PriceSmart Inc (PSMT) 2014 Q4 法說會逐字稿

Good day and welcome to PriceSmart Incorporated earnings release conference call for the fourth quarter of fiscal year 2014, the three month and 12-month periods ending on August 31st, 2014. All participants are currently in a listen-only mode. After remarked from Jose Luis Leparte, 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 Wednesday, October 29th, 2014. A digital replay of this call will be available through November 30th, 2014 by dialing 888-203-1112 for domestic callers, or 719-457-0820 for international callers, and the passcode is 9101656. I would now like to turn the conference over to John Heffner. Please go ahead sir.

Thank you Brendan, and welcome to our earnings call for the fourth quarter of fiscal year 2014, we will be discussing the information that we provided in our earnings announcement which we publicly released yesterday, October 28th, 2014. You can find it on our website, www.PriceSmart.com. We plan to release our 10-K on Thursday October 30th, 2014.

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, 2013, filed with the Securities and Exchange Commission on October 30th, 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 Leparte, PriceSmart's President and Chief Executive Officer.

Good morning everyone, and thank you for joining us on the call. We are speaking to you from Bogota, Columbia, where today we officially opened our first warehouse club in this wonderful city, and we're very excited about that. We now have four warehouse clubs in Colombia. We did something a little different for this opening, compared to other warehouse clubs openings. We had two days of what we term soft opening, where we invited certain members to visit the club and show up on Monday and Tuesday, in advance of the official Grand Opening today. Both of those days and the VIP event we held last night were well attended, and made for a busy week for our Bogota team. I will speak more about this later in my comments. Let me start my report by talking about the sales for the fourth quarter of the fiscal year 2014 that ended on August 31st. Sales came in at $599.6 million, representing a 5.6% total growth compared to last year. In terms of comparable sales, we have an increase of 1.8%. Similar to what we first saw in Q3, we experienced a slower growth in sales in this fourth quarter compared to the first two quarters of the fiscal year, compared to the year earlier period. When we look at sales for particular countries, I would like to comment that consistent with other recent quarters, we have double-digit comp growth in Panama, single digit comp growth in all other countries, except for Costa Rica, Honduras, Jamaica, and El Salvador. Poor devaluation and economics conditions are having some negative effect. Costa Rica and Honduras were also impacted by the opening of our Tres Rios and El Sauce warehouse clubs, with some sales being transferred from our Zapote and Tegucigalpa warehouse clubs, which negatively impacts the comparable sales measurement. As I have spoken of before in those markets, and overall for the Company.

In terms of merchandise categories, we saw double-digit growth in areas like electronics, this deals an effect of TV sales for our clubs, gourmet, deli, and toys. Other relevant departments in terms of sales with single-digit growth include HVA, liquor, sodas, fresh meats, seafood, and in nonfoods, we have small appliances, basic apparel, and home furnishings. Areas with comp sales decreases, includes juices, canned meat, vegetables, oil, computers, and housewares and tires. Membership income for the quarter had an increase of 7.9%, with $9.8 million of income. Our renewal rate was 84% for the 12-month period.

Now I would like to offer some comments on our full year results. We finished this year, fiscal year 2014, with sales of $2.4 billion, representing a total increase of 9.2%, and 4.8% in comparable sales. Net warehouse sales grew in all countries, with the exception of Jamaica, that experienced a significant devaluation of its local currency. As a result of that, also have challenges in the economy of that country. Countries recording in double-digit sales growth for that year, include Colombia, Panama, Trinidad, and Tobago and Aruba. Our sales growth of 9.2% for the year resulted from an 8.1% growth in transactions, and 1% growth in average ticket. Our average sales per club for the year that we just ended was $74.1 million, compared to $72.2 million a year ago. Five of our warehouse clubs exceeded sales of $100 million, and another ten clubs did between $80 million and $99 million for that year.

By regions, Latin America had a 10.2% growth, which was aided by the two new warehouse clubs that we added during the fiscal year, one in Costa Rica, and one in Honduras, and the full year impact of our Menga club in Cali, Colombia. The Caribbean region had a 6.9% growth in sales compared to the same period last year, with no change in the number of warehouse clubs. In our membership results for the year, we ended with more than 1,182,000 membership accounts. Membership income was $38.1 million.

