PriceSmart, Inc. (PSMT) Q4 2015 Earnings Report, Transcript and Summary

Welcome to the PriceSmart Inc's Earnings Release Conference Call for Fourth Quarter and Full Year of Fiscal 2015, the 3 and 12 month period ending on August 31, 2015. [Operator Instructions] After remarks from Jose Luis Laparte, PriceSmart's President and Chief Executive Officer; and John Heffner, PriceSmart's Executive Vice President and Chief Financial Officer, you will be given an opportunity to ask questions as time permits. [Operator Instructions] As a reminder, this conference in being recorded on Friday, October 30, 2015. A digital replay of this call will be available through November 30, 2015, by dialing 888-203-1112 for domestic callers or 719-457-0820 for international callers. The passcode is 7637863. 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 fourth quarter of FY '15. We will be discussing the information that we provided in our earnings press release which we released yesterday, October 29, 2015. We also released our 10K yesterday. You can find both in the press release and the 10K 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 risk detailed in the Company's annual report on form 10K 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 and thank you for joining us today. A year ago we conducted this call from Bogota, Columbia, as we were then opening our first warehouse club which we called Salitre in that large city. It was a very successful and exciting opening and was followed by the opening of two more warehouse clubs in Colombia in the following month. We now have six warehouse clubs operating in Columbia and we're announced earlier this week our plans to start construction on club number 7 in November in the city of Chia, just north of Bogota. We expect to open that new club in the fall of 2016. We believe it will not only serve new members in Chia, but it will also draw from the northern neighborhoods of Bogota which are not being served by our Salitre club which is more in the Southwest part of this very large city. That year-ago period was certainly a very busy time for us with the three new openings and we were very pleased with our record level of new member sign-ups and opening sales. When we opened our Bogota Salitre warehouse club, the Colombian Peso was a trading at 2,015 Peso's to the dollar. From that point in time, that Peso devalued fairly consistently through the year and today is trading at nearly 3,000 pesos to the dollar. Almost a 50% devaluation. While these have made things challenging for us and others in this market, we're still optimistic about our opportunity in that country. I will speak more about Columbia in a few minutes, after I give some details about our fourth quarter results. Let me start with our update on sales for the quarter. Warehouse sales for the fourth quarter -- for the fourth fiscal quarter was $677.2 million. A 13% increase compared to the prior year. Transactions in the quarter grew 14.5% and the average ticket, when converted back to U.S. dollars declined 1.3%, related to the devaluation of the Columbian Peso. Excluding Columbia, the average ticket grew 1.6%. We ended the quarter with a 37 warehouse clubs, compared to 33 a year ago and comparable sales for the 13 weeks ending August 30, 2015 grew 3.4%. Net income for the fourth quarter of FY '15 was $22.4 million or $0.75 per share, compared to $21.9 million or $0.73, a year ago for the same quarter. Central America had sales growth of 11.2% which included the new opening of our new warehouse club in Panama in June. Bringing the total in Panama to five and 20 in Central America. All countries in the region experienced good sales growth. In the Caribbean region, sales grew 6.2%. We have 11 warehouse clubs in our Caribbean segment, the same as the year ago period. While all countries have positive sales growth, three did particularly well. Columbia recorded sales growth of 51% when converted back to U.S. dollars with the three additional clubs, compared to the same period a year ago. Measuring in local currency, net warehouse sales growth in Columbia in the fourth fiscal quarter was 122%. The average exchange rate for the quarter was 2,753 pesos to U.S. dollar, compared to 1,882 in Q4 of FY '14. From a merchandise standpoint, out of all these, housewares, small appliances, toys and fashion apparel did particularly well, with double-digit sales growth. High single digit sales growth area include soda, liquor, meats and sporting goods. In electronics, computer, uses, seafood and [indiscernible], we had a challenge -- we had a few challenges for this period. We saw very good growing membership over the year, adding nearly 304,000 accounts, a growth of 25.7%. Much of that growth came from our three Colombia openings, where we added 216,000 accounts during the year. In the fourth quarter alone we added 23,000 in Columbia and 56,000 overall. Our membership renewal rate has improved somewhat to 86% for the 12 month period. This compares with 85% at the end of May 2015 and 84% at the end of FY '14. The opening of three warehouse clubs in Columbia a year ago and the record level of new member sign-ups that occur at that time creates an interesting challenge for us with respect to expected renewal rates, as [indiscernible] those openings. In the month of October and November, we have nearly 92,000 fair share member accounts expiring in Columbia. Our history shows that the renewal rate for first-year members is lower than members who have been with us for multiple years. In addition, in Bogota, where we have the most members, the frequency of shopping for those numbers on average is below our company average. We believe that in a city like Bogota, where we have only one club serving the whole metropolitan area, it is not that convenient to shop often for some people, given busy roads and the traffic in the city. We're taking action to reach out to all of our members through our call-center we established, offering them an easy way -- an easy means to renew their membership. However, the combination of first-year renewal rates, a lack of shopping frequency on the part of certain those expiring accounts, will likely result in a reduced renewal rate and effect the total renewal rate for the company. Given the exception of a large number of expiring members, this will negatively impact our renewal rate over the next 3 to 6 months. We anticipate that our site in Chia will help get some of those members back, particularly those current members that are in the northern part of the city. I would like to provide some general comments on the full-year results. We finished the year with sales of $2.7 billion, for a growth of 11.3% and 2.7% in comparable sales growth. Net warehouse sales grew in all countries. Membership income for the year was $43.7 million, an increase of 14.7% compared to FY '14. Our growth of 11.3% came from transactions going 11% and average ticket 0.3%. Six of our clubs exceeded $100 million of sales, compared to 5 the year before and 11 of our clubs did between $80 million to $99 million for the year. We had a very productive period of club openings, with four in the year. In addition to the three in Columbia in October