PriceSmart, Inc. (PSMT) Q4 2016 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the PriceSmart announces fourth quarter results of operations for fiscal year 2016 conference call. This call is being recorded. [Operator Instructions] I will now turn the call over to Mr. John Heffner. Please go ahead, sir.

Thank you very much. Joining me on the call today will be Jose Luis Laparte, PriceSmart's President and Chief Executive Officer. Thank you, and welcome to our earnings call for the fourth quarter of fiscal year 2016. We will be discussing the information that we provided in our earnings press release, which we made available yesterday, October 27, 2016, along with our 10-K. You can find both the press release and the 10-K 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, 2016, filed with the Securities and Exchange Commission on October 27, 2016. We assume no obligation and expressly disclaim any duty to update any forward-looking statement to reflect the occurrence of events or circumstances, which may arise after the date of this call. Now I'll turn this over to Jose Luis Laparte, PriceSmart's President and Chief Executive Officer.

Good morning, everyone, and thank you for joining us today. Net warehouse sales in the quarter grew 1.3% to $686.4 million, and comparable sales ended with a decrease of minus 1.2%. Sales in our non-Colombia market, Central America and Caribbean in aggregate grew 2.2%. We saw good sales -- good growth in sales in excess of 5% in Honduras, Jamaica and Guatemala as well as Panama, which benefited from having an additional warehouse club for some portion of the quarter compared to Q4 of fiscal 2015. For Colombia, comp warehouse sales decreased 6% when translated to U.S. dollars at the average rate for the period of COP 2,970 to the dollar. As I mentioned in past earning calls, our goal has been to have positive local currency sales growth. And in this quarter, we saw a comp sales increase of 1.5% with an improving comp trend for each month during the quarter when measuring Colombian pesos. When we look at the results for Colombia with more detail, sales of locally acquired merchandise increased 19.2%, which reflects the results of our effort to convert items from imports to locally sourced. We are not sacrificing quality of those items, and we're able to realize a reduction in prices versus some of the imports. And we're glad to see the acceptance of our members on the items that have been converted. Sales of imported merchandise had a decrease of minus 12.6% for the quarter. The stabilization of the Colombian peso in recent months at around COP 3,000 to the dollar has provided an environment where we are seeing an increase in the spending by our Colombian members. Some of the sales trends in the specific markets that we saw in the third quarter continued in the fourth quarter. Soft demand and flat to slightly down year-on-year sales occurred in Costa Rica, Dominican Republic and Barbados. Economic weakness and government policy are making things difficult for our business in Trinidad that began in Q3 when the government expanded the number of products subject to VAT in February. Q4 sales declined in that market 5% from a year ago, although they were essentially flat when measured in local currency. I will spoke more about Trinidad later in my remarks. In terms of merchandise categories for the quarter, with some mid-single-digit increases year-over-year in pets, health and beauty, oils and condiments in the food area. In fresh, produce, deli and gourmet deli showed also single-digit increases. For non-foods, we saw softer sales in most of the categories. The standouts with single-digit increases were automobile, home furniture and fashion apparel. Warehouse margins in the quarter were 14.7%, flat with last year. As some of you may recall, Q3 wasn't a good quarter for margin, given the level of markdowns we did in that period as well as underperforming our end cap and vendor support areas. Margins in Q4 were 100 basis points higher than Q3. This sequential improvements in margin occurred in both our Colombian and non-Colombian markets. Margins in Colombia are stabilizing after many quarters of year-on-year reductions. Merchandise margins in Colombia this quarter were only 20 basis points below Q4 of last year. Membership income increased 0.7% for the quarter to $11.6 million. We finished the quarter with more than 1,490,000 membership accounts and a 12-month renewal rate of 80% compared to 86% last year. If we exclude Colombia, the 12-month renewal rate was 87%, which is consistent with our renewal rate in the past few years. If we look at the Colombia renewal rate, the overall 12-month rate is still affected by the large number of nonrenewals experienced in Q2 due to the anniversary of the opening of the 3 warehouse clubs in the fall of 2014, which will continue to impact the 12-month renewal calculation in Q1. On a monthly basis, however, we have seen a steady improvement in renewal rates in Colombia, particularly the last few months of the fiscal year. We are encouraged by the trends and see this as an evidence that with a stabilizing currency, coupled with the efforts of our operations and by the team, members are increasingly seeing the value that a hike on membership provide. In addition to the improving renewal rates, we continue to see strong sign-ups, especially in our Bogota and Medellin markets. I will add a few things about membership in Colombia when I talk about our Chia opening. Moving on, operating income for the quarter was $32.8 million compared to $34.9 million in Q4 of last year. Despite some of the improving trends we have been seeing in local currency sales in recent membership renewals, Colombia recorded an operating loss for the quarter of $1.3 million, which included $802,000 of preopening expense associated with our Chia warehouse club, which opened in