Good day and welcome to PriceSmart, Inc.’s Earnings Release Conference Call for the First Quarter of Fiscal Year 2016, the period ending on November 30, 2015. All participants are currently in a listen-only mode.
After remarks from Jose Luis Laparte, PriceSmart’s President and Chief Executive Officer; and John Heffner, PriceSmart’s Executive Vice President and Chief Financial Officer, you will be given an opportunity to ask questions as time permits. [Operator Instructions] As a reminder, this conference call is being recorded on Friday, January 8, 2016.
A digital replay of this call will be available through January 31, 2016, by dialing 888-203-1112 for domestic callers or 719-457-0820 for international callers. The passcode is 6532245. I would now like to turn the conference over to John Heffner. Please go ahead, sir..
Thank you and welcome to our earnings call for the first quarter of fiscal year 2016. We’ll be discussing the information that we provided in our earnings press release which we released yesterday, January 7, 2016 along with our 10-Q. The earnings release also included information about our net warehouse and comp sales for December.
You can find both the press release and the 10-Q filing on our website www.pricesmart.com Please note that statements made during this call may contain forward-looking statements concerning the Company’s anticipated future plans, revenues and related matters.
These forward-looking statements include, but are not limited to, statements containing the words expect, believe, will, may, should, estimate and similar expressions.
These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the risks detailed in the Company’s annual report on Form 10-K for the fiscal year ended August 31, 2015 filed with the Securities and Exchange Commission on October 29, 2015.
We assume no obligation and expressly disclaim any duty to update any forward-looking statement to reflect the occurrence of events or circumstances which may arise after the date of this call. Now, I will turn this over to Jose Luis Laparte, PriceSmart’s President and Chief Executive Officer..
Good morning, everyone. Happy New Year and thank you for joining us today. I am pleased with the Company’s performance in the first quarter with good sales growth in all markets. Positive overall comps, earnings per share of $0.78 compared to $0.68 a year ago and a good preparation by everyone for holiday shopping in December.
It was not without its challenges however as the Colombian peso continued to decline against the U.S. dollar, creating a headwind for our growing business in that new and important markets and affecting our overall consolidated financial results when translated back to U.S. dollars.
I will speak to these items and I will also talk about our December sales results which we released yesterday. Let me begin first with sales for the first quarter.
Net warehouse sales in the quarter were $690.8 million, an increase of 8.6% when compared to the first quarter of last fiscal year with the opening of our second Nicaragua club in November, we ended the quarter with 38 warehouse clubs compared to 37 at the beginning of the quarter and 36 a year ago.
Central America had sales growth of 10.5% in the quarter which included the effect of two additional warehouses, one in Panama opened back in June 2015 and one in Nicaragua opened in early November 2015 compared to the same period a year ago.
In addition to good sales growth in those two countries where we had the new clubs, we saw very good sales growth in Honduras in the period in excess of 10%. While the Caribbean segment had somewhat lower growth at 6.7%, it did so without adding any new warehouse clubs essentially all comp growth.
Trinidad and the Dominican Republic, our two largest markets in that segment of the Caribbean performed well while Jamaica grew over 10% compared to last year’s first quarter. Colombia and U.S.
dollar sales growth of 3.0% was significantly impacted by the devaluation of the Colombian peso despite the fact that we have three additional warehouse clubs for the whole quarter this year compared to the last year’s quarter one. When mentioned in local currency however, the sales growth from last year was 49.2%.
To provide some perspective on this difference, the warehouse club sales we made last year in the first quarter were translated to dollars at an average rate of 2,070 pesos to the dollar. In the most recent quarter, the translation was made at 2,999 pesos to the dollar, a 45% difference.
Comparable warehouse club sales which include 33 of our 38 clubs have an increase of 1.7% for the 13 weeks ending November 29, 2015. In our last two sales press releases, November and then again in the Yesterday’s release, we have separated out the impact of Colombia and the peso devaluation on our overall comparable club sales.
For the 13 weeks ending November 29, comparable warehouse club sales excluding the three Colombian warehouse clubs that are currently in the calculation for comps, increased 5%, a 230 basis-point difference. For the 17-week period ending December 27, 2015, comparable warehouse sales increased 1.7%.
Excluding the three Colombian warehouse clubs, comparable warehouse sales for the 17-week periods increased 4.6%, a difference of 300 basis points. Beginning in January, our Bogota warehouse club will become part of the comp calculation and in February, we will have the Medellín and Pereira clubs to the calculation of total comp sales.
Assuming that the Colombian peso remains at its current rate of approximately 3,200 pesos per dollar, we will expect an ongoing negative impact on our overall comps in the months ahead related to the translation of warehouse club sales in Colombia back to U.S. dollars.
By comparison in January and February of last year, the Colombian peso was trading in the 2,400 to 2,500 range. The top performing merchandise categories with double digit sales growth included liquor, automobile, home furniture and fashion apparel. High single digit growth categories included households, electronics, sporting goods and toys.
We have some challenges on different categories that include computers, garden and patio tires and gourmet deli. Membership income for the period came in at $11.5 million and we finished the quarter with $1, 463,136 member accounts, an increase of 13.4% in both accounts and income.
However, for the end of fiscal year 2015 August, we had an overall accounts reduction of 23,049 accounts. This reduction is due to the expiration of a large number of accounts primarily associated with the opening of three new clubs in Colombia in late Q1 a year ago.
More than 91,000 membership accounts had an expiration within the months of October and November of 2015 for those three warehouse clubs alone. As I explained in the last earnings call, our history shows that the renewal rate for first year members is lower than the members who have been with us for multiple years.
The other consideration affecting the renewals in Colombia is related to the price increases that we experienced in all the important groups due to the Colombian devaluation. Our Bogota warehouse club has by far the largest number of members of any of our warehouse clubs, even our highest volume clubs in Costa Rica and Panama.
And while we seek to retain all members, it is not surprising that we saw lower renewal rate in that club. In that very large city, we only have one club serving the whole market and we recognize that the location might not be as convenient where all members coming from areas in the north.
We are optimistic that when we open our warehouse club in Chia, we may be able to get some of those members back. Even with the renewal rate experienced in Q1, our Bogota club remains number one in terms of membership accounts. As a result, our renewal rate for the first quarter declined to 82% from 86% at the end of fiscal year 2015.
If we exclude Colombia, the renewal rate was 87%. I will add that we continue to see good sign-ups in all our locations in Colombia, over 10,000 accounts in the first quarter in Bogota alone. And we experienced an increase in the renewal rate in December in Colombia as members whose account expire in October and November renew in with us in December.
Even in these difficult times and bad economy, we believe our membership concept of bringing good values and exciting merchandise to our members is a formula for success in the long run. To finish some of my comments for the first quarter, in the first week of November we opened our second warehouse club in Nicaragua.
And although it is taking some sales from our existing club in the same city, we are pleased with the initial results and we believe it is going to make us stronger in that particular market. Let me now move to some comments regarding December sales and some activities in place during the next three quarters of fiscal year 2016.
Sales for December came in at $319.1 million, a new record for us, representing a 3.7% increase in total sales and 1.3% in comparable sales for the four weeks ended December 27, 2015.
As noted in our press release this morning, comparable sales were negatively impacted by the devaluation of the Colombian peso which three of our clubs in that country being part of that comparable sales. If we exclude those three clubs, our four-week comparison growth would be 3.6% and the 17-week period it would be 4.6%.
Transactions within the month of December were nearly 3.5 million, a growth of 6.2% over a year ago. Our average transaction was up versus last year in all countries except for Colombia.
Also on the two non-Colombia clubs reported negative comps, one in Panama and one in Nicaragua, both of which were affected by new warehouse clubs that we opened in the same trade area. We have 14 clubs exceed $10 million in sales in the month with one club recording sales of nearly $14 million for that month of December.
Three clubs increased their sales from December of last year by over $1 million. Thanks to the efforts of our buyers and logistics personnel for effectively flowing the merchant next to our warehouse clubs and our operations and support personnel for managing the large volume of transactions.
We were able to serve our members and operate our warehouse clubs at an average annualized sales run rate of 100 million per club for the month.
Other activities that are relevant during the second quarter that started in December are that we continue making progress with the construction of a new location in Chia which is the municipality in the northern suburb of Bogota.
We believe we would be opening that club in fall 2016 where we would be able to better serve, not only the community of Chia but also the residents of Northern Bogota who currently have to drive to our location in the area that leads near the international airport.
During that holiday season, particularly in December, I had the opportunity to visit a lot of our countries. I actually saw [ph] clubs in 10 of our countries and had the opportunity to see firsthand what is going on in our markets.
I have to say that I was very impressed with the commitment and passion that I see from our team in the different countries. They really enjoy the warehouse club business and they work very hard to keep our building safe, friendly and fun to save our members every day.
As I travel, I always enjoy seeing shopping carts full of items, wholesale our business members buying merchandise on flat bed recognizing our value. That’s what this business is about but more important is the fact that we also find things where we can -- that we can do to improve our business to create greater value and make our members happier.
We’re currently planning expansion in two of our clubs, one that we already started is in Barranquilla, Colombia where we will add some additional sales force space to our buildings, expand our food service and add more parking, building a parking deck.
The second is the similar expansion that we plan to soon start in one of our clubs in El Salvador, Santa Elena where we will have sales floor base and also parking deck. We’re also working on the expansion of our [indiscernible] facility in Miami so that we can better serve the needs of our import in the deli and gourmet deli categories.
Before I turn things back to John Heffner, I will like to add two more comments. On Colombia, the current currency volatility continues to be a challenge and has an impact on our overall results.
But as I mentioned earlier, we are committed to this market for the long-term and we will continue to find better ways to compete and better serve our members during these difficult times for the economy.
We continue to hear good things from our members about the value we bring on the exciting important merchandise we’re offering in these markets despite the rising cost when measured in pesos. We also continue to expand our product offering on merchandise from high-quality, local suppliers at an excellent value.
To finish my comments, I would like to appreciate the hard work of all the PriceSmart team during this busy holiday season. We have more than 10.5 million people passed through our clubs last month safely and hopefully delighted to be a PriceSmart member. Thanks again for joining us today. After John’s remarks, we will take your questions..
Thank you, Jose Luis. Let me highlight a few brief additional items with respect to our financial results for the first quarter. The currency situation in Colombia continues to have a measurable negative impact on the overall consolidated results of the Company when translated to U.S. dollars as Jose Luis alluded to.
We are providing more information in our 10-Qs and 10-K by way of segment reporting and more recently in our monthly sales release to allow greater visibility to that affect relative to the operating performance of our other 11 countries and 33 warehouse clubs.
Net income in the quarter of $23.7 million resulted in earnings per share of $0.78 compared to $0.68 a year-ago. The non-Colombia segments when added together improved about $0.02 from the equivalent of $0.79 per share last year to $0.81 per share this year.
The Colombia segment contributed the equivalent of a $0.03 loss per share in the quarter but this was an improvement of about $0.08 per share from the year-ago period.
While sales and membership income in Colombia grew from the year-ago period, the planned lower margins that we’ve been operating to for the past few quarters in response to the currency situation more than offset those items when compared to last year.
The improved results from the year-ago quarter in Colombia were primarily from no pre-opening expense, we opened three clubs in Colombia in Q1 last year and much lower currency related losses as a result of efforts that we’ve put in place to minimize our exposure despite continued very high currency volatility.
Total consolidated warehouse gross profit margins in the first quarter were 14.6% of net warehouse sales, a reduction of 73 basis points from the same period last year. The impact of the Colombia margin reduction on the consolidated margins was 30 basis points.
