PriceSmart Inc (PSMT) 2015 Q1 法說會逐字稿

Good day, and welcome to the PriceSmart, Inc.'s Earnings Release Conference Call for the First Quarter of FY15, the three-month period ending in November 30, 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, January 9, 2015. A digital replay of this call will be available through January 31, 2015 by dialing 888-203-1112 for domestic callers or 719-457-0820 for international callers. The passcode is 181-8608. I would now like to turn the conference over to Mr. John Heffner. Please go ahead, sir.

Thank you, Hannah, and welcome to our earnings call for the First Quarter of FY15. As usual, we will be discussing the information that we provided in our earnings Press Release which we released yesterday, January 8, 2015, which also included our announcement of December sales. We also released our 10-Q yesterday. You can find the Press Release and the 10-Q filing 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, 2014 filed with the Securities and Exchange Commission on October 30, 2014. 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.

Happy New Year, and thank you for joining us today. Yesterday, we released our results of operations for the First Quarter of FY15 with a net income of $0.68 per share compared to $0.71 per share a year ago largely impacted by the pre-opening costs we incurred in the quarter in Colombia, as we opened three new warehouse clubs in the period. We also announced our December sales. I will stick to our sales and membership activity as well as the new club openings, and John Heffner will speak to some of the other items in our overall financial results in the period.

Net warehouse sales in the quarter were $636 million representing 7.9% total growth compared to prior year. This growth resulted from a 5.3% growth in transactions and a 2.5% growth in average ticket.

We opened three new warehouse clubs in the quarter, all in Colombia. Bogota on October 29, Pereira on November 13, and Medellin on November 26. Our Q1 sales in the period benefited from all these openings.

In terms of comparable sales, we have an increase of 2% for the 13-week period ended November 30, 2014. During the quarter, we passed the anniversary date of the opening of our sixth warehouse club in Costa Rica, Tres Rios, which we have previously indicated has caused some reduction of sales in our Zapote Club which negatively impacted comps.

As a result, the cannibalization effect on comps in the current quarter was less than in the past two quarters at approximately 180 basis points. The Tres Rios club will be in our comparable sales reporting beginning in January, although we still have some impact from our second Tegucigalpa El Sauce club.

When we look at sales growth by region, Latin America sales were up 10.1% and Caribbean sales 3.3%. We have double-digit sales growth in Colombia, clearly as a result of the three new warehouse clubs we opened during Q1, and also, in Panama which continues to be one of our strongest Markets in terms of sales growth.

We experienced single-digit sales growth in the rest of our countries. The exception -- countries with sales decreases were Barbados, and USVI, both with decreases of less than 1% and Jamaica with a low single-digit reduction. As mentioned before, Jamaica still reflects the impact of the currency devaluation, and Barbados and USVI seem to have some challenges in the economy that made for a difficult first quarter in those countries.

We saw good growth in membership accounts in the quarter with a resulting growth in membership income. Membership income in the first quarter grew 9.1% compared to the same period last year to $10.1 million.

At the end of the quarter, we have more than 1.29 million membership accounts, 15.2% more than last year. Again, a lot of this growth in membership accounts came from our Colombia openings in the quarter. The renewal rate was consistent with the previous quarter at 84% for the 12-month period ended November 30, 2014.

Now, I would like to spend a few minutes talking about other activities of significance during the first quarter of FY15. It was certainly one of the busiest quarters we have at PriceSmart with the opening of three new warehouse clubs in a six-week period.

I want to recognize the extraordinary efforts of the entire PriceSmart team that allow us to achieve these three very successful openings. With these openings, we now have six warehouse clubs in Colombia, equal to the current number of warehouse clubs we have in Costa Rica. We believe that this continues to be -- there continues to be opportunity for more warehouse clubs in Colombia, given the population and size of that country.

For our last Conference Call, John and I were in Bogota, attending the opening of that warehouse club. The Bogota opening set new records for us as a Company in terms of grand opening sales and also in pre-opening new membership sign-ons.

It appears that people in the city with more than 6 million inhabitants were really looking forward to PriceSmart opening in that city. As some of them were already members and have shopped with us in other locations in the country, either Barranquilla or within one of the Cali clubs.