September. This loss compares to a small profit a year ago, resulting in a year-on-year difference of $1.6 million. This was the largest contributor to the $2 million year-on-year reduction in operating income for the total company. Net income for the quarter was $22.3 million or $0.70 -- $0.74 per diluted share, $0.01 below the fourth quarter of last year. The net income in the current period contains a beneficial effect of certain tax-related items, reducing our effective tax rate and favorably contributing approximately $0.06 per diluted share to our results in the quarter. John will provide some additional information about this in his remarks. Now let me go to a quick update on the work we're doing to grow sales in some of our warehouse clubs by expanding the sales floor and adding parking spaces. In Q4, we completed the expansion of our Barranquilla club, and we're nearing completion of the expansion of our Santa Elena club in El Salvador. In both cases, we're adding about 8,000 square feet of sales floors and 30% more parking spaces, just in time to improve our members' shopping experience for the upcoming holiday season. We have a number of additional clubs that are candidates for similar expansion, and we're proceeding with permitting process for them. We continue to push forward a number of other sites for additional warehouse clubs in a few of our markets. As you have heard me say before, the time lines to obtain all of the approvals and permits necessary for us to construct and operate a successful warehouse club can be long. Having said that, let me tell you about the warehouse club we just opened. In September, we successfully opened our seventh warehouse club in Colombia in Chia, a municipality just north of Bogota. Our grand opening on September 1 was an exciting day, and we had sales during the first 3 days in excess of $1 million. Our shoppers on those days were both new members who signed up in the few -- in the weeks leading up to our opening along with existing members who have been shopping with us in our Salitre, Bogota club or even our Barranquilla club. We even had more than 500 numbers that have purchased a membership at our Salitre club but have never shopped at any PriceSmart. They made their first purchase at our Chia club. As such, we believe that this new location will not only add new members to our existing base in Colombia, but it will also allow a more convenient location for some existing members, particularly in the northern part of Bogota. We expect to see those members increase the frequency of visits and shop more with us, which will also contribute to an improving renewal rate. The construction activity associated with the building of a facility that would be the future home of our Miami distribution center is proceeding, and reports are that it is even slightly schedule ahead. We currently expect to take possession sometime during our second fiscal quarter and begin operation soon afterward. I would like to come back to Trinidad, which I mentioned earlier in my remarks. Trinidad is providing a somewhat unique challenge, as we and other businesses are experiencing a very liquid market with respect to sourcing hard currency in that country. We are currently unable to exchange TT dollars for U.S. dollars or other tradable currencies at the level needed to settle payments owed to PriceSmart Inc. by our Trinidad subsidiary for the shipments we are sending to Trinidad. This reduces our ability to deploy that cash for corporate purposes and also exposes us to the financial risk of a devaluation of the TT dollar. We're doing everything we can to source tradable currencies with our banks. However, until such time that, that certain state of tradable currency is resolved, we plan to take a step to limit our exposure. We have made the difficult decision to restrict future shipments of merchandise to Trinidad from our distribution center in Miami to levels that generally align with our Trinidad subsidiary's ability to source and pay for the merchandise in U.S. dollars. Although the situation is dynamic, based on recent levels of tradable currency availability, we anticipate reducing planned U.S. shipments to Trinidad by approximately 20% over the next 3 months. This is likely to result in our Trinidad warehouse clubs running out of certain merchandise, negatively impacting sales in Trinidad, which we estimate to be in the $8 million to $12 million range for the fiscal second -- for the second fiscal quarter. These actions do not impact merchandise on hand or currently en route from our Miami distribution center to Trinidad. So Q1 of this year will not be impacted nor do they impact our plans to purchase and stock merchandise we obtain locally in Trinidad. We will increase or decrease shipments from the U.S. in line with our ability to exchange TT dollars for other hard currencies, and we will continue to seek to maximize the level of tradable currency our Trinidad subsidiary can obtain. Trinidad has historically been a very good market for us with good sales and very loyal members, but we may be dealing with this difficulties for several more quarters. One final comment as we finish the month of October and prepare our PriceSmart clubs for the upcoming holiday season. In most cases, the exciting merchandise we have for our members is already either in the clubs or almost there. The initial reaction to our seasonal items appears to be good. Across our company, we're ready for the busy season of the year, and we will continue to seek opportunities to improve our results even with the challenges that exist in the markets either because of soft economies or other factors. We always recognize that we can do better and show the members that we're there for them to help -- we're there for them to help them save money. Thanks again for joining us today. After John's remarks, we will take your questions