In other words, merchandise margins excluding Colombia decreased 43 basis points in the quarter compared to Q1 of last year. Total SG&A expense as a percent of sales increased 12 basis points with five additional warehouse clubs operating for some or all of the quarter compared to a year-ago.
Higher deferred comp expense associated with stock awards granted in the quarter hit the G&A line along with additional spending in the buying and information technology areas. We incurred $305,000 of pre-opening expense in Q1from for the Managua number two club which we call Masaya.
The continuing currency volatility and devaluation in Colombia during the quarter did have some impact to the tune of about $386,000 but this was partially offset by gains in some other countries of $142,000. In total, we recorded a net loss of $244,000.
The effective tax rate for the quarter was 34%, an improvement of approximately 300 basis points from a year ago, nearly all attributable to the reduced pre-tax loss in Colombia. We ended the quarter with a strong balance sheet and $140 million in cash and equivalents. A year ago at this time, our cash was $119 million.
The first quarter is a time of merchandise inventory investment as we prepare for holiday sales in December. In the most recent quarter, merchandise inventories grew $55 million to $322.6 million which included the inventory necessary for the new warehouse club we opened in Nicaragua.
Last year’s first quarter saw a more substantial $97 million inventory investment as we prepared for the opening of the three new warehouse clubs in Colombia at that time.
As a result, our overall working capital requirement in the quarter to support this inventory buildup that is a growth in merchandise inventory less the growth in accounts payable was $23 million this year compared to nearly $40 million last year. Overall operating cash flow for the quarter was $1.9 million.
We used $17.7 million in the quarter for investing activities, primarily for the completion of the new Masaya, Nicaragua warehouse club but also for the initial construction activities for our Chia Colombia warehouse club.
[Indiscernible] debt in our Costa Rica subsidiary for foreign exchange purposes and as part of an overall restructuring of our financing of Colombia. We also retired about an equivalent amount of short-term and long-term debt in the quarter, bringing our total debt level at the end of the quarter to $96.4 million.
We have adequate cash reserves and are projecting sufficient cash generation from operations to meet our planned operating investment needs at this time without additional financing. With that Jose Luis and I’d be happy take your questions.
Kim, can I turn things over to you?.
Yes, sir. [Operator Instructions] We’ll go first to Dave King with ROTH Capital Partners..
I guess first off, in terms of the three stores in Colombia that were opened a little over a year ago.
Can you talk about what the -- or do you have handy what the renewal rate was at those stores, in particular I think you said what it was excluding the stores, I think it was 87% but do you have for those stores in particular?.
We don’t disclosed updates the numbers for those three -- I mean for those three specific clubs separately. We just highlighted what the result would have been in the total Company taking out those but unfortunately we don’t disclose separately each of the country. No..
And then, as I think about that, if I look at the sales trends at those -- what it looks like the sales trends were at those three stores since the anniversary of those openings, it seems like the sales dropped off a fair bit, right after those would have anniversaried or right after people would have been approaching their or hitting their one year of membership, is that indeed the case? I guess what I’m wondering is it seems to me like, maybe some of the membership drop off was people who actually were still buying which could theoretically still be a good thing then once Chia opens up but at the same time it’s sort of weighing on the new productivity as we see it.
Is that a fair assessment?.
Yes, the impact on some of the prices going up affected definitely the sales in those markets. I guess the only one that’s celebrated I guess that 13-month anniversary is Salitre and actually the one in Bogota and in the month of December actually had a good performance when measured in local currency.
So, that’s the way we’re actually tracking right now our sales for the most part in those -- in that market because it’s the only way to really get a real comparison of our performance. And we feel -- think obviously Medellín and Pereira the other two still have the effect of the grand opening.
So it’s a little bit hard to compare them until we really pass the 13 months and we get them to a level of comparison that will be fair and takes out the excitement of grand opening and all that.
So we’re tracking those numbers and obviously hopefully we will be able to be reporting growth, at least in local currency which is our ultimate goal, not to start growing in that market when it comes to local currency sales..
But in terms of the membership renewals, just to make sure I understand it correctly.
So, when they go to renew, is that after 12 months, how long is the membership, is it 12 months or is it 13 months?.
It is 12 months; the membership expires. And actually some members do early renewals, they can renew at the rates [ph] first when they visit the club a month earlier, whenever they are there, they have the option. And some members obviously don’t [ph] visit probably before the membership expires and we get their renewal a month later.
So, that’s why we saw a drop. And as I mentioned on my notes, in December, we actually saw a better renewal rate in Colombia because members probably didn’t visit us before December and the membership expired.
We picked it up again in the month of December as they visit the warehouse or also we do that through our call center that we have in place to call members and give them the ability to renew online without -- over the phone, without having to visit the club.
So, we do different -- we have different efforts in place to get those renewals done, especially in this particular market where we know we have a lot of main accounts expiring..
If I’m understanding correctly, you think that at least on the stores that those three stores, if there’s been any sales drop off, it’s been more related to price increases as opposed to members more buying dropping off in terms of no longer being members, is that correct? Am I understanding that correctly?.
I would say that’s probably fair Dave. As we look at the information of members who did not renew in those clubs, their frequency of shops and their -- amounts that they purchased during their year of membership was substantially below those that did renew on average.
So, we’ve done that analysis and it’s clear that ones who were not renewing were not taking advantage of either shopping with us in terms of either frequency or the amount of purchases..
Then maybe switching gears then to the price increases. So, I think you guys said that product margin at stores ex-Colombia was down, I want to say 43 basis points I think you said John, if I heard you correctly.
Do you have what that is in Colombia, or is there a sense of how we should be thinking about price increases and when did those really go into effect where you started sort of passing along the price increases in Colombia?.
Well I think the difference in the first quarter in Colombia was I think we indicated 300 and some basis points, 363 basis points difference from a year ago in terms of our margins in Colombia because it’s really in the second quarter when we really started reducing the margins.
So, I think this comparison, if you look on a sequential basis was probably not overly significant from what we did in Q3 and Q4 of last year. But since we are comparing to a Q1 of year ago, that’s where we see again probably one this last quarter of a big year-over-year difference..
And then did you guys raise, start raising prices more in this quarter or post this quarter at all, more or so than you had been in the past in terms of passing along the currency related price increases to the consumer?.
I mean to some degree, whenever we see spikes obviously on the currency, we have to reflect some of those -- obviously we are also at the same time trying to be more aggressive in our pricing.
So, this it’s everyday change the state and we have to -- try to be reasonable as possible with price increases but at the same time with the currency of 3,200 doesn’t help sometimes..
And then lastly from me, switching gears, in terms of the stores in Barranquilla and El Salvador that you alluded to Jose Luis where you’re going to be doing the square footage expansions, do you have -- how should we be thinking about those in terms of how much square footage at least to the selling space you will be adding as a percentage of the sizeable box or just in terms of absolute numbers of square feet? Do you have anything that can help us there?.
It varies by buildings obviously because each market and each building we have to analyze how much of space we can really add. We’re trying to add enough space to be able to expand obviously the sales floor in a way that we can improve our fresh business, at least where we are adding some of the space also some of our -- on our non-foods area.
So, there are different variations. I will say that we’re probably adding 10% to 15% of sales floor space in each of those buildings. So that’s the goal.
And more than anything also we’re trying to replace parking because we still have parking deck because as we expand we will be taking some of the parking spaces and we’re compensating the parking and both our buildings that can really use the additional parking because that has been one of the things we have learned through the years especially over the weekends and busy times it gets more difficult to find the parking space, those particular buildings.
So it’s a new exercise that we’re doing and we’re going to evaluate the first two but we feel that’s a good approach. We have done some of the expansions in the past as far as sales force spaces. These two are the first ones that we do compensating with our parking deck in those particular buildings.
