PriceSmart Inc (PSMT) 2015 Q2 法說會逐字稿

Good day and welcome to PriceSmart Inc's earnings release conference call for the second quarter of FY15, the three- and six-month period ending on February 28, 2015.

(Operator Instructions)

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 call is being recorded on Friday, April 10, 2015. A digital replay of this call will be available through April 30, 2015 by dialing 888-203-1112 for domestic callers, or 719-457-0820 for international callers. The passcode is 7665186. I will now turn the conference over to John Heffner. Please go ahead, sir.

Thank you and welcome to our earnings call for the second quarter of FY15. As usual, we will be discussing the information that we provided in our earnings press release, which we released yesterday, April 9, 2015, which also included our announcement of March 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 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 things over to Jose Luis Laparte, PriceSmart's President and Chief Executive Officer.

Thank you for joining us today. In the release that we [made that just serve] for our results of operation for the second quarter of FY15, we reported a net income of $0.82 per share compared to $0.93 per share a year ago. As I indicated in the earnings release, while I am pleased that many of our markets performed well in the quarter, the reduction in net income can be attributed to Colombia, where various factors, most notably the devaluation of the Colombian peso, led us to a year-on-year reduction of net income and negatively impacted the consolidated results of the Company by approximately $0.16 per share.

The currency devaluation impacted, number one, our warehouse sales and membership income in Colombia; two, caused a reduction in warehouse margins as we work to offset the price increases on important merchandise to our Colombian members; and three, resulted in a direct currency loss of $1.8 million in Colombia.

One more item deserves mentioning. Colombia established a new tax on businesses based upon their level of equity, which went into effect this calendar year. For us, that amount was equivalent of $846,000. It is an annual number for calendar year 2015, but was required to be fully recognized in the quarter per accounting rules.

The rest of the Company did well in the quarter with growth in sales and membership income and higher operating profit, contributing additional net income of approximately $0.05 per share to the consolidated results, compared to the second quarter of last year. Let me start with our sales and membership activity, and John Heffner will speak to some of the other items in our overall financial results for the period.

Net warehouse sales in the quarter were $732 million, representing 11.4% total growth compared to prior year, on an 11.5% growth in transactions. While we generally see year-over-year currency devaluations in many of our markets, what we experienced in Colombia was particularly significant, on the order of 22%, which impacted the conversion of sales made in local currency to the consolidated sales we report in US dollars.

In terms of comparable sales, we have an increase of 1.4% for the 13-week period ended February 28, 2015. We have estimated that cannibalization effect of our second warehouse club in Tegucigalpa, Honduras, negatively impacted our Q2 comps by 84 basis points. We also know that there was an impact to comparable sales activity in our three existing Colombian warehouse clubs from the opening of our three new clubs in Colombia, but given the non-comparability of the currency conversion year-over-year, it is difficult to make an adequate assessment of that impact.

For the first time this quarter, we are providing a specific visibility in our reportable segments to Colombia, and we now have three operating segments in addition to the US segment. Net warehouse sales in Colombia's segment had an increase of 87%, despite a currency devaluation, driven by the effect of the three new Colombian warehouse clubs which, we opened in October and November 2014. On our lock out currency basis, this growth was 126%.

Central America sales were up 5.7%. Within Central America, we have double-digit sales growth in Honduras, with one additional club, and in Panama, where strong economic conditions continue to fuel good consumer demand. The Caribbean segment sales were up 3.7%.

We saw very good growth in membership accounts in the quarter, with a resulting growth in membership income. Membership income in the second quarter grew 14.9% compared to the same period last year to $10.8 million. At the end of the quarter, we have had more than 1.38 million membership accounts, 20% more than last year.

Again, a lot of this growth in membership accounts came from our Colombia openings at the end of the first quarter and continuing through the second fiscal quarter. The renewal rate has stayed constant with recent quarters, at 85%, for the 12-month period ended February 28, 2015.

All three of the new warehouse clubs in Colombia -- Bogota, Pereira, and Medellin -- opened near the end of the first fiscal quarter. The second quarter was their first full quarter of performance. While the currency devaluation no doubt had an impact on our sales, we are very encouraged by a number of things in those new clubs.

New member sign-ups have far exceeded our expectations in all three clubs. In fact, our Bogota location now has more membership accounts than any other warehouse club in our Company. We just closed the 100,000 member account level. The Medellin club has seen ongoing new member growth since its opening in late November and has a level of membership accounts at or above some of our mature Costa Rican locations.