Thank you, Jose Luis. Let me briefly touch on a few additional items that Jose Luis did not touch on in his remarks with respect to our financial results for the fourth quarter. We had interest income of $527,000 and interest expense of $1.4 million. Last year, interest income was $245,000 and interest expense of $1.7 million. We have cash on deposit in certain countries, providing an increased level of income. And on the expense side, we have less interest expense related to hedging activity and more capitalized interest expense in the current quarter compared to a year ago. In total, a year-on-year profit improvement of $552,000. Foreign exchange transactions and the revaluation of monetary assets and liabilities resulted in a net $119,000 currency gain in the quarter compared to $214,000 gain in Q4 last year. Despite another year of currency volatility, particularly in Colombia, we were able to reduce foreign exchange losses associated with currency fluctuations from $4.4 million in fiscal year 2015 to $899,000 in fiscal year 2016, an improvement of $3.5 million. Having said that, we continue to have exposure to currency fluctuations in many of our countries like Trinidad. As Jose Luis mentioned, our EPS results for the quarter were helped by items that contributed to a favorable tax rate. The effective tax rate for the period was 30.4% compared to 33.3% last year. This benefit was largely attributable to an intercompany transaction between PriceSmart Inc., the U.S. entity; and PriceSmart Colombia related to our ongoing market development efforts in Colombia. This transaction resulted in a $10.9 million reduction in taxable income in the U.S. entity and an associated $3.9 million reduction in tax expense. The transaction resulted in a corresponding increase in taxable income in Colombia. That additional income, however, did not generate additional income tax expense in Colombia, because the taxable income in Colombia was offset by the reversal of valuation allowances on past accumulated losses in that subsidiary. We expect that the next several quarters will also see a benefit to the effective tax rate by approximately 200 basis points. The improvement in our consolidated tax expense in the current quarter was offset by the establishment of a valuation allowance against the deferred tax assets of our Barbados subsidiary of approximately $2 million. The net effect of these 2 items was an overall reduction in tax expense in Q4 of $1.9 million, equating to about $0.06 per diluted share. The company ended the fourth quarter with the cash position of $199.5 million, an increase of $42.5 million since the beginning of the fiscal year. For the fiscal year, net cash generated from operations was $140 million. Investing activities during the year of $78 million included the completion of the warehouse club in Managua, Nicaragua earlier in the year, which opened in November, and the construction activity for the Chia, Colombian club, which opened in September. In addition, there was spending for maintenance CapEx and the expansion in Barranquilla. From a financing perspective, the largest use of cash was the dividend payment in 2 installments during the year, totaling $21.3 million. Jose Luis spoke about the progress being made in construction of the distribution center in Miami. We're arranging financing for up to 75% of the completed value of that project, which will be available at the time of closing, which will likely be in our second fiscal quarter. With that, Jose Luis and I'll be happy to take your questions. Operator, I'll turn things over to you.

