PriceSmart, Inc. (PSMT) Q2 2015 Earnings Report, Transcript and Summary

Good day and welcome to PriceSmart Inc.'s Earnings Release Conference Call for the Second Quarter of Fiscal Year 2015, the three and six month period ending on February 28, 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 call is being recorded on Friday, April 10, 2015. A digital replay of this call will be available through April 30, 2015 by dialing 888-203-1112 for domestic callers or 719-457-0820 for international callers. The passcode is 7665186. I would now turn the conference over to John Heffner. Please go ahead, sir.

Thank you, and welcome to our earnings call for the second quarter of fiscal year 2015. As usual, we will be discussing the information that we provided in our earnings press release which we released yesterday, April 9, 2015, which also included our announcement of March sales. We also released our 10-Q yesterday. You can find the press release and the 10-Q filing on our website, www.pricesmart.com. Please note that statements made during this call may contain forward-looking statements concerning the company's anticipated future plans, revenues and related matters. These forward-looking statements include, but are not limited 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, 2014 filed with the Securities and Exchange Commission on October 30, 2014. We assume no obligation and expressly disclaim any duty to update any forward-looking statement to reflect the occurrence of events or circumstances which may arise after the date of this call. Now, I will turn things over to Jose Luis Laparte, PriceSmart's President and Chief Executive Officer.

