PriceSmart Inc (PSMT) 2013 Q4 法說會逐字稿

Good day and welcome to PriceSmart, Incorporated's earning release conference call for fourth quarter and full-year of FY13, the 3- and 12-month periods ending on August 31, 2013.

(Operator Instructions)

After the 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 )

A digital replay of this call will be available through November 30, 2013 by dialing 888-203-1112 for domestic callers or 719-457-0820 for international callers. The passcode is 5817132.

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

Thank you and welcome to our Q4 and full-year 2013 earnings call. I hope you'll find this to be a useful form to review the information that we provided in our earnings press release and 10-K filing, which we released yesterday, October 30, 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, 2013 filed with the Securities and Exchange Commission on October 30, 2013. We assume no obligation and expressly disclaim any duty to update any forward-looking statement to reflect the occurrence of events or circumstances which may arise after the date of this call.

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

Good morning, everyone, and thank you for joining us in our conference call for the fourth quarter and FY13 results.

I would like to start with an update on warehouse sales for the fourth quarter. We ended the quarter with sales of $568 million, resulting in a 13.9% product sales growth versus the fourth quarter of last year. Comparable warehouse sales growth for the quarter was 9.3%. During the quarter, the Latin America segment had sales growth of 17.1%, which included the addition of the two Columbia locations, which opened on Q1 and Q3.

The Caribbean segment had sales growth in the quarter of 7.5%. There was no change in the number of clubs in the Caribbean. We saw a small positive growth in the single club Island market and a stronger growth in our larger Trinidad market. In terms of merchandise categories for the quarter, we saw comp increases in the low double digits for the areas of food, fresh and other business, which includes food service and bakery. The non-foods area had low single-digit comp growth. Membership income for the quarter was $90 million, an increase of 24% over last year.

We finished the quarter and the fiscal year with 1,095,500 active accounts, representing an increase of 13.5% over last year. By increasing the annual fee in most markets, which took effect in June 2012, along with the platinum membership introducing Costa Rica in November, 2012 contributed 10.7% to the increased membership income of the fourth quarter. The membership renewal rate for the year was 85% and although it is lower than the 88% from last year, as we explained in our last call, we have now 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, which negatively impacted the renewal of these last 12 months. Going forward, we will see what impact this has on members who are now renewing have already been exposed to the higher fee.

I would like now to spend a few minutes with some of the highlights for the FY13 that we ended on August 31, 2013. Sales for the year totaled $2.2 billion, representing a 12% growth in total sales and 9% in comparable sales. Average sales per club were $74 million compared to $68.9 million the year before. The accomplishment of sales have been possible with a combination of high-quality and exciting merchandise. During the year, a focused effort was in place to reduce the out of stocks of important merchandise, as our imports represent both a higher percentage of sales and also differentiation in our countries. Given the long lead times it has been a point of focus for the buying team to avoid losing sales due to out of the stocks.

A new replenishment system has been put in place, which is helping the buying team to reduce the out of the stocks and also to better manage the level of inventory needed in the clubs to optimize our sales. Our platinum membership program is nearing the first year anniversary of its introduction in Costa Rica. We are pleased with the good assistance of this program, as it now represents 6% of our member base in the country. There are no immediate plans to roll this out to other countries, but we may do so in the future.

Now, FY14 has started and we have been busy with plans for this new year. Not only with the holiday season, but also with the new club opening. On October 18, 2013, just two weeks ago, we opened our sixth warehouse club in Costa Rica located in the area of La Union, Cartago. We had a great opening weekend and our members in Costa Rica were excited to see PriceSmart expanding in that market. This new warehouse club is larger than the other clubs we have in Costa Rica, with additional selling pallets spaces, additional overstock capacity and an expanded food service area and bakery.

It also has a covered parking garage with 350 spaces, which will make things convenient for our members. The initial results of this new club are encouraging and although it will take some sales from our existing supporter location, we believe it is the right thing to do, not only to allow supporter to continue growing, but also to cut through more sales from members that couldn't visit our club as often as they might have, due to the physical capacity limitations of the supporter club and parking lot.

In addition, we expect to attract sales from new members signing up in this new club, since it is closer to their home or business. The planned reduction in sales in our supporter club will no doubt have an impact in our comparable sales going forward. We anticipate this could be as much as 1% depending on the number of members who shop the new club versus the old supporter club. Congratulations to our Costa Rico team for this is great accomplishment on the opening.

We are making progress also on the construction of our third Honduran club in southern Tegucigalpa. According to our plans, we will be opening this new club in spring 2014. Regarding Columbia, since I know it is question that I always get at the Q&A session of the call, I would like to share with you we continue to pursue size opportunities in the other major cities that do not currently have a PriceSmart, including Bogotá. But we're not yet ready to make an announcement on any particular acquisition or deal.

We are pleased with the results of the cities in Barranquilla, where we just celebrated our second year anniversary in August 2013 and Cali for our first club in the South also celebrated the first year anniversary two weeks ago. Growth in sales in that market and the increase in sign-ups are a good indication of the acceptance of our concept.

An additional comment in Columbia is that beginning in August we started a new service only for Bogotá, at this point, that allows the members in that city to buy merchandise that we have in our club through an online webpage. And they can get it delivered to their homes in Bogotá by using the services of a third party delivery company that has been working with us on this program. So far the results are also encouraging and we see this as a good opportunity to start serving that community of some existing members that live in Bogotá who have signed up with us during a visit to either Barranquilla or Cali. In addition, a new member can also sign up for this webpage and start shopping with us.

Deliveries of all these goods to the homes of our member are within 24 to 48 hours of the order being placed, since we sell the merchandise available in our club. We think it's a good way not only to serve our Bogata members, but also to introduce ourselves to the Bogotá community.

The last comment I have is related to our holiday season. In my recent visits to the club during September and October I have been able to see a lot of our new and exciting merchandise that we have for more than one million membership account, and the clubs are ready for what we expect to be a busy holiday season.

All our teams at the solution centers, warehouse clubs, and in the offices in San Diego, Miami, and in the countries where we operate did a good job preparing for the holiday. And I would like to thank them for that and also for the results of the fourth quarter and fiscal year that we finished in August 2013.

Thank you again for joining us today and before we take your questions let me turn things back to John Heffner for a few additional comments about the financial results.

Thank you, Jose Luis.

You all have the numbers from our release and filing yesterday, so I will not over them in great detail. And Jose Luis has already addressed net warehouse sales and membership. I would like to highlight a few other items in our financial results specific to the fourth quarter and the fiscal year just completed. Warehouse gross profit margins as a percent of net warehouse sales were 15.1%, a reduction of 25 basis points from Q4 of FY12. Warehouse gross profit margins were up 69 basis points in the third quarter.

Contributing to the sequential rise in gross profit margin percent were increased vendor rebates, including volume related rebates and promotional income which we apply as a reduction to cost of sales, as well as some reduced per-unit cost of distribution. For the full year warehouse gross profit margins of 14.8% were 10 basis points below FY12. Warehouse club operations expenses for the quarter were 8.9% of sales, a 39-basis point improvement from Q4 of last year, despite having two additional warehouse clubs in operation in the current quarter compared to Q4 of last year.

The Company experienced good operating expense leverage relative to sales in nearly all categories of spending. For the full-year warehouse club operations expense decreased 31 basis points to 8.7% of sales. General and administrative expenses, that is the expenses associated with the Company's corporate and US buying functions, were 2.2% of net warehouse sales in Q4 of FY13 compared to 2.1% in Q4 last year. Operating income in the quarter was $33 million or 5.8% of sales. For the full-year operating income was $128 million or 5.7% of sales.