Another positive sign is that, despite the Colombian peso devaluation, the average ticket in our Bogota club is one of the highest in the Company, and in Q2, total sales for that club were among the top five of all our warehouse clubs. These are all very positive indicators about the market acceptance of what we're bringing to the Colombian consumer.

The currency issues in the near term are clearly a challenge and does not allow for some of those positive things to translate as fully as they will in a stable currency environment to our consolidated results. Nevertheless, we believe that Colombia is a good long-term growth opportunity for us and we will work through the current challenges to build a sustainable market position in Colombia.

In that regard, let me say a few things about our approach to pricing our imported merchandise in Colombia during this evaluation. There is no question that the prices of imported merchandise across all retailers in Colombia are going up, which negatively impacts consumer demand.

It probably has a bigger impact on us, given the level of imported merchandise we feature in our warehouse clubs, approximately 60% of our sales in Colombia. We will continue to find ways to reduce the cost of our imported merchandise in this country through better buying and distribution efficiencies and be the best alternative for our members to find exciting merchandise and good values in our selection.

In addition, we have reduced our merchandise margins in Colombia over the past few months in order to pass on further value to our members. We are prepared to accept lower merchandise margins and profits in Colombia in order to solidify our market position in that country for the future.

In aggregate, our non-Colombia markets performed well in the second quarter, contributing an approximate of $0.05 per share increase in earnings. We saw growth in warehouse sales and membership income, good operating expense leverage, and profit growth. I am pleased with those results.

Having said that, I think we could have done even better. I feel that certain merchandise areas didn't perform up to their full potential in Q2 in some of our markets. I am now seeing improvement in a number of areas. During February, our clubs where Carnival festivities are important were ready for our members, and we saw good results in a lot of departments affected by those sales. At the same time, I am pleased with our transition into spring programs.

Just a few weeks ago, I was able to visit some of our Caribbean markets and I came back optimistic from the things I saw. The markets look very dynamic. Yes, they all have competition, but PriceSmart delivers a business concept in those countries that we don't see any other competitor offering: exciting high-quality merchandise, novelties, and good values for our members.

During my travels, however, I always see even further opportunities for improvement to execute the club philosophy in our merchandise offerings and finding cost efficiencies in our buying, distribution, and operations. I also have opportunities to span the capacity of some of our warehouse clubs to accommodate and better serve our growing membership base. Delighting our members by bringing value to the membership is what this business is about.

In terms of new club openings, we keep making progress for the opening of our fifth club in Panama, in La Chorrera, a growing area in the west of Panama City. We are planning to open this club in the last week of June 2015. And last but certainly not least, we continue with our efforts to find more opportunities in Colombia for sites; our recent experience, particularly in Bogota and Medellin, indicates that these cities [alone] are not one-club cities.

Now before I turn things over to John Heffner for further detail on our financial results for the quarter, let me share with you the other announcement made yesterday, our March sales results. As reported, during the month of March, our sales growth was 17% total, and in comp sales we came in at 7.3%, a very strong comparable sales growth compared to recent months.

March and April always have some year-to-year comparison differences due to the timing of Semana Santa, the week leading up to Easter. While the Semana Santa week itself, along with the number of close dates for some or all of our warehouse clubs, including Holy Thursday, Good Friday, and even Easter Monday, were being [made pure] and comparable to last year, the week before Semana Santa is historically a strong sales week.

That week fell into March this year and was in April last year. As our result, we expect the month of April to have a lower comparable growth. Although, as I mentioned in my comments above, I do believe that, as a team, we are better prepared to optimize our sales in this third quarter. I'll now turn things back to John Heffner for some additional comments before we take your questions.

Thank you, Jose Luis. Let me highlight a few additional items with respect to our financial results for the second quarter based upon our release yesterday before we take your questions. As Jose Luis mentioned, the extraordinary devaluation of the Colombian peso over the past several months has had a material impact on our financials in the most recent fiscal quarter.

Given the level of merchandise that we import into our markets that is purchased in US dollars, dramatic changes in currency can impact us in a number of ways, all of which came into play in Colombia in Q2. Jose Luis spoke to the impact to sales and the actions we've taken, which resulted in reduced merchandise margins. Let me address that which is perhaps the most visible currency-related impact to our P&L, the line item called other income and expense net.

