PriceSmart Inc (PSMT) 2017 Q3 法說會逐字稿

Good day, and welcome to PriceSmart, Inc.'s earnings release conference call for the third quarter of fiscal year 2017, the 3-month period ending May 31, 2017. (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 Thursday, July 6, 2017. A digital replay will be available through July 13, 2017, starting 1 hour after the conclusion of this call by dialing (877) 344-7529 for domestic callers or +1 (412) 317-0088 for international callers and entering replay access code 10106771.

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 fiscal year 2017. We will be discussing the information that we provided in our earnings press release and our 10-Q, both of which we released yesterday, July 5, 2017. This morning, we also released our June sales results. You can find both press releases 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 can 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, 2016, filed with the Securities and Exchange Commission on October 27, 2016. 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'll turn this over to Jose Luis Laparte, PriceSmart's President and Chief Executive Officer.

Good morning, and thank you for joining our earnings call for the third quarter of this fiscal year 2017. Net warehouse sales for the period were $710.7 million, an increase of 3.8% compared to the same quarter a year ago. Comparable sales for the 13 weeks ended June 4, 2017, were 2.2%. Net income for the third quarter was $18.8 million or $0.62 per share compared to $16.8 million or $0.55 per share in the comparable prior year period.

Sales in our Central America segment were up by 1.8%. Panama and Guatemala recorded the strongest growth in excess of 5%, and we also saw positive sales growth in El Salvador, Honduras and Nicaragua. Costa Rica was the only market in Central America where we saw a decrease in sales compared to last year. While currency headwinds have been a factor, sales in local currency grew 1.8% in the quarter in that country while continuing to invest in the Costa Rican market, which I will touch on further.

For the Caribbean, we only saw a growth of 0.6% compared to last year. Both Trinidad and Barbados experienced negative sales growth, as has been the case for the past several quarters. Trinidad, our largest market in that segment, has been experiencing difficult economic conditions, which is impacting consumer demand and our members shopping, with transactions down 2% from a year ago. On the other hand, membership renewal rates in Trinidad continue to remain at 89%, and our new member additions are on plan, which positions us well should the economic environment improve.

Foreign currency liquidity remains an issue in Trinidad. Also, our in-country and corporate teams are doing a good job in their efforts to source tradable currencies to support our business. As a result, we are not limiting anymore shipments as we did for several weeks in November and December. During the second quarter, Trinidad was down 9.6%, partially impacted by actions we took to limit shipment. In the third quarter, the sales decrease was only 1.5%.

Barbados, while not having the same overall impact on the company sales as Trinidad, is also experiencing difficulties which is impacting sales.

Now moving to Colombia. Colombia continues to have good sales results with a growth of 27.2%, which includes our new Chia club that opened on September 1, 2016. From a comparable club standpoint, the increase was nearly 10%, even with the effect of cannibalized sales, particularly in our Salitre Bogota club. We saw an increase of 16% in transactions, and the average ticket was up both 9%, which was helped somewhat by a better exchange rate.

In the current quarter, the average exchange rate was COP 2,917 to the U.S. dollar. A year ago, it was COP 3,035, a 3.9% change.

In local currency, our average ticket was up 5%, as we continue to focus our merchandising efforts on growing sales with the large membership base we have in Colombia. I will talk more about Colombia when we get to membership results.

Warehouse margins for the quarter were 14% compared to 13.7% a year ago. The improvement is largely explained by the higher margin in Colombia, which show an increase of 414 basis points in the past quarter compared to last year. Again, a reflection of improved market conditions and the fact that last year in the same period, we have more markdowns given the currency variations.

In the non-Colombia business, we also had a year-ago more markdowns given a softer Easter season in some markets.

From a membership perspective, we finished the third quarter with more than 1,531,000 accounts, representing a 3.7% growth in the membership base. Membership income was $12 million, reflecting a 4.9% increase versus last year on the same quarter. Membership renewal rate finished at 84%, which is an improvement compared to the renewal rate at the end of fiscal year 2016 where we finish at 80%. Even if we exclude Colombia, the renewal rate for the quarter was 87%.

We have seen improvements also in Colombia where we added more than 16,000 accounts since the beginning of the fiscal year. And the 12-month renewal rate for the country is at 76% compared to only 58% at the start of fiscal year 2017.