The new Bogota club has continued to perform exceptionally well with sales in the Top Five of all of our clubs Company-wide during the first two full months of its opening.

Our Pereira club opened on November 13, and it, too, exceeded our expectations for pre-opening membership and opening day sales. Pereira is a smaller city within Colombia. However, we believe that we can do well in that market.

And finally, Medellin, which as I mentioned opened on November 26, was a very successful opening with pre-opening membership above plan and very good initial sales.

I had the opportunity to attend all of these openings, and it is gratifying to see the excitement of the members as they shop with us for the first time and the comments we receive from many of the members thanking us for opening in their cities bringing exciting merchandise, mostly imports at great values.

While Colombia is a very exciting market for us, it is not without its challenges. One of these challenges is the variability of the local currency against the US dollar.

During the most recent quarter and continuing into the month of December, the Colombian Peso has been on a significant decline against the US dollar. The exchange rate at the beginning of the quarter was COP1,935 to the dollar. At the end of the quarter, it was at COP2,206, a decline of 14%. In December, it ended at COP2,392 with spot rates during the month in excess of COP2,450.

It is generally felt that the Colombian Peso devaluation is associated with the decline in oil prices, and it is considered a petrocurrency. In comparison, the average exchange rate a year ago, Q1, was COP1,908 and December-end 2013 was COP1,926 to the dollar.

This impacts our financial results in a number of different ways. And again, John Heffner in a few minutes will speak to this some more.

What is evident is that a large devaluation of the local currency impacts the value of the sales that would translate back and record in US dollars in the near term. In addition, as we land new important merchandise in the country, we need to begin raising prices to offset the devaluation. While other retailers in the market will likewise need to do that on merchandise that they import, PriceSmart is more heavily dependent on imported merchandise in our Markets, particularly Colombia, than other retailers.

How this may affect us going forward is difficult to predict. As much as possible, we have been holding our prices on all our imported merchandise that landed in the country prior to the Peso decline in an effort not to burden our members with price increases. As we receive new inventory in the country, we will have to start increasing prices, but we will do our best to minimize the level of price increases while being consistent with our business model of selling quality merchandise at low margins but not below cost.

Going forward, we will continue with our efforts on finding the best way to be more efficient in our buying and logistics efforts, direct shipments, special buys, et cetera, in an effort to keep reduced costs, allowing us to bring value to our members. The impact of the significant currency devaluation often puts pressure on overall customer spending in general, not just on imported merchandise. We experienced this in Costa Rica last Spring as we continued to feel the impact there to date. I also have first-hand experience as one who grew up in Mexico and spent my early professional life there. Again, we are committed to do our best, notwithstanding the recent volatility. All we can do is keep working hard for our members and be there to offer the best possible price on our merchandise.

These are my comments regarding our first quarter, now let me touch on our December sales. Sales were $307.8 million compared to $280.8 million last December, a growth of 9.6%. Again, the three new Colombia clubs contributed to the higher growth.

For the four-week period ended December 28, our comparable sales growth was 0.3%. The Colombia Peso devaluation negatively impacted total growth, and to a lesser degree, comp growth. Similarly for the Costa Rican colon has stabilized. It is still 7% lower than a year ago December.

Transactions in the month exceeded 3.2 million, a growth of over 10% from December a year ago. However, the average ticket was down specifically in those Markets most impacted by currency devaluation -- Colombia, Costa Rica, and Jamaica. Despite these challenges, I believe we saw a lot of good things happening in our warehouse clubs during the month of December with Panama, Trinidad, Guatemala, Nicaragua, and Aruba recording high single-digit growth.

In terms of merchandise categories, during December we had double-digit growth in deli, gourmet deli, garden patio, and Christmas seasonal. Single-digit growth in areas like housewares, domestics, grocery, seasonal, and liquor, to name some. We also had definitely some challenges in areas of non-food categories that had a comparable decrease versus last year -- electronics, computers, toys, and apparel are in that category.

Now, we are ready for the new seasons of the New Year, where our focus is on the January programs that include exercise, health, and vitamins, patio, outdoor furniture programs. Programs that we believe will help us get ready for the soon-to-come Carnival season and Semana Santa.