When imported merchandise is purchased, the liability is incurred in US dollars. At the time payment is due, it is satisfied with local currency, and therefore subject to the fluctuating exchange rate between that currency and the dollar. During the first quarter and extending into the second quarter, a very large volume of US-valued merchandise and fixed-asset shipments were received by Colombia in advance of and during the initial opening of the three new warehouse clubs.

This created large US-dollar liabilities, which upon later settlement at a weaker Colombian peso, resulted in realized currency losses. Net of the hedging instruments we had in place during this period, the hit to the P&L in Colombia during the second quarter was $1.8 million.

We have taken steps to greatly reduce US dollar liabilities in Colombia from that initial build-up through internal financing mechanisms that will now allow Colombia to match the timing of payments with the US dollar liabilities as they are incurred and avoid the high level of financial impact of future negative currency movements. Overall, the consolidated currency loss for the Company was $1.7 million, as we had a net gain of about $120,000 across our other markets. This compares to an overall consolidated net currency gain last year in Q2 of $712,000.

Our 10-Q now shows Colombia as a separate reportable segment, disaggregated from what was our Latin America segment. We made this decision based upon the growing size and importance of Colombia to the Company, but also the fact that its dynamics are sufficiently different from our other segments, that we believed it would enhance understanding of the performance of our different Markets. In that regard, both Central America and Caribbean operating segments recorded revenue growth, operating expense leverage, and increased operating profit in the quarter compared to a year ago.

The effective tax rate for the quarter was 35.3%, a little better than the 37% we had in the first quarter, but impacted by the same fundamental issue, a pre-tax loss in Colombia for which we are not recognizing a tax benefit. This negatively impacted the current effective tax rate by about 300 basis points.

The accumulated tax losses in Colombia do not expire and are available to us to reduce or eliminate future tax expense. Last year's 28.2% effective tax rate was the result of a currency-related gain recognized in that period which did not have a corresponding income tax provision.

We ended the quarter with approximately $119 million in cash and cash equivalents, about even with where we ended the first fiscal quarter. Cash provided by operating activities in the quarter net of changes in working capital was $33 million.

Capital investments in Q2 were $14 million, which included construction-related expenses for our new club in Panama, as well as ongoing maintenance CapEx, which runs about $30 million per year. Net financing activities resulted in a net use of $10.6 million in the quarter due to the semi-annual dividend paid at the end of February. With that, Jose Luis and I would be happy to take your questions. Operator?

(Operator Instructions)

We'll go to our first question from David King with ROTH Capital Partners.

Thanks. Good morning, guys. I have a lot of questions here, so I'll just try to stick to a few and maybe come back into the queue. But in terms of that $0.16 that you guys highlighted from Colombia currency devaluation, just to be clear, was that the tax that you guys talked about, as well, that hit in the quarter?

Was that included in that $0.16 number? Then the reason I ask is I'm just looking for a little bit more color in terms of how much you guys think it weighed on sales in the Colombia region versus warehouse club gross margins, et cetera? Thanks.

Yes, David. Thank you for the question. Yes, the tax effect was definitely part of those $0.16. Also, [the resulting] impact of the currency fluctuations. So both elements were part of those $0.16 per share. And as I mentioned at the beginning, we believe that the devaluation obviously caused a reduction to some degree of our sales.

Sales definitely got affected. It's hard to measure how much our sales got affected by that other than the conversion in general. The confidence of that consumer in Colombia was a little rough for the last quarter, given the 22% devaluation that they experienced.

Fair enough. Then maybe asking the question a little bit differently, in terms of your pricing strategy in Colombia, maybe putting some -- versus let's say your typical 14% to 14.5% targeted warehouse club gross margin, with your strategy of trying to maintain market share or grow market share, et cetera, how low are you willing to go there specifically right now given the current currency pressures without having to raise prices?

Yes, obviously, you're right. We have reduced our margins in Colombia over the past few months in order to pass on further value to our members in Colombia. And yes, we are prepared to accept lower merchandise margins and profits to solidify that market position for the future. We were -- in terms for the quarter, I believe we had a difference of about 200 basis points, 200, 250 basis points compared to our regular market.

Okay. And that 200 basis points as a number going forward, would you be willing to push that even further to 300 or 400, or is that more of a -- do you want to keep it in that 200 basis point?

I do want to keep it in that range. It's hard to tell that -- the second quarter in particular, David, had also the effect of so much fluctuations. Keep in mind all these currency devaluations started about Thanksgiving time in the US, so it was basically impacting us for the full quarter, with a lot of fluctuations going from COP1,900 where it started or close to COP2,000 to COP2,100, then COP2,200, then hitting as much as COP2,600 at some point.

So there were so many fluctuations and we were keep bringing merchandise at different cost levels, so it was a little bit hard to -- in the second quarter, in particular, to even price merchandise. But we believe that definitely, given our long-term view in Colombia, the most important thing for us is to try to be more reasonable with price increases, and obviously, be there for the members to sustain the long-term position.

Okay. That's all extremely helpful, Jose Luis. Then maybe just one more, in terms of the March comp, obviously you had a benefit still Semana Santa, just in the weeks leading up to that, or the week leading up to that. Is there a way to maybe quantify that, John, or is there a good way to think about that, and then alternatively just also think about how much we should be thinking that should weigh in April?

The bigger impact is -- which will be comparable -- is the fact that we have so many clubs that are closed right around Easter. All of our clubs are closed on Good Friday, a number of them are closed on the Thursday before, and we have a number that are closed on Easter Monday.

The good news is that will -- all those will both fall into April. The impact of what that week leading up to Semana Santa falling one week versus the other, we think it had an impact, but we are not in a position to make an estimate of what we think -- how that will play out in April. Jose Luis?

The only thing I will add, David, obviously we got the benefit of the good days in March. April will be more of a comparable because the closing dates fortunately are falling on the same month. Although, as I said, on my opening comments, or during my comments, I believe that we are better prepared this year for this third quarter.

Our merchandise selection, a lot of improvements that we have seen in different categories or departments in the Company, are going to help us have a better performance in April, even with the closing days and all that. All-in, usually the way we look at it internally is we put together March and April to get a feeling of what the real comp, because mixing those two months gives you really the real growth that you have compared to a year ago within the same time frame, March and April.

Okay that's great color. Good luck.

Thank you, David.

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

Thank you very much. Just a clarification. You haven't given local currency comps. Is there any chance of getting that, particularly for Colombia, and maybe some of the core markets?

Well, Dave, let me just jump on that and then Jose Luis can join in, too. When you do constant currency, or currencies across different market baskets, you have got to go back to a constant currency view. We can look at Colombia as an individual country, and Jose Luis mentioned that we had about 126% growth in local currency across that country. When we aggregate in all of the other countries, we have to go back to a constant currency approach, since you can't add the currencies together.

Generally, our currencies devalue against the US dollar, so it's safe to say that our -- if you were to do the market basket of the currencies that we have, weighted by the clubs we have, our constant currency growth rate would be probably 200 to 300 basis points higher than what we report in US dollars. I don't think its been much different than that for the last year or two years. I don't recall a time when the US dollar growth rate would be higher than the constant currency growth rate and it's probably in that 200 to 400 basis point range.

Okay. Another question is as you're looking out for new store growth, two questions. Number one, it sounds like ex the currency stuff, Colombia is going probably as good or probably better than you had anticipated and pretty happy with it. Is there any decision -- does it change your decision process about timing of store openings there?

And just in other markets where you currently are, you seem to be more comfortable with cannibalization, you seem to be getting through some of the worst cannibalization after -- Honduras, you'll get through that this summer. Any other markets where you think the cannibalization by markets or countries that can make sense going forward? You have one more club destined to open. Any further thoughts about what's going to happen over the next one to three years?

Yes. Let me tell you, David a little bit. Obviously, to your first question on Colombia, obviously the currency concerns us, but that doesn't change our view of a market that has a lot of opportunity long term, so the initial results are encouraging. Obviously, since we started in Colombia, we knew it wasn't going to be without challenges.

I believe that this is good opportunity for us to keep looking for opportunities to grow there. Definitely, in particular the Bogota and Medellin cities are big cities where we still see opportunities for us, and even with the devaluation, as I mentioned, in Bogota, is setting up important records for us as a Company. Our thought process is that it will only get better. Hopefully, these peso devaluations will not get worse and then things will continue to be -- or the things will be normal at some point in Colombia. That's speaking for Colombia.

In the rest of the markets, as we are doing with Panama, we keep looking at different markets. Hopefully in the next 12 months, 18 months, we will be looking at opportunities in the next -- in existing countries or existing cities where definitely there is still opportunity to add another warehouse club, probably get some [revitalization] out of the existing warehouse club.

But at the end grow in [proposition] in markets where we -- obviously, given the busy clubs that we have, they need some help and we need to transfer sales to new locations. So that continues to be our strategy. With the fact that we are opening more in Colombia doesn't mean we are slowing down in the other markets where we obviously identify opportunities. We will continue putting clubs there, David.

Great, thank you. One last question and I'll let you go. You talked about some improvements in merchandise, some changes going on. Can you just maybe get a little bit of color about that, and then I'm finished? Thank you very much.

Yes. No problem, David. What I meant to say, and this was something we realize, as a Company, the opening of the three clubs in Colombia in the first quarter put a lot of attention in that specific country from all the buying teams, from all of the operations teams, from everyone. So to some degree, I believe that as a Company we probably got a little distracted with that and we didn't take advantage of many opportunities as we could have seen in first quarter and second quarter.

We did important structural Management changes internally just to make sure that we dedicated enough resources to make sure that we have focus in other countries and other departments. Now we have already seen some of the results. I happen to believe that the March results were definitely influenced by a good Semana Santa preparation, but also the fact that we have seen improvements in our merchandise selection, we have seen improvements in-stocks in the clubs.

For us, the in-stocks, when you ship merchandise, a lot of our merchandise from the US to some of the other markets, it takes -- if you have an out-of-stock, it can be for two or three weeks. We have been fine tuning those replenishment orders in order to avoid having out-of-stocks.

When you put all those things on the basket, when you put more exciting merchandise for the members, when you keep working on getting better value as we keep growing as a Company, when you reduce your out-of-stocks internally, all that adds up to have a good performance in departments.

Last but not least, we are making it a point to keep bringing exciting merchandise to the clubs and be the differentiator, the retailer in all of the markets. That's what is paying back for us in all those departments, David.

Thank you very much. Congratulations. Have a great day.

Thank you, David.

(Operator Instructions)

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

Good morning, Jose and John.

Good morning, Jon.

If I look at the Colombian peso here so far in your third quarter, it might be down over 25% year-over-year, and it's down 10% sequentially. To maintain your margins in Colombia, at the second-quarter levels, do you have to raise prices a little bit, given what the peso has done here in the third quarter, or can you maintain pricing at the second-quarter level and maintain the current level of gross margins?

No, we definitely, Jon, we definitely have to impact some of our margins. Obviously, we are being careful how we impact that and it comes into play how much inventory you have at the old currency and the new currency, but at the end of the day, we definitely have to impact, as everybody in the market, a lot of our prices.

There is no way we can -- we are trying to maintain, obviously, a very competitive position. As I mentioned, obviously, we price Colombia -- we are prepared to accept lower margins as we build our market for the future, but definitely we have to be raising some of the prices as needed.

Okay. Have you seen your competitors raise prices, too?

Yes, we see -- there's been a lot of fluctuation, and the last quarter in particular, where everybody was bringing merchandise from either from different currencies and all that, we definitely saw a lot of movement and everybody is reacting, no question.

When you look at, not only the food portion that is imported, but obviously all the electronics, computers, a lot of those categories where there is no Colombia production, you definitely have to -- everybody has to be raising prices and adapting to that. The consumers are, they understand that, not they don't like it, but they understand that, that's the result of the devaluation, and everybody is trying to get their piece of the market, but definitely we have seen some prices raising.

In addition, we're also working to keep working on bringing better value to our members. We don't forget there is opportunity to get some local merchandise to some degree, that obviously has less of an impact. We have been working since the beginning in Colombia on developing some good local items that obviously has less of an impact in terms of obviously currency fluctuations. They may have a little bit of an impact if you bring some raw materials, but all-in they have less of an impact in pricing, so there is -- all that is mix on that basket to try to provide our members the best value going forward.

Jose, how long or what do you think it would take in terms of the currency for you to return margins back to quote-unquote, more normal levels? If the peso would level out at these levels, would it take 12 months to get back to a more normal level or how would you think about that?