As a reminder, in Colombia, we increased the membership fee in February 2017. The increase was COP 10,000 in local currency or about $3.30. We have not experienced any reduction in renewal rates or a slowing of new member sign-ups resulting from that increase. When translated to U.S. dollars, a membership in Colombia now yields approximately $21 compared to $35 in most of our other markets.

Besides the numbers, let me add a few comments on important activities, which occurred during that past quarter. Costa Rica has been a challenging market for us in recent months with respect to sales growth. It is still, however, our most successful overall market, generating the highest level of sales and income for the company. Part of our problem with our sales growth in that market is how successful and crowded our existing clubs are, making it sometimes difficult for our members to access our parking lots and shop with us. That is why we're excited to see the progress in construction -- in constructing our seventh club in the country. The location is in the area of Santa Ana, will be close to one of our highest volume clubs in San Jose, Escazu. Although we expect some cannibalization to that location, we are looking forward to incremental sales for that -- from the new club and an improved shopping experience in the existing Escazu club. The grand opening is still planned for the first week, October 2017. And coupled with merchandising and operational improvements, we think we can better serve our Costa Rican members going forward.

In terms of expansion, I am happy that we're able to announce this morning the acquisition of about 25,000 square meters of land in the east area of Santo Domingo in the Dominican Republic. This will be our third club in the city and the fourth in the country of Dominican Republic. We are starting construction in the next week or 2, and we expect to have this club open in the spring of 2018.

Besides 2 new warehouse clubs that will open in fiscal year 2018, we have been working on some of our expansion projects in existing clubs. We just started with the expansion of our Pradera club in Guatemala City. This is a very successful club that has limited parking and smaller than average sales floor space while adding more parking spaces to the existing parking deck and increasing the sales floor by expanding into areas formerly occupied by other retail tenants. We have started but don't expect to finish expansion before the holiday season given the challenges of construction while the club continues to operate, but we will have it completed in calendar 2018.

Before speaking about June sales, I would like to address an important topic for all retailers related to the online channel given recent activity, particularly in the United States, where retail companies have taken action to strengthen their online presence or even companies looking at combining their online activity with more traditional brick-and-mortar businesses via acquisition. We realize that this is an important trend in meeting future consumer needs. And although the online channel is less developed in our markets, we at PriceSmart are developing a strategic plan and investing in technology to satisfy the shopping needs of our business and retail members. We believe that if done well, we can integrate the best of our traditional brick-and-mortar warehouse clubs with the new trends of online shopping and create the right omnichannel experience for our members.

We don't look at this online business in isolation but instead, we believe it should be fully integrated with the other activities we have right now that allow us to serve more than 1.5 million members accounts in the 13 countries where we do business. We also believe we have a privileged condition given the fact that through our membership base, we know who our members are and what they buy. We also have a well-developed and extensive distribution network within the region along with a deep understanding of our markets. If done well again, we see an opportunity for PriceSmart to take full advantage of the trends toward increasing online shopping capabilities and integrate them with our existing clubs and distribution infrastructure.

Now June sales, which were released this morning. Total sales for June 2017 were $230 million, an increase of 4.2% compared to the same month last year. For the 4 weeks ended July 2, 2017, comparable warehouse club sales for the 38 clubs opened at least 13.5 months was 1.5%. While Trinidad and Barbados struggles continues, we saw an improvement in Costa Rican and Colombia continues to perform well in June.

With 2 more months to complete our fiscal year 2017, we feel that we're in a good position with our merchandise inventories and competitive pricing and good renewals as we end a fiscal year. In a few weeks, we will start seeing some red and green in our clubs with the first arrival of holiday items for our early-in strategy.

With that, I just want to thank you for joining us today. And after John's remarks, we will take your questions.

Thank you, Jose Luis. Let me cover a few additional items. Total gross margins in the period included the effect of a lease liability charge associated with the difference in cash flows over the remainder of our lease term in the space we vacated in Miami upon moving into our new distribution center. In our last call, I indicated that charge would be approximately $450,000. However, we ended up recognizing expenses of $751,000 in the period, which not only included the lease liability charge but also the current period cost of space that we have not yet sublet and a charge related to exiting part of our lease. In total, this impacted gross margin by about 11 basis points.

Efforts continue to sublease space or find tenants that will cause the landlord to release us from our obligation. In the upcoming quarter, we will likely incur some additional costs in rent expense for which deals have not yet been finalized.

Total SG&A expenses increased 37 basis points in the quarter as a percent of sales. Low or negative comp growth, particularly in large markets like Costa Rica and Trinidad, resulted in higher club expense ratios. On the other hand, Colombia continues to have good expense leverage with sales -- with its sales growth it's experiencing. Warehouse expense as a percent of sales in Colombia improved 34 basis points.

We have slightly higher interest income compared to the third quarter of last year, but interest expense was higher by $250,000 resulting from both the debt associated with the acquisition of the Miami distribution center in Q2 and a $12 million loan we took in Trinidad this quarter as part of our efforts to address the illiquidity situation.

Foreign exchange transactions and revaluation of monetary assets and liabilities resulted in a $1.1 million currency gain in the quarter compared to a $220,000 loss in Q3 last year. Devaluing currency movements in some of our countries during the quarter resulted in currency gains in those countries that had a net U.S. dollar asset position like Jamaica and the Dominican Republic.

And in Honduras, a country in which we have exposure to the lempira, the currency strengthened by 0.76% resulting in a net gain.

Finally, in Trinidad, despite higher transaction costs for converting TT dollars into U.S. dollars, we made an allowance for that additional cost in our operating model resulting in an overall net currency gain.

The effective tax rate for the period was 31.0% compared to 35.2% last year. The beneficial change was again attributable to intercompany transactions between PriceSmart, Inc., the U.S. entity, and PriceSmart Colombia related to our ongoing market development efforts in Colombia and the improving conditions compared to prior years when losses in Colombia had the effect of increasing our effective tax rate.

Q4 last year was the first quarter where we began experiencing this lower level of effective tax rate in which we will anniversary in this upcoming Q4. From a balance sheet perspective, the company ended the third quarter with cash of $192.1 million, an increase of $10.1 million during the quarter. Operating activities in the quarter [add] $21.8 million. We invested $12.4 million in various capital projects, including the construction activity associated with the Santa Ana, Costa Rica warehouse club and we had net cash from financing activities of $1.9 million.

With that, Jose Luis and I would be happy to take your questions. Gary, I'll turn things over to you.

(Operator Instructions) The first question comes from Dave King with Roth Capital.

This is Phil Klados on for Dave. Looks like part of the sequential decline in the club gross margin was due to the vacated lease charge. Can you talk about any other factors that weighed? Was it mainly currency? And how then should we think about the outlook given these ongoing currency pressures in traditionally devaluing markets where, unlike Colombia, you've operated there for longer periods of time?

I'm not sure I follow your question exactly. Can you repeat that? Is it regarding gross margins, you said?

Yes, exactly. It's basically talking about was there anything outside of the vacated lease charge that weighed? And were there anything outside of the currency pressures that weighed on that as well?

No. But basically, we had an improvement versus last year. And other than that, the currency's changes happen all the time in different countries. We didn't have, except for a little bit in Costa Rica during one of the months of the quarter, we didn't really have any big changes in currencies in any of the other markets. So that's something where, I guess, is mixed into our numbers. At any given time, we're always having experiences of changing prices of -- or moving prices up or down depending on currency fluctuations. But again, I don't recall any big move that will have been, I guess, drastic in terms of changing our gross margin. We actually have, compared to what we budget, compared to our budgets, we were right there in terms of gross margin. I hope that gives you a little bit more of explanation. I'm not sure I -- that's what you were asking.

Yes. No, that helped. I think I'll just kind of move on to my last question. I know on the last earnings call, you mentioned the potential to take Platinum memberships to other markets besides Costa Rica. I just wanted to see if there were any updates there.

Yes, we are about to launch it. We should be -- if nothing changes, we should be doing that at the beginning of our fiscal year 2018, which starts in September. And we have 2 markets that we will be launching that effort. So everything is about ready, and we're excited with that. Obviously, the experience in Costa Rica after a few years has been good. We saw the better renewal coming from those Platinum members. We have higher spending from those Platinum members and obviously, creating that loyalty to continue shopping with us, which is, at the end, one of the most important things. So yes, members are happy with that in Costa Rica and launching it in 2 more countries. And we'll report on that probably for our next call.

The next question comes from Ronald Bookbinder with Coker Palmer.