On the new warehouse club front, I am happy to report that we are making progress in the construction of our fifth warehouse club in the country of Panama, in La Chorrera, a growing area just West of Panama City. Our goal is to open this location during the Summer of 2015. In the meantime, we will continue our efforts of finding more opportunities in Colombia and the other assisting Markets where we can add more warehouse clubs.

I'll now turn things back to John Heffner for some additional comments before we take your questions. Thanks for your time again and happy New Year 2015.

Thank you, Jose Luis. Let me highlight a few additional items with respect to our financial results for the first quarter based upon our release yesterday before we take your questions. Warehouse gross profit margins as a percent of sales were 15.3%, an increase of 82 basis points from the year-ago period.

We saw improvements in our cost of goods sold in a number of operational areas including distribution cost efficiencies and better-than-planned shrink and throwaways. We also had good demo activity and vendor support which contributed positively to margin. Warehouse club operating expenses as a percent of net warehouse sales increased 5 basis points with the new club depreciation and some statutory registration cost for capital in Colombia contributing negatively by 19 points offsetting positive gains in most other areas of our operating expense structure in our clubs.

Pre-opening expenses were clearly significant in the quarter as a result of the spending associated with the three new club openings. This spending includes the costs associated with hiring and training new staff, the incremental costs associated with Management support of those openings, local pre-opening Marketing and membership outreach activities, and, in the case of the Bogota location, the land rent cost for the site prior to the opening.

In total, we incurred $3.1 million in pre-opening expense in the quarter. Despite that additional expense with no corresponding sales offset, our operating income in the period was $36.3 million, or 5.7% of sales.

Jose Luis touched on the subject of currency. In the quarter, we incurred a $2.6 million net currency loss, $2.3 million of which was associated with the Colombian Peso devaluation in the period, coupled with a large amount of US merchandise and some fixed assets we were shipping into Colombia throughout the quarter. These US dollar-denominated liabilities on Colombia's books get re-measured at the current exchange rate at the end of each period.

While we also had non-deliverable forwards in place to hedge a large portion of this exposure, the devaluation was so significant that even the net exposure resulted in a large recorded loss. While we can't accurately predict which direction currencies will move or by how much, we remain vigilant in our efforts to minimize our exposure to movements in exchange rates.

The effective tax rate of 37% was quite a bit higher than what we had experienced in some time. It really relates to the period losses that were incurred in Colombia in the quarter associated with the high level of pre-opening expense incurred and the currency loss which reduced the consolidated pretax income of the Company by about $5 million without any tax benefit.

The tax provision associated with the pretax income, excluding these items, otherwise would have been a more normalized 32%. In addition, these items directly reduced net income for the first quarter of FY15 which resulted in $0.68 per share compared to $0.71 per share last year.

We ended the quarter with $119 million in cash and cash equivalents, $18 million less cash than the end of FY14. The first quarter is a period of time when we use cash to increase inventories in all clubs in preparation for holiday sales, and particularly in this recent quarter, to stock the new Colombia warehouse clubs as well as the backfill pipeline. In the quarter, we increased inventories by $97 million of which $57 million was vendor financed through terms with our suppliers.

We invested another $30 million in capital largely to complete the construction of the Colombian clubs but also for the acquisition of land and the initial construction activity for the La Chorrera, Panama, club. We had an increase in cash provided from financing activities of $25 million with some additional long-term loans but also some short-term borrowings associated with the use of working capital lines to support our inventory -- merchandise inventory buildup.

That ends my remarks. So, with that, Jose Luis and I would be happy to take your questions. Hannah, I will turn things over to you.

(Operator Instructions)

We'll take our first question from Dave King with ROTH Capital.

Thanks and happy New Year. First off, in terms of the gross margin improvement you had in the quarter -- warehouse club gross margin being up 82 basis points, et cetera. John, you talked about some of the drivers there and it sounds like a lot of those are sustainable.

Can you talk about what kind of benefit or what kind of flexibility that provides you on a go-forward basis in ability to be able to not have to raise prices -- I guess is the best way of characterizing it to offset some of those currency pressures that you talked about, Jose Luis, in some of your prepared remarks. With it being -- warehouse gross margins being above your targeted long-term range, how much flexibility do you have on a go-forward basis? Thanks.