As I mentioned at the beginning of may comments, when I reported on fourth quarter sales, some markets like Costa Rica and Jamaica are facing challenges because of devaluation of their currencies, and an effect also on the economic conditions in those countries. El Salvador, and to a lesser extent Honduras, are also facing challenges in economic and general security issues, that we believe have negatively affected our sales. Even in those markets, with challenges, we remain consistent with our principal of offering good quality merchandise to our members, and making sure we offer the values that they expect to find in our clubs. John Heffner will give you more details on the financial results for the quarter, but before we do that, I just want to provide a little more information about this exciting time in Bogota, and update everyone on the call with our plans for additional club openings in this calendar year. As I mentioned earlier, today we're officially opened our club here in Bogota, located near to the airport. We're very pleased with the welcome we have received, especially during our two soft opening days. We're opening today with a record number of member accounts for our new warehouse club. And even before we include approximately 7,000 member accounts that we already had in Bogota, as a result of people from this city shopping in one of our other three warehouse clubs in Colombia, either in person or online. Our first shopping day on Monday was by invitation only, to those members who had shopped with us before, but now have a warehouse club in relatively close proximity. Last night we held an event at the club.

Next month actually we expect to add two more new clubs in Colombia. On November 13 we expect to open Pereira, a city in the coffee region area, and on November 26th, less than a month from now, we expect to open in Medellin, the second largest city in Colombia. The results of membership sign-ups are very encouraging in these cities, and similar to Bogota we have existing members for these cities that have been shopping with us in Barranquilla or Cali or online, and will soon be able to shop with us in their own city. I guess the last comment on those soft opening days, is we actually also set some good records on sales for us, so it's kind of exciting to be here, watching all of the activity happening in our clubs, so it's a very good time for us as a Company. Apart from Colombia, we started construction of a future warehouse club in La Chorrera, Panama. A growing area just west of Panama City. The goal is to open that club some time in the summer of 2015. When completed it will be our fifth warehouse club in Panama, a country that has been one of our faster growing markets. Our efforts to continue expansion in Colombia and other existing markets in the region are a priority for our real estate team.

At the same time, all of our 34 clubs are ready with a full selection of exciting holiday merchandise, and we're now full steam into our seasonal categories in other different departments of the club. This time of the year as you all know is critical for us to move a lot of merchandise into the our buildings, with special attention on maintaining good in-stock positions for our members. We have been working with our automatic replenishment system and network of distribution centers to avoid out of stocks, and get a consistent flow of merchandise to our clubs during this busy holiday time.

Before I turn things back to John Heffner, I would just like to thank all of you for participating in our call, and wish you the best in the upcoming holidays. Thanks also to the PriceSmart team for all of your efforts for a successful holiday season, and the opening of three warehouse clubs in such a short period of time. 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 fourth quarter, based upon our release yesterday, before we take your questions. As I mentioned, we plan to file our 10-K on Thursday, tomorrow, and that will contain additional information about our full year results. As Jose Luis mentioned, our net warehouse club sales increased 5.6% over the comparable prior period. The Company ended the quarter with 33 warehouse clubs, compared to 31 warehouse clubs at the end of the fourth quarter of fiscal year 2013, comparable warehouse club sales for the 13 weeks ended August 31st, 2014 grew 1.8%. The impact of the cannibalization of sales in existing clubs, Zapote, Costa Rica and Tegucigalpa, Honduras was approximately 270 basis points, about the same as what we experienced in Q3.

Membership income for the fourth quarter of fiscal year 2014 increased 7.9% to $9.8 million. Warehouse gross profits, that is net warehouse club sales less associated cost of goods sold in the quarter increased 6.4% over the prior-year period, and warehouse gross profits as a percent of net warehouse club sales were 15.2%, an increase of 12 basis points from the same period last year. Selling General & Administrative expenses, not including pre-opening expenses and loss on disposal of assets, increased 4 basis points as a percentage of sales, and operating income of $33.8 million was an increase of $1.3 million, or 4% over the fourth quarter of fiscal year 2013. The Company had a $528,000 net loss for currency exchanged transactions in the current quarter, compared to a $97,000 net gain from currency exchange transactions in the same period last year. And net income for the fourth quarter was $21.9 million, or $0.73 per diluted share, compared to $0.69 per diluted share in the fourth quarter of last year. This small increase in net warehouse margin percent over the year-ago period was largely attributable to both operational effects, such as lower shrink, salvage and throw aways, and due to vendor support related to items like higher end cap activity and supplier rebates.

As always, these reductions in our cost of goods sold provide us an opportunity to pass on these savings to our members, and lower prices going forward. Similar to last quarter, the additions of the Tres Rios, Costa Rica, and El Sauce, Honduras warehouse club contributed higher operating expenses compared to the incremental sales generated in the period for those clubs, which resulted in an overall 7 basis point increase in warehouse operations expense, as a percent of net warehouse sales. Corporate G&A was down slightly by 2 basis points as a percent of sales.

Pre-opening expenses were quite a bit higher than year ago, at $1.4 million, compared to only $116,000 last year. This reflects the increased activity in Colombia, especially at our just opened Bogota location, where our lease expense for that site was being recognized in pre-opening prior to this week's opening of the club. Most significantly below income on our P&L, below operating income on our P&L was a net currency loss of $528,000 in the quarter, after a number of quarters of currency gain. For the full year we had a net gain of $987,000. The effective tax rate in the quarter was that 32.1%, 178 basis points lower than a year ago, resulting from the mix of income recognized across our various countries.

At the end of August, the Company had $137 million in cash and cash equivalents. For all of fiscal year 2014, the Company generated $137 million in operating cash, invested $120 million, primarily in additions to property and equipment, and had a net increase in cash related to financing activities of $2 million, which included two dividend payments totaling $21 million. With that, Jose Luis and I would be happy to take your questions. Brendan, let me turn things over to you.

(Operator Instructions). We'll go first to Dave King with Roth Capital.

Thanks. Good morning guys. I guess first off, Jose Luis, it sounds like you've had a fair amount of success in getting new members at not only the store you're opening today, but just in terms of the other two in Colombia. I guess, can you reconcile that with some of, that one, I think it was $1.182 million number that you put out there for where new memberships, or members now stand? Does that August number include some of these new stores already, or is most of that coming in, or did most of those new members come in after the quarter?

Well, I guess to your second question, the 1,182,000 is only from the ending period, so it doesn't include any of the effect of the new openings. On the first question, we don't really provide, I guess details on the number of accounts coming from a specific country. That was, as we report in the next quarter at the end of this first quarter of fiscal year 2015, the new club opening numbers would be then included on the new number, no?

Okay. That helps, though. And then, John, turning to the pre-opening expense stuff that you outlined, it sounds like obviously for these new stores, it sounds like some of that is due to the lease cost for Bogota, which obviously will then continue into next quarter as well. How should we be thinking about the level of pre-opening expense as we look forward? How much of that $1.4 million, how much of that should be continuing in the next quarter, and then as we look out over the course of the year, when should it return back to kind of that normal rate we've seen in prior periods?

Sure. Well, as of this week, since we opened the club this week, we now will take that lease expense and put it into normal warehouse operations expense. So all the pre-opening expenses associated with Bogota will be in operating expenses going forward. This quarter, this first quarter, you'll see some pretty high pre-opening expenses, so it will be both the continuation of that lease here for Bogota for September and October, but more importantly, it's the cost of hiring and training people, both for this warehouse club, as well as the clubs in Medellin and Pereira, which are planned to open before the end of this quarter.

So this will be a pretty heavy period of pre-opening expenses for all three of those warehouse clubs. Going forward, after November, the pre-opening expenses will cease for those clubs, it will then as we get closer to openings of additional clubs, for example, the one we announced in Panama, that we would plan to open next summer, we would start seeing the pre-opening expense probably in the third and fourth quarter for that club. So I would expect Q2 and Q3 to be fairly low pre-opening expense quarters.

Okay. That's very helpful. Thank you. I guess just in general as we think about kind of location selection, store openings, things of that nature, how should we be thinking about, or what are you guys thinking in terms of new opportunities for stores? Is it more of a focus on Colombia? Obviously we have Panama coming which has been a good market for you. How are you guys thinking about new locations, where do things stand with that, pace of openings, regions, et cetera?

Okay. I'll take that one. Well, I will say definitely the one confirmed so far is the one in Panama for our [Worcape] warehouse club, I will say that definitely there is a focus on Colombia still, because Bogota, we learned a lot during these two days, I have been here since Friday in Colombia, working in the warehouse club directly, and talking to a lot of members, and what we hear is that given the size of the city they want something on the north, or next to the airport, which is more a south location, so definitely there is opportunity for more warehouse clubs in this particular city.

We have been working in different locations. We don't have anything official, but there are locations, as I have been reporting in other calls or in other comments that we have been trying to figure out, and to work out so that we can add them to what we call the pipeline of warehouse clubs, no? So we don't have anything confirmed definitely for the next, let's say, eight to ten months, but as soon as we get confirmation on sites, we will be happy to announce them. That speaks definitely not only for the City of Bogota, but for the rest of Colombia where there are other cities, including Medellin, which is also another big city, and other big cities that are still an opportunity for us, Caramanga, to mention another one, possibly something else in Barranquilla. So we're studying the market because Colombia still shows good opportunity.

And it doesn't mean that we forgot Central America, and other locations in the Caribbean. We're still studying the possibility of adding a couple of warehouse clubs in the other areas, like Central America, where we believe there is still in some of the bigger cities, still room for some growth in terms of earnings, it's a combination of those. Colombia, definitely having a lot of wait in terms of the priorities, because we are still trying to cover, I guess, be good for a City with 45 million, sounds still like a low penetration, no? So we believe there is still room for growth for sure here.

Fantastic, fantastic. Thanks for the color.

Thank you.

Next we go to Jon Braatz with Kansas City Capital.

Good morning, everyone. John, the last couple of quarters we've had a couple of asset disposals at about a $500,000, $600,000 loss. What are those from, and where do you see that in the future?

Yes, Jon, I can comment on that. What they really come from is, as we do different things in our warehouse clubs, and we upgrade our varied aspects of some of the displays, some of the fresh areas, particularly fresh areas is an area of big investment, as we expand some of our refrigeration, or things like that, what we do is we will pull out the old equipment that still has some depreciable life on it, so it's still functioning equipment, but it has essentially zero value once we pull it out. So those are the non-cash write-offs that we make at that point. And it really reflects, I think the replacement of more efficient or higher capacity type things that we are doing to improve the member experience.

Okay. And secondly, on the interest expense, I assume you have capitalized some of the interest expense associated with the 3 new stores. Would we see that begin to reverse? I assume we should see that begin to reverse in 2015, and would we see a pickup in interest costs from the fourth quarter level?

Sure, I think that is fair. I think to the-degree that it reflects the activity, the construction activity that is going on, and right now we're in a period of fairly heavy construction activity. So I think when we put the K out, you'll see a more closely disclosed as to what the specifics are around our capitalized interest, but the activity of this quarter and of the fourth quarter, and again here in Q1, is pretty heavy in that construction area, so that would provide the opportunity for more capitalized interest.

Okay. Alright, John. Thanks. More importantly, are you going to be able to pick up the seventh game of the World Series and watch the Kansas City Royals win? From Colombia, I mean?

It was on last night at the hotel lobby.

Okay. Thanks.

Thank you, John. Good luck.

Thank you.

We'll go next to Thomas Vester with LGM.

Hi guys. Thanks for the call. Jose Luis, I guess, can you share some color on, I mean if you take the average basket in your new warehouse club in Bogota, what's the price premium in terms of the same basket in Cali, just to try and get an understanding of what's the cost, exist cost of doing business when you have to transport the goods inland in Colombia?

Some of the studies we have done of some of the items it shows probably like a 5%, depending on the cube of the item, it's between 4% to 5% higher costs serving these locations, but what we found, when we were doing all of these studies in terms of competition, that competitive umbrella remains very good, or pretty much at the same level as the other cities because at the end of the day, anybody bringing goods inside Bogota is going to have to go through the same expense, no? So there is definitely an added cost of bringing some goods our of Barranquilla Port, or Buena Ventura Port, it doesn't matter which port that you use, it is just getting to Bogota or Medellin, what we have noticed is that everybody impacts that on the freight, and we haven't seen any distortion that will make so much of a difference in our competitive umbrella. I hope that answers more or less your question.

That's a good answer. Thanks. The next question, I mean, you mentioned I think it was six clubs above $100 million, and can you repeat the figures you said, and the number of clubs between $85 million to $99 million?

Yes, I sure can do that. Last year we had five that exceeded $100 million, and another ten that were between $80 million and $99 million. So that was what I was saying. Five above $100 million, and 10 above $80 million and $99 million, no?

What were those figures a year ago?

That was from last year.

What about the year before that? Gentleman so for the year before, in 2013, what was that? That was 2014.

For the year before in 2013 what was that, that was 2014?I am not sure that I have that information sitting here with me.

I don't think I have it handy.

Maybe, John, if you shoot you an email, perhaps then you can give it to me?

I'm sure that we are like 3 above $100 million. I don't exactly recall now many.

Probably go 2 more into that category in the past year.

Yes. We move a lot of clubs, more in the category of $80 million to $99 million, obviously you saw wherever a club growing almost $2 million.

Okay. Okay. And then a question, you also I mean, whichever the October same store sales, and I don't know if you can give any color on this, because I know it's related to an expectation going forward, but when one plugs in the, I mean, on a chart your same store numbers month by month, there's a very clear downward trend since the devaluation in Costa Rica, and you also tribute the fact of your decline to the problems in Costa Rica. But do we have anything to share in terms of how long-term you expect this downward trend to continue, when you expect it to stabilize, do you expect to go into negative same store sales, or is it not possible to share anything on this?