and November of last year, we opened our fifth warehouse club in Panama in the area of Coasta Verde, west of Panama city in June. The results for that club in the first few months have exceeded our expectations. While we've seen the cannibalization of some sales from our city clubs, particularly from our El Dorado location which will affect our outcomes. However, the net addition of members and sales in the growing area outside the city will allow us to continue our growth in Panama. Let me now look to some other comments we guided in our business, as we move into the new FY '16. Next week we will open our second club in the city of Managua, Nicaragua. It is scheduled to open on November 5 and even though we will take some business from the existing Managua club, we believe it will increase our presence in [indiscernible], a very good market for us. I will report more about this opening on our next earnings call. Our plans for expansion in other regions are still in place and our real estate team remains active in looking for a opportunities to find new sites in existing countries where we believe we can increase our market share and help some clubs that are getting too much volume and have some parking challenges on the big busy weekend. We're also actively looking to increase our capacity of some of our clubs, allowing them to handle the growth in business volume. We have two expansions planned. One that we already started. It is Barranquilla, Columbia, where we will add additional sales floor space, about 88,000 square feet, to our building. Expand our food service area and add more parking by building a parking bay. That location has had some challenges to serve our volume of members the way that we would like, despite only being four years old. We will start a similar expansion in one of our clubs in El Salvador, Santa Elena. Adding sales floor space and also park intake. In both of these expansions the additional sales floor space will help us better merchandize our clubs, add refrigerated space to our fresh areas, add more registers and as a result, obviously increase our sales and productivity. In addition we're expanding our primary distribution center in Miami, adding square footage to allow us to be more efficient and increase our level of exports to our markets. Before I turn things back to John Heffner, two more items. One, regarding Columbia and the other related to upcoming holiday season. On Columbia, the current currency volatility continues to be a challenge and clearly has had an impact on our overall results. I remain pleased with our efforts and I recently visited two of our locations there and was able to see in action a lot of the different initiatives that we have put in place in response to this equation. This action includes adding some successful local items developed on our private label brand. We also added some of the other items -- some other important local brands in our selection and we continue to have in place a more aggressive approach in terms of margin for that country, in an effort to minimize the impact of the currency devaluation. We will continue with our commitment to our Columbia members to bring exciting items in the country, reinforce our position as a place to find unique quality merchandise at a good value. With respect to the important upcoming holiday season and I will say that all 37 of our clubs and even our new club in Managua, 38, are ready with a full selection of exciting holiday merchandise. We have seen a lot of improvements in the way we flow our holiday merchandise through the country compared to previous years and we now have domestic distribution centers in a few countries that allow us to better manage our inventory as we keep growing our volume in our existing clubs. To finish my comments and before I turn things back to John Heffner, I would just like to express my appreciation for the hard work of all of the PriceSmart team and am looking for to a good FY '16. 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 fourth quarter and full-year, based upon our releases yesterday. Warehouse gross profit margins in the fourth quarter were 14.8% of net warehouse sales, a reduction of 46 basis points from the same period last year. We continued to operate with lower margins in Colombia which impacts the consolidated results. Within Colombia alone, the year on year reduction within the quarter was approximately 282 basis points. This had a 31 basis point impact on the overall consolidated warehouse gross profit margins in Q4. We will likely see a similar situation the first quarter of FY '16, with the lower margins in Colombia effecting the consolidated margins when compared to the year earlier period, as we did not take the action to reduce margins in Colombia until the second quarter of FY '15. For the full year FY '15, merchandise margins in Colombia decreased 211 basis points from FY '14. Merchandise margins excluding Colombia for the year increased 30 basis points. Membership income for the quarter was $11.5 million, a growth of 17.5%, but less than the growth in accounts. As Jose Luis mentioned, much of the account growth during the year was in Columbia. The cost of a membership in Columbia is 65,000 pesos, including VAT. A year ago, that membership yielded approximately $30 of membership income to our consolidated results. Now it yields the equivalent of about $20, due to the devaluation. Warehouse operating expenses as a percent of sales increased 21 basis points with the higher cost structure in Colombia, compared to more mature markets. Excluding Colombia, warehouse operating expenses as a percent of sales were flat. We incurred $326,000 of pre-opening expense in the quarter for the new Panama club which opened in June. In the first of fiscal quarter of 2016, we will have pre-opening expenses for the Managua number two club, opening next week. Despite the containing currency devaluation in Columbia during the quarter, we did not incur a loss. In fact, we recognized a gain of $214,000 compared to a year ago loss of $528,000. For the full year, however, currency lost predominantly in Columbia in Q1 and Q2 totaled $4.4 million. The effective tax rate for the quarter was 33.3%, an improvement over the past three quarters which were 33.7%, 35.3% and 37%, reflecting the improved operating performance of Colombia. Compared to the year ago period, however, the effective tax rate was 115 basis points higher, primarily due to the non-deductibility of some expenses in certain markets when compared to the year-earlier period. We ended the year with $157.1 million in cash and equivalents, an increase of $20 million from the end of last fiscal year. Operating cash flow for the fiscal year was $110.5 million. We used $89.1 million for the purchase of land in Columbia, Panama and Nicaragua, the construction of the four warehouse clubs we opened during the year and the partial construction of the warehouse that will open next week in the Nicaragua and ongoing maintenance capital spending to improve our operations and ensure a good shopping environment for our members. With that, Jose Luis and I would be happy to take your questions. Don, I'll turn things over to you.

[Operator Instructions]. And we will take our first question from Dave King with ROTH Capital Partners

I guess first off, in terms of the huge membership growth you had this quarter, looks like a lot of that was still concentrated in Columbia, even if that contribution, I think was down a little bit from last quarter. Did the -- Jose Luis, did the new location in Nicaragua contribute at all to that growth, or is that -- should we be thinking about that as just mainly the comp stores and Panama, still?

Definitely, it is more the existing clubs. I know the Columbia -- the new location doesn't have a lot of impact in this past quarter, Dave.

And then, in terms of the renewal rate that you talked about and the magnitude -- or that rolling over, it sounds like, from 86% given what you talked about in some of your stores. How should we think about the magnitude of the decline? Is that 86% down to the 84% you did a year ago, or is it more significant than that? And then more importantly, in terms of membership income, and I guess impact or effect on transactions and sales, how should we be thinking about that?

Okay, we are definitely expecting, Dave, to see an impact on our world membership renewals. There is no question, I guess based on the history of new members and especially all of these new cities, and more than anything what affects us is the fact that there are so many members at the same that will expire. Probably, what we'll get then within the quarter and within the holiday season, there is some risk. We expect definitely to see a couple of percentage points of impacting our membership renewal rates. We still think that, other than the renewal capture rate, we expect the warehouse sales and membership income to be more on line. This is definitely more an impact on renewal capture rate, and is very specific to this opening in Columbia. We're still pretty optimistic about the sales and everything for that market. Actually, looking at the pretty good sign-ups in existing clubs. There is a lot that we're learning with this Columbia market and we're still very optimistic on this.

Okay. That's extremely helpful. It sounds its more optical in nature than fundamental. And then in terms of -- I guess switching gears, in terms of thinking about your store expansion plans. If I'm thinking about this correctly, it looks like as we head out over the course of this year, looks like you are opening one store, call it, maybe versus four last year? Because I think the new Chia store is going to be in early FY17. I guess, can you talk about how you are thinking about annual store growth? And then just resources dedicated to site selection, given the approach to buying real estate, and just how we should be thinking about it?

Yes. Okay. Right now, we have the Chia on the horizon for the opening that hopefully in the timeframe of September, October, of next year. We plan to have it ready for the holiday season in Columbia. In the meantime, we haven't reduced our efforts, not only for Columbia, we have our real estate team BT, as I mentioned in the initial comments, on trying to secure more sites in existing countries where we still believe there is opportunity for growth. Columbia, it's not the section, as I mentioned on the calls -- is still a challenge to find the perfect locations to get the permits in, and but as we speak, we are still actively working on that market. We do have a little bit of a soft economy right now, driven by the devaluation and other factors in the country. But we still are pretty optimistic about Columbia, and we haven't reduced our efforts. So hopefully as we get more things on the pipe, then we will be happy to announce all of the new openings. Now, at this point on the horizon, Chia is right there for next year, opening on our -- more likely on our FY17.

Okay. And then maybe just one follow-up to that one. Any thoughts or any updated thoughts, there, in terms of markets beyond existing beyond Columbia? Say Chile? Say Peru? Anywhere else? Or any thoughts on leasing more locations, at this point, to potentially accelerate the store opening process?

Your second comment on leasing, we haven't discarded that as an option, as we did with the current, Columbia location, the current location in Barranquilla. Leasing, if we have a good opportunity for that, we will take it in any particular place. In terms of new countries, the reality is we spent a lot of the year really with a lot of potential in existing countries and Columbia, particularly because of that economical challenges in that country, so we didn't make that much progress. Nothing new to report on future countries at this point. It often means that we won't explore anything, but at this point, definitely no new updates, Dave, on that area.

[Operator Instructions] We will go next to John Braatz with Kansas City Capital.

Jose, I wanted to make sure I understood correctly. You had mentioned that some of the actions you are taking to mitigate the problems of the lower currency, and did I hear correctly that you may selectively, in Columbia, raise some prices to improve margins? Did I understand that correctly?

No, you actually understood the opposite. Because, we've actually been more aggressive in our pricing there to mitigate our little bit, Jon, the impact of the devaluation. Obviously, there's so much you can mitigate in terms of about 50% of our [indiscernible] compared to year-to-year. We're actually going the opposite way. We're trying to be more aggressive in pricing, and definitely no plans of trying to get more of that. Obviously, we're doing that through -- I also mentioned something about bringing local items, some of local items, that are also helping us, more than anything, to drive sales, but not entirely intended to drive incremental profitability. I think, one, we want to focus on the top line, which is sales and getting more market share in that market, Jon.

When you look at the competitive landscape in Columbia, how has the competition handled the depreciation? Have they, too, been reluctant on raising prices? Or how have they reacted to the depreciation?

It affects us a little bit different than competition. In the general terms, we do have a higher component of imports, Jon, in that market. So, you look at it from our standpoint, definitely we have a higher impact of [indiscernible] or imports in our assortment. But at the end of the day, when you think about electronics, computers, liquor, a lot of the categories that are in Columbia, we have seen obviously, everybody reacting to prices and obviously, price increases. No, I think we're all in the same boat for that respect. All the competitors bring merchandise from Europe, to some degree from the US also, and I think we're all moving the prices at the same time. It's been a difficult year for the consumer in Columbia, because not only are we starting to see that in the US and imports to some degree, also local merchandise. Especially now for the holiday season, we are seeing much more, many more increases as a result of raw materials, and things moving, inflation, and everything. So, a lot of indicators for the economy in Columbia are moving on the upside. So, we're going to probably see more of that in the next few months.

Okay. And John, you had touched a little bit about the impact -- the continuing impact on gross margins in the first-quarter because of the weak currency. Last year in the first-quarter, the margins were, I guess, higher than what I was anticipating, and I think there was attributable to vendor rebates and some other maybe one-off items, I'm not sure. But how do you look at the first-quarter in terms of some of those items that positively affected the gross margin last year? Will you continue to see that?

In my comments there, and I think what we'll probably be more significant in the first quarter, here, is that the actions we took in Columbia, which I think quarter-over-quarter were 282 basis points. One quarter with 320 basis points in Colombia alone. That effect was still happen in the first-quarter. We didn't really reduce our margins in Columbia until the second quarter, so that will sort of anniversary that phenomenon, when we get to the second quarter. That's really what I was referring to. So I would expect to see some continuing impact on the overall margins based upon the year-over-year comparison to Columbia.

Sure. But weren't there some -- maybe some items in last year's gross margin in the first quarter that positively influenced it?

At any given quarter, we have some things that can affect us. It's usually our approach that, when we can sort of institutionalize some of those cost savings, we will push that back into lower prices, and not see it in the margin.

[Operator Instructions]. There are currently no additional questions. So at this time I will turn the conference back to John Heffner for any closing or additional remarks-- Excuse me, we have had someone else queue in, if you would like to take that?

Sure.

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I just wanted to ask regarding Columbia and membership renewals, you mentioned that you expect some cancellations of memberships. Would you consider offering concessions to lower prices on membership in Columbia?

No, at this point, we're not considering that. We really intent to continue driving our membership renewals, our membership sing-ups, though our value and our selection, our uniqueness of our merchandise. The Membership in Columbia is already, I guess, a good deal at 65,000 pesos. A year ago, that turned out to be about $30, is now pretty much $20 at the exchange rate. So, no plans. I think we work on getting our members back and getting the new members through different options, not necessarily just lowering the value of membership.

That does conclude today's question and answer session. So, now I will turn the conference back to Mr. John Heffner for any closing remarks.

Thank you, Don, for your help, today. This ends our call. Thank you all for participating with us, and have a nice Halloween weekend. Bye.

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