PriceSmart Inc (PSMT) 2016 Q3 法說會逐字稿

Good day, and welcome to PriceSmart Inc.'s earnings release conference call for the third quarter of FY16, the three-month period ending on May 31, 2016.

(Operator Instructions)

After remarks from John Luis Laparte, PriceSmart's President and Chief Executive Officer and John Heffner, PriceSmart's Executive Vice President and Chief Financial Officer, you will be getting an opportunity to ask questions as time permits.

(Operator Instructions)

As a reminder, this conference call is being recorded on Friday, July 8, 2016. A digital replay of this call will be available through July 31, 2016 by dialing 1-888-203-1112 for domestic callers, or 719-457-0820 for international callers. The passcode is 2945542. 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 third quarter of FY16. We will be discussing the information that we provided in our earnings press release, which we released yesterday, July 7, 2016, along with our 10-Q. The earnings release also includes information about our net warehouse and comp sales for June. 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 statements to reflect the occurrence of events or circumstances which may arise after the date of this call. Now I will turn this over to Jose Luis Laparte, PriceSmart's President and Chief Executive Officer.

Good morning, everyone, and thank you for joining us today. I will begin my remarks focused on our third-quarter results, and will follow that with some comments about June sales, which was also included in our press release. And then some additional comments about our significant activities happening in PriceSmart.

For the third quarter of FY16, we reported net income of $16.8 million or $0.55 per share. This compares to $21.2 million or $0.70 per share for the third quarter of FY15, a reduction of $0.15 per share. The reduction in earnings from the year-ago period is related to, number one, a larger year-on-year loss in Colombia of $1.5 million, equivalent to $0.05 per share. And number two, less net income generated from our non-Colombia operations in the previous compared to the third quarter of last year on a 57-basis points reduction in gross margin, as a percentage of net worth of sales, and up 1.4% sales growth.

Starting with Colombia, as we have been experiencing for the past few quarters, the strong dollar versus the Colombian peso continues to have a measurably negative effect on our business. The average exchange rate during the month, the most recent quarter, was 3,035 pesos to the dollar. For the same period a year ago, that rate was 2,503 pesos, a difference of 21.3%. These impacts are reported US dollars results from our business in Colombia when consolidated into [a world] financial. It also causes the price of imported produce to increase with a corresponding reduction in the demand for those products in the market.

Reported US dollar sales for Colombia declined 20.7% in the current quarter compared to a year ago. When measuring pesos, the sales decline was less, at a negative 3.8%, but still an overall reduction. While it has been our goal to have positive local currency warehouse sales growth in Colombia, we did not achieve that in that quarter, largely due to the sales decline for imported produce.

Sales of merchandise that we imported into the market declined 16.5%, while sales of locally acquired merchandise increased 13.2%. As I have mentioned on our prior calls, we have been actively working to broaden our offering of high-quality, locally sourced merchandise -- some of which, like towels and detergents and others, we have been importing. While this merchandise shift contributed to the reduction in imported sales, it is clear that the higher prices of US dollar cost-based imported items are impacting consumer demand for those items.

We have been very aggressive with our margins in an attempt to spur demand and provide value to our members, despite the currency challenges. These lower margins, they are 154 basis points below the same period last year, and 458 basis points below the same period two years ago when the exchange rate was approximately 1,958 pesos to the dollar. Coupled with the impact that level of sales volume in the current environment, continues to drive an operating loss in our Colombia segment.

Excluding the Colombia segment, net income for the third quarter was $18.9 million or $0.62 per share. Last year it was $0.72 per share, a net difference of $0.10 per share. Lower warehouse margins as a percentage of sales, coupled with negative 0.4 comp sales for the 13-week period, were the primary drivers of lower overall profits compared to a year ago, for the non-Colombia segment.

We did not see strong spring sales -- spring seasonal sales, a key driver of overall sales in our third quarter. Net warehouse sales, excluding Colombia, grew 4.4%, but that included two additional warehouse clubs. Our [in] stocks were in good shape, and as I traveled to the clubs, I saw exciting merchandise at a good value. There was generally soft demand in a number of larger markets that had been routinely doing quite well. Among them: Panama and Costa Rica and Dominican Republic.

Trinidad is experiencing a very difficult economic environment, tied to its dependence on oil and gas exports as a source of foreign currency, with GDP reportedly registering negative growth. In February, the government greatly expanded the number of products which now are subject to VAT, effectively raising prices for consumers on more than 1,200 items by adding a 12.5% VAT. Things like juice, sodas, snacks, and even electronics like laptops and computers. As a result, we saw a negative sales growth in a market that experienced comp growth of approximately 8% and 3% in the first two quarters of this fiscal year. On a positive note, Honduras, Guatemala, Jamaica, El Salvador and Aruba posted good sales performance.

Margins, excluding Colombia, [of] 14.3% of sales, were 57 basis points lower than last year, and below where we had targeted them for the period. We did not perform well in a number of areas, and have opportunities to improve. Merchandise markdowns were higher than a year ago, resulting from weaker sales than we had anticipated. Also we can improve in the [end cap] and vendor support area, which contributes positively to margins.

Coupled with this, a reduction in our sales of imported merchandise, largely related to Colombia, resulted in high opportunities to [reduce] costs to our logistics network, which contributed to lower margins in the quarter. With the low level of sales growth in the quarter, we were not able to leverage our operating expenses, which included two additional warehouse clubs, [four other arrow] within our non-Colombia EBIT margins, resulting in an EBIT margin as a percent of sales of 4.7%, versus 5.6% last year.

While economic conditions in certain non-Colombia countries provided headwinds, our [comp shops] look good and our merchandise inventory is clean as we head into the final quarter of FY16. I view many of tissues in the third quarter as related more to areas where we can work to improve our internal operations, and not caused by external market forces, such as the significant competitive or pricing pressures.

Membership income for the consolidated Company increased 2.6% on membership account growth of 3.3%. We finished the quarter with 1.477 million accounts, and a 12-month renewal rate of 80%. Excluding Colombia, the 12-month renewal rate was 87%, consistent with the past few quarters. The overall 12-month renewal rate is still affected by the large number of non-renewals we experienced in Q2 in Colombia, due to the anniversary of the opening of three warehouse clubs in the fall of 2014.

We have seen some improvement in our monthly renewal rates in Colombia, and we're working to further improve them to a level that we experience in other markets. There are various factors which can impact renewal rates, some of which can be unique to Colombia. But it is clear that not all of our Colombia members are recognizing the values we offer. This is something we need to work on. However, during Q3, we saw an ongoing stream of new member sign-ups, with Barranquilla, Bogota and Medellin continuing to lead all clubs in that metric.

With regards to expansions, we're making great progress with our construction of our new warehouse club in Chia, a municipality in the northern suburb of Bogota. The club is nearly complete, and our membership sign-up office is open and adding new members in anticipation of our opening in early September. We are nearly finished with the expansion of our club in Barranquilla, adding approximately 8,000 square feet to the club, and a parking deck to better accommodate the needs of our members.

In El Salvador, we're doing something similar to Barranquilla, expanding the warehouse club and adding a parking deck to our Santa Elena club in that city. This work has recently started, and we expect completion by early November, in time for the Christmas holiday shopping season. We have several additional locations under review to determine what we could do to expand them, either in the current property footprint, or by acquiring adjacent land when available. We will announce individual projects of this nature as we move forward.

There are a number of things that we're doing with our US distribution operations as well. As announced a few months ago, we entered into an agreement to acquire a building in Miami, into which we will move much of our current distribution center. That construction has started, and we expect it to be completed in the spring of next year, 2017.

Our [call DC] will remain in the current building, even after we move other elements of the operations to the new site. To accommodate the growing volume of our [fresh] business, we are currently expanding the call DC by about 30,000 square feet, to approximately 100,000 square feet. These are exciting times for our distribution and logistics operation, which is a key component of our success in this business. These actions will help improve the flow of goods to our countries and improve our cost efficiencies.

In Colombia, our goal remains to grow that business and yield results similar to what we have seen in other markets. It will not happen overnight, but the foundation for success is there. Colombia has the highest number of members per club of any of our countries, including our most successful countries like Costa Rica, and the highest rate of new member sign-ups. However, it also has the lowest suspended per active member and the lowest renewal rate.

Our comp shop tells us that we're providing good value on the merchandise we offer. Our challenge is to increase the average visit and spending for those people who are already our members. By doing that, we will increase the value our members are receiving from their membership at PriceSmart, improve our renewal rate and increase our sales volume. This will also provide us an opportunity to improve our margins over time, as higher sales volume will allow us to buy better and drive further internal cost efficiencies. With respect to our non-Colombia market, our plan is to better manage our margins, and find operating cost leverage, even in an environment of single-digit sales growth.

My last comment is related to June sales, which we also reported yesterday. We finished with a total growth of 1.8%, and a comparable growth for the four weeks ended June 26, 2017 of a negative 1.9%. Excluding Colombia, total sales growth for the month was 4.4%, and the four-week comp was negative 0.1%.

Being June the first month of our fourth and last quarter, I would like to add some extra comments. Some markets had good performance, Guatemala, Honduras, Aruba, Jamaica. Others, like Trinidad and Costa Rica, were still a little soft or negative in growth. For the remainder of this fiscal year, we have clean and good inventories that will help us achieve our margin goals. The merchandise plan and the preparation we have for the summer months are in place, and we believe we are in a good position to maximize our sales and execute the plan.

All in all, as I said in my opening remarks, this was a challenging quarter for us. We had some difficult external factors definitely impacting our performance. But more importantly, we had some things that we can improve upon to yield a better overall result. This is our focus going forward. Thanks again for joining us today. After John's remarks, we will take a few questions.

Thank you, Jose Luis. Let me briefly touch on a few additional items with respect to our financial results for the third quarter. Consolidated warehouse operations expenses grew 3.3% from the year-earlier period. The expenses in this quarter included the expenses associated with two additional warehouse clubs in the cost base. The translation of the Colombian peso to the US dollar, however, had a positive overall effect. Net warehouse sales grew 1.4%, and as a result, warehouse operations expense increased 17 basis points as a percent of sales.

The expenses associated with the Company's general and administrative activities increased 30 basis points as a percent of sales when compared to the year earlier period, largely related to costs associated with our buying and information technology departments. As well as the ongoing recognition of higher deferred compensation expense for stock awards granted in the first fiscal quarter of this year.

Foreign exchange transactions and revaluation of monetary assets and liabilities resulted in a net $220,000 currency loss in the quarter, compared to $311,000 loss last year. We have seen some recent increased volatility and devaluations in exchange rates in several countries other than Colombia, countries like Honduras, Trinidad, Dominican Republic, and most recently, Costa Rica. The effective tax rate for the period was 35.2%, compared to 33.7% last year at this time, largely due to the higher loss we recognized in Colombia.

The Company ended the quarter with a cash position of $202.6 million, an increase of $45.5 million since the beginning of the fiscal year. Net cash generated from operations was $112 million, with improved working capital contributing $13 million. Investing activities during the first nine months of $51.9 million included the completion of the warehouse club in Managua, which we opened in November, and the construction activity for the Chia, Colombia club, which is nearing completion. In addition, there was spending for maintenance CapEx and some larger expansion projects, like Barranquilla.

From a financing perspective, the only item of significance is the semi-annual dividend, which we paid in February, which used $10.6 million. With that, Jose Luis and I would be happy to take your questions. Amy, do I turn things over to you at this point?

Yes, sir. Thank you.

(Operator Instructions)

Your first question is from Dave King with Roth Capital Partners. Please go ahead, sir.

Thanks. Good morning, guys.

Good morning.

I guess, first off, in terms of the warehouse club margin decline in the quarter, can you talk about the components there? Obviously Colombia was down 154 basis points or so. But you also then had inventory markdowns, higher per-unit distribution costs. Are you able to quantify the reduced in-cap activity at all? And then of the 154-basis point decline in Colombia, did those things weigh there as well? I would assume that some of them did. Some more color there, I think, would be helpful.

Yes, Dave. I can tell you that definitely a big component was warehouse markdowns that we had. Obviously we were expecting stronger spring sales, and those didn't happen. I know that we had to get rid of some inventory. Part in Colombia, definitely, and the rest obviously in other countries where we found some softness. So I will say that the biggest component was definitely the markdowns, our performance.

We went a little bit more aggressive on our general projections, and that definitely affected. I wouldn't say that the other component of end cap vendor support was as important. I will probably put more weight definitely to the part that we did have important markdowns, and that's a correction that I think we made already for all the inventory.

I think we have clean inventories, as I mentioned a few minutes ago, entering into the last quarter of this year. And we shouldn't see that affecting us going forward. I think we are in a good position now. And definitely we created some good values for the members out there. But the respective impact that it's had in our sales -- or our profits, actually, for this third quarter.

Okay, that's good color then. And then if I think about that, I think when we talked last quarter on Colombia, you know, the thought was, I think at that point, Colombia warehouse margins were down like 130-something basis points. And then obviously that decline accelerated a bit this period.

And then Jose Luis, you commented today that you're expecting to kind of hit your goals. How should we be thinking about warehouse club gross margins going forward, given last quarter, I think that you said that you would expect that, that degradation might fade? Is that the now -- the new assumption from here, assuming that the inventories are cleaner? Just some context, I think, would be helpful.

Yes, definitely we will have good improvements, even with Colombia's [deck], assuming the currency helps us, as it's been pretty much consistently at an average of 3,000 pesos. I think we will be able to sustain all our margins, and obviously without the need of increasing prices. During Q3, we have definitely more activity in price changes, especially in Colombia also, because currency was still moving, and it didn't help.

I think as we continue with this quarter, there's no reason why we shouldn't adjust -- accomplish our margin goals. And hopefully, we don't have to raise any more prices. Especially in the Colombia market, I think the currency is getting more stable, and that hopefully will help obviously how we price our imports. In the meantime, we're continuing our process -- which also helps margin.

Let me talk a little bit about local items. Definitely the combination of some items that we have had during the past year obviously helps lowering prices of merchandise, and getting members all of the good values that eventually will help in our sales and margin goals. It's a combination of things that -- sales, first we need them to recover faster so that we can see increase in our merchandise sales on imported items. As I mentioned, we had a decrease of 16%. And then local merchants had an increase of 13%.

We want to continue with that increase on local merchandise. But hopefully with the currency more stable, we will see also an increase on US goods, as members probably get used to those new currency rates.

Okay. Actually that brings up sort of another question along those lines. As you think about having more goods locally sourced, what's the overall sort of margin trade-off? Or how should we think about that in terms of -- I mean, obviously it sounds like that would be good in terms of import costs not weighing as much, in terms of having to re-price. But then obviously you have the lower cost -- or, excuse me, the higher cost per unit on the distribution weighing. Is there a good way to sort of think about those two drivers, offsetting drivers? Is it generally still positive, I would assume, to have more locally sourced goods?

Yes, the locally sourced goods -- I'll give you a good example of something that, it's a clear example of items that make senses to convert to local. We recently changed our -- some our towels were being brought from outside Colombia. We found a vendor that is actually doing the same towel to our specs in Colombia. But we were able the to lower the price of those towels. So we're definitely offering a better value to the member -- the quality as good as the quality we were bringing from the program that we were bringing outside Colombia.

But obviously we have the opportunity to get more sales, because we lowered the price of that, and definitely even without sacrificing margin. Because in the past what we have been doing is, with a lot of these imports we have been lowering the margins in an effort to push the sales, and obviously help the currency challenges in the country. So the combination -- during this rise, and little by little, we have been successful in converting some of the items.

I'm giving you a real story of something that we have seen with items, that as soon as we convert them to local, we lower the price because we have a better value. We obviously keep our specs, because we don't want to sacrifice our specs on any item that we sell in clubs. We're not going after lowering prices by reducing quality. We're staying with the same quality. We're staying with our club concept. A lot of these items happen to be actually under our private brand.

So by doing all those things, Dave, we try to keep increasing our sales and improving our margins. Because we have the opportunity to still offer a good value to the members at a lower price. That's kind of the things that are going on in terms of the combination of local versus US, and how we kind of handle the margins and sales that we're trying to drive.

Okay, that's great color. Then switching gears a bit, on memberships, it looks like the growth decelerated further this quarter. But you talked about continued new member sign-ups in Colombia. Has the growth rate there -- what's the growth rate there been doing?

And then it seems like you said, I think -- and then things in the Q as well -- that you had improving renewal rates in Colombia. Does that then mean the renewal rates subsided a bit in some of the other markets? Just some of the drivers around memberships renewals and growth would be helpful.

Membership in total in Colombia actually has stayed pretty even during the quarter. The new members that we signed up, Dave, in the quarter sort of offset some of the renewals we did not get in the period. So we were somewhat flat with our membership in Colombia.

The growth that we got in total for the Company really came in the non-Colombia area. We have seen some improvement in the membership renewal rate. It's ticked up a little bit in the last couple of months, but it's still nowhere that we're happy with, or where we think it should be relative to the high-80s we're seeing in the other countries.

Okay, that's great color.

And I will only add something, Dave. I will say that for -- particularly for Colombia, obviously it's a good sign that we have new member sign-ups. But definitely, as I mentioned in my comments, our next important activity is to make sure that we keep retaining those members that we're signing up. And we're doing that through the values. And we definitely recognize that we have to do a better job on showing the values. We know the values are there, but we have to do a special effort in Colombia, making sure that all our members appreciate those values.

The opening of Chia hopefully will also help, because we're looking at some members, especially in that Bogota market, that are in the north of the city, that the distance of the traffic make it harder for them to shop. And we want to make sure those members hopefully have a warehouse that probably will be a little closer. And we should see some renewals, particularly in that market -- which is our biggest base out of Colombia, that Bogota market. There are a lot of things going on at the same time that we see as a good indication that we hope to see improvements in our renewals rate little by little in each quarter.

Okay, great, fantastic. And good luck with the rest of the year.

Thank you, Dave.

Thank you. Our next question is from Ronald Bookbinder of Coker Palmer.

Hi, good morning. Thank you for taking my question.

Hi, Ron.

Hi. What was the traffic versus ticket -- sort of the breakout of the comp?

I have that here. For the quarter?

Yes.

The traffic for the quarter was up 4.4%. And the average ticket was down about 2%, almost 3%.

Okay. So you're still sort of gaining market share when it comes to traffic? It really just is the impact of currency that's driving the lower ticket prices, as prices increase on the imported goods, correct?

Yes, that's in total. And obviously the currency impacts that. Colombia is some portion of that, but we've seen some devaluations in the quarter in some other areas -- DR, Trinidad. But our transactions overall are up, and in essentially most of our markets, if not all of them. It's down in Colombia, our transactions are down. But that sort of tracks with sales being a little bit down.

And the markdowns -- you ended the quarter with inventory down 7.5%. So you entered with pretty tight inventories. Can you tell us what specifically, or what general category most of these markdowns came in?

The biggest component was coming out of hard lines. Definitely that was the area where we had the higher markdowns applied during the third quarter, more on the hard goods.

That's primarily the US imported goods?

Yes, definitely. I would say 95% of that component is US goods, definitely.

Which is the things you plan further in advance.

That's correct, yes, things that we definitely go back and bought maybe a year ago, in some cases. I think we have a more cautious plan right now with the purchases. And again, we feel good about the level of inventory that we have in the warehouse clubs right now.

What sort of comp do you guys need to leverage SG&A? Is it about a 2% comp?

I think our approach is to always try to figure out how we can leverage SG&A. And I think certainly over a period of time -- I mean, a time period certainly has an impact on that. Our ability to leverage in a very short window is somewhat limited over a longer window. We have a greater ability to do that.

I can tell you the focus throughout our operations is to focus on leverage and doing things better, both through our distribution operations and the way that we buy. And obviously within the four walls of a warehouse club, that's where operations puts a lot of their efforts. I don't have an exact number, but I think it is somewhat time-fazed a little bit as to how we can leverage those expenses over time. But I think over time, we should be able to leverage expenses essentially under any scenario, given enough time.

Okay. And with oil sort of stabilizing as of late in the $45 to $70 range, do you think that could help Colombia get back to a positive comp, and Trinidad also?

What was the reference?

With oil --

Oh, oil, okay. I couldn't follow that first --

It's around $45 to $50 a barrel. Is that good enough, and as long as it's stable, that these petro currencies, the Colombias and the Trinidads -- would that be enough to help get you back to a positive comp in those areas?

I will say, obviously without trying to predict oil or currencies, I will say that at least, speaking first for Colombia, I think that a lot of things have adjusted already. At least we hope that, that adjustment was already digested in the market. We have seen pretty steady currency for the last few weeks. There are other indicators in the country that put the country in a good perspective, going back to growth, security improving -- a lot of good things happening at the same time, that hopefully it will be part of that comeback, call that it way, that we would like to see in the Colombia market.

For Trinidad, there was an impact definitely for oil and gas prices. But I think during Q3, I will say that the one that affected those probably a little bit more was the VAT. When you start moving items that were paying zero VAT to the 12.5%, we saw consumption in a lot of items basically being lowered. So it was something definitely difficult to digest, as I mentioned in my comments. We came from a Q1 growing 8%, a Q2 growing 4%, to basically negative growth in Trinidad, just for that quarter. So the impact was probably more driven by the VAT increases.

If I can add to that, to your point about oil, Ron, I mean, it was really the government policy reaction to the price of oil, I think, that really drove more of what we saw. So I think government policy, by adding VAT to increase the government -- flow of revenues into the government, as a result of the lower oil, how that will play out over time, I guess I don't know.

We have looked at places where that happened to us before. I think a couple of years ago in Jamaica we saw a similar sort of thing, where VAT was added to a number of products that didn't have VAT, and some changes in that. And what we saw is, it took close to a year, I think, to work through the system, in terms of people adjusting to those prices. So I would expect that Trinidad could be a difficult place for awhile longer. And really related to, I think, the government policy more than the price of oil specifically.

Okay, great. That's all my questions. Thank you, and good luck in the new quarter

Thank you, Ronald.

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

Good morning, John, Jose.

Good morning.

Going back to Colombia, as we look ahead into 2017, the currency could be flattish year over year, and maybe a little bit of a tailwind possibly. But I guess my question is, is it possible in that type of environment to see margins in Colombia improve year over year? Or do we need -- or do we just simply need additional sales growth and volumes in Colombia?

We believe obviously the currency will help us, as you mentioned, to get some of the improvements that we need in the margin. I think the conversion of local items is also helping us. I will also say that our position as we keep growing -- obviously we have six clubs now, close to seven in a few months -- should also help us to be in a better position of even buying better all the local merchandise.

So I think there are different components, Jon, that we see making parts of that, and to help us grow. And definitely if we see the currencies stabilize, we should see sales improve. Our hope continues to be that members are getting used to the exchange rate. It took longer than we expected. Realities of Colombia went through a huge evolution, when you put it in perspective, from 1,900 to the 3,000 that it is now. We hit points of 3,400.

So there was a lot of confusion in that market, specifically with currency moving all the way. So even our pricing has been difficult to keep in that market. So there are a lot of components and a lot of moving pieces, Jon, to get that. But we believe that we can stabilize obviously those margins, little by little.

Okay. Jose, in your prepared comments, you talked about a little bit of weakness in what are two of your biggest markets, Costa Rica and Panama. What are you seeing there in terms of the economy, and what may be behind that little -- that weakness?

Well, Panama has been obviously growing tremendously in the past few years, with the expansion of the canal. I think Panama -- and the way we view it, they were going -- I think someone made the reference once that they were going 180 miles per hour, and they're now going a little slower. So we definitely continue to see growth. A lot of investment going on in Panama, a lot of positive things happening. But definitely the slowdown.

We still feel pretty optimistic about Panama's market. Definitely we opened -- we just anniversaried the opening of our warehouse. That did very good for us a year ago. We opened Costa Verde, and we just anniversaried that one. That should help us in a few months with our comps that were affected, actually, in two of our locations over there. And obviously that new location will start comping, we believe, positively also.

So I think there are components in the Panama economy that is obviously dollarized, that should be helping us going forward -- or at least not taking such a bad hit. So obviously it may slow down a little bit, I will have to say, Jon. I don't think it will continue growing at the same pace it was growing. But I think it's still pretty strong.

And Costa Rica is in a similar condition. Costa Rica went through some challenges the last quarter, but they have the indications that currency also got a little affected. Not much, I believe -- not as drastic. But they went back to a currency of about 550, if I recall, when they were already 535, 540.

So they had a little bit of a currency devaluation also in Costa Rica -- I don't think to the degree that it will affect spending as much. So it's probably just a matter of things happening in that market. They give relatively good growth in terms of -- I guess tourism is still a big component for them. So we feel more optimistic about Costa Rica in general. And this is still an important market for us.

And there are good signs in those two markets I will say, Jon, also. Renewals are good, which is a good sign. We feel good about our value proposition. Those are markets where we have good competitors. But we definitely feel good about the things that we bring to those two markets, and that they are just the combination of those big components of our sales as a percentage.

All right. One last question. I know it might be a little bit early, but are you taking memberships yet for Chia?

Yes, we started about two or three weeks ago, and we already have a trailer outside our parking lot. And we're actually seeing decent traffic, for a beginning. So I think it's going to get stronger as we get closer to opening day. Which we believe -- we're still thinking about first week of September, if not earlier. So we think it's going to be a good warehouse club.

And we obviously are treating that one -- that one will open with obviously the new exchange rate, whatever that is. And hopefully the members that are -- we have been hearing good comments about being in that part of the city, not only for the Chia municipality, but more importantly to some degree, the level of people that can probably access that location from the north of Bogota. It's a positive sign.

Okay, good. Have you been able to discern whether some of the new members were members at the Bogota club?

Some of the new members? We're actually capturing renewals there, so yes, they were definitely members at the Bogota club. I'm sure we're going to start seeing actually many more renewing in that location. We have -- our database indicates that we definitely have members that were members.

Either at that one, or maybe some even in Barranquilla. Because, remember about some of the history for Colombia, we have -- even before opening in Bogota, we had a good amount of members that were shopping in Barranquilla when they were visiting. So we see a second point in Colombia will definitely give us the ability to recapture and go back to get those members that we probably lost because of the distance on a big city.

Okay, thank you.

Thank you, Jon.

Our next question is from Thomas Vester of LGM.

Hi, Jose Luis, and hi, John. Thanks for the call. Just first, we saw in the news yesterday, you had a robbery in Mausica in Trinidad. We've never seen that before. Of course, we hope that all the stuff is well and nobody was injured. It didn't indicate from the article. But can you just tell me if this is something that is happening regularly, and if you're insured for it?

Well, that definitely doesn't happen regularly at all. Those incidents happen, fortunately, not very often at all. And we didn't have anyone injured. And definitely we have insurance for that. But it was a very unique condition.

I think has happened in the past, but it's rare. We have a number of procedures associated with how we do closings and things that -- we take obviously a lot of care associated with it. But this was an interesting one that I think is under investigation.

Yes.

Okay, good. Well, it's good to know that everyone is well. Maybe just coming back to Colombia, when looking at Exeter and San [Casoot] where we have the Company's figures only for Q1, they really post significantly better things for sales in local currency. I mean, pretty high single-digits, 7%, 8%. We don't have the Q2 yet obviously. Maybe there is some base affect, because it was slightly depressed. Especially Exeter alluded to that in the [mo high in format], that they felt that you took something away from them in Bogota with the opening.

But they are -- we understand a lot of the problems, but I guess that's one of the things that probably would raise some concern, that they are comping at better rates in local currency. There again, we don't know the Q2. But is that something you're feeling, especially someone like Exeter has been explaining, at least to us, that they are trying to look at your offering? And simply just be aggressive in some of the things you bring in, and bring in at equal or better prices, to really fight on your turf?

I will say, Thomas, because, yes, we actually have been waiting for Q2 results from Mexico in particular. Because I noticed their Q1 results, and they have definitely single-digit growth. One disadvantage we have is, the component of imported merchandise hasn't been growing yet for us. And obviously as much as we're seeing growth in the locally sourced merchandise -- I reported I think about 13%, when I reported on local growth. We still have a decrease on the imported merchandise that is not -- we're not getting the sales increase that we need in that part of our merchandise. So that is not helping.

We get -- we really need to get -- that's our next goal, for sure, to get local currency growth with the combination of local and imported merchandise. And obviously our component of imports being much higher than either San Casoot or Exeter, puts us in a much more challenging condition to get that growth.

But yes, we keep an eye on those figures. And I can tell you that our number one goal right now for Colombia is to get that local currency. Because we can't control the US currency or the currency exchange, so the only thing we can control is trying to get the members in local merchandise and everybody thinking in pesos, and get those sales in local currency to be positive. That's our goal for -- definitely for Q4, we are keeping an eye on that number every single day, Thomas.

Good to know. But then also, Jose Luis, you're underway with a seventh club. It is a very big, what can I say, strategic move for you to go into Colombia, and you have invested a lot of capital and a lot of time. We clearly appreciate that the timing was just very unlucky, and nobody could have forecasted that -- at least, we couldn't, and you couldn't.

But I mean, there must be part of you that asks a little bit if this was the right move, and if it's the right plan to continue to ramp up in Colombia, or if you want to stay at those seven clubs, and then give it a couple of years? Can you just share a little bit the mood and your thinking, and also the mood in the boardroom? Because it is clearly -- it's hard to separate these factors. But clearly it would be problematic for PriceSmart long term if it proved that, for some reason, the club concept won't work in Colombia.

Yes, I will say that the -- how do I start? First of all, I will say that it is a concern definitely. The timing couldn't be -- I mean, worse, definitely, with all the things going on in Colombia in terms of the currency and all this, obviously you name it -- oil, or whatever causes the currency to move. Obviously the timing didn't help a concept like ours.

I think in terms of proving our concept, there are good indications at the end of the day in some of these particular clubs or cities, where members appreciate our concept. We keep talking to members. We use a lot -- every time we try it, we find someone that is from Colombia, we hear very positive comments about our concept, what we bring to the table. Obviously everybody is concerned, even the way we raised prizes. Although they understand; members understand why prices went up.

I think we have -- if we get that currency to be stable, I think we definitely have a very good chance to move the needle in terms of the spending with the members. Keep educating them. We have to put into consideration also that this is a new market, where a lot of these members are learning how to shop in the clubs -- [tax] sizes, you name it. There are different things that you really -- I mean, when we talk about the other markets, we have been there for many years, so the members are well educated on how to shop at the clubs.

Colombia, where focus is with all this -- assuming all this stabilization in the market, to get the extra item in the basket, to keep working on the members understanding our value. And in the meantime, we're trying to keep our expenses as low as possible, but still run a good business in Colombia.

So I don't think we're disappointed that we got there. We didn't know that things were going to turn out to be that difficult with the currency in the past 17, 18 months. But I think we're still definitely optimistic of turning things around. And the opening of Chia is going to be strong for us -- has to be strong for us to prove obviously our -- to keep proving our concept in that market.

Yes, okay, good. And then just on the openings, I think I asked you on the last call as well, and now another three months has progressed. I'm pretty sure this is the longest period in the last five years where you haven't announced any new clubs being under construction, any new sites. Am I correct in that?

Is it just because you're working on multiple different things, and suddenly their [might] has come out at the same time? Or because it's -- I mean clearly, it's very important that there are more members in the existing stores and they're spending more, and that is driving margins and revenue. But clearly another thing is just to continue to increase the penetration and increase the number of clubs as well in new existing markets. Can you share anything on that compared to what you shared last time?

Yes, I'm not sure I keep the same count that you're keeping in terms of how often we announce, but definitely it's a while that we haven't announced a new building. We do have things in the works that definitely will be announced, until we get confirmation of sites. So there are in other markets different from -- or I will say, non-Colombia markets, we have activity on the real estate side that I hope we can come back with some good announcements soon, Thomas.

We didn't by design -- just decided not to announce anything or not to keep moving on projects. It just takes longer. In some countries, it is just a slow process for getting permitting. But we didn't definitely lower our expectations in this market.

In the meantime, I will say something else also. As I mentioned, we're doing some of the expansions in current buildings. We have found out -- we believe that's going to be another good vehicle to keep growing. In the past, when we have done them, we have seen good results. We haven't done parking decks, but we have good experience doing club expansions.

We have done probably five or six in the past that have come to my mind, in different markets in Panama. We expanded [via] Brazil, we expanded the one in the [building], Santo Domingo. We expanded the one in [Charles Homer]. We expanded Barbados. So we have -- expanded Nicaragua at some point. So there is some history on expansions that helped us better serve our members, helped us grow our sales and definitely better member service, more parking. So there are different initiatives.

The way to look at expansion would be in those two ways. And that's why everything we talk about in terms of growth is coming either from -- it's starting from the beginning, which is the DC, distribution center, to be able to serve the locations better. The clubs, they are getting expansion, are getting more space, more in the fresh area, for sure. We're kind of seeing a big component of growth in our fresh areas, and it will be reflected in some of these expansions, as we do with a new club.

So there are different pieces moving when it comes to expansion. It's not limited only through the new buildings, but also to the current buildings that obviously should get a lot of leverage, expanding those buildings. The investments are less, and still good expectations that we have sales growth for those.

Really appreciate it. Maybe just a last thing then. Can you share anything in terms of offerings? You've been talking about before that you are investigating other avenues on top of the bakeries, the tire centers, et cetera, in the clubs. Is there anything that you think makes sense? Or maybe -- I would appreciate you cannot share anything complete. But just if you see anything that you could add onto clubs? Any offering that you [can attribute on the lower end]?

We have a couple of things here or there, but nothing significant right now. In terms of adding things to our clubs, no, we're just doing the regular expansions. I'm trying to think if I mentioned something in the past about that. We're definitely trying to improve -- one thing we're doing, actually, is delivery to some business members, and even diamond members.

So we're looking at different areas where we can improve our business and give the members more reasons to shop, and make it easier for them to shop. So delivery will be one of the things that we're looking more seriously into adding into some of our locations, when it comes to appliances and maybe business deliveries. So those are kind of some of the initiatives we have. Nothing yet concrete on those. But they are some ideas that we're definitely looking at doing in those terms, Thomas.

Okay, great. Okay, thank you so much for your call.

Thank you, Thomas.

Our next question is from Scotiabank, Pablo Vallejo.

Hi, good morning, John and Jose. My first question is regarding the Colombian operation, when you mentioned the example of the towel, how you switched to locally sourced. What would be -- first of all, it would be another category that you're looking into. Or in another way, what percentage is now imported, and where do you see it in the next year or so, from total merchandise?

Let me -- I guess -- you were going to say something?

Well, I was going to say, in terms of the split, I think we're just under 50% now with imported, where you go back probably two years ago, we were probably 60% to 65% imported. Some of that is the shift of some of the merchandise categories. But I think a big part of is it the currency and the impact on the volume demand for imported merchandise.

Yes. I will say, Pablo, that obviously we have a list of items that we have been converting. Colombia is a big country. Fortunately, there are a lot of sources of merchandise. And when we look at that, it's kind of unique, even for us, in terms of the size of the country and the number of item opportunities that we have there. Towels was a good example of something I use, but we have done oils, we have done some detergents, we did pet food, we did -- we're looking at now doing some snacks.

There are opportunities in different areas that has given us not only the opportunity to bring items -- local items -- to Colombia, we're even exporting some of those items to other countries. We did also -- the towels was a good example of an item that we're doing not only for Colombia, but even for other markets in other countries. So there is a component of items that we will continue developing, some under our private label brand, Pablo, and will help us continue that growth of local merchandise in Colombia.

Got it, thanks. And whenever you guys speak about the new distribution center in Miami, is there any specifics that you can give us in terms of margin improvement that this might provide to the Company, once it's in full operation?

Well, it's part of our overall efficiency of driving costs out of our distribution operation. It will be -- we will not move to that new facility until probably April or May of next year. And that's not the only activity we're doing in our distribution to continue to reduce costs and to provide more efficiencies in how we distribute our products. I think, similar to most things, once we take costs out, I'm not necessarily sure it creates margin improvement as much as it -- although it can contribute to that. But does contribute to an opportunity for us to pass on lower prices to our members.

And that will be our goal. As much as we can, we want to see if we can lower our cost of handling the merchandise. This DC will would be across the facility. It's designed to be much more efficient. At the same time, we rolled out a few months ago a new warehouse management system in our distribution center. So that combination of those things should help us as part of our strategy, that it is to just keep lowering our cost of operation and try to get that to the members, Pablo.

Thank you. And one last question, on store expansion. Has anything changed -- and specifically in Colombia -- in terms of the process? Is the government delaying the processing of new stores? Or nothing has changed on that front?

Nothing has changed that we are aware on that front, no government challenges. I think the challenges are the same: finding sites in a city like Bogota. That is definitely a key market for PriceSmart, as it is for everyone. It is challenging to find sites. And the permitting is as difficult as it was probably five years ago, when we started in Colombia.

So I wouldn't say that anything has changed, Pablo, dramatically for us, from a government perspective. It's just continuing to be a challenge to find the appropriate sites, the size that we need, and obviously getting permits. But nothing else has changed in that respect.

Okay, thanks. And if could you please remind me, what would be the approximate average time for government agencies to do all the permits for zoning for a new store?

For Colombia, it would probably be about not less than 15 to 18 months maybe. It's pretty slow. A little over a year, I would say. Actually, I would say in most of the markets, it's becoming to be kind of eight to 12 months. Colombia is probably a little longer, but it's not very unique to Colombia. It's a lot of permitting. I mean, when you do these big boxes in most of these countries, there are so many permits from -- permits and studies from traffic, environmental, and a lot of those things, that make things a little slow. But obviously we can't take short cuts, and we just follow the rules.

Okay. Thank you very much.

Amy, I think we're getting near the end of our time. Do we have other questions that we need -- that we should do?

We have one final question.

Okay, we'll take that.

From RWC, we have Patricio Danziger.

Hi, how are you? Thank you for taking my last question.

Thank you.

So my question is, do you think we can have the same margins in Colombia you expected before the Colombian peso depreciation? And if you think margins at some point should be better than in some -- than in the other countries, given the size of the operation?

I will say to the first question, Patricio, I think eventually there's no reason why we shouldn't have similar margins to what we have in the other countries. It will probably be a little longer process, but eventually we see that. I mean, that's how we opened Colombia. At some point, we didn't have really the differentiation with the other markets. The currency definitely put us in a difficulty to get them to the same level. But I don't see any reason.

I don't know if they will go higher. I'm not sure that's the way we view our business. I think we will get them to a level where we feel good about obviously running a good business. But we will probably -- I don't think we'll be using Colombia as a vehicle to get even more margins than the other countries, for any reason. It would just be business as usual at some point, when we get it to that level. And just, I hope instead of getting it through higher margin just because of raising prices there, I hope that as things stabilize, we should see it in stronger sales, and at the end of the day, driving the bottom line with the growth on sales, rather than just margin increases.

But definitely at some point, little by little, we should see Colombia getting more to look like the other countries. Where we have pretty much -- we have operations from country to country, but for the most part, they are all running a similar margin.

Yes. And just as a follow-up of that, do you think -- I mean, you've done these investments or these decisions when the Colombian peso was a lot stronger, and now the business has changed, and you're competing with local merchandise. Do you think you can be, I would say, selling 80% local merchandise in the future? Can you do that? Do you have the capacity to do that?

I don't know if it's about capacity, Patricio. I don't think that's our intention. Definitely it's not our intention. I think what we bring to the table in Colombia, even with the challenges, is unique merchandise. And when you think about local merchandise going to 80%, I think our mix will remain. It will grow a little bit more eventually, with the currency stabilizing. But I see it actually probably a little bit higher component, because there is more production in local goods in Colombia.

But when you look at items like hard lines, for instance, anybody in Colombia will have to continue importing appliances, electronics, small appliances, TVs. A lot of those things are not made there. So I would still think that will be a huge component. And again, also by design, a lot of the things that we bring to the table are unique imports that members still like. Obviously with the currency, they have to adapt and digest new prices in all of these goods.

But we definitely see us still being the premier, I guess, player of imported and unique merchandise at good values in that market of Colombia. I wouldn't say it will change our business model to the point that we will be 80/20, or whatever number, or even close to what Exeter and Casoot or all other players have there. We will for sure remain with a key component of imported merchandise for that market as well.

Great, thank you very much. That's very helpful. And my last one is, how many years does a typical store get mature? And how many years do Colombian stores have?

Colombia started in 2011. August 2011 we opened our first warehouse club there, with Barranquilla. In terms of mature, that one is a tricky one. Because it depends on -- if you put all these things in the blender, like currency, and whatever has happened in Colombia, I'm not sure we have had even the time to get that maturity in a lot of these buildings. The ones that we opened almost two years ago, it's going to be in 2014 that we opened.

It was October, November 2014. So that's not even about a year and a half.

Yes, those have been a year and a half. So I'm not sure. In normal conditions, they would probably be maturing in the second year, when you get to -- I think the first year, you always claim the first base of members that don't really -- that join you, that they don't really belong to the club. And then you start stabilizing the whole business after the second year. But with Colombia, I will say, it's probably a little challenging, and it is going to take a little longer because of the economic conditions and all the situations that were around those openings. I'm not sure there's a straightforward answer to how fast we can mature those markets, Patricio.

Yes, but in the other countries, the typical years of maturity, you would say, are two years?

Yes, I will say that after two years, we definitely have convinced the members that really like the concept to stay with us, and we see a renewals rate. We have seen that in every country, we lose -- in every place, every warehouse club, the first year, you kind of lose more members because of the fact that some of them were not the right members to join the club, and some of them can't afford it. Some of them just don't like it as much. Some of them don't find the values we would like them to find. So I will say that after two years, it's a good time to get the clubs to be more mature.

Yes, and when I'm saying mature, the I'm thinking about margins there.

Oh. I will say margins -- I wouldn't say that there's a different behavior in terms of margins, in any market that we open. I was thinking more in terms of renewals and members and the whole behavior of things, sales around that club. Margins are -- we don't have any differentiation on margins in a new warehouse club versus another. And more mature warehouse clubs, they usually behave very similar, Patricio.

Okay. Thank you very much for all the answers.

Great.

Amy, I think that means to end our call, if there's any other questioners. I think we're at the end of our time.

There are no additional questions, thank you.

Okay, well, thank you, Amy. This ends our call. Thank you for joining us. Have a good day and a very nice weekend.

This concludes today's conference. Thank you for your participation. You may now disconnect.