The Colombian peso has declined approximately 6% since the end of the quarter. While it's nothing compared to what you experienced not too long ago when it declined almost 30%, but should we expect to see some pressure on the memberships and on the buying activity in Colombia given the recent decline in the Colombian peso?

Ronald, I think we are pretty much -- I will speak for the market. I think that consumers and the members digested the devaluation already. The other results, live valuations, I was actually looking at this morning's report on the Colombian peso. We track it every day. It was showing a 3.9% difference. And as you mentioned, it's about 6%. I don't think we have noticed any big changes. And one of the reasons might be, obviously, we are now -- I guess we have a higher base of items that are produced locally, which obviously have less of an effect in the currency changes. For the most part, I think in the Colombian market, somewhere in between 3,000, a little above, a little below, it's fine with them. I don't think they consider that a devaluation. Sometimes, it actually appreciates. We can have a couple of weeks where it goes up and then it goes slightly down. So I think we haven't seen any effect. And in membership, our renewals, as I reported, were at the highest ever. We believe we actually tracked at 76%, which compares, I believe I said 58% at the end of the calendar year. So it's an improvement -- an important improvement, 76% compared to the 58%. So we don't see any impact on that on renewals either. So I think things are trending on the right direction. And again, a lot of that is our mix has changed and that we are seeing good results with the items that we have been developing in the local -- from the local market, including some private label items that are doing very good and is actually giving us the opportunity for export. So a lot of good things happen in Colombia, finally after a couple of years of pretty challenging times. I hope that answers your question, Ronald.

Yes. And speaking on the new locally sourced items and private label, they're doing very well in Colombia. And I think on the last conference call, you talked about possibly taking them to other stores in your network. Is there any progress or update on that? And how could that benefit revenues and margins going forward?

Well, we definitely -- we already have a couple of items that were developed a year ago. We have towels that were developed more than a year ago and are sourcing them also to other countries. What we did is we look at the pricing obviously that these towels or any items when we look at sourcing into other countries. If it's replacing an item, an existing item, which was the case for the towels, we were making sure that we were landing them at a better cost than the other products coming either from the U.S. or wherever the towels were coming from. So that's one of the things we are looking at, so it gives us either the benefit of better margins or more likely, reducing our prices and trying to get more sales. And like that, we have a couple of items that are getting developed. We shipped some to smaller markets to start with. And then eventually, we try to push them to, if possible, eventually, to all markets. So it's a combination -- we have a combination of efforts to try to push more exports out of Colombia, which benefits obviously our relation with the local vendors in the country. The fact that we're not buying only for the 7 clubs in Colombia, but more for maybe 20 or eventually for 39 or close to 40 clubs in the future. That's kind of our vision for all those Colombia exports. And great items. Again, quality is there, especially when we put our name on private label items, we make sure that the quality is there to take it not only to the Colombia clubs but the rest of the markets, Ronald.

And inventory was up 10% versus the 3.8% warehouse revenue increase. Is the inventory at markdown risk? Or why the build in the inventory?

No, we have been looking at that. I don't believe we have any markdown on our seasonal inventory. We just finished the season of what we call like the carnival season, Semana Santa. We got into the summer season. We got new programs running in the clubs. Right now, it's furniture and other things that we're doing. I think what we are doing different is we are trying to push more sales through buying inventory, having the clubs the opportunity to do the right end caps to put items in the front fence, to put items in the seasonal area, flex area, any opportunity. I think in the past, sometimes, we were limiting a little bit too much the flow of inventory, not allowing our warehouse managers to really have something to play with and generate sales. So that's a little bit of the approach. We believe it's the right investment. Yes, we do realize it is higher than last year, but I think it is the right investment. And the good thing is a lot of that is -- most of it is just safe inventory with not necessarily a stamp of seasonal that will cause later on a markdown, Ronald.

Okay. And lastly, you announced the new store in the DR this morning and you are constructing the store in Costa Rica. Is there a movement away from the Colombian focus given the difficulties that you have faced there?

No, not at all. Not at all. It's just, I guess, we announced them as they come out. And when we have our projects in, I guess, in the pipeline in different countries, these were the 2 -- obviously, Costa Rica came a few months ago and this one just came as of June, the one in DR. But that doesn't mean we are discouraged or anything like that with Colombia. It's just the speed of how things move and the availability of, I guess, bills in that specific country. But it's not an indication at all of moving away from that country or from the growth of opening there, no.

The next question comes from [Padarcio] Danziger with RWC.

I wanted to ask a question on margins again, if that's okay. I see that operating margins were one of the lowest in the history of the company and profit margin was also very low. You're comparing it versus Q3 2016, but that was also a very (inaudible) number. Just want to understand a little bit if you plan to go back to quarters like the second quarter or the first quarter or the history in general.

I think Q3 in comparison with the other 2 quarters came a little below. That was more a result of activities. There's always some activity cleaning up inventories even though it wasn't a big shift in margins because we didn't have that much to have markdowns. Q3, for the most part, usually has that part of having a little bit more of markdowns, but they were not necessarily obviously as aggressive as they were last year. I would say that going forward, we will probably be more close to what we have maybe in Q2. Again, Q1 and Q2 happen to be a little on the higher side, and we're not necessarily looking at increasing margins. It's just the way obviously with Colombia. The big shift is coming out of Colombia where compared to last year, we have seen improvements in every single quarter. The rest of the market is just business as usual. Sometimes, we get a little bit of pressure, I should add, on competition. Obviously, there are key items that sometimes become more competitive and you have a little bit more of pressure. You have wholesale business going on in -- sometimes in 1 quarter that you don't have in another quarter. So there are variables there that may drive the margin a little below the average, but there isn't any other factor that we foresee. And John, you were...

Yes, let me just add to that because I think the question also is relating to operating margins, not just gross margins. And well, there is a seasonality to our operating margins as a percent of sales, Q2 being our highest because of the high level of sales we get in December. And so that always is a seasonal shift from Q2 to Q3. I think one of the things that was impacting us in the third quarter, which I think we addressed a little bit, is the -- our 2 -- 2 of our 4 largest markets, Costa Rica and Trinidad, has seen negative sales, and that certainly has an impact on our ability to leverage expenses and the expense ratios that we have in those countries, which weighs on our operating margin percent. So I think it's a combination of both of these natural seasonal activities from Q2 to Q3 as well as what we're experiencing with the sales in those 2 very large markets for us.

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

Jose, I think I know the answer to this question, but is there any reason to think that if things got more chaotic in Venezuela, would there be any impact on your Colombia stores? And then also with the sort of the financial turmoil in Puerto Rico, and I know you don't have stores there, but any reason why that -- any of these sort of outside variables would have any impact on your business in sort of the Colombia or the Caribbean stores?

We actually, Jon -- we see that all the time. I guess, a year ago, we started to see, and it is still happening. We have a lot of accounts in Panama, more than in Colombia, we get a lot of those in Panama, people that go and do big shopping.

Venezuela.

Venezuela. And actually, Venezuelans actually are moving -- a lot of them are moving to Panama. Or it's our impression they are moving there. They sign up. They renew year after year. So we have a good percentage of members that are actually from Venezuela in our Panama market. And also, some of them in Aruba. Aruba has the, I guess, more, I guess, convenient shopping experience. A lot of the Venezuelans use to fly there to buy stuff because they didn't have much in Venezuela or they couldn't have it over there. And then they will take it and resell it or just to get dollars. So there is a lot going on especially more than in Colombia, I will say. We see a little bit in Barranquilla but more than anything, we get it in the other countries. Panama, and to some degree, Aruba, which is a small island. But still, they get a lot of visitors. It's in very good proximity to Venezuela. So we see that. Will that get better? I don't know. It's -- I don't know if -- I know things are not getting a lot better in Venezuela, so I don't know if that will have a better -- a more positive impact on us. It's hard to tell but we get that all the time.

What about Puerto Rico? Anything to think about there?

I have -- we haven't experienced anything. I will have to look into our things. Obviously, Puerto Rico has the other 2 clubs, Costco and Sam's, so I don't know if we will get much of that business or any of that impact in our proximity area, not to -- I don't think -- I guess in the last 13, 14 years I have been here, I don't recall any benefit out of Puerto Rico activity. And I know they're having their difficulties right now.

Okay. Costa Rica, obviously, there's some economic difficulties there. Anything the government's doing there to stimulate the economy, maybe get things better and improve the situation? What is sort of your outlook for the Costa Rican economy over the, let's say, over the next year? Do you see some things improving or sort of continuing as things are?

I think that we're going to see a little bit of improvement. Now we come from a year that hasn't been that great for the Costa Rican market, so we definitely have a lower base to compete with starting Q1 next year. And even in June, we have a -- we saw a little bit of improvement. There's a lot going on. I don't think from the government perspective, we see this declining. I hope we can continue getting some growth. We were also -- we also did some changes, I guess, internally to make sure we attack that market a little better. So I think we are well positioned to keep looking at -- to turn around that market for us and with the opening of the new club, obviously, we are very optimistic we can make that happen. So obviously, whatever is under our control, we think we will be well positioned to have a good end of quarter and a good start for the fiscal year 2018. A lot going on in Costa Rica. And even though again, some challenges in the economy, in general, we had a tough month. I think it was 1.5 months ago where currency actually went a little on the high side, almost hitting COP 600 to $1, so it didn't help. But it's now kind of stabilized.

Okay. One last question. The issues maybe in Trinidad and -- Trinidad is -- are easing a little bit. But in the past calls, you've talked a little bit about what the currency is trading for in the black market. Is it still trading at a discount in the black market versus the stated rate, so to speak?

Yes, it is, Jon. There's still a premium that if you wanted to, that you can buy U.S. dollars at a premium on the black market, but it's small quantities. You certainly couldn't -- that's not something we would want to engage so we have -- from time to time, we are offered through reputable sources offers of currency, hard currency to euros or U.S. dollars at a bit of a premium. And in some cases, we've taken advantage of it. We felt like it's in the range. But the black market is even beyond that.

Yes. So relative to maybe where you were 6 months ago, are you less concerned that there might be a devaluation in Trinidad?

We have reduced substantially our exposure to any devaluation that might occur. So while I can't predict whether one will occur or not, we have taken actions such that our exposures are pretty minimal now compared to where they were back in November.

I think it's only at 600K or something like that.

The next question comes from Victor Cárdenas with Scotiabank.

My question for you is in regards to in view of the quarterly results and the year-over-year improvements. If you could give me some color to help me understand why the stock price has negatively reacted that significantly?

I'm looking at John for the...

Some great insight?

Yes.

I don't know, Victor. I mean the -- we don't provide guidance to The Street. The -- and therefore, the -- I'm not sure what the basis for people's projections for what our results might have been for the quarter or could have been. So I really have no comment on movement of the stock as a result of any public announcement that we make.

Yes, I will only add that, obviously, we run the business quarter-by-quarter and looking at just keeping -- obviously looking at making improvements. And regardless of however the market reacts, I think we are running good things. We have a lot going on in the company. We're happy with the results. Can they be better? For sure. But I think we're going to do a lot of good things. We're having a good end of quarter and hopefully, the market will react to that again. But it's a tough one to give you the right answer. I think internally, we just keep looking at how can we do better regardless of whatever the market really does. So I think again, we're running a good company and hopefully, we're pretty excited about 2018 with 2 new clubs. So a lot going on in the company that should make us feel good anyway.

The next question comes from Thomas Vester with LGM Investments.

I have a bunch of questions, just let me know how many I can ask. But the first one would be on Colombia. I mean, clearly as you point out, the margin is trending up again, and now you know impossible in the bottom line in Colombia. But can you -- do you have any view on where the margin will go to because clearly, there are margin differentials in your markets. And clearly, also in Colombia, you maybe have a slightly more expensive structure with especially an expensive lease in Bogotá. But I mean, Caribbean is low margin structurally than in Central America. But can you just share a little bit of insights what a sustainable margin should be in Colombia? And if you want, when that will be reached? I mean clearly, probably that comment will depend on assuming a stable currency. That will be great.

Yes. Obviously, when we -- it's been a tough ride, as you know, for the last couple of years in Colombia. And we made a point this year given that we have some currency stabilization that we were -- we have the opportunity obviously to consolidate our business there, get the members' confidence. And I think we have been successful on that site for the most part with getting obviously good renewals. We were able to increase our membership fee. We were able to, little by little, get our margins more adjusted. We still think it will probably take a little longer to get to the margins, maybe more like Central America. The cost structure is more similar to Central America versus the cost structure of the Caribbean market. So we see that happening, but it will probably take another couple of years to get there. Competition is strong in Colombia. We don't have a straight club competition but obviously, we have a lot of respect for the retailers over there, the big retailers. And obviously, we are still relatively small still for -- in comparison with the other guys, I think everything is going in the right direction to position us well to continue growing. And I think we're going to take it very carefully in terms of trying to reach the same level of margins that we have in the Colombian market -- I mean, Central America or the Caribbean market where we want to get there eventually, that's kind of the way we compare all the countries. But obviously, individually, each country, at the same time, has something that we need to make sure we stay competitive on that specific market that we have room to get those -- the margins that we need. It varies by categories. The mix of sales, obviously, in Colombia is a little bit different compared to other markets. So everything plays in the equation of getting to the margins we want. So I hope that answers your question.

Yes. And -- but you still expect the market to continue to trend up? Or do you expect it to level out here?

We still expect the markets to -- I think it will level off.

So the margin in this quarter in Colombia should sort of be the base for the coming quarters?

Yes, more likely. I think we are getting there. Obviously, we saw that 414 basis points improvement, but I think we are getting there.

Okay, great. And then just on the warehouse. This is probably more for you, John, and I think I asked it last time as well. But I understand some of the costs with the move and on the early lease termination costs, et cetera, but shouldn't we start to see some cost savings as well from not having those rental expenses? And one would guess that owning it would be better for gross margin going forward since you're taking this big CapEx?

Yes. Over time, it will, Tom. In the near term, though, we vacated space that we're still on the hook to provide the lease cover for us, so we are -- and while we're taking a lot of efforts to sublet that space, we do have some -- we're paying rent on the vacated space in the near term. However, I think we certainly recognize that when we made the decision to go to the new -- to acquire the new DC. And despite what we believe is going to be some short-term risk that we had to overcome to offload some of that cost, the long-term benefits both operationally and strategically at the DC more than outweighed that risk. So a lot of activity in that area. But in the short term, I think we're going to continue to have some excess space that we vacated that will pay some lease on.

Okay. And then just next, can you say anything -- I mean, it's clearly much appreciated that '18 is looking to be a year with 2 new clubs coming from the slightly more lean on the new club additions in the last 24 months after the big expansion in Colombia. But can you share any color on the pipeline, and how comfortable you are? And if you are looking at any ways to speed it up without sacrificing the quality of your offering?

I'm not sure we can give you a lot more color. All I will say is that we have projects in the pipeline, Thomas, that we're optimistic that we will be able to little by little start, I guess, rebuilding the projects that come in the pipeline. We're obviously doing our best to try to secure properties. It is difficult in every single market. More than anything, the permitting process is slow and we're just learning how to be patient. Obviously, doing the right things as a company. So I'm not sure we can give you a lot more, but I can assure you that definitely, we want to keep finding a way to add more clubs this year. Fiscal '18 happen to be one that we will be adding 2, which is so far -- hopefully, we may be able to squeeze something else maybe in the calendar year 2018. But things are looking good, so we feel pretty optimistic that we will be announcing something soon.

Great. And just on new markets. I don't know if you can answer this question, but I mean clearly, there's many more markets around you that looks interesting from a club penetration perspective. I mean, Peru has been talked about as one that looks interesting. Can you say if you're actually looking to secure land in any new markets outside in your existing territory? Or are you just considering new markets? Or I mean -- so I guess I'm asking if you can share if you are actually looking to acquire land and it's just that has been holding up or you are not at that stage for any new markets?

We're not at that stage of looking for land. We always try to be aware of what's going on in the markets, Peru, the one that you mentioned, Chile, a few markets that we're kind of familiar with, to some degree familiar with the markets, but not ready to be making any announcement on a new country yet. I think we kind of -- I think we feel responsible to be aware of what's going on, what's the opportunity out there for us and try to figure out if we can figure something as far as a strategy for those markets. But nothing on a really active role right now with those markets, Tom.

Good. Great. And just 2 more then I promise to stop. The next one is on...

Quite a long list.

Yes, on e-commerce. Much appreciated your sharing, Jose Luis, in the beginning. I mean we have been doing a lot of thinking about how they -- I mean clearly also looking at what Costco is doing. Because one could argue there is some structural difficulty for top retailers to go online given the membership structure. But what I hear you say is that your online strategy would be focused or centered around that it's only for members. Is that correct?

Yes, definitely. Whatever we do in terms of online, it wouldn't be different to the way we run our clubs. You got to have a membership and some people think it's crazy not to allow everyone to shop but we know that, that works. And obviously, Costco and Sam's do the same thing in the States. So whatever we do is going to actually be with a number of accounts, 1.5 million accounts that we have more than 3 million cards, I guess, if you put the additional cards sold. Our potential is as much as 3 million cards out there that can be, not only shopping in the brick-and-mortar, but eventually integrate the online experience and have that successful experience what everybody calls now the omnichannel. It doesn't matter where you shop, you can shop brick-and-mortar. You can shop on your phone, wherever you shop. But it will be definitely to our members.

Yes, okay. Understood. And then the last question. I mean I guess just following on the question from Scotia. I mean, you are coming out of a significant category cycle with the need you had for the ramp up in Colombia and now, the big expense in Miami. But given the very cash generative nature of your business, you're still net cash. And I guess with the current cash generation, you can easily internally finance 3 or 4 clubs a year, if that should be needed with the current level you kept for qualities and the dividend. And on top of that, it seems from what you're saying, John, that the liquidity tie-up in Trinidad is getting a bit better. So I guess my question is, I mean, is the level of the share price where it makes sense for PriceSmart and specifically for its shareholders that you start buying back shares?

I don't think that's something that we are considering certainly, so I really couldn't comment on that at this point, Thomas.

(Operator Instructions) The next question comes from [Greg Halter] with [Laurel Grove].

Just curious about the online strategy and obviously, being in the States here, there's lots of concern over Amazon and other online players, they being the largest. Just wonder how you view that threat and just wonder if you could elaborate a little more on what your plans are to stem that, if you will. And how big of an issue is it in countries you serve versus what we see in the U.S.?

Well, as I mentioned at the beginning, in our countries, it is still -- obviously, the -- there's no presence per se of, I guess, a competitor like Amazon, although people can shop -- currently, anybody in a country can shop, obviously, not only Amazon, I guess, any site in the States. And for the most part, they choose postal offices and they can get some goods. Usually, it's smaller goods. If you want to buy bigger stuff, it's just a challenge because the price and the delivery will kill you, no? So it's a little bit harder right now for our markets. But they have the ability to do some of that shopping. Now with that said, obviously, the level of online activity is not as big as it is, not even close to what it is in the States, but we see that trend changing. And that's why we, I mentioned at the beginning, the strategy that we're not giving up on having a good strategy to serve the needs of the online shopping. And obviously, we believe we have the strength obviously given that we have the distribution network. We know the market. We have this base of members. We know what they shop. So it's a matter of organizing all those things that we know about our market and try to get the online experience mixed with our brick-and-mortar that is still a successful part of the business, as it is in the markets in the States where we see the component of brick-and-mortar being important. So I don't know if I can give you more details on the strategy. We are working and investing on doing something. We believe there is a need to invest in technology, to invest in things that will make that online experience better for the members. And that's where we are heading right now. We don't want to wait to see if this becomes more important in our countries. It is going to be probably may take a little longer. We don't know if it's going to be 2, 5 years, 10 years, but it's -- I think all retail is moving on that direction and we just want to be ready.

Okay. And one other quick one. What do you do currently regarding cybersecurity given all the threats and issues and, I guess, there are more than threats these days going on out there across the world?

Well, we have a pretty strong -- every -- probably every board meeting we have discussions on cybersecurity. And recently actually, we met -- we had a special meeting to -- with the people that give us all the advices and the team that works on cybersecurity. And we feel we have a pretty secure network. We do take care of the member information that we have. Although we don't carry a lot of -- different from other competitors, we don't have in our files or in our, I guess, in our database credit card information and things like that as other companies do. But still, we do have very strong things going on in terms of cybersecurity. We just want to be ready for whatever that is that may happen. You never know what can happen. Fortunately, we haven't had any issues in our company, and we think we have good plans right now on going forward. That's something we keep reviewing and trying to update every -- as things change or evolve in that market.

This concludes our question-and-answer session. I would like to turn the conference back over to John Heffner for any closing remarks.

Well, thank you, Gary. And I think I'll wrap things up. This will end our call. So thank you for participating with us this morning. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.