It's hard for us to tell, but we will price very competitively, and be prepared to accept a lower margin. And it will probably -- it's all about, [especially] our experiencing the past with other markets, obviously, not at this level of devaluation, because this one, Jon, in particular, has been a little higher than what we have seen in other markets. Usually it takes to probably about to almost a year for people to get back in the mood of the new currency.

Assuming it doesn't keep moving up, or it doesn't go the other way, but it's obviously very hard for us to tell, but we believe that within a year time frame people get adjusted. They just realize of the new currency and they go back to normal spending, so that's when we will probably be considering the normal condition.

In the meantime, obviously, since our position for Colombia is long-term, we believe that it's the right thing to do and we're going to try to keep working on those values for the members. You'll definitely think, at the end of the day they all live in local currency. They have to. That's how they make their money, so it is hard to work on that, but we're prepared.

One last question. The gross margins elsewhere were better and offset some of the decline in the Colombian stores. Is that -- do you think that can continue?

We don't have any intention of raising them. We have good economic conditions in most of our markets, so there's not any reason to think that we will have to have a different approach in those markets. I want to make it clear, we are not trying to offset that loss of margin in Colombia by raising prices anywhere else.

We look at every market independently. As a whole, obviously, the other market definitely contributed more to the second-quarter gross margins, but we will remain competitive in all the markets. We believe that the general economic conditions are for the most part good in some of the markets that will allow us to keep offering good values, but definitely not [raising them]. We see them just pretty much in line with last year, pretty much.

Okay, thank you.

Thank you, Jon.

We'll go to our next question from Margaret Kalvar with Harding Loevner.

Yes. Hi. Thanks for taking the question. I was interested a little bit more color on comps, in terms of traffic versus ticket, particularly in Colombia. You may have an awful lot of traffic coming -- people look and see and maybe buy a few things, but then when they return, are you getting any indication of the ticket increasing?

The membership sign-up implies that, yes they will return, but as prices go up, and maybe as the consumer sentiment isn't that strong yet, once the initial euphoria wears down, are you seeing any moderation?

Yes. Thank you for the question, Margaret. Obviously, we have seen a decrease just as a result of converting the pesos to dollars. Obviously, we see a big impact on our average basket or average ticket. Although, when we look at them in local currency, they are not obviously down as much in terms of the comparison with when you look at dollars.

There is a little bit of more -- the members are probably not spending as much in every transaction as a result of some of the prices going up, but in some particular items, we have been able to maintain pretty good sales, and the impact of the basket is definitely going to be there until we anniversary these devaluations. Do you want to add something, John?

No. The transactions is a good indicator and it's tracking more like the local currency sales, certainly more than the US dollar sales, so we're seeing good transactions and good sales when we denominate them in pesos. It just makes it a little difficult when we convert it back to US dollars.

As I mentioned, Margaret, during my comments, it's encouraging to see the sign-ups. That's a good indication for the members, that they are willing to pay the membership fee. They are willing to keep shopping with us, and they definitely will realize -- some of the members, when we talked to some of them, they obviously say, some of the prices are going up.

They do see that. They are smart shoppers and they do recognize that some of the prices are going up. They also understand the reason that, that is happening. They do realize all the imports are getting hit the same way in the country. So it's a good sign that the sign-ups are there, and obviously, we will keep doing our best to try to get the average purchase either with the same items or just with members adding that extra item to the basket.

Okay. One more question. I know working capital there are a lot of moving pieces here. There are the openings and stocking up for those, there's Semana Santa, there's also currency impacts. What would your expectations be for working capital movements over the course of the year?

Let me take that one. Generally speaking, our working capital -- we have a very high level of inventory at the end of our first quarter, which is November, because that's when we're really stocked up for sales for December and then we move on from there. Relative to working capital, generally speaking, the addition of Colombia into our mix is -- two things that are going on.

One is that we have a higher proportion of US merchandise that we're selling in Colombia than we are overall for the Company and its got a little bit of a longer supply chain moving in. So if anything, there would be pressure on our working capital to invest a little more in that.

In the second quarter, our working capital, the ratio between our accounts payable and our inventory, about 83%. A year ago, it was 82%, so about even with the year ago, and so it should be about the same. But if anything, the addition of Colombia in our mix probably tilted a little bit towards a little more investment in working capital, but minimally.

Okay. Thank you very much.

Thank you, Margaret.

We'll go to our next question from Thomas [O'Neil] with [Dent & Company].

Two questions. One, are you pursuing -- you've mentioned a hedging strategy. How is it different and what's the cost? And second, with the increase in the dollar against the peso, you haven't announced new locations, but have you accelerated any purchase of land or options on land, given the favorable dollar situation?

On the second, let me answer the second one, first. Definitely we see the opportunity of buying land because all of the opportunities are -- all the land this quoted in pesos. It would definitely depend on getting permits and getting through all those processes before acquiring land.

But as I mentioned, we haven't changed our position in Colombia, so we will keep looking at those opportunities. We can accelerate them, Thomas, as much as possible, but at the end of the day, we depend on permits and getting the licenses and all that. So I will say that it is a good opportunity and we will take it as long as we get the benefit of the licenses and permits for some of these locations. And then, John, you want to take the first question?

I didn't talk about the hedging activities. The peso devalued truly an exceptional amount at a time when we were shipping an unusually significant amount of US merchandise to Colombia to support those openings. We had some non-deliverable forward hedges in place during that time but the devaluation rate was quite a bit more severe than we had anticipated.

Going forward, where we are right now, Thomas, is we really worked through that overhang of the ramp-up of those liabilities and we reduced the exposure in Colombia significantly, in terms of the merchandise we brought in there. We've paid for that merchandise. We've paid for the fixed assets that have gone in there.

Now we're in a situation that we are in a better position to match the timing of the liability that we're incurring on a real-time basis with a payment or a corresponding asset on a real-time basis. So we worked through that overhang and that's probably the most significant part of where we are now compared to where we were in Q1 and Q2.

Great, thanks.

Thank you.

(Operator Instructions)

We'll go to our next question from Dave King with ROTH Capital Partners.

Thanks for taking the follow-up, guys. My question has to do with new stores, first, in terms of Panama for June, how should we be thinking about cannibalization or new store cannibalization, if at all? And then secondly, how are you thinking about FY16, given that you opened four stores in FY15, do you think there's the potential to open any stores in FY16 or is it still too early to tell? Thanks.

Okay. On the first one, definitely, we are expecting to have a little bit of cannibalization. This is a new area in the City of Panama. It's a growing area, La Chorrera in that municipality, but we definitely, based on our database, we know we are going to experience probably about a 5% to 6% devaluation from our existing unit. So there will be some of that impact, which some of our clubs, David, in Panama, can probably use some of that cannibalization, given the high transactions that they have. So it will be healthy to see some of those sales transfer to the new location.

In terms of FY16, we are working on trying to get more clubs in line to get a few openings. We can't -- we don't have anything to talk about or officially publish in terms of openings, but hopefully in a few months, we will be able to announce some of the plans for the next calendar year as we get some of the permits and things moving forward.

Great. Fantastic. Thank you.

Thank you, David.

We'll go to our next question from Dafydd Lewis with LGM Investments.

Hi guys. Just two quick questions. Just the net income for your Central American operations was lower in the second quarter, year-on-year. Maybe you can just explain why that was?

Secondly, just when do you expect the Colombian operations to break even again?

Let me take your question about Central American operations. Operating profit was up year-over-year. The difference between operating income and net income in those segments is predominantly FX, and the resulting tax. In my comments, I mentioned that the lower tax rate we saw last year was because we had a currency gain and did not have -- that was not -- did not have a tax impact to it.

That currency gain was actually in Costa Rica last year and so we've got a bit of a benefit in our Costa Rican operation, which falls into that Central American operation. So the difference -- you can see the difference between operating income and net income year-over-year is that gain we saw in the currency in Costa Rica that fell into that segment.

Okay, great.

Relative to your other question about Colombia, we're working to move that into a positive operating profit. A year ago, we recorded a positive operating profit in Colombia, and as we work through the currency devaluations, and hopefully, we have settled that down relative to how it would impact the P&L directly with that currency loss issue that I referred to, and perhaps if the currency stabilizes relative to our pricing and sales, we can return to the kind of performance we saw a year ago.

Yes. That's the plan, and obviously, we don't have anymore -- hopefully, at least now, tax impact is -- we took everything on the second quarter, so that should help also on that performance.

Okay, great. Thank you very much, guys.

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, Levi, for helping us with this call. This ends our call. Thank you for participating with us today. Bye-bye.

That concludes today's conference. We appreciate your participation.