PriceSmart Inc (PSMT) 2014 Q3 法說會逐字稿

Good day, and welcome to the PriceSmart Inc. earnings and release conference call for the third quarter of FY14, the three months and nine month periods ending on May 31, 2014. 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 Friday, July 11, 2014. A digital replay of this call will be available through July 31, 2014, by dialing 888-203-1112 for domestic callers or 719-547-0820 for international callers. The pass code is 9238757.

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

Thank you, Hannah, and welcome to our earnings call for the third quarter of FY14. As usual, we will be discussing the information that we provided in our earnings press release which included a report on our net warehouse sales for June 2014, and our 10-Q filing, both of which we released yesterday, July 10, 2014. You can find both the 10-Q filing as well as the 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 statements 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 and thank you for joining us today. I will begin with a quick update on our third-quarter results. Sales came in at $598 million, representing 7.6% total growth, compared to prior year. The growth was driven mainly by transactions that were up 7.3%, and average ticket was up 0.2%.

The rate of sales growth has slowed as we have progressed through the fiscal year. The 7.6% growth in the current quarter compares to 12.6% growth in Q1 and 11% growth in Q2. The June sales results which we also released yesterday continue that trend with a 4% growth over June last year. I will speak more about this later in my remarks.

In terms of comparable sales for the fiscal third quarter, we have an increase of 2.9% for the 13-week period ended June 1, 2014. As we have mentioned in the past two calls, the transfer of sales from warehouse clubs that are not in our comp measurement to the three warehouse clubs that are not yet in our comp calculation continues to have a negative impact on our reported comps. If one removes from the comp calculation not only clubs that are less than 13.5 months old, but also those three warehouse clubs that have been most affected by the transfer of sales, the comps for the same 13-week period will be 260 basis points higher.

When we look at the numbers by region, in Latin America where we have three additional warehouse clubs as compared to the year-ago period, sales were up 8.4%. In the Caribbean region, which has the same number of clubs as compared to the year-ago period, sales were up 5.7%.

As for particular countries, we had double-digit sales in Colombia, Panama, and Aruba and single digit sales growth in all but two of the rest of the countries. The two countries with sales decrease were Jamaica, still experiencing challenges due to devaluation of its currency, and El Salvador, where we have also seen some challenges in the economy of the country.

Let's now talk about some merchandising categories and their performance during this quarter. With double-digit growth were liquor, deli, gourmet deli, and fresh seafood. In the nonfood areas, we had double-digit growth in electronics, as a result of sales of TVs driven by the World Cup in Brazil, home furniture, fashion apparel, basic apparel, and toys.

We had some challenges in some areas where we saw decreases in sales including some food categories like juices, oils, grains and frozen foods. Also in the nonfood categories, housewares, small appliances, major appliances and tires show a sales decrease versus last year.

Let me now cover some highlights on membership. In terms of membership income, we have $9.6 million with an increase of 8.9% compared to last year. At the end of the quarter, we had more than 1,000,167 membership accounts representing 10% more accounts than last year. The renewal rate was consistent with the last quarter, at 85%. Those are my main comments on the third-quarter results.

And now I would like to additionally share some information on our June results that were announced yesterday. Sales came in at $194.3 million with a 4% total growth and a 1% comparable growth for the same four-week period a year ago.

We experienced a slow pace of growth in June in both our total and comparable sales. We believe that the slowdown is driven by different factors worth mentioning. Let me expand a little bit on this.

First, the Costa Rica market, our highest contributor in sales for the Company, is experiencing some challenges given the devaluation of their currency of about 10%. That happened in the month of February. Currency exchange devaluation has a negative impact in our members' purchasing power. We therefore believe that the devaluation had a negative effect on our third quarter and it continued into June.

While we experienced continued good traffic in Costa Rica with double-digit transaction growth in June, the average ticket was down 9%, which speaks to that reduced purchasing power associated with the significant devaluation. This is similar to our experience in 2010, when the effects of the US recession impacted many of our markets. Transaction growth continued, but average ticket was negative.

It is difficult to predict how this devaluation and some recent projections about a slowing Costa Rican economy including Intel's announcement of closing a significant operation there which will impact export activity, will affect our business as we move forward. But we remain committed to providing value to all our members in this important market where we have six clubs. We believe that challenging times is also when members will be looking for ways to save money, and that's where our club concept can particularly help our members.

Number two, Jamaica. As mentioned in the third quarter comments a few minutes ago, continues to have challenges driven by the devaluation of its currency and tough economic conditions.

And last, number three, El Salvador and to a lesser extent Honduras have been impacted by political and general security issues which have a negative impact on consumer behavior and the retail sector. We don't see anything in the near term that will provide a significant boost to the level of economic activity in these markets that would dramatically change our recent sales growth. However, we're very excited about what the future holds for the Company as we complete the construction of the three warehouse clubs in Colombia, which I will speak more about later. My last comment on June sales is regarding World Cup. We definitely saw some continuing benefit of sales in categories like electronics, obviously with TVs, especially in the first two weeks of June. But we also had some very soft days of sales, particularly in those countries on the days that their teams were playing.

While we shared the excitement of seeing our countries do well in the World Cup and are happy for many of our employees who are big fans of their national teams, we clearly saw a slowdown in sales in countries like Colombia, Costa Rica, Honduras on game days. To a lesser degree, other countries also were soft as a result of World Cup excitement and the opportunity to watch games of this particular sport in our regions.

Now let me move to other comments regarding our business. During the third quarter, we opened our third warehouse club in Honduras, which is our second club in Tegucigalpa. The opening was on May 1. Although it had an impact on our existing club in the city and therefore impacted our comps, as previously mentioned in my earlier comments, we believe we are now in a better position to keep growing our market share in this city, particularly the Southern area of the city.

This new club, El Sauce, also incorporates some of the recent changes in the way we're designing our new clubs, including more sales floor space, more steel racking to allow us to put more merchandise in the building, and improved food service area with more seating and bathrooms for our members and more parking spaces, all resulting in an overall better shopping experience for our members.

Obviously, a big area of focus for us is Colombia. We are seeing very good progress in the construction of the three new clubs in the cities of Pereira, Medellin and Bogota, all new markets for PriceSmart in this country. From time to time, we have been posting photos on our website on the construction activity, and it is progressing. We're currently on track to open all of them during the holiday season. Sometime in November, if things keep moving at the current pace.

We believe there is already good expectation in these cities, and we're now beginning our marketing efforts for membership sales in preparation for the three openings. As I had mentioned in prior conference calls, we already have members in Bogota and Medellin who have experienced what PriceSmart has to offer as a result of vacation travel to Barranquilla or Cartagena, where in Barranquilla we opened our first Colombia club several years ago.

Two last comments before I finish. One, I want to thank the PriceSmart team for their accomplishments during Q3 and the successful warehouse club opening in Honduras. Two, as a team we continue to be focused on delivering the best values and exciting merchandise to our members. Our in-stocks are in very good shape, and as I visit the clubs I see that our local teams are doing all the right things for our members. Even in challenging times, in some of our countries, we never lose that focus, and we will keep working hard to make that happen.

I now turn things back to John Heffner for some additional comments before we take your questions. Thanks again for your time and attention.

Thank you, Jose Luis. Let me highlight a few additional items with respect to our financial results for the third quarter before we take your questions.

As Jose Luis mentioned, net warehouse sales in the quarter grew 7.6%. Operating income in the quarter grew 9.5% as result of higher net warehouse margins, 34 basis points, offset somewhat by higher operating and pre-opening expenses.

We had more net interest expense compared to a year ago, largely as a result of less capitalized interest this year, although we did take on some additional long-term debt which also added some interest expense. We recorded a favorable gain in currency, and we had a lower effective tax rate, all of which combined to yield a 15% growth in net income of $0.70 per share, compared to $0.61 per share for last year's Q3.

The increase in net warehouse margin percent from the year-ago period was largely attributable to both operational effects such as lower shrink, salvage and throw-aways, and on vendor related items like higher end cap activity and supplier rebates. Membership income grew 8.9% on a 10% growth in member accounts. For the past few quarters, we have been seeing membership income growing faster than account growth, as a result of the membership fee increase of two years ago.

That effect became less and less as the fee increase worked its way through the member hip income stream, and in the current quarter, the currency devaluation in Costa Rica negatively impacted membership income as the deferred member income is now being translated back to US dollars in approximately 10% less value. The result being an overall Company decrease in income recognized per member account of 1.2%.

The additions of the Tres Rios Costa Rica and El Sauce Honduras warehouse clubs contributed higher operating expenses compared to the incremental sales generated in the period for those clubs, which resulted in an overall 8 basis point increase in warehouse operations expense as a percent of net warehouse sales. Corporate G&A was up by 6 basis points.

Pre-opening expenses were a little over $1 million in the quarter, and $600,000 more than last year. The largest portion of that expense is associated with the land lease for our first Bogota warehouse club which is currently under construction. The lease cost is being recognized in pre-opening expenses during the construction period but will become warehouse operating expense upon opening of the warehouse club. This will continue in the fourth quarter and again in the first quarter of FY15. In the quarter, we also had the customary pre-opening expenses for the El Sauce Honduras club which opened in May.

Below operating income on our P&L, we saw increased net interest expense compared to Q3 of last year, but that was offset by a year-over-year positive $1.3 million swing in currency. In the current period, we recorded a $489,000 gain whereas last year it was a $785,000 loss. The effective tax rate in the quarter was 30.9%, 200 basis points lower than a year ago, resulting from the mix of income recognized across our various countries and the reduction in valuation allowances against net deferred tax assets in Colombia.

We added long-term debt in the quarter to finance ongoing expansion investments and manage our exposure to local currencies in certain markets. In total, after using some of the proceeds from one of the loans to retire another one, we added approximately $34 million in new long-term debt. The Company now has approximately $94 million in long-term debt, $24 million of which is cash secured.

At the end of May, the Company had $124 million in cash and cash equivalents. In the quarter cash from operations generated $40 million. We invested $25 million in land, buildings and fixtures and with the additional debt financing activities added $32 million. In total, our cash balances increased $48 million from the end of Q2.

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

Thank you.

(Operator Instructions)

We will take our first question from Ronald Bookbinder from The Benchmark Company.

Good morning.

Hello, Ronald.

You talked about the cannibalization from the new stores opening, but now you've got a couple, I believe both the Cali stores in the months of June have entered into the comp base. As these new stores hit that 13, 14 month mark that they enter into the comp base, shouldn't we begin to see a benefit from those as they will likely be ramping up at a higher rate than the Company comp?

The second warehouse club in Cali will be in the comps for first time in July, Ron. Next month we will see it. I would say the biggest cannibalization though we're seeing really is in Costa Rica and Honduras.

But as we look forward, historically as these new stores come into the comp base, do they typically -- since they're new and they're ramping up and building their market share and business, wouldn't they be comping above the Company average?

Yes, that's our expectation, and I think we're going to notice that in this first month they will be definitely into the comp figure run.

Okay. And on the membership fees, with the problem with the currency devaluations translating those back into dollars, have you all ever thought about just charging the fee in US dollars, or would that put too much of a strain on membership renewals?

Ron, we do, actually. So we adjust the price for new members that are coming in now. In Costa Rica, we do essentially peg it to the US dollar. We would adjust prices.

The issue is we've got a huge base of people who bought memberships over the last year, and they bought it in local currency at whatever the value was at that point, then we defer the revenue recognition over 12 months. Now we can't go back and charge those people more money for the membership that they already have. So it's an accounting issue associated with the fact that now everyone who bought a membership prior to I guess February when we started adjusting the price because of devaluation, that base of people were translating their 1/12 of their membership income back in US dollars, which was impacted by the devaluation.

Okay. And one last question, then I will get back into queue. But continuing on that topic, you talked about the ramp-up in membership renewals that we saw last year before this price adjustment went into effect.

So when we get to the end of Q4, the rolling 12 months average of renewals, it's been steady at about 85%, which is pretty nice. But should we expect to see a slight decline in that as we had that big bump-up in Q4 last year?

It was actually June of two years ago that we did it.

It's been two years.

We worked it through now.

We already anniversaried that effect. I think we're going to continue, hopefully we're going to continue seeing the same renewal rate or better which has been consistent for the last few quarters.

Okay. Great. Thank you. I will get back into queue.

Thank you.

We will take our next question from Patricio Danziger from Everest Capital.

Hi. I was just curious on what happened in terms of prices in Costa Rica, if you increased prices in line with devaluation of the currency or if you're just increasing prices in line with inflation? And then what we're seeing is basically prices are lower in dollars and volumes are the same or increasing a little bit.

Let me kind of describe what's happening there. Obviously, we will start seeing an increase in prices as we get some of the new merchandise, especially the US imports arriving into the country.

We try to hold our prices as much as possible without impacting necessarily our members; definitely we know they have been affected by the devaluation. But as we get the you new inventory, definitely we will start seeing an increase in those prices. And locally we will also be seeing some price increases coming from a lot of vendors or distributors that definitely will have the same impact either because of raw material or production or inflation. Normally when we have these devaluations in these countries we see also an impact in terms of inflation.

As a policy, with he we try to keep our prices obviously as sharp as possible, we keep an eye on competition so that we're not the first one raising prices. So we have been doing for the last -- especially the last third quarter, we have been trying to hold our prices. At the end of the day, we have seen more probably units and impact of people just not spending as much especially in the nonfood area and even in some food categories. So that's how we pretty much treat all our prices when we have devaluation in place, particularly in Costa Rica.

Great. Thanks. And just as a follow-up, if you did not increase prices as much as the devaluation of the currency, did you see volumes going up decently or volumes not even growing?

I don't think we have really seen volumes growing. I think what we have seen in Costa Rica is -- I think people are very cautious on how they are spending their money. I don't think we have seen something changing in terms of volume.

I guess I would say, let me add to that because I think we talked about the fact that transactions are up. We are having good June. Our average ticket was down about 9%. Devaluation was 10%. And I guess they would be sort of -- the average ticket would be about even and our transactions are up I guess if you run the math that way. So I think we continue to see relatively good traffic there, but really it's the buying power I think of the members that are coming in.

Thank you very much.

Thank you.

And we will take our next question from Jon Braatz from Kansas City Capital.

Good morning, gentlemen. Jose Luis, I guess I was unclear, you had mentioned you were talking about the June comps and you had said something about 260 basis points higher. Could you clarify that for me? I missed that.

That was the explanation if we were to remove the three clubs that are basically -- the three warehouse clubs that are not yet in our comp calculation continue to have a negative effect. So if we were to remove those clubs, those three warehouses from the calculation of comps, the comps would be 260 points higher.

Okay.

So essentially, Jon just to clarify, if we have 33 warehouse clubs, we comp 30 of them, but there's three others that are impacted. We say let's just comp 27, what would it be? One way to look at it is the Caribbean grew 5.7%, the Caribbean is all comps.

It's all comp, okay, okay. Good.

It's probably a clearer picture in the Caribbean because there's not any calculation.

Looking ahead, when do we start seeing sort of an inventory build in advance of the new Colombian stores? Do we see it here in the fourth quarter? Is that more of a first quarter 2015?

It's going to be more in the first quarter 2015. We're going to have a little bit in the fourth quarter, at the end of the fourth quarter, because of some seasonal merchandise, that we purchased for those new clubs, and there will be a little bit of that. But mainly will be definitely first quarter starting September, a little bit in August and then heavy in September and October for sure.

How should we think about pre-opening expenses as we approach let's say the opening dates of the three new stores? It's pretty heavy already with recognizing the lease payment, but does it ratchet up even more from that $1 million level as we get into the first quarter of 2015?

Jon, yes, it will certainly go up. I think with this run rate right now, since we don't -- in this quarter, Q4, we don't have any new clubs opening right now but we do have the [run] rate on the lease payment in Bogota. When we get to the first quarter with three new clubs opening, there will be a fair amount of pre-opening expense in that first quarter, and I think you can probably -- if you look back at quarters when we opened warehouse clubs and then multiply it by three, it will probably give you a view of what that would look like.

Okay.

The effect of three makes it obviously a little higher.

We're spending a little more in Colombia, particularly as we enter these new markets in Medellin and Bogota. A little bit more marketing activity as opposed to in the city like Tegucigalpa where they know us already.

Okay. And then lastly, any commentary you want to make on further expansion in Colombia?

Well, I would only say that we keep looking for opportunities. We do recognize that there are more cities out there, and definitely Bogota just as a city, we know that one club wouldn't be sufficient for that area.

The only thing I would say is that we continue pursuing and looking for opportunities to continue the expansion. Knowing that the opportunity's there, Jon, and eventually we will be finding -- hopefully we will be announcing and finding possible new sites in Medellin, Bogota, and more cities that we haven't even announced.

Okay. Thank you very much.

Thank you, Jon.

We will take our next question from [Donatis Fiscarellis] from [LGN] Investments.

Hello. Thank you for the call. If I may start from a little bit broader picture. We've seen since January decreasing same store sales.

If I may ask, was that completely unexpected for the Company or more a surprise? And is there a way how the Company can improve same store sales growth? Also, if I may ask, do you see any stabilization in Costa Rica and Honduras in general, or perhaps we could see negative growth in those markets or any of the markets?

Okay. Let me start. Let me make sure I understand the first question regarding -- I guess you were asking if we had -- if it was a surprise for us, the slowdown in sales? That's what you were referring to?

Yes.

I would say that in some markets, like Costa Rica definitely we couldn't predict at all that there was going to be a devaluation, and it was definitely a surprise and an impact on our sales. I think it took a couple of weeks after the first devaluation that we started seeing in our sales very clear that members were just more cautious on their spending. And I would say it was a surprise, because we kind -- we had the same experience in Jamaica almost a year ago, when we saw the devaluation.

I don't think there is much you can do to prepare for devaluation, and definitely it affected members' purchasing power. So that's -- obviously as we see a slowdown in the economies in the other countries, particularly, for instance, El Salvador or to a lesser degree as I said in my comments Honduras, we do see the members just more cautious on their spending. They just don't spend. That's the effect that we're trying to see.

I'm not sure if that's going to change drastically in the next couple of months. Probably not. Probably we're going to have a little bit of challenge in those specific markets until we see some things improving.

I know hopefully like cycles, like we have seen cycles in all these countries, they go to our recovery. But right now I think what we're focusing our efforts to improve the results is on maintaining good in-stock in the inventory by doing the right things with our merchandise, keep bringing exciting merchandise and paying attention to member service.

I think that's the way we kind of attack those challenges in the economy. And I want to reinforce, as we have seen in the past, not only here but even in -- not only for our country, but even in the US and other markets, in difficult times is when the members are going to be looking for savings and that the clubs are there for that. So as we keep an eye on renewals, because that's an important indicator and so far even in these countries with challenges our renewals haven't slowed down which is a good sign. Members are there. Members are, as we mentioned, we have the transactions; they are just not spending as much.

We will keep doing our best to try to get that extra item on the basket and obviously with our values and savings for the members, try to get the comp sales that we need. I hope that answers your question.

If I may ask one more question. With your expansion in Colombia and going into new areas, what are you doing to sign up new members to your clubs?

Well, we have different efforts. Right now, as we are building, we kind of started a little bit of our marketing efforts. Right now you if you did to a lot of our countries, a lot of those cities, Pereira, Medellin, And Bogota, obviously we have big buildings already with good progress.

People are starting to wonder what are they building there. We have signs out there announcing coming soon. We are doing some social media. Also we have e-mails.

We are also in our existing buildings, we got good traffic especially in Barranquilla of visitors from other cities. We're working also on marketing efforts from those buildings. There are different activities. The members can now sign online also. We have that already available for those cities.

If you live in Bogota, you want to sign online, buy your membership today versus waiting for the club opening, you can do that, and you can even start shopping because we have already in these three cities, we just released the opportunity for members to buy their membership and they can start shopping online and receive it at their home. So those are some of the efforts that we have, and we're working on I guess marketing those efforts so that when we open we can have a good base of members already that are -- that sign up and they may even be familiar completely with our concept.

Could you give me an indication of how many people have signed up?

We don't disclose details on membership per club, but it's -- I can tell you that we already have, even before opening in Bogota, we had a good percentage of members that were traveling to Cartagena or Barranquilla on vacation and that they were members of our club. Especially from Bogota and Medellin. It is a good percentage of members that have been exposed to the PriceSmart brands and have been actually enjoying the purchases with us.

Okay. Thank you.

Thank you.

We will take our next question from Ronald Bookbinder from Benchmark Company.

Thank you for the follow-up. You brought up the World Cup and some pros and cons about the World Cup. But overall, do you think the World Cup was a benefit or a hindrance to the June comp?

I think for June in particular, Ron, I don't think it was a benefit, that big of a benefit. I can tell you that the party's huge. Football as we call it or soccer as you call it here in the States is so popular in our country and it's incredible. Some of the games where the last Costa Rica game was on a Saturday. So people just didn't go out shopping for sure.

So I think it was -- and there was a particular effect this year on World Cup. The hours of the games compared to other years, like four years ago that they were in South Africa, the hours were either way too early in the morning, so didn't really affect that much sales. This year sales were 3 o'clock Costa Rica time or 1 PM Colombia time.

So they were good for members obviously to watch the games. I would say that in June the effect was probably negative on our traffic in the clubs and our spending. People were just celebrating and I guess we're happy for the employees, but a lot of the teams made its way through the quarter finals. So I would say that was the effect, Ron.

Okay. And during the quarter you used some cash to put some land on hold. How many parcels of land do you have on hold, and can you tell us what countries they might be in?

No, I can't tell you that, Ron. We do have some on hold as we indicated. We announce a parcel or land when or site when we have secured it.

That sometimes takes some time, and there's a process we go through which includes sometimes putting down a deposit. And so we have disclosed that we do have those deposits, and but until we work it through and know that we have control of the site, our policy is that we don't announce it until then. But it is, as Jose Luis mentioned, there are sites in Colombia as well as in our non-Colombia markets that are of interest to us and we continue to look for opportunities for expanding new warehouse clubs.

Okay. And lastly, on the tax rate, you mentioned the benefit from a change in the Colombian taxes. Should that continue to benefit taxes going forward, or was that more of a one-time thing and we should go back to more historical levels?

That will continue to impact the year over year until we probably anniversary this year. Because we were -- had tax losses in the past in Colombia and, therefore, we were not getting -- but we were reserving any tax benefit associated with it, and as Colombia continues to do well, we are -- don't have that level of reserve for tax losses and, therefore, we're getting a little bit of benefit. The negative aspect of that over the last I guess couple of quarters is sort of resolving itself, so we're sort of anniversarying what was a reserve we had in the past, we're not taking a reserve anymore.

Okay. Great. Thank you very much.

Thank you, Ron.

(Operator Instructions)

It appears there are no further questions at this time. Mr. Heffner, I'd like to turn the call back over to you.

Well, thank you, Hannah. This ends our call. Thank you all for participating with us today.

This concludes today's conference. Thank you for your participation.