The re-valuation of monetary assets and liabilities, which we report as currency gain or loss, had little impact on the quarter's results at a positive $95,000. Last year's Q4 had a positive $250,000. For the full-year the Company recorded a net currency loss of $954,000 compared to a loss of $525,000 in FY12. As reported in our earnings release, net income for the quarter was $20.8 million or $0.69 per share compared to $0.58 per share in the year ago quarter.

The Company ended the year with $121.9 million in consolidated cash and cash equivalents, up $30 million from the end of FY12. The growth in cash resulted from the Company generating $130.6 million in operating cash during the fiscal year, investing $71.8 million in the acquisition of land, fixtures, equipment, and warehouse club construction and improvements, and using $21.8 million in financing activities, most notably the payment of two $0.30 dividends during the year totaling $18.1 million.

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

(Operator Instructions)

Dave King, ROTH Capital Partners.

First off, appreciate the color Jose Luis on the store growth outlook for Columbia. I guess just a follow-up to that, a little more color there. I was curious as to maybe we can get an update in terms of how you're thinking about that, your willingness to look at larger formats, is that still the case? To what extent are you looking at maybe leasing stores versus buying. And then sort of a longer-term question, to what extent are you evaluating any new markets beyond Columbia, other Latin American countries et cetera.

First of all thank you, Dave, for the question. And definitely in Columbia and I wouldn't say that we are necessarily looking at expanding our format. I think the format we have, which is either the one that we just opened in La Union, Cartago in Costa Rico is probably kind of our growing format, which is only 500 meters bigger than our regular, I guess, warehouse club. That's pretty much the format that we believe is our big [area] of growth for the upcoming years, not only in Columbia but anywhere where we do business, no? So, that will be kind of our format going forward if possible, obviously the land allow us to put that.

As we have, in terms of leasing or buying, as we reflected before in our reports, we do have a preference for buying, but definitely we are considering when -- if needed we will consider leasing land or leasing opportunities in terms of growth. We are not necessarily saying we wouldn't be considering a lease opportunity. Obviously, as I mentioned in past calls, we're basically looking at the bigger cities. Obviously, Bogota, Medellin, Bucaramanga. Different size cities in Columbia that have the opportunity to have a PriceSmart, we definitely are pursuing all of those size opportunities in those markets.

At this point, I can't say anything as far as a new market per se. We're really busy with our opportunities definitely in Central America, which is on the Caribbean and obviously Columbia keeps us busy at this point with the opportunities for expansion.

Okay, that helps. Then maybe just a follow-up to that. To what extent are you -- I mean, are you seeing more opportunities out there? Is it still kind of the same existing opportunities you see in Columbia in terms of what's out there. And then to what extent are you allocating more people, if at all, to the real estate acquisition side, just to help us get some comfort in terms of how to think about the store growth opportunity going forward.

Yes, Dave. In terms of resources, we believe we have the amount of resources as far as our real estate resources. I don't think it is a matter of resources. It is more, as we have said in the past, the availability of land, good land and land with the right zoning and obviously getting the permits in these big cities is more of a challenge. Obviously, we pursue all the angles and we are pursuing heart, as much as we can on all those opportunities, but definitely I wouldn't say it is a matter of resources.

I don't know if that conditions have changed. I don't think it's any harder than it was before when we started doing business, it's probably equal in terms of the conditions. It hasn't been harder, it's challenging, but I wouldn't describe it as being much more difficult.

Okay. That helps. And then separate question, in terms of thinking about margins and abilities to pass good margins back into price to drive volume. Warehouse club gross margin of 15.1% of AORs came in higher than the long-term target range that you guys are at, but at the same time I think operating margin was more towards the midpoint. I guess my question is somewhat theoretical in the sense that how do you think about those two versus each other? Which is kind of the priority in terms of how you think about the ability to drive it back into price with one higher then the range, one being already kind of within the range? Thanks.

Dave, yes, I think as we've talked before I think our EBIT margin or operating profit margin is more operative, I guess, approach. To the degree that we can leverage our operating expenses with more volume and that becomes a smaller percentage of sales then allows us to reduce our gross margin percent and maintain our operating margin percent in that sort of mid-five range. On a sequential basis our gross margins did go up from 14.4% in Q3 to 15.1%. In the short term we benefited from increased vendor rebates and promotional income, as well as lower per unit distribution costs. On a year-over-year basis margins decreased 25 basis points and I think the year-over-year comparison is more consistent with our business model.

Okay, good. That helps. Thanks, guys.

(Operator Instructions )

David Strasser, Janney Capital Markets.

Thank you very much. A quick question. In Barranquilla, as you finish your second year, did you have a fairly significant comp in that market? By that is there clearly opportunity for more stores in that market?

We don't disclose comps per unit basis but I can tell you we are pleased, David with the results of Barranquilla. After two years I think that there are a lot of learnings and, obviously, everyday we keep learning more about the Barranquilla, that Columbia market and definitely we are pleased with the results and again although we don't disclose specific growth, we are happy with what we're getting right now with renewals, with members really enjoying the Price [line] experience.

Fair enough. That's where I was going with it anyway, but thank you. So when you look at other markets, like the Costa Rico one, a couple of questions about that. How much cannibalization do you think would be A, acceptable. Do you think it's going to be when you open that. And as you look, having been down there and seeing Panama and Costa Rica, it does seem like at some point you run up against just parking lot problems and where cannibalization might probably is a good thing and in some of these bigger markets of yours, do you think there's a lot more opportunities for more fill in markets in, say, Costa Rica or Panama?

Yes. The opening of [Tres Rios] is kind of a -- the answer that we have to that question. We were suffering definitely at a couple locations that I described during my script. We definitely were suffering of members of finding a space to park, especially over the weekend. Sometimes holidays and weekends was a little hard. So that reveals club needs the opportunity to take some of those sales, make the existing club or old club more friendly club for the members, more accessible and in addition, obviously, it's shows us a very [skilled] opportunity for members that we were not entirely attracting. This specifically talking about Costa Rico and this club in La Union, Cartago. It is [Basilica] as we call it internally, but it is not only approaching that region but also we exceeded very close, which is Cartago, and definitely I think we gain both. We give a break to the existing supporter club by taking some kind of a light fill, which we believe long-term is the right thing to do, even though it's going to hurt our comps at this point. Long-term we believe it is the right thing to do to keep growing in the market like as you described, feel good opportunity.

Panama may seem probably similar condition in some of the parking lot situations and we are basically studying all the opportunities in the cities where we are currently making business. We have a lot of history. We know a lot of the opportunists that are members are coming from. So, that helps us when design or we decide to go to a new club, we know how much of the sales work or we think we know how much of the sales aren't going to move from one club to the other one. And usually we kind of hit very close to what our numbers show. So, we -- even though we are cannibalizing the clubs, we know at the very beginning of the opening how much we are going to hit because we have a lot of data that allow us to do that. It's a combination of helping the old club be more efficient and handle more volume and in addition also create new club that will take care of new members and will help us grow our membership base in those countries.

And obviously -- (multiple speakers )-- maybe that will be the case soon [in Aruba]. Now we are opening our second in the city [Honduras] which will be a similar effect. We are doing good business in the existing [Zaporte] location. This one will not only milk some of that business, but will continue and this located in a growth area of the cities. So, we look at that also when we build a new club. What is the city growing in that direction and things that we put in place considerations for these new warehouses.

One more follow-up, what about -- we are trying to look at our models. We are trying to figure out cannibalization. Is it hundreds of basis points, many hundreds? Can you help us at all think about sort of quantitatively from a modeling standpoint how to think about a club like that. How many clubs does it actually hit? I'm not even going to attempt to use -- to say the sound, the cities because you do it much better then I do and it would just butcher them. But I am just trying to think about it from the point of view of just trying to help from a modeling standpoint.

Specifically, the one that we just opened we think it could probably be as much as a 1% impact to our total comp. So, that's kind of the effect of that one. We will have to see in the next couple of months, as I guess as new members or old members decide exactly where they think that they will be shopping. But at this point [at least we] would believe with our internal calculations that it can probably be as much as a 1% of our 12 comp build.

Thank you very much.

No problem. Thank you, David.

Ronald Bookbinder, Benchmark.

Congratulations on another strong quarter. I was wondering about the online effort for Bogota, why is it only for Bogota and not all of Columbia?

The main reason for starting only right now with Bogota is we want to understand the fact -- we want to do it right and ultimately we first of all we have a lot of members from Bogota visiting. I guess they could probably go to Barranquilla or Cartagena on vacation, on weekends and they kind of experience that PriceSmart experience over there shopping with us. So, we have a good base of members from Bogota and obviously as we learned it shouldn't limit us necessarily for expanding it to other places. It's just a matter of, I guess, walking before running. But that's just the case.

Is this your first large online effort?

On that type of -- we have been doing online business in other ways, but more with the merchandise that we see from the US basically and obviously the lead time is more two to three weeks at the best because obviously we ship one's a vendor order that goes to our distribution center in Miami and gets to the country. So, it is a longer lead time. We also have a different program in El Salvador that we use for -- it's called Amigos, familiar amigos, friends and family and basically that program is for some people that want to shop for their relatives in El Salvador. People in the US that can shop for their relatives in El Salvador and that's been in place for probably almost more than one year, close to two years.

So, we have different approaches when it comes to online business and this one in particular is kind of new and unique for given the size of the Bogota city, even the fact that we didn't have presence there, we thought it was a good ability and relative when (inaudible) this came up because we knew how much business we were getting in Barranquilla in particular with members that were shopping from Bogota and they were using this delivery service company that we have in the club. So, that give us the indication of the opportunity that was there because all these members where doing it without the online, specially. They were just going to Barranquilla shopping and they will send it to their address that is in Bogota. It came as an idea to make it easier for those members to have access to our merchandise and that merchandise we have on hand at the club. So, if I mentioned in my script, it is at 24 to at the most 48 hour delivery to the home address. The member pays for -- they get the same prices that they get at the club, except for the delivery fee. That is very reasonable. So, it's a good opportunity and again it is not limited to Bogota but nothing stops us as we improve it and we make sure we are ready to probably launch it in other cities.

And you could launch it sort of system-wide throughout Central America and the Caribbean?

Yes, pretty much. We have not done it that way, but, yes, once we have the ability through our systems, there is nothing that stops us from doing. I think the key is finding a good delivery company. Because we are not handling the delivery. We just give it to a third-party and they're the ones doing it. So, from our side we will probably need to do is adopt a system, which shouldn't be that hard, and at the end of the day finding a good delivery company that can guarantee us that we can provide a good service at a reasonable fee, also, in terms of delivery. But, yes, it has definitely a scale to grow if we want to do it in other cities in Central America or the Caribbean.

Are these sales incorporated in the store comps?

Yes. Those sales are part of our -- they go to one of our clubs in Columbia.

Currently, they are -- it's coming through Cali, so, that's not in the comps right now. It's in our sales. It will be from -- it is club sale in one of our clubs.

The club actually serving those sales is Cali, one of our Cali locations is the one serving those needs, filling the merchandise and sending it.

Okay, great. Thanks very much.

Thank you.

Right now there's no additional questions in the queue. I will give one final reminder.

(Operator Instructions)

We will pause for just a moment. With no further questions I will turn the call back over to Mr. Heffner for closing remarks.

Thank you, Jake, and thank you all for participating with us today. This ends the call. Thank you.

Ladies and gentlemen, this does conclude your conference for today. Thank you for your participation.