Let me jump in on this -- Jose Luis, maybe you can join in. Obviously, we focused a lot of attention consistently on reducing our cost and being more efficient and our distribution logistics operation is a key part of that as well as our buying activities and the work we do with our suppliers. And, as well as I think the activity in the clubs around things like shrink and throwaways. So, it's a real team effort to focus on what is our largest cost -- the cost of goods sold.

To the degree we can do that, we continue to move prices down. How that might help us vis-a-vis the significant devaluation particularly in Colombia -- I think the Colombia activity is probably more significant, particularly to that market than we could offset completely through cost reductions in reducing our supply chain efforts in Colombia.

I think we benefit all of our members across most of our countries with the efforts we do there. But, specific to Colombia, we're going to need to take some action there in Colombia to raise our prices there.

And, we have been obviously, Dave, trying to hold our prices as much as possible given the fact that we just don't want to increase them right away. But, obviously to the degree that we will never sell below cost so at some point, we will have to start raising prices. We will probably see that in the whole economy in the country.

There is a concern in the consumer spending because a lot of things will probably start going up. There is a lot of dependency in the industry -- different industries in the market that will have the pressure of that currency devaluation. So, we'll do our best to keep our prices as sharp as possible and offer the best value, but eventually we will have to start getting our margins in line.

Okay, that helps there. So, appreciate it. And then, Jose Luis, I appreciate all the color you gave in terms of membership growth during the quarter, and it sounds like that exceeded expectations across-the-board at all three clubs. Do you have any color on how that trended into the month of December? How are you thinking about that on a go-forward basis?

Well, the month of December, actually not only the three clubs that we opened had a good pre-opening sign-ups. They actually continued with a good trend during the month of December, particularly Bogota has been doing very good in terms of membership sign-ups. I think the expectations in those three cities has been very good.

In addition, we have been getting more gains in terms of renewals. Some of the members that used to be shopping in Barranquilla or Cali that for a period of time probably they stopped. If they didn't visit those cities they were obviously not using the membership, and they didn't renew it. We have seen some good renewals coming out of those members that are back.

So, I think you are set up for a good trend going forward, with the membership growth in that particular market, and the rest of the markets, we still see obviously an 84% renewal rate, which is pretty consistent with the last quarters. We want to continue raising it, and our goal is to get it to a higher level. But, at this point, we feel we're accomplishing good results in terms of not only Colombia, but the rest of the markets, in membership renewals.

Fantastic, and good luck with the rest of the year.

Thank you, Dave.

Our next question is from Jon Braatz with Kansas City Capital.

John, returning back to Colombia, and your strategy in terms of raising prices. Obviously, you opened a couple new stores, three new stores recently. Would you be willing to raise prices more in your established markets, like Barranquilla and Cali, as opposed to Bogota and Medellin and Pereira? Would you differentiate the markets a little bit, in terms of trying to capture some of that higher prices?

No, I guess obviously we will be driving -- our pricing strategy, Jon, will be pretty much consistent. It's not our intention to drive prices higher in any of those markets. Actually, to the contrary, we will do our best to keep offering the best value, even in those existing markets.

To that degree, obviously, that probably Barranquilla, because of freight, and everything is probably one of the markets where we have the advantage, or the ability to have the lowest prices actually, because there's not an additional freight component compared to Bogota, or Medellin, or the other cities getting the merchandise into.

But I guess the question though, Jose Luis, if I paraphrase for Jon is given that we will be -- as we land new merchandise and prices will go up, will we differentiate between -- will we raise prices differently into different markets, specific to the devaluation?

Not necessarily, no.

To the degree that we do have differentiated prices right now because of the cost of bringing product to those markets, that difference would remain.

Okay, I guess from a big picture standpoint, on net, do you think you will have to eat a little bit of the devaluation, so to speak, and see margins in Colombia, gross margins come down in that market a little bit?

Well, really in Q1, since most of the merchandise that had landed -- had already landed at a lower exchange rate, we were able to hold prices, but as new merchandise lands at the higher Colombian Peso cost, due to the devaluation, we will need to increase the prices on those goods, as will other retailers. So we will try our best to provide value to our members in Colombia, and may be more aggressive with our margins there during this period of volatility in the markets, to the benefit of our members, so we're certainly having those discussions right now, and we may be a bit more aggressive on our margins there in this near term.