Thank you for joining us today. In the release that we made yesterday for our results of operation for the second quarter of fiscal year 2015, we reported a net income of $0.82 per share compared to $0.93 per share a year ago. As I indicated in the earnings release, well I'm pleased that many of our markets performed well in the quarter, the reduction in net income can be attributed to Colombia. While various factors, most notably the devaluation of the Colombian peso let us to a year-over-year reduction of net income and negatively impacted our consolidated results of the company by approximately $0.16 per share. The currency devaluation impacted number one, our warehouse sales and membership income in Colombia. Two cost reduction in warehouse margins as we work to offset the price increases on important merchandise to our Colombian members. And three, resulted in a direct currency loss of 1.8 million in Colombia. One more item deserves mentioning, Colombia established a new tax on businesses based upon their level of equity which went into effect this calendar year, for us that amount was equivalent of $846,000. It is an annual number for calendar year 2015 but was required to be fully recognized in the quarter per accounting rules. The rest of the company did well in the quarter with growth in sales on membership income and higher operating profit, contributing additional net income of approximately $0.05 per share to the consolidated results compared to the second quarter of last year. Let me start with our sales and membership activity and John Heffner will speak to some of the other items in our overall financial results for the period. Net warehouse sales in the quarter were $732 million representing 11.4% total growth compared to prior year on an 11.5 growth in transactions. While we generally see year-over-year currency devaluations in many of our markets, what we experience in Colombia was particularly significant on the order of 22% which impacted a conversion of sales made in local currency to the consolidated sales we report in U.S. dollars. In terms of comparable sales we have an increase of 1.4% for the 13 -week period ended February 28, 2015. We have estimated the cannibalization effect of our second warehouse club in Tegucigalpa, Honduras negatively impacted our Q2 comps by 84 basis points. We also know that there was an impact to comparable sales activity in our three existing Colombian warehouse clubs from the opening of our three new clubs in Colombia but given the non-comparability of the currency conversion year-over-year it is difficult to make an adequate assessment of that impact. For the first time this quarter we are providing a specific visibility in our reportable segments to Colombia and we now have three operating segments in addition to the U.S. segment. Net warehouse sales in Colombia segment had an increase of 87% despite the currency devaluation driven by the effect of the three new Colombian warehouse clubs which we opened in October and November 2014. On a local currency basis this growth was 126%. Central America sales were up 5.7%. Within Central America we had double-digit sales growth in Honduras with one additional club and in Panama for the strong economic conditions continue to feel good consumer demand. The Caribbean segment sales were up 3.7%. We saw very good growth in membership accounts in the quarter with the resulting growth in membership income. Membership income is the second quarter group 14.9% compared to the same period last year to $10.8 million. At the end of the quarter we had that more than 1,380 million membership accounts, 20% more than last year. Again a lot of this growth in membership accounts came from our Colombia openings at the end of the first quarter and continuing through the second fiscal quarter. The renewal rate stayed constant with recent quarters at 85% for the 12 month period ended February 28, 2015. All three of the new warehouse clubs in Colombia Bogota, Pereira and Medellin opened near the end of the first fiscal quarter. The second quarter was the first full quarter of performance, while the currency devaluation no doubt have an impact on our sales, we're very encouraged by a number of things in those new clubs. New member sign-ups have far exceeded our expectations in all three clubs. In fact our Bogota location now has more membership accounts than any other warehouse club in our company. We just crossed 100,000 member account label. The Medellin club has seen ongoing new member growths since its opening in late November and has the level of membership accounts after a both some of our mature Costa Rican locations. Another positive sign is that despite the Colombian peso devaluation, the average ticket in our Bogota club is one of the highest in the company and in Q2 total sales were among the top five of all our warehouse clubs. These are all very positive indicators about the market acceptance of what we are bringing to the Colombian consumer. The currency issues in the near term are clearly a challenge at it does not allow for some of those positive things to translate, as fully as they will in a stable currency environment to our consolidated results. Nevertheless, we believe that Colombia's had good long term growth opportunity for us and we will work through the current challenges to build a sustainable market position in Colombia. In that regard, let me say a few things about our approach to pricing our important merchandise in Colombia during this evaluation. There is no question that the prices of important merchandise across all retailers in Colombia are going out which negative impacts consumer demands. It probably has a bigger impact on us, given the level of important merchandise we feature in our warehouse clubs approximately 60% of our sales in Colombia. We will continue to find ways to reduce the cost of our important merchandise in this country, through better buying and distribution efficiencies and be the best alternative for our members to find exciting merchandise and good values in our selection. In addition, we have reduced our merchandise margins in Colombia over the past few months, in order to pass on further value to our members. We are prepared to asset lower merchandise margins and profits in Colombia in order to solidify our market position in that country for the future. In aggregate, our non-Colombian markets performed well in the second quarter contributing an approximate of $0.05 per share increase in earnings. We saw growth in warehouse sales and membership income, good operating expense leverage and profit growth. I'm pleased with those results. Having said that, I think we could have done even better. I feel that certain merchandise areas didn't perform up to their full potential in Q2 in some of our markets. I have not seen improvement in a number of areas. During February, our clubs where Carnival festivities are important were ready for our members, and we saw good results in a lot of departments affected by those sales. At the same time, I’m pleased with our transition into spring programs. Just a few weeks ago, I was able to visit some of our Caribbean markets and I came back optimistic from the things I saw. The markets looks very dynamic, yes, they all have competition but I think PriceSmart delivers a business concept in those countries that we don’t seen any other competitive offering, exciting high quality merchandise novelties and good values for our members. During my travels however I always see even further opportunities for improvement to execute the club philosophy in our merchandise offerings and finding cost efficiencies in our value and distribution and operation. I also saw opportunities to expand the capacity of some of our warehouse clubs to accommodate and better save our growing membership base. Delighting our members by bringing value to the membership is what this business is about. In terms of new club opening, we keep making progress for the opening of our fifth club in Panama, in La Chorrera, a growing area in the west of Panama City. We are planning to open these clubs in the last week of June 2015. And last but certainly not least, we continue with our efforts to find more opportunities in Colombia for sites. Our recent experience particularly in Bogota and Medellin indicate that these cities alone and not one club cities. Now before I turn things over to John Heffner for further detail on our financial results for the quarter, let me share with you the other announcement made yesterday, our March sales results. As reported during the month of March, our sales growth was 17% total and in comp sales we came in at 7.3%, a very strong comparable sales growth compared to recent months. March and April always have some year-to-year comparison differences due to the timing of the Semana Santa, the week leading up to Easter. While the Semana Santa week itself along with the number of close dates for some or of our warehouse clubs including Holy Thursday, Good Friday and even Easter Monday, would be in April and comparable to last year. That week before Semana Santa is historically a strong sales week. That week sales into March this year and was in April last year. As a result we expect the month of April to have a lower comparable growth. Although as I mentioned in my comments above, I do believe that as a team we are better prepared to optimize our sales in this third quarter. I now turn things back to John Heffner for some additional comments before we take your questions.

Thank you, Jose Luis. Let me highlight a few additional items with respect to our financial results for the second quarter based upon our release yesterday before we take your questions. As Jose Luis mentioned the extraordinary devaluation of the Colombian peso over the past several months has had a material impact on our financials in the most recent fiscal quarter. Given the level of merchandise that we import into our markets that is purchased in U.S. dollars, dramatic changes in currency can impact us in a number of ways all of which came into play in Colombia in Q2. Jose Luis spoke to the impact to sales and the action we’ve taken which resulted in reduced merchandise margins. Let me address that which is perhaps the most visible currency related impact to our P&L, the line item called other income and expense net. When imported merchandise's purchased, the liability is incurred in U.S. dollars. At the time payment is due, it is satisfied with local currency and therefore subject to the fluctuating exchange rate between that currency and the dollar. During the first quarter and extending into the second quarter, a very large volume of U.S. value merchandise and fixed asset shipments were received by Colombia in advance of and during the initial opening of the three new warehouse clubs. This created large U.S. dollar liabilities which upon later settlement at a weaker Colombian peso resulted in realized currency losses. Net of the hedging instruments we had in place during this period that hit to the P&L in Colombia during the second quarter was $1.8 million. We have taken steps to greatly reduce U.S. dollar liabilities in Colombia from that initial build-up through internal financing mechanisms that will now allow Colombia to match the timing of payments with the U.S. dollar liabilities as they are incurred and avoid the high level of financial impact of future negative currency movements. Overall the consolidated currency loss for the company were $1.7 million as we had a net gain of about $120,000 across our other markets. This compares to an overall consolidated net currency gain last year in Q2 of $712,000. Our 10-Q now shows Colombia as a separate reportable segment, this aggregated from what was our Latin American segment. We made a decision based upon the growing size and importance of Colombia to the company but also the fact is dynamics are sufficiently different from our other segments that we believe that would enhance understanding of the performance of our different markets. In that regard, both Central America and Caribbean operating segments reported revenue growth, operating expense leverage and increased operating profit in the quarter compared to a year ago. The effective tax rate for the quarter was 35.3% a little better than the 37% we had in the first quarter but impacted by the same fundamental issue, our pre- tax loss in Colombia for which we are not recognizing a tax benefit. This negatively impacted the current effective tax rate by about 300 basis points. The accumulated tax losses in Colombia do not expire and are available to once to reduce or eliminate future tax expense. Last year’s 28.2% effective tax rate was a result of currency related gain recognized in that period which did not have a corresponding income tax provision. We ended the quarter with approximately $190 million in cash and cash equivalents about even with where we ended the first fiscal quarter. Cash provided by operating activities in the quarter net of changes in working capital was $33 million. Capital investments in Q2 were $14 million which included construction related expenses for our new club in Panama as well as ongoing maintenance CapEx which runs about $30 million per year. Net financing activities resulted in a net use of $10.6 million in the quarter due to the semi-annual dividend paid at the end of February. With that, Jose Luis and I would be happy to take your questions, operator?

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

Good morning guys. I have a lot of questions here so I'll just try to stick to a few and maybe come back into the queue but in terms of that $0.16 that you guys highlighted from Colombia currency devaluation just to be clear was that the tax that you guys talked about as well that hit in the quarter was that included in that $0.16 number. And then the reason I ask is I guess I’m just looking for little bit more color in terms of how much you guys think it weighed on sales in the Colombia region versus warehouse club gross margins et cetera thanks.

Yes David thank you for the question. Yes the tax effect was definitely part of those $0.16 and also obviously all the impact of that currency fluctuation. So there were both elements were part of those $0.16 per share and as I mentioned at the beginning we believe that the devaluation obviously cause a reduction of - to some degree of our sales definitely got affected. It is hard to measure how much our sales got affected by that other than the conversion in general, the confidence of the consumer in Colombia was a little rough for the last quarter given the 22% devaluation that they experience.

Right. It’s fair enough, I guess then maybe I’m asking the question little bit differently in terms of your pricing strategy in Colombia maybe putting some versus let’s say your typical kind of 14% to 14.5% targeted warehouse club gross margin, I guess with kind of your strategy of trying to maintain market share or grow market share et cetera, you know how low you are willing to go there specifically right now given that currency pressures without having to raise prices?

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

Okay. In that 200 basis points is number going forward would you be willing to push that even further to 300 or 400 or is that more of a kind of you want to keep in that kind of 200 basis points?

I do want to keep that in that range it’s hard to tell the second quarter in particular David had also the effect of so much fluctuations, keep in mind all this currency devaluation has started about Thanksgiving time in the U.S. So it was basically impacting us that full – for the full quarter with a lot of fluctuations going from 1900, where it started to or close to 2000 to 2100, then 2200 then kidding us much as 2600 at some point. So there were so many fluctuations that we would keep bringing merchandise at different cost level. So it was little bit hard to in the second quarter in particular to even price merchandise them but we believe that definitely given our long-term view in Colombia the most important thing for us is try to be more reasonable with price increases and obviously be there for our members to sustain the long-term position.

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

I think the bigger impact is which I think is will be comparable is the fact that we have so many clubs that are closed right around Easter. I think all of our clubs are closed on Good Friday and number of them are closed on the Thursday before, we have a number that are closed on Easter Monday and the good news is that - all those will fall into April. The impact of what that first - that week leading up to Semana Santa falling one week versus the other, we think it had an impact but I'm not in a position to sort of make an estimate what we think how that will play out in April.

The only thing I will add David yeah obviously we got all the benefit of the good base in March. April will be more of I guess comparable because our closing date fortunately falling on the same month. Although as I said on my opening comments or during my comments, I believe that we’re better prepared this year for this third quarter I think our merchandise election a lot of improvements that we have seen in different categories or departments in the company are going to help us have a better performance in April even with the closing days and all that. So all in I think it’s really hard the way we look at it internally is we kind of put together March and April to get a feeling of what the real comp because mixing those two months gives you really the real growth that you have compared to a year ago within the same time frame March and April.

Okay. That's great color, good luck.

Thank you, David.

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

Thank you very much. Just on a clarification you haven’t given local currency comps is there any chance of getting that particularly for Colombia and maybe just on the core markets?

Dave let me just step on that and then shape on that and then Jose Luis can join in too. When you do constant currency or currency the cost of different market baskets you got to go back to sort of constant currency view. And we can look at Colombia as individual country, and I think Jose Luis mentioned about 126% growth in local currency across that country. When we aggregate in all the other countries, we got to go back to sort of a constant currency approach since you can’t really add the currencies together. Generally our currency devalue against the U.S. dollar so it’s safe to say that our – if you would to do the market basket of the currencies that we have weighted by the clubs we have, our constant currency growth rate would be probably 200 to 300 basis points higher than what we reported in U.S. dollars. And so I don’t think it’s been much different than that for the last year or two now I don’t recall a time when the U.S. dollar growth rate would be higher than the constant currency growth rate it’s probably in that 200 to 400 basis point range.

Okay another question as you’re kind of looking after new store growth I guess two questions, one it sounds like extra currency stuff Colombia is going probably as good and probably better than you had anticipated and you’re pretty happy with it. Is there any decision, does it change your decision process about timing of store openings there. And just in other markets where you currently are you’ve seen to be more comfortable with cannibalization, you seem to be getting through some of the worse cannibalization I think after Honduras you’ll get through that this summer. Any other markets where you think in cannibalization by markets or countries that can make sense going forward? I think you have one more club destined to open any further thoughts about what’s going to happen over the next two, one to three years?

Yes let me tell you, David a little bit. Obviously to your question on Colombia probably that currency concerns us but that doesn’t change our view of a market that has a lot of opportunity long-term. So the initial results are encouraging obviously since we started in Colombia, we knew it wasn’t going to be without challenges. And I believe that this is good opportunity for us to keep looking for opportunities to grow there definitely the in particular the Bogota in cities are big cities where we still see opportunities for us. And even with the devaluation as I mentioned in Bogota is setting up important records for us as a company. Our process – our thought process is that it will only get better hopefully this peso devaluation will not get worst. And then things will continue to be or the things would be normal at some point in Colombia. That is speaking for Colombia. In the rest of the markets as we’re doing with Panama, we keep looking at different markets. And hopefully in the next 12 months, 18 months we’ll be looking at opportunities in the next in existing countries or existing series where definitely there’s still opportunity to add another warehouse club probably get some cannibalization out of the existing growth. But at the end growing proposition in markets where we’ve obviously given the basic clubs that we have they need some help and we need to transfer sales to new locations. So that continues to be our strategy. With the fact that we’re opening more in Colombia doesn’t mean we’re slowing down in the other markets where we obviously as we identify opportunities, we’ll continue putting our clubs there David.

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

Yes no problem, David I think what I meant to say and this was something we kind of realize as a company the opening of the three clubs in Colombia last quarter, I guess last in the first quarter put a lot of attention in that specific country from all the buying team, from all the operations team, from everyone. So to some degree I believe that as a company we probably got a little distracted with that and we didn’t take advantage of many opportunities that we could have seen in first quarter and second quarter. We did important structure management changes internally just to make sure that we dedicated enough resources to make sure that we have focus in all the countries and all the departments. And I think now we have already seen some of the results I have – I happen to believe that the March results were definitely influenced by a good operation, but also the fact that we have seen improvements in our merchandise election, we have seen improvements in our in stocks in the clubs or the in stocks when you ship merchandise a lot of our merchandise from the U.S. to some of the other markets. It takes if you run out of the stock it can be for two or three weeks, we have been fine-tuning those replenishment orders in order to avoid having out of the stocks. So when you put all those things on the basket I guess when you put more exciting merchandise for the members when you keep working on getting better value as we keep growing as a company when you reduce you are out of the stocks internally. I think all that adds up to have a good performance in department. And last but not least we’re making it a point to keep bringing exciting merchandise to the clubs and be the differentiator that we tailor in all the markets. I think that’s why it is paying back for us in all those departments daily.

Thank you very much. Have a great, congratulations have a great day.

Thank you, David.

[Operator Instructions] Our next question is from Jon Braatz with Kansas City Capital.

Good morning Jose and John.

Good morning, John.

Good morning.

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

No we definitely, Jon we definitely have to impact some of our margins obviously we’re being careful how we impact that and it comes into play how much inventory you have at the old currency and the new currency. But at the end of the day, we definitely have to impact us everybody in the market a lot of our prices no there is no way we can we’re trying to maintain obviously at very competitive position. And as I mentioned obviously we price Colombia, we are prepared to accept lower margins as we build our markets for the future, but definitely we have to be raising some of the prices as needed.

Okay have you seen your competitors raise prices too?

Yes we see there’s been a lot of fluctuations on this, it’s the last quarter in particular where everybody was bringing merchandise from either from different currencies and all that we definitely saw a lot of movement. And I think everybody is reacting no question I mean when you look at that, not only the food portion that is important, but obviously all the electronics, computers and lot of those categories where there is no Colombia production you definitely have to everybody has to be raising prices. And adapting to that and I think that consumers are they understand that no they don’t like it but they understand that that’s the result of the devaluation and everybody is trying to get their piece of the market that definitely we have seen some prices raising. In addition we’re also working I guess to keep working on bringing better value to our members, we don’t forget there is opportunity to get some local merchandise to some degree and that obviously has less of an impact. So we have been working since the beginning in Colombia on developing some good local items that obviously have less of an impact in terms of currency, obviously currency fluctuations that may have a little bit of an impact if you bring some raw material. But all in they have less of an impact in pricing no so there is a – or there is a mix on that basket to try to provide our members the best value going forward.

Jose what – how long or what do you think it would take in terms of the currency for you to return margins back to “ more normal levels” if the Peso would level out at these levels would it take 12 months to get back to more normal level or how would you think about that?

I think it’s hard for us to tell, but I think we will price very competitively and be prepared to set the lower margin and it will probably, I think it’s all about usually our experience in the past with other markets obviously not at this level of devaluation, because this one Jon in particular has been a little higher than what we have seen in other markets. It usually takes probably about to almost a year for people to get kind of back in the mode of the new currency. Assuming it doesn’t keep moving or it doesn’t goes the other way but I think it’s obviously very hard for us to tell but we believe that within a year timeframe people get adjusted. They just kind of realize that the new currency and that they go back to normal spending. So that is when we will probably be considering, I guess the normal condition. In the meantime, obviously since our position for Colombia’s long-term, we believe is the right thing to do and we’re going to try to keep working on those values for the members, they definitely thinking at the end of the day they all leading local currency, they have to meet that, that’s how they make their money. So it is kind of hard to work on that but we’re prepared for it.

Okay, one last question, the gross margins elsewhere were better and offset some of the decline in the Colombian stores, is that’s, do you think that can continue?

We don’t have any intention of raising them. I think we have good economic conditions in most of our markets, so there is not any reasons to think that we will have to have a different approach in those markets. I want to make it clear, we’re not trying to offset those, that loss of margin in Colombia by raising prices anywhere else. We look at every market independently and obviously the other market definitely contributed more to the second quarter gross margins but we will remain competitive in all the markets and we believe that that general economic conditions are for the most part good in some of the markets that will allow us to keep offering good values but definitely not great. We see them just pretty much in line with last year pretty much.

Okay, thank you.

Thank you, Jon.

And we’ll go to our next question from Margaret Kalvar with Harding Lovener.

Hi, yes, hi thanks for taking the question. I was interested in little bit more color on comps in terms of traffic versus ticket particularly in Colombia, you may have an awful lot of traffic coming that people look and see. And maybe buy few things but then when they return are you getting any indication of the ticket increasing of the membership signup implies it, yes they will return but as prices go up and may be as, the consumer sentiment isn’t that strong yet, once the initial euphoria wears down are you seeing any moderation?

Yes, let me thank you for the question, Margaret. I think obviously we have seen a decrease just as a result of converting the pesos to dollars. Obviously, we see a big impact on our average basket or average ticket. Although, I guess when we look at them in local currency they are not obviously down as much in terms of the comparison with when you look at dollars. Now there is a little bit of more I guess the members are probably not spending as much in every transaction as a result of some of the prices going up but in some particular items we have been able to maintain very good sales and the impact of the basket is definitely going to be there until – and the devaluations. I don’t know, you want to add something John?

No transactions, as a good indicator and it’s tracking more like a local currency sales certainly more than the U.S. dollar sales. So we’re seeing good transactions and good sales on when we denominated pesos, it just makes a little difficult and convert it back to U.S. dollars.

Yes. And as I mentioned Margaret in the initial, during my comments to correction to see the sign-ups. I think that’s the good indication for the members that they’re willing to pay, the membership fee, they’re willing to keep shopping with us and they’re definitely were some of the members when we talk to some of them, they obviously say hey some of the price gone up, they do see that now they’re smart shoppers and they do recognize some of the prices are going up. They also understand the reason that is happening, they do realize that all the inputs are getting hit the same way in the country. So it’s a good sign that the signups are there and obviously we will keep doing our best, try to get the average purchase either with the same items or just with the members having that extra item to the basket.

Okay. And one more question, I know working capital there are lot of moving pieces here. The openings and stocking up for those, there is Semana Santa there is also currency impacts but what would your expectations be for working capital movements over the course of the year?

Let me take that one. Generally speaking our working capital we sort of have a very high level of inventory at the end of our first quarter which is November, that really stocked up for sales or December. And then we move up from there. Relative to our working capital generally speaking the addition of Colombia into our mix is two things going out one is that we have a higher proportion of U.S. merchandise that we’re selling in Colombia than we are in overall for the company, it is little bit of longer supply chain moving in. So if anything there would be pressure on our working capital to invest a little more in that. In the second quarter our working capital, the ratio between our accounts payable and our inventory about 83%, a year ago was 82% so about even with year ago and so it should be about anything the addition of Colombia in our mix probably tilted a little bit towards a little more investment or working capital but minimally I think.

Okay. Okay thank you very much.

Thank you, Margaret.

And we’ll go to our next question from Thomas O'Neil with Dent & Company.

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

I guess on the second – let me answer the second one first, definitely we see the opportunity of buying land because all the opportunities are in all the land is quoted in pesos. We definitely depend on getting permits and getting through all those processes before acquiring land but as I mentioned we haven’t changed our position in Colombia. So we will keep looking at those opportunities, I mean we can accelerate it then Thomas as much as possible but at the end of the day it would depend on permits and getting the licenses and all that. So I will say that it’s a good opportunity and that we would take it as long as we get the benefit of the licenses and permits for some of these locations. And then John do you want to take that first question?

I can talk about the hedging activities, the peso devalued improving exceptional amount at a time when we’re shipping an unusually significant amount of U.S. merchandise to Colombia to support those opening. Now we had some non-deliverable forward hedges in place during that time but the devaluation rate was quite a bit more severe than we had anticipated. Going forward where we are right now Thomas is we really work through that overhang of the ramp up of those liabilities, and we reduced the exposure in Colombia significantly in terms of the merchandise that we bought in there, we paid for that merchandise, we paid for the fixed assets that have gone in there. And now we’re in a situation that we are in a better position to match the timing of the liability that we’re incurring on a real time basis with a payment or corresponding asset on a real time basis. So we work through that overhang and that’s probably the most significant part of where we’re now compared to where we were in Q1 and Q2.

Great, thanks.

Thank you.

[Operator Instructions] And we'll go to our next question from David King with ROTH Capital Partners.

Thanks for taking the follow-up guys. I guess my question is with new stores first in terms of Panama for June, how should we be thinking about cannibalization – our new store cannibalization if at all. And then secondly sort of how are you thinking about fiscal 2016 given that you opened four stores in 2015, do you think there is a potential to open any stores in 2016 or is it still too early to tell. Thanks.

Okay. On the first one definitely we’re expecting to have a little bit of cannibalization, this is kind of a new area in the city of Panama, it's a growing area the La Chorrera in Pan Municipality. But we definitely - based on our databases we know are going to experience probably about a 5% to 6% of evaluation from our existing unit. So there will be some of that impact, which some of our clubs David, in Panama can probably do some of that cannibalization given the high transactions that they have. So it will be healthy to see those some of those sales transferred to the new location. In terms of fiscal year 2016, we’re working on kind of get the more clubs in line I guess to get some few opens is that we - we don’t have anything to talk about officially publish in terms of openings but hopefully in a few months we’ll be able to announce some of the plans for the next calendar year as we get some of the permits and things moving forward.

Great, fantastic. Thank you.

Thank you, David.

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

Hi guys. Just two quick questions, just a net income for your Central American operations was lower in the same quarter year-over-year. Maybe you can just explain why that was? And secondly just when do you expect the Colombian operations to breakeven again?

Let me your question about Central American operations. The operating profit was up year-over-year, the dividends in operating income and net income in those segment is predominantly FX and resulting tax. And in my comments I mentioned that the lower tax rate we saw last year was because we had a currency gain and did not have - did not have a tax impact to it. That currency gain was actually in Costa Rica last year and so we got a bit of benefit in our Costa Rican operation which falls into that Central American operations. So the difference - you can see the difference between operating income and net income year-over-year is that gain we saw in the currency in Costa Rica that fell into that segment.

Okay, great.

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

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

Okay. Great, excellent. Thank you very much guys.

Thank you.

It appears there are no further questions at this time. Mr. Heffner, I'd like to turn the conference back to you for any additional or closing remarks.

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