices when we have the pressure of the devaluation, which is completely out of our control. But again, it will depend. We don't really have a target for a specific -- I guess it will vary by item, depending how much inventory we own and what are the conditions for the items. We just try to do as best as we can, maintain our price leadership among anything and that obviously continue to drive value with our members. Sometimes the prices will go up even in those conditions. I don't know if you have anything else to add, John, on that.

No, I think you covered that. I think the only comment I would make is that can certainly impact demand, maybe not so much, as Jose Luis said, from a competition standpoint, we're probably subject to -- our competitors are subject to some of that same activity. But it probably has an on impact demand in some of those countries, whether it's the prices are going up in local currency. But that would probably part of the economic conditions of that country.

Absolutely. Okay. Fair enough. That's extremely helpful, guys. Following up on David's question, it sounds like some of that, then, could be offset, though, based on the fact that you've kind of lowered prices across the board recently. Is there a thought looking back in history at how long it takes to flow through when you kind of lower prices across the board, how long it takes to flow through into higher unit volumes or does it just vary?

It really varies, depends on I guess the type of items when we start working on lowering prices. Our experience tells us that the members are very smart. They do recognize, obviously, they know the prices they pay, especially on commodities or items like that. I think it takes some time sometimes to get the volume on sales. I really think that our members appreciate that we operate under that philosophy. I think after so many years operating in these markets, they do understand how we operate and they have the loyalty to our business, knowing we always try to do the best and keep our prices low. That will continue being our business philosophy and probably not a lot of retailers have the same philosophy of trying to achieve where else they can reduce expenses to keep lowering the prices, but definitely we keep that one and believe in that.

Either it will come through sales volume or more members joining our warehouse clubs or even increasing our membership renewals there. A lot of effects, we don't only see it on merchandise. Hopefully, we will see that also in better membership renewal, more word of mouth getting out about our prices and having more members join our club. I think low prices will give us our good result in different lines of our business, most of them.

Fantastic. Thanks so much, guys.

(Operator Instructions) Ronald Bookbinder, The Benchmark Company.

In the Q, it talked about that the merchandise mix had a small positive impact on gross margin. Are people shifting to more discretionary items and do you expect that to continue?

The comment there is, I think we indicated some of the hard lines and soft lines had a little bit higher growth I think which had an impact on the margins. But the other thing is, our amount of imported merchandise is up a little bit as a percent of the total and our US -- that is all the imported things from the US, which pretty much is consumable, so our US food, that sort of thing. I think the combination of the different kinds of merchandise we're bringing in had a small positive impact in the period compared to a year ago.

Do you think that shows an improving economy, especially in the Caribbean area, as people are moving to more imported merchandise?

Yes, I would say, Ronald, that there is definitely that. As soon as we see improvement in the economies in the countries, we get a little bit of shift. It's not dramatic, obviously, because there's not anything big driving those changes. But I would say that little by little, people, obviously, they probably look more at imports or probably more discretionary items, the non-food items, as we're getting to these type of conditions. Hopefully, the improvement will continue in the Caribbean locations and the Caribbean markets in general and we will be able to keep seeing those types of moves. I'm not sure there was a big shift. It's more of what John explained, as far as I guess even in our US mix there is good quantity of basic consumables in our mix from detergents to basic cereals and things like that, that people still have the preference for those type of items, Ronald.

Ronald, let me add one more thing. Thanks for reading the 10-Q. I'm glad you read it already.

Okay. Also in there, it talked about sales up 12.3% with hard lines and soft lines growing 16% and 15%, respectively. What are the lines that are lagging and is there anything going on there causing that shift?

I wouldn't say anything lagging. I just highlighted the one that are a little higher than the average, I guess.

Yes, a little higher and I don't think we have any specific concerns on categories. Obviously, we do a lot of those things are sometimes special programs that we do in certain categories that fortunately cause an impact for those to reflect a better performance in a specific quarter. We were pretty pleased in most of the categories or departments. I don't think there is a special area where we are concerned that we're not driving increases. I think, for the most part, we're seeing decent increases. There were some, obviously, that are important to highlight. But I don't think there is an area of concern in our business of categories that are lagging.

Here and there we see sometimes a couple of departments that is troubled, but they're probably not that significant in our total sales volume. I will say that I'm not concerned on a specific department at this point, one that would be lagging or would not have any growth at all. Fortunately, everything seems to be pretty much growing at similar pace and there are some, obviously, outliers out there. But other than that, it's pretty good to see just consistent growth among different categories and departments in the countries.

While small, export sales increased a fair amount. Is the retailer in the Philippines, is he doing anything different or is it just lumpy?

He's ordering some more from us, so we must be doing some good things there. I don't have a specific insight into their business other than what I see from what they order from us.

Okay. Lastly, tax rate for 2014, is there anything that should be driving it up or down from this year?

In any given quarter, we have some tax adjustments that could impact the quarter's rate. But all things being equal, the effective tax rates of our countries and the mix of taxable profits across our subsidiaries would suggest sort of a normalized rate of about 32%.

32%. Okay. Thank you very much and good luck going forward.

Jon Braatz, Kansas City Capital.

Going back to gross margins, was the broad reduction in prices, was that effective for the full quarter?

Like on the first day that we changed all the prices?

I mean roughly, John.

I think it's a trend over time. It's always changing. It was changing during Q2. It's changing into Q3. I think just a strategic direction we have with the Company.

Okay. Has the Company ever seen such a broad reduction in prices or has it been sort of a little bit here and there? Was this as broad as you've seen in the past?

No, I think it's part of our business model, Jon. I don't think we specifically drive changes in the quarter or anything. We just keep trying to get lower prices and any opportunity we see, either by negotiating with vendors, lower costs or by improving your our logistic costs or at any given time that we see an opportunity to keep lowering prices, it might even be duties, some of these countries, as we go through year after year, where there are trade agreements. Not every item went to zero tax or zero duty when trade agreements are in place, usually for some items, it takes some time. It may be that an item that was at 20% goes down 5% on duty, we get that 5% and we use it to lower prices. There are so many variables, it's a strategy that we have in place, we just have it in place in our basic business philosophy. That's how we operate. It's in our blood to keep trying to lower our margins.

Okay. John, do you think we'll continue to see, for the next couple quarters, that high rate of interest expense being capitalized?

To the degree that we continue to build clubs, the accounting rules allow us to capitalize interest expense. It will be based upon the investments that we have going forward will drive that, how much we will capitalize.

For the two stores that you were planning currently --

There will be capital raised in those clubs that are under construction right now; the one we saw yesterday here in Costa Rica and the one that we will begin building in the new fiscal year for Honduras. Yes, we will see some capitalized interest for those clubs.

Do you think it will be as significant as it was this quarter?

I don't have --

Too early to tell?

Yes.

Okay. All right, John. Thank you very much.

It appears there are no further questions at this time.

Okay. If that's the case, then I would like to thank everyone for being on the call and I hope you all have a good day. Bye-bye.

Thank you.

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