[Operator Instructions] And we'll take our first question from Dave King with Roth Capital.

So, I guess, first off, a question on currency and the impact to warehouse club gross margins. I guess, it seems like Colombia is starting to work in your favor a bit or at least stabilize. And then offsetting that, there are several markets where there's some devaluation at this point. But those are markets you've been in for a while. I guess, how are you thinking about the willingness or need to raise prices in some of those markets? And I guess, more importantly, how are you thinking about warehouse club gross margins going forward? It sounds like, Jose Luis, you talked about, I think, a sequential improvement across markets and not just Colombia in the period. So, I guess, how should we be thinking about the devaluation in, call it, Costa Rica and some of those places, and how that will impact you guys going forward?

Thank you. Let me tell you, Dave, for the most part, I guess, we have been dealing with currency devaluations through many years in all the countries. I would say that the Colombia factor, obviously, in the last 2 years was huge, because the devaluation was just a nexus of about 50% and at some point about 60%. In the current markets, where we have seen a slight devaluation, we just -- we're not as worried. Obviously, it doesn't impact our sales as much as it did at some point in Colombia. And we just keep adjusting margins as we find it necessarily. But again, it's not as bad or the impact in some of these markets hasn't been as drastic. So we don't foresee any big challenge in those markets. We'll just be -- definitely, we may see -- if things continue to be worse in terms of devaluation in some of these markets, we may have to raise some of the prices as we keep receiving new merchandise, obviously. But we see that also happening in local merchandise. A lot of vendors will be using local imported ingredients. So we may see some prices rising in those markets too. But for the most part, again, as I mentioned before, we deal with those things every single year in different markets, where some appreciate, some, I guess, go the other way. And I don't foresee any big changes in our margin.

Okay, that's great color. And then maybe switching gears a bit to Trinidad. Probably a question for you, John. In terms of the $18.9 million of U.S. dollar-denominated liabilities that you've got there, can you just talk about what that is and whether or not we should expect a big increase in other expense? Or just help us understand what that risk is and why it was called out.

Sure. What that relates to, Dave, is as we ship products from the U.S. into Trinidad, they need to settle that payment back to the U.S. entity in U.S. dollars. So the product gets sold in TT dollars, and they need to convert TT dollars intoU.S. dollars to then settle the liability that the subsidiary has back to the U.S. And the difficulty we're seeing that we're pointing out is that there is a very illiquid market, which is -- which we've experienced before in Trinidad from time-to-time, but this has continued for quite some time, which is why we wanted to call it out specifically at this point in that we cannot -- we're having difficulty converting TT dollars into either U.S. dollars or euros or Canadian dollars or any other kind of currency that can be then eventually converted back to U.S. dollars. So what happens is the liabilities build up as we keep shipping products in there. And at some future point if the Trinidad dollar devalues, and there's some indication theoretically in economic theory that it very well might and it has been a little bit at a time, that liability will get remeasured. And the exposure will present itself as a foreign exchange loss on our P&L. So that's what drives that issue.

Okay, that helps. So it's not a decision whether or not to record it, it's just going to run through based on how the currency moves in terms of...

Yes, it's the same issue we dealt with in Colombia last year, as you may recall. So it's that issue. We -- but the difficulty here is there -- unlike Colombia, we didn't have the money to pay it back, because we're building that business. Trinidad, generates a lot of cash. We just can't get it translated back into U.S. dollars.

Right, okay. That helps. And then on the tax, while I have you, in terms of the 200 basis points of savings on sort of a go forward, I guess, what I'm trying to just get at is sort of how should we be thinking about when we take all the different inputs -- because I think there's also the valuation allowance you've recorded, I want to say it was this quarter, that offset. I guess, what's sort of the right tax rate to be using or assuming kind of over the next few quarters then?

Sure, yes. The valuation allowance that we took was a onetime issue. So I would take that out of the equation. What we're seeing with Colombia to the degree that it has these NOLs and this transaction creates some taxable income there, which is offset, and with the flip side being in the U.S., that's the 200 basis points that we're probably talking about. And it'll probably occur for the remainder of the fiscal year until such time as we sort of use up those NOLs in Colombia, and then that will probably -- we'll come back to a more normalized rate, the run rate we've sort of been after for the last year.

Okay, okay. And then maybe one more and then I'll step back. In terms of Chia, Jose Luis, it sounds like that's going really well, so that's encouraging. And it sounds like that actually may even help in terms of not just the renewal rate recovering just because of time, but also that may help -- that itself may also help the renewal rate, because you get more members that stay. So that's all good. I guess, the one concern I had was, should we worry at all about any cannibalization impact on comp from some -- on some of the stores that are there? Is it going to be meaningful at all in any way?

Yes, Dave. We definitely -- we knew -- since we started, obviously, the plans to build Chia, we knew how many members were coming from the Chia area from support from -- obviously, that vicinity of that area. And we knew also that there was a risk of losing some of those sales, especially for the Northern Bogota members. But a good sign is -- there are a couple of good signs during the month of September and October. So far in October, the cannibalization of our Salitre club in Bogota has been less than what we expected. So that's a good sign. We did plan for some cannibalization, for sure, but it has been a little bit less. And the sign-ups especially in September, the whole month of September, the sign-ups in our Salitre club were as strong as they were in July, August, before opening Chia. So both are good indications that even though the Chia is going to take some of the sales, we were able to see less cannibalization than expected. Not to mention the fact, which is important, that a lot of members that were just not going that often to Salitre are now having the possibility of shopping more often in Chia. So I think that combination all in is a good result, and we expected that to happen in a city the size of Bogota, which obviously the driving distance is a big factor for a lot of members not to visit us.

[Operator Instructions] We'll take our next question from Ronald Bookbinder with Coker & Palmer.

The memberships have really improved the renewals, and you have kept the price of the membership in Colombia sort of artificially low, not moving it with the currency. When would you consider increasing the membership fee in Colombia? Or do you want to really nurture that market and grow the base there?

Definitely, Ronald, we want to continue growing the base for sure. We think it's a little too early to go through a change immediately. I think we have considered it. We have talked about it. The fact of the matter is if you live in Colombia, you don't really care much about the currency to some degree. You sign up for COP 65,000, and we just -- if you think about it, we just opened 3 of those clubs. It's going to be 2 years now. So it's probably a little too early to change the membership price. But it doesn't mean that we wouldn't consider in the near future at the same time. It's been something that we have been talking about it. But definitely right now, we're basically focused on keep growing our base. I think the stability of the currency will help us also in the renewals, because at some point during the last year, we saw -- we had challenges in the renewals, because prices were going all over the place with the instability we saw. So if things continue, as they are with the currency, we should be able to follow that trend of good renewals. And eventually, we'll consider raising it a little bit, because it is definitely on the low side at almost about $19 to $20 per membership in Colombia. I hope that answers your question, Ronald.

Yes. And on the gross margin, the gross margin was the highest it's been all year. Are you planning for any price cuts, or are you going to wait for the operating margins since you still have some deleverage or carrying some higher SG&A expense? Would you wait for the operating margin to sort of get over that 5.5% before you would consider lowering prices to drive more volume?

Ron, this is John. No, I don't think that's the driver. We're going to -- we work the -- when you look at the margins, I think one of the things that's helping is an improving picture in Colombia, which always was a bit of a headwind in our overall margin mix. So as we've seen that improve a little bit with the improving environment there, we'll take a look at the margins in each of our countries and make the right decisions about that going forward sort of independent of, as you call, some SG&A actions for the company.

Yeah. And I will add, Ronald, that definitely, we came from a Q3 where we have a kind of a rough quarter in terms of markdowns. Q4, we definitely ended a lot cleaner. And we're heading into the holiday season with pretty clean inventory. So we don't see any reason why margins should drop. But at the same time, we don't have any strategy to just raise them. So we should have a pretty good stability in our margins going forward. But it's not driven by -- it's driven more by the markets, by the competition, by things where we can react, not necessarily SG&A spend.

And looking at the comp, the comps have finally turned positive and moving in the right direction. For the quarter, how was traffic versus ticket?

For the quarter, we actually had -- let me see, I have it right here. We were 1.3% growth. However, our sales were down 1.5%, and our transactions were up 2.8%. So we got more coming out of the transactions. The average ticket has been suffering a little bit more. You can obviously mix the fact -- that some of the fact that there is some compression in prices. But other than that, we're pretty glad to see transactions-- strong transactions. We'll figure out how to keep working on getting -- obviously as price compression continues in some categories, which it does affect us for sure as it had been affecting a lot of other retailers. It's good to see we're probably lowering some of our prices and members get advantage of that. But we'll figure out later on how to keep improving our average sales. But at least, the transactions are there with the higher transactions.

Okay. And lastly, you've opened the store in Chia. Do you foresee any other store openings in fiscal '17?

For fiscal year 2017, no. And I say that, because obviously, we haven't started any construction in this fiscal year -- I mean, that would be on time to be opened in fiscal year 2017. But I would say that we have a few projects in place that hopefully we can announce and we can start construction very soon. So we're actually pretty optimistic that we will be announcing a couple of projects soon. But the chances for opening in fiscal year 2017 are definitely very low, because we can't build them as fast. But for sure, we still have a hope that we can get something for the calendar year 2017 for next -- ready for the next holiday season, Ronald. That's our hope.

So probably early fiscal '18?

That is correct, yes.

And we'll take our next question from Patricio Danziger with RWC Partners.

I see that you normalized gross margins this quarter after the weak third quarter. But I'm also seeing that operating margin is a little bit lower than in past years. That was about 5% to 5.5%. Can you comment on that? I mean, if you plan to get to the 5% level or 5.5% level that you got in the prior quarters?

Patrizio, let me -- this is John. Let me address that, and maybe Jose Luis can add something. What we saw in our SG&A, we have 5 warehouse clubs in our results this year that were not in the prior year in the same way either in total or partially. And what we saw is that when we add those clubs, we add a quantum of cost associated with that in there. And the sales -- incremental sales that we got for those clubs in their first year or the beginning didn't fully offset the -- those costs relative to what we see with more mature clubs. So if you think about it, mature clubs have a certain rate of expense. These new clubs come in and they have a good deal of the same expense as fixed cost, but the incremental sales that we're adding for those clubs in their first year of operation is not the same level. So it has a tendency to have an impact on our SG&A or our warehouse expense as a percent of sales in the short term. So our goal obviously over time is to, as those sales increase and as we manage our expenses as we do, we would see the -- that improvement over time for those clubs.

You mentioned that you see an improvement in Colombia. Do you mind telling us the sales growth in local currency?

In local currency, for the quarter, we ended positive 1.5% for Q4, Patricio.

That is taking into account that you opened -- I mean, you have a lot more stores this quarter than last year, right?

That is that -- no, the Q4, it was comparable sales growth counting only our 6 warehouse clubs -- with 6 warehouse clubs. We didn't open Chia until September 1. So the 1.5% is a comparable same stores number, 1 .5%.

[Operator Instructions] And we'll move next to Rodrigo Echagaray with Scotiabank.

I have a couple of questions. I mean, obviously, great to see that the FX in Colombia is stabilizing, which helps margins and returns and everything around that operation. But we're about to probably hear back from the government on the tax reform, which on the one hand appears to be possibly reducing the corporate taxes but maybe increasing the VAT. So I don't know if you can share some color on that, if you are preparing for that in any way or it may be too early until that is passed on Congress or what are your thoughts on that?

Yes, let me talk about the VAT, because yes, we have been hearing the possibility of the fact that they would probably raise it for some of the products. And obviously, it's hard to say how we can prepare. I know obviously, it hits us sometimes in the other markets, what we have experienced as we did in Jamaica a few years ago and in Trinidad just recently. Obviously, