PriceSmart Inc (PSMT) 2016 Q1 法說會逐字稿

Good day, and welcome to PriceSmart Inc's earnings release conference call for the first quarter of FY16, the period ending on November 30, 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 conference call is being recorded on Friday, January 8, 2016. A digital replay of this call will be available through January 31, 2016, by dialing 888-203-1112 for domestic callers, or 719-457-0820 for international callers. The pass code is 6532245.

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

Thank you, and welcome to our earnings call for the first quarter of FY16. We will be discussing the information that we provided in our earnings press release, which we released yesterday, January 7, 2016, along with our 10-Q. The earnings release also included information about our net warehouse and comp sales for December. You can find both 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, 2015, filed with the Securities and Exchange Commission on October 29, 2015. We assume no obligation, and expressly disclaim any duty, to update any forward-looking statement to reflect the occurrence of events or circumstances which may arise after the date of this call.

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

Good morning, everyone. Happy new year, and thank you for joining us today. I am pleased with the Company's performance in the first quarter, with good sales growth in all markets. Positive overall comps, earnings per share of $0.78 compared to $0.68 a year ago, and a good preparation by everyone for holiday shopping in December.

It was not without its challenges, however, as the Colombian peso continued to decline against the US dollar, creating a headwind for our growing business in that new and important market, and affecting our overall consolidated financial results when translated back to US dollars. I will speak to these items, and I will also talk about our December sales results, which we released yesterday.

Let me begin first with sales for the first quarter. Net warehouse sales in the quarter were $690.8 million, an increase of 8.6% when compared to the first quarter of last fiscal year. With the opening of our second Nicaragua club in November, we ended the quarter with 38 warehouse clubs, compared to 37 at the beginning of the quarter, and 36 a year ago.

Central America had sales growth of 10.5% in the quarter, which included the effect of two additional warehouses one in Panama, opened back in June 2015, and one, in Nicaragua, opened in early November 2015, compared to the same period a year ago. In addition to good sales growth in those two countries where we had the new clubs, we saw very good sales growth in Honduras in the period, in excess of 10%.

While the Caribbean segment had somewhat lower growth at 6.7%, it did so without adding any new warehouse clubs, essentially all comp growth. Trinidad and the Dominican Republic, our two largest markets in that segment of the Caribbean, performed well, while Jamaica grew over 10% compared to last year's first quarter. Colombia's US sales dollars growth of 3% was significantly impacted by the devaluation of the Colombian peso, despite the fact that we had three additional warehouse clubs for the quarter this year, compared to the last quarter -- last year's quarter one.

When we measure in -- when measured in local currency, however, the sales growth from last year was 49.2%. To provide some perspective on this difference, the warehouse club sales we made last year in the first quarter were translated to dollars at an average rate of COP2,070 to the $1. In the most recent quarter, that translation was made at COP2,999 to the $1, a 45% difference. Comparable warehouse club sales, which includes 33 of our 38 clubs, have an increase of 1.7% for the 13 weeks ending November 29, 2015.

In our last two sales press releases, November, and then again in yesterday's release, we have separated out the impact of Colombia and the peso devaluation on our overall comparable club sales. For the 13 weeks ending November 29, comparable warehouse club sales, excluding the three Colombia warehouse clubs that are currently in the calculation for comps, increased 5%, a 230 basis point difference. For the 17-week period ending December 27, 2015, comparable warehouse sales increased 1.7%. Excluding the three Colombian warehouse clubs, comparable warehouse sales for the 17-week period increased 4.6%, a difference of 300 basis points.

Beginning in January, our Bogota warehouse club will become part of the comp calculation. And in February, we will lap the Medellin and Pereira clubs to the calculation of total comp sales.

Assuming that the Colombian peso remains at its current rate of approximately COP3,200 per $1, we will expect an ongoing negative impact on our overall comps in the months ahead, related to the translation of warehouse club sales in Colombia back to US dollars. By comparison, in January and February of last year, the Colombian peso was trailing in the COP2,400 to COP2,500 range.