So, we’re really looking forward as that can be a good way to keep growing some of those markets where you just improve the facility and you make it a better member experience when they shop there..
So, it sounds like that you see potential for this in other markets and these will sort of be -- two stores kind of tested, do we hold this that….
That’s kind of yes. Yes, definitely these are the first two but we really think we’re obviously working on other plans because we think it’s going to fill in a way that can be both the extra sales and obviously do better presentations in the club, more productivity inside the club, improve obviously the way we manage our merchandise.
There are a lot of benefits to this, even at the registers. Most of this cases, we have refrigeration space, we have storage space, we have the space for the fresh areas, we have registers. So, it’s a win-win in a lot of areas for this warehouse..
[Operator Instructions] And we’ll go next to Rodrigo Echagaray with Scotiabank..
I want to revisit same store sales in Colombia for a moment, if I may.
If you can talk about what sort of same store sales in local currencies; I know you don’t disclose that but I mean can we talk a little bit about what range are we probably seeing, how that has evolved in last couple of months? And I am just trying to gauge what the impact will be now that we are going to have three more stores from Colombia playing in the same store sales numbers starting June..
I guess just to start and maybe I’ll turn it over to Jose Luis, in December I think we had about 300 basis points difference and in that case only has three clubs in our comps.
So, while I can’t predict what the currency is going to do going forward in terms of how we translate it back, we’re certainly operating -- we’re currently operating about 3,200 pesos to the dollar.
When we add three -- what will be one more club into the comps in January and the other two in February, so we’ll end up with six clubs, it will certainly have I would guess a bigger impact, if the currency difference is similar to what we’ve seen in the last November and December..
But I guess before talking about I guess forward-looking, can we talk about same store sales trends in local currencies in the past couple of months in Colombia?.
Yes that’s the way we are actually Rodrigo measuring or trying to measure our performance because it’s a better reflection of our business and it’s been impacted. We don’t disclose it separately; it’s been impacted. As I mentioned we have obviously Salitre or Bogota really performing at a better level in the month of December.
And going forward that’s our goal to keep track of those..
And Rodrigo, I think even though we don’t specifically disclose that I think probably we get a pretty close estimation, given the growth in our sales in total and devaluation we are talking about I think probably estimate what that would like roughly in local currency..
Now I guess I mean we can probably take this offline but not my -- my calculations tell me that they may be negative in local currencies given that you have a 5% increase in same store sales in -- without Colombia and 1.7% increase consolidated given that there is only three stores from Colombia in the same store sales count.
I mean from what you tell me and from what I hear, even though there is a lot of challenges in Colombia, things for the most part are going okay. And I don’t know if I can understand that negative same store sales number in local currencies in that context..
Well I think when you take a look at once we get all the clubs in the comp base, we are always dealing with the -- so that we have mentioned the excitement of a new opening when we opened in October and November which is why we wait 13.5 months before we add a new club into the comp base..
And one other question on Colombia.
Now that currency has devalued, do you see more opportunities on the real estate front, are you accelerating the lookout for new stores there, do you see better prices of real estate or opportunities?.
We definitely did in a slowdown especially in city like Bogota we are still continuing; we are really putting more efforts in our efforts of finding sites. I don’t know if there has been more opportunities necessarily that came up in the last few months. But we believe that we are not going to slowdown in that respect.
Obviously the opening of Chia will give us a better indication; it’s going to serve the north of Bogota. And we are still really optimistic with city, the size of Bogota where obviously given the number of accounts that we have in the crew and club in Bogota, we know that there is opportunity to open more locations in that city.
So that’s definitely an area of opportunity that we don’t want to lose obviously focus, Rodrigo, and we will continue focusing on that area..
[Operator Instructions] As we have no further questions, I would like to turn the conference back over to John Heffner for additional or closing remarks..
I want to close things off. Thank you, Kim. This ends our call. Thank you all for participating with us today..