No, we don't really share, obviously our goal, the only thing that I can tell you is that we are probably going to get into negative comp growth and we are working hard to keep the positive trend that we have had, but other than that, it would be a speculation. Hopefully things will get better in the economy, we will in Ebersaria, at some point the opening of some of the, like the Tres Rios club in the next quarter, starting in the second quarter, will be comping against the regional clubs, with the opening of the second one. So things will get probably better for some of the clubs in that respect, but there is really not much we can comment on the economic conditions that definitely will drive for some of these countries, like Jamaica and Costa Rica in particular. Some challenges, no?

I guess I would add we're about a week away from releasing our sales for October, so the next checkpoint will be about a week away.

Okay. Great. Just two quick ones more, if I may. There was quite a significant pickup in the export revenue. Is that due to more volume with your existing relationships in the Philippines, or was that due to other exports?

No, it's simply, we are still specifically, the only activity going through there right now is to the single customer in the Philippines, that really reflects the growth of their demand they put on us. No, we're not expanding that to other countries or other customers.

Okay. And then just finally in terms of, I mean, you've never done a share buy back, if I'm correct. Is this something that has been talked about, or is it simply out of the question?

It's not anything that we've been talking about.

Okay. Thanks a lot for your call, guys.

Thank you, Thomas.

(Operator Instructions). We'll go next to Carlos Botelho with Cartica.

Hi, Jose Luis and John, thanks for taking my question. I just wanted to get a little bit better understanding on, I guess what we can expect, in terms of the pace of store openings moving forward? I'm looking at sort of your historic data on store openings, and it's somewhat irregular, but we did not portend, I mean, you are, based on what you've announced in this fiscal year 2015, going to open at least three warehouses in Colombia, fiscal year 2014 you've opened two, fiscal year 2013, two. But then if you look to the five years before, on average you only opened one per year. Five, more or less, in the last five years on the five years between 2008 and 2012. I mean, can we expect the future to be more like the last three years, faster or slower?

Carlos let me start with that, and I'll let Jose Luis weigh in on this one. Just to correct the numbers, at this point we would expect to hope four warehouse clubs in this fiscal year, the 3 that we're actually doing this month in Colombia, and then the one that we've broken ground on, and construction started in Panama, which we hope to open before next summer, so that would be four. And those are the only ones we've announced at this point, and Carlos, as you probably know, we don't announce new clubs until we have secured the site, and have it permitted. So as Jose Luis mentioned, we are working a number of opportunities, both in Colombia and in our non-Colombia markets, but we would announce that as we go. Jose Luis, anything you wanted to add to that?

We don't really have a goal of saying this many this year, and this many next year. We basically know on the horizon there are a few that we're working on, and as soon as we get permits, we just move forward, no? These three all happened to be in November, obviously we have been working on those for many, many months, and they just happened to be a good opportunity to get them open before the holiday season, no? And we did our best, no?

You have a land bank for many warehouses, in addition to the ones that have been announced?

No, we currently don't have any land banks.

No.

Just trying to understand, these are sort of extraordinary circumstances that have led to four openings in fiscal year 2015, and even in the two years before another 4, which is much faster than your history. I mean, did these just sort of happen by, although there is a lot of work that goes into it, but some of it is out of your control. I mean, strength throughout, whether--?

More than anything, it's when the opportunity comes, we get the permits, we move forward. So sometimes some permits may happen to take a little more time, but as soon as we confirm permits and buildings, we just move forward. So chances are in another year we get permits faster, and we can open another two or three, maybe not be that fast, and we push one to another year, so there's not really a pace that we have, obviously if you look at our history, it was a good year opening four, but I'm not sure we can maintain it, depending on the permits and the ability to get those sites, no?

Your capacity to grow faster has increased over time. You have more, how is your team organized? You have a team in Colombia, a team, are we sort of the store, how is the site development team organized?

Carlos, I would say that entering Colombia, which we did about three years ago now, has really provided an opportunity for us to open a number of warehouse clubs in areas that do not have clubs, in the non-Colombia areas we have far more penetration of existing warehouse clubs, and so I think that entering Colombia as sort of a greenfield has provided us the opportunities to open more clubs, and to support this market. The pace at which we can do it is driven by sites being available, and us being able to identify those sites, and as Jose Luis mentioned, permits have been moved through the process to close on them.

Okay. Thank you. And congratulations.

Thank you.

And we have no additional questions in the queue. I'd like to turn the call back over to Mr. Heffner for any additional closing remarks.

Well, thank you, Brendan, and thank you all for your attention. This ends our call. And I will reiterate Jose Luis' comments, I wish you all a happy holiday season. Thanks, bye.

And that does conclude today's call, thank you all for your participation.