The top performing merchandise categories, with double-digit sales growth, included liquor, automobile, home furniture and fashion apparel. High single-digit growth categories included housewares, electronics, sporting goods and toys. We had some challenges on different categories that include computers, garden and patio, tires and [grew med daily]. Membership income for the period came in at $11.5 million, and we finished the quarter with 1,463,136 million member accounts, an increase of 13.4% in both accounts and income.

However, for the end of FY15, August, we had an overall account reduction of 23,049 accounts. This reduction is due to the expiration of a large number of accounts primarily associated with the opening of three new clubs in Colombia in late Q1 a year ago. More than 91,000 membership accounts had an expiration within the months of October and November of 2015, for those three warehouse clubs alone. As I explained in the last earnings call, our history shows that the renewal rate for first-year members is lower than the members who have been with us for multiple years.

The other consideration affecting the renewals in Colombia is related to the price increases that we experienced in all the imported goods, due to the Colombian devaluation. Our Bogota warehouse club has by far the largest number of members of any of our warehouse clubs, even our highest volume clubs in Costa Rica and Panama. And while we seek to retain all members, it is not surprising that we saw a lower renewal rate in that club.

In that very large city, we only have one club serving the whole market, and we recognize that the location might not be as convenient for all members coming from areas in the north. We're optimistic that when we open our warehouse club in Chia, we may be able to get some of those members back.

Even with the renewal rate experienced in Q1, our Bogota club remains number one in terms of membership accounts. As a result, our renewal rate for the first quarter declined to 82%, from 86% at the end of FY15. If we exclude Colombia, the renewal rate was 87%.

I will add that we continued to see good sign-ups in all our locations in Colombia, over 10,000 accounts in the first quarter in Bogota alone. And we experienced an increase in the renewal rate in December in Colombia, as members whose accounts expire in October and November renewing with us in December. Even in these difficult times in that economy, we believe our membership concept of bringing good values and exciting merchandise to our members is a formula for success in the long run.

To finish some of my comments for the first quarter, in the first week of November, we opened our second warehouse club in Nicaragua. And although it has taken some sales from our existing club in the same city, Managua, we are pleased with the initial results, and we believe it is going to make us stronger in that particular market.

Let me now move to some comments regarding December sales, and some activities in place during the next three quarters of FY16. Sales for December came in at $319.1 million, a new record for us, representing a [3.7%] increase in total sales, and a 1.3% in comparable sales, for the four weeks ended December 27, 2015.

As noted in our press release this morning, comparable sales were negatively impacted by the devaluation of the Colombian peso, with three of our clubs in that country being part of that comparable sales. If we exclude those three clubs, the four-week comparison growth would be 3.6%, and the 17-week period, it would be 4.6%.

Transactions within the month of December were nearly 3.5 million, a growth of 6.2% over a year ago. Our average transaction was up versus last year, in all countries except for Colombia. Also, only two known Colombia clubs reported negative comps, one in Panama and one in Nicaragua, both of which were affected by new warehouse clubs that we opened in the same trade area.

We had 14 clubs exceed $10 million in sales in the month, with one club recording sales of nearly $14 million for that month of December. Three clubs increased their sales from December of last year by over $1 million. Thanks to the efforts of our buyers and logistics personnel, for effectively flowing the merchandise to our warehouse clubs and our operations, and support personnel, for managing the large volume of transactions, we were able to serve our members and operate our warehouse clubs at an average annualized sales run rate of 100 million per club for the month.

All the activities that are relevant during this second quarter that started in December are that we continue making progress with the construction of a new location in Chia. Chia is the municipality in the Northern suburb of Bogota. We believe we will be opening that club in fall of 2016, where we will be able to better serve not only the community of Chia, but also the residents of Northern Bogota, who currently have to drive to our location in the area of Salitre, near the international airport.

During the holiday season, particularly in December, I had the opportunity to visit a lot of our countries. I actually saw co-ops in 10 of our countries, and had the opportunity to see firsthand what is going on in our markets. And I have to say that I was very impressed with the commitment and passion that I see from our team in the different countries, they really enjoy the warehouse club business, and they work very hard to keep our buildings safe, friendly and fun to serve our members every day.

As I travel, I always enjoy seeing shopping carts full of items, wholesale or business members buying merchandise on flatbeds, recognizing our values. That's what this business is about, but more important is the fact that we also find things where we can -- that we can do to improve our business, create better value, and make our members happier.

We are currently planning expansion in two of our clubs, one that we are [already starting raising] Baranquilla, Colombia, where we will add some additional sales floor space to our building, expand our food service, and add more parking, building a parking deck. The second is a similar expansion that we plan to soon start in one of our clubs in El Salvador, Santa Elena, where we will add sales floor space and also a parking deck. We are also working on the expansion of our [cold VC] facility in Miami, so that we can better serve the needs of our import in the deli and gourmet deli categories.

Before I turn things back to John Heffner, I would like to add two more comments. On Colombia, the current currency volatility continues to be a challenge, and has an impact on our overall results. But as I mentioned earlier, we are committed to this market for the long term, and we will continue to find better ways to compete and better serve our members during this difficult time for the economy.

We continue to hear good things from our members about the value we bring on the exciting imported merchandise we are offering on these market, despite the rising costs when measured in pesos. We also continue to expand our product offering on merchandise from high-quality local suppliers, at an excellent value.

To finish my comments, I would like to appreciate the hard work of all the PriceSmart team during this busy holiday season. We had more than 10.5 million people passed through our clubs last month safely, and hopefully delighted to be a PriceSmart member.

Thanks again for joining us today. After John's remarks, we will take your questions.

Thank you, Jose Luis. Let me highlight a few brief additional items, with respect to our financial results for the first quarter. The currency situation in Colombia continues to have a measurable negative impact on the overall consolidated results of the Company when translated to US dollars, as Jose Luis alluded to. We are providing more information in our 10-Qs and 10-K, by way of segment reporting, and more recently in our monthly sales release, to allow greater visibility to that effect, relative to the operating performance of our other 11 countries and 33 warehouse clubs.

Net income in the quarter of $23.7 million resulted in earnings per share of $0.78, compared to $0.68 a year ago. The non-Colombia segments, when added together, improved about $0.02, from the equivalent of $0.79 per share last year to $0.81 per share this year. The Colombia segment contributed the equivalent of a $0.03 loss per share in the quarter, but this was an improvement of about $0.08 per share from the year-ago period.

While sales and membership income in Colombia grew from the year-ago period, the planned lower margins that we have been operating to for the past few quarters, in response to the currency situation, more than offset those items when compared to last year. The improved results from the year-ago quarter in Colombia were primarily from no pre-opening expense -- we opened three clubs in Colombia in Q1 last year -- and much lower currency-related losses as a result of efforts that we have put in place to minimize our exposure, despite continued very high currency volatility.

Total consolidated warehouse gross profit margins in the first quarter were 14.6% of net warehouse sales, a reduction of 73 basis points from the same period last year. The impact of the Colombia margin reduction on the consolidated margins was 30 basis points. In other words, merchandise margins, excluding Colombia, decreased 43 basis points in the quarter, compared to Q1 of last year. Total SG&A expense, as a percent of sales, increased 12 basis points, with five additional warehouse clubs operating for some or all of the quarter compared to a year ago.

Higher deferred comp expense associated with stock awards granted in the quarter hit the G&A line, along with additional spending in the buying and information technology areas. We incurred $305,000 of pre-opening expense in Q1, from the Managua Number 2 club, which we call Messiah.

The continuing currency volatility and devaluation in Colombia during the quarter did have some impact, to the tune of about $386,000, but this was partially offset by gains in some other countries of $142,000. In total, we recorded a net loss of $244,000.

The effective tax rate for the quarter was 34%, an improvement of approximately 300 basis points from a year ago, nearly all attributable to the reduced pretax loss in Colombia. We ended the quarter with a strong balance sheet and $140 million in cash and equivalents. A year ago at this time, our cash was $119 million.

The first quarter is a time of merchandise inventory investment, as we prepare for holiday sales in December. In the most recent quarter, merchandise inventories grew $55 million, to $322.6 million, which included the inventory necessary for the new warehouse club we opened in Nicaragua.

Last year's first quarter saw a more substantial $97 million inventory investment, as we prepared for the opening of the three new warehouse clubs in Colombia at that time. As a result, our overall working capital requirement in the quarter to support this inventory buildup -- that is the growth in merchandise inventory less the growth in the accounts payable -- was $23 million this year, compared to nearly $40 million last year.

Overall operating cash flow for the quarter was $1.9 million. We used $17.7 million in the quarter for investing activities, primarily for the completion of the new Messiah Nicaragua warehouse club, but also for the initial construction activities for our Chia, Colombia warehouse club. We added about $7.4 million in long-term debt in our Costa Rica subsidiary for foreign exchange purposes, and as part of an overall restructuring of our financing of Colombia.

We also retired about an equivalent amount of short-term and long-term debt in the quarter, bringing our total debt level at the end of the quarter to $96.4 million. We have adequate cash reserves, and are projecting sufficient cash generation from operations to meet our plant operating and investment needs at this time, without additional financing.

With that, Jose Luis and I would we happy to take your questions. Kim, can I turn things over to you?

Yes, sir.

(Operator Instructions)

We'll go first to Dave King with Roth Capital Partners.

Thanks. Morning, guys.

Good morning, Dave.

I guess first off, in terms of the three stores in Colombia that were opened a little over a year ago, can you talk about what the -- or do you have handy what the renewal rate was at those stores, in particular? I think you said what it was, excluding those stores, I think it was 87%. But do you have it for those stores in particular?

We don't disclose the numbers for those three -- I mean, for those three specific clubs separately, no. We just highlighted what the result would have been in the total Company, taking out those. Unfortunately, we don't disclose separately each of the countries. (multiple speakers)

Okay. No problem. And then as I think about that, if I look at the sales trends at those -- what it looks like the sales trends were at those three stores, since the anniversary of those opening. It seems like the sales dropped off a fair bit, right after those would have anniversaried, or right after people would have been approaching their -- or hitting their one year of membership.

Is that indeed the case? I guess what I'm wondering is, it seems to me like maybe some of the membership drop-off was people who actually were still buying, which could theoretically still be a good thing, then, once Chia opens up? But at the same time, it's weighing on the new store productivity, as we see it. Is that a fair assessment?

Yes, obviously, yes, the impact on some of the prices going up affected, definitely, the sales in those markets. We are just -- I guess the only one that celebrated their 13-month anniversary is Salitre, and actually the one in Bogota, and, in the month of December, actually had a good performance when measured in local currency. So that's the way we're actually tracking, right now, our sales, for the most part, in those -- in that market, because it's the only way to really get a real comparison of our performance. And we still think, obviously, Medellin and Pereira, the other two, still have the effect of the grand opening.

So it's a little bit hard to compare them, until we really pass that 13 months, and we get them to a level of comparison that will be fair, and takes out the excitement of a grand opening and all that. So we are tracking that, those numbers, and obviously, hopefully, we will be able to be reporting growth, at least in local currency, which is our ultimate goal, to start growing in that market, when it comes to local currency sales.

Okay, okay. I think that helps. But in terms of the membership renewals, just to make sure I understand that correctly. So when they go to renew, is that after 12 months that they -- how long is the membership? Is it 12 months or is it 13 months?

Yes. No, it is 12 months.

12 months.

The membership expires, and actually, some members do early renewal. They can renew at the registers, when they visit the club, a month earlier. Whenever they are there, they have the option. And some members obviously don't visit out club, probably, before the membership expires, and we get their renewal a month later. So that's why we saw a drop. And as I mentioned on my notes, in December, we actually saw a better renewal rate in Colombia, because members probably didn't visit us before December, and the membership expired.

We pick it up again in the month of December, as they visit the warehouse. Or, also, we do that [through a into the] have in place, too. Club members, and give them the ability to renew online without -- over the phone, without having to visit the club. So we do different -- we have different efforts in place to get those renewals, especially in these particular markets where we know we have a lot of member accounts expiring.

Okay, okay. That helps. So then, if I'm understanding correctly, you think that, at least in the stores, that those three stores, if there's been any sales drop-offs, it's been more related to price increases, as opposed to members who were buying dropping off, in terms of no longer being members, correct? Am I understanding that correctly?

I would say that's probably fair, Dave. In fact, as we looked at the information of members who did not renew in those clubs, their frequency of shop, and their amounts that they purchased during their year of membership, was substantially below those that did renew.

Okay.

So -- on average. So we've done that analysis, and it is clear that the ones who were not renewing were not taking advantage of either shopping with us, in terms of frequency or the amount of purchases.

Okay. That helps. That helps a lot. Then maybe switching gears, then, to the price increases. So I think you guys said that product margin at stores, ex-Colombia, was down -- I want to say 43 basis points, I think you said, John, if I heard you correctly? Do you have what that is in Colombia? Or is there a sense of how we should be thinking about price increases? And when did those really go into effect, where you started passing along the price increases in Colombia?

I think the difference in the first quarter in Colombia was, I think we indicated -- was what, 300 and some basis points? 363 basis point difference from a year ago, in terms of our margins in Colombia. Because it was really in the second quarter, is when we really started reducing the margins. So I think this comparison, if you looked on a sequential basis, is probably not overly significant from what we did in Q3 and Q4 of last year. But now -- but since we're comparing to a Q1 a year ago, that's where we see, again, probably one -- this last quarter of a big year-over-year difference.

Okay. And then did you guys raise -- start raising prices more in this quarter, or post this quarter, at all? More so than you had been in the past, in terms of passing along the currency-related price increases to the consumer?

To some degree, whenever we see spikes, obviously, on the currency, we have to reflect some of those (technical difficulty). But obviously, we're also, at the same time, trying to be more aggressive in our pricing. So it's -- every day it changes, Dave, and we just have to try to be as reasonable as possible with price increases. But at the same time, obviously, the currency at COP3,200 doesn't help sometimes, no.

Right, no. Absolutely. And then lastly for me, switching gears, in terms of the stores in Baranquilla and El Salvador that you alluded to, Jose Luis, where you're going to be doing the square footage expansions. Do you have -- how should we be thinking about those, in terms of how much square footage, at least to the selling space you'll be adding, as a percentage of the size of the box? Or just in terms of absolute numbers, square feet? Do you have anything that can help us there?

Yes, it's varying by-- it varies by building, obviously, because each market and each building, that we have to analyze how much space we can really add. We're trying to add enough space to be able to expand, obviously, the sales floor in a way that we can improve our fresh business, at least where we are adding some of the space, also some of our non-foods area. So there are different variations. I will say that we're probably adding 10% to 15% of sales floor space in each of those buildings. So that's kind of the goal.

And more than anything, also, we're trying to replace parking. Because -- do a parking deck, because as we expand, we will be taking some of the parking spaces, and we're compensating the parking. And those are buildings that can really use the additional parking, because that has been one of the things we have learned through the years, that especially over the weekends and busy times, it gets more difficult to find a parking space in those particular buildings. So it's a new exercise that we're doing.

We're going to evaluate the first two, but we feel that's a good approach. We have done some of these expansions in the past, as far as sales floor spaces. These two are the first ones that we do, compensating with a parking deck in those particular buildings. So we're really looking forward, as that can be a good way to keep growing in some of those markets, where you just improve your productivity, and you make it a better member experience when they shop there.

Okay. So it sounds like that you see potential for this in other markets, and these will be a two-store test at doing some of this? Is that --

That's -- yes, definitely these are the first two. But we really think -- we're obviously working on other plans, because we think it's going to (inaudible) in a way that can give us the extra sales, and obviously better presentations in the club, more productivity inside the club, improve, obviously, the way we manage our merchandise. There are a lot of benefits to this, even at the registers.

In most of these cases, we add refrigeration space. We add, still, the storage space. We add the space for the fresh areas. We add registers. So it's a win-win in a lot of areas for these two warehouses.

Okay, great. Thanks for the color, and good luck with the rest of the year.

Thank you, Dave.

(Operator Instructions)

We will go next to Rodrigo Echagaray, Scotiabank.

Thanks for the call, and happy new year. I want to revisit same-store sales in Colombia for a moment, if I may. If you can talk about what sort of same-store sales in local currencies? I know you don't disclose that, but can we talk a little bit about what range are we broadly seeing? How that has evolved in the last couple of months? And I'm just trying to gauge what the impact will be, now that we're going to have three more stores from Colombia playing in the same-store sales numbers, starting soon?

I guess just to start, and maybe I'll turn it over to Jose Luis. In December, I think we have about a 300 basis point difference. In that case, we only have three clubs in our comps.

So while I can't predict what the currency's going to do going forward, in terms of how we would translate it back, we're certainly operating -- we're currently operating about COP3,200 to the $1. When we add what will be one more club into the comp in January, and the other two in February -- so we'll end up with six clubs -- it will certainly have a -- I would guess a bigger impact, if the currency difference is similar to what we've seen in the last -- in November and December.

Okay, but before, talking about forward-looking, can we talk about same-store sales trends, in local currencies, in the past couple months in Colombia?

Yes, that's the way we're actually, Rodrigo, measuring, or trying to measure, our performance, because it's a better reflection of our business. And it's been impacted. We don't disclose it separately. It's been impacted. As I mentioned, we have, obviously, Salitre or Bogota really performing at a better level in the month of December. And going forward, that's our goal, to keep track of those.

Yes, and Rodrigo, I think if -- even though we don't specifically disclose it, I think you can probably -- you get a pretty close estimation, given the growth in our sales in total, and the devaluation we're talking about, I think you can probably get an estimate of what that would look like, roughly, in local currency.

Okay. I guess we can probably take this offline, but my calculations tell me that there may be negative in local currencies, given that you have a 5% increase in same-store sales in -- without Colombia. And a 1.7% increase consolidated, even though there's only three stores from Colombia in the same-store sales count. I don't know if -- from what you tell me, and from what I hear, even though there's [challenges] in Colombia, things, for the most part, are going okay. And I don't know if I can understand that negative same-store sales number, in local currencies, in that context.

I think we need to take a look at, once we get all the clubs in the comp base. We're always dealing with the -- as Jose Luis mentioned, the excitement of a new opening, when we opened in October and November, which is why we wait 13 1/2 months before we add a new club into the comp base.

Okay, and one other question, on Colombia. Now that currency has devalued, do you see more opportunities on the real estate front? Are you accelerating the lookout for new stores there? Do you see better prices of real estate or opportunities?

We definitely didn't slow down, especially in a city like Bogota, we are still continuing, or we're really putting more effort in our efforts of finding sites. I don't know if there has been more opportunities, necessarily, that came up in the last few months, but we believe that we're not going to slow down, on that respect Obviously, the opening of Chia will give us a better indication. It's going to serve the north of Bogota.

And we're still pretty optimistic, with a city of the size of Bogota, where obviously, given the number of accounts that we have in the current club in Bogota, we know that there is opportunity to open more locations in that city. So we -- that's definitely an area of opportunity that we don't want to lose, obviously, focus, Rodrigo, and we will continue working on that area.

All right. Thank you very much, guys. Appreciate it.

Thank you, Rodrigo.

(Operator Instructions)

As we have no further questions, I would like to turn the conference back over to John Heffner, for any additional or closing remarks.

I will close things off. Thank you, Kim. This ends our call. Thank you all for participating with us today.

And that does conclude today's conference. Thank you for your participation.