Okay. John, one last question. Is the $2.3 million currency loss that you took, are you trying to reduce that net exposure so that it might be less? Depending -- obviously depending on how the currency ends up for the quarter, but have you reduced that exposure so everything else being equal, it would be less this quarter?

Well, we're always trying to manage our currency, and in fact last year, I think we do a pretty good job at it, generally speaking. Last year, we actually had a net currency gain of $1 million over the course of the year. In the most recent quarter, there was some really extraordinary events that resulted in that large loss.

The Colombian Peso, the devaluation was a pretty exceptional 14%, at a time when we were really shipping just a tremendous amount of goods, a significant amount of US merchandise to fill up three new warehouse clubs, which we never had to do before, in support of our openings. So while we had a number of strategies in place to hedge the risk, the devaluation rate was really more severe than we could have reasonably anticipated, and it was, I think, a pretty extraordinary period.

December was difficult as well. There had been some ongoing devaluation in December, so we hope to see some stabilization, but I think our efforts are in place to minimize our exposures going forward, and we'll see how things play out with how the currency moves.

Okay, thanks, John.

(Operator Instructions)

We'll take our next question from David Strasser with Janney Capital Markets.

Thank you, happy New Year. It's Sarang Vora for David. You know my question is similar to ones before. As this is a big picture and we were thinking out loud, your accounts are slowing, related to what it has been in the past, but your gross margin is going higher, and you also seem to be raising prices going forward.

We were thinking, is there a decision to raise gross profit per unit because the capacity of stores have maxed out? Or to put it differently, is profit maximization going forward going to come from gross profit as opposed to productivity moves?

Our business models have profit grow as a result of sales volume growth, and we've talked about price increases, and Jose Luis, you can jump in on this, if I don't say it quite correctly. The price increases we're speaking of really just relate to the devaluation offset, so we can maintain the low margins that are part of our business model.

If we are running a 14% overall margin and currencies devalue 20%, if you don't change your prices, you'll end up selling your product at a 6% loss in those markets. So that's what the price -- when we referred to I think price increases, that's what we are referring to, it's specific to those markets, which is a standard process we do in most of our markets anyway.

David, just to reinforce that comment, we are definitely not changing the business model, just Colombia particularly when you have a 24%, 26%, depending when you look at it, it's a 26% variation on currency devaluation, you've got to move your prices, but the rest of the markets were pretty consistent with our philosophy.

And even for Colombia, the philosophy hasn't changed, it's just an adjustment we're going to have to do but no question that our focus will be to continue working on the top line, which is the sales line, and try to get those sales higher in comp and total sales growth, so that we can capture more of the bottom line, but definitely it is not going to be through increasing prices.

I have a follow-up question. I know you shared ticket and traffic for the total sales. Is it possible to get ticket and traffic on a comp level just to understand how a store level information, on a comp basis?

We don't provide comp level transaction data. We provide total transaction. I think Jose Luis provided some of the information for December specifically, I think we were over 10% in transactions, but average ticket was down and that was really driven by the we think mostly by the devaluation, in those countries where we saw the devaluation. But at this point, we're only providing comp sales in total but not transactional or average ticket comp information.

Okay got it. Good luck ahead.

I'm sorry, you asked a question?

I've got it. Thank you.

Our next question comes from Thomas Vester with LGM Investments.

Happy New Year, Jose Luis and John. Just the first question would be, can you give same-store sales in December in local currency? And going forward would there be an opportunity to report both dollar same-store sales and local currency same-store sales, just to get more clarity on how the underlying business is performing, because there's -- given you have so many functioning currencies in this market, there's just so many moving parts here.

Well I guess you say local currency, I guess the way to do that would be to say in constant currency, right?

Yes.

That is if the currency did not change from one year to the next, given that the market basket of different currencies, and it's clear that our comps, if they are measured in constant currency, would be higher than how we report them in US dollars. However, I think many factors could impact the sale over the course of the year, which is, when you measure comps, you're measuring from a year ago to this year.

And one of those things for example, as we've talked about here could be that we during the period as a result of devaluation, have increased the prices of our imported merchandise, to offset that devaluation. So yes, I guess it's clear that constant currency sales would be higher than US dollar sales. So yes that is, it's clear that's the case, but we don't report it that way; we report in US dollars because that's how we manage our business.

Okay. Then just, the inventory jump was rather steep, and you explain it with, of course, the stocking up for Colombia and then also the holiday sales in December. Can you just give like the increase, how much was due to Colombia and how much was due to the holiday sales?

I don't have a breakdown of that specifically, but I think it's pretty much in line with adding three new warehouses.

The biggest impact is definitely the addition of three new clubs and especially at the holiday season, we definitely saw and pushed a lot of merchandise for that holiday season. All these locations definitely had a good December, and we're also getting ready for a good second quarter.

As I mentioned in my initial comments, there's a lot of good merchandise flowing through the clubs, and the new season's exercise, health products, a lot going on for the upcoming Carnival and Semana Santa season in this country. So there isn't a breakdown that we can -- I guess if your question is more related to the increase in Colombia, that's definitely just driven by the fact that we have more warehouse clubs.

I think there's probably a little bit of a mix issue there, too, Thomas, in that given that the new clubs in Colombia, that the growth was there in Colombia. Colombia tends to have a slightly higher mix of US merchandise than our other countries, and has a longer supply chain in terms of the freight to move to Colombia. So the combination of those things, we end up with a slightly higher inventory per club in Colombia, just by virtue of the mix of business and the supply chain, so that would have a weighted average impact, I think, on our total inventory as well.

Yes, okay, that was exactly what I was getting at. So going forward, as Colombia is becoming bigger, one would increase the inventory days for your business, all else being equal with some days, I guess?

I think all else being equal, that's probably correct.

It is correct. Just lead times and the percentage of imports will definitely drive a higher number.

Okay, and not matched by payables?

Well, again, our US merchandise, we tend to make an investment in US merchandise. We turn our local inventory, and that's a net cash generator, but our US inventory is a net cash consumer, given the supply line for it, and the fact that we pay duties upon arrival at the port, and we do not get terms on duties and things like that. So that's consistent with how we've always run our business, that we invest money on the US merchandise, but we generate cash on the local turns, and the net of that comes out to about something like 80%, I think for the Company of a vendor finance, for the total inventory.

Okay, and just on the tax rate, you mentioned the higher tax rate due to you are not able to utilize the benefit of the tax laws in Colombia. Is it carried forward, or can't you do that in Colombia?

Yes there's tax loss carry forwards in Colombia that we would have access to, at some future point.

Okay, and then just finally, all this volatility and pressure, especially on commodity exporting countries and there's a fair amount of them in Latin America, and also they're all exporting, you're feeling that in Colombia. That would normally also open up for the timing of maybe looking for new opportunities, because that's a time when land prices come under pressure, et cetera, and you can make a good deal.

So my question is, are you looking to scale up now where land prices in dollar terms in Colombia has become significantly cheaper? Are you looking to recover an economy like Peru, or something like that, or is the agenda of the expansion of PriceSmart not changed of cheaper and volatility in Latin America?

Well, I will say specifically for Colombia, that definitely we do realize that it is good timing and we're continuing our efforts, and we never stop our efforts. Fortunately, I guess in terms of currency devaluation, it doesn't help for creating a good economy in the short-term, but obviously, we're investing on the long term in Colombia. We believe there's a lot of opportunity in that market, and we will continue our efforts to acquire land.

Definitely we do recognize the impact of the currency devaluation helps in buying land, no? And as much as possible we will try to take advantage of that. And again, we keep searching for opportunities in Bogota and other cities in that country, knowing that the opportunity is there, and we are not changing that direction.

Now I can't say for any other country at this point, we haven't revisited any other country with that view. At this point we are really focusing on our existing countries and specifically being South America will be Colombia.

Okay, great. That was all for me, and thank you very much also for the clear communication in a tougher quarter. That's much appreciated.

Thank you, Thomas.

Our next question comes from Edwin Johnston with Sandhill Investment Management.

Good morning to you. Are you fully hedged on a currency basis in Colombia right now, or how close can you get to being fully hedged? You obviously were starting the stores this quarter, so it's a little more difficult as the inventory flows into the country. But John, maybe you can just highlight, has your exposure or will your exposure on a currency basis decrease over time, because you're able to more purely hedge, as you're aware of your inventory and sales positions in Colombia?

Yes, our exposure, yes, we can improve -- reduce our exposures going forward. Part of that is simply because we are now selling that merchandise that we brought into Colombia, and the working capital build up for the opening of those clubs is now turning, and therefore reducing our exposure. In that way, we're able to then convert that into US dollars to offset the new shipments that are coming in, as well as manage our reduced, we maintain our NDFs, non-deliverable forwards, so our exposures are decreasing from the peak of sort of late November, early December.

And how liquid are those hedging markets? Are you able to do that? Is it a problem for you to do it, whether you're spot or on a three-month forward, or I just don't have a feel for how liquid those markets are.

The Colombian Peso, it's a liquid market, and we can access that, so -- in fact, that's the only country of our collection of countries that really has a market for us to hedge in that way.

Okay, on the macro environment there, is it all due to basically the commodity markets, as has been discussed, all oil? Just sort of talking about the macro situation there which is relative to both the currency and the health of the purchasing power with the Colombian Peso. Could you just maybe give a brief outline? Is the country in recession? Is it all oil driven? Is it something else? Just thumbnail sketch six months going forward of what it looks like in Colombia currently.

Let me answer from what we feel, and what we get from the input in the country. I wouldn't say that it is in a recession. Definitely there is pressure in spending, and as I mentioned in my comments, for any country that has these currency fluctuations, there's always a concern on the consumer spending, and we saw that in Costa Rica only with a 10% impact on the currency. When you have something in like Colombia, above 20% [to 11], sometimes of 24%, 25%, there is always a concern and people are more cautious on their spending.

I don't think it gets to the point of a recession at all. It will probably be a little bit more challenging environment in the next probably six months, three months, six months. I wish we knew where the currency is going exactly.

But assuming things don't change much, it will still be a little challenging period for Colombia in the consumer spending. They will start seeing prices going up, not only on the imports as I mentioned, also raw materials and a lot of things depend on imports, no?

So there will be some challenges in the whole economy. But I think it will -- I wouldn't qualify it as a recession at all, Edwin, just a little challenging, and it's good opportunity for us to be there for the members, as I mentioned, and try to offer the best value, and be the best option for them to continue saving money and find good deals.

Just one more. Will the mix of products there, you said it's more US weighted right now, which obviously hurts you on the currency side, because you wanted to hold prices down as you open these stores. Will that change? Is that a factor of these are new stores, and the mix will change to more local over time, or is this something that will remain in that particular mix, and is endemic to what the Colombian consumer wants?

I think there's a combination of things, Edwin. Definitely, we will not change dramatically our view of imports. One of the reasons we are there in Colombia is to offer differentiated merchandise, so that's definitely going to continue being our focus. I see this in every other country.

Now I will also have to add though that there are some good opportunities of merchandise produced in Colombia that can be good opportunity for us, and I'll give you an example of recent items that we converted. We used to have cooking oil that was coming out of Argentina. It is now being produced in Colombia. And like that, we're looking at a couple of items of bigger opportunities given that the country has great vendors and great opportunities for manufacturing, we don't discard that. I don't see that, though, changing completely in our direction.

I think as a Company, we definitely want to continue with differentiation on imports. But again, with good items that we can be finding opportunities, not only to have in Colombia where even considering some of these items produced in Colombia may become exports for us to take to other markets and be more competitive with prices and good items. So Colombia can play a very good role, a high role in that respect, because again there are good vendors there, actually willing to produce items for us, not only to buy there but also export, so that's the direction going forward.

Okay, great, thank you. And I just want to say that given you had pre-opening expenses, pre-tax of $0.10 and a currency loss pretax of $0.09 which is $0.19, what you delivered I thought you both did, and the Company did an outstanding job in the quarter. Thank you very much.

Thank you.

It appears there are no further questions at this time. Mr. Heffner, I'd like to turn the conference back to you for any additional or closing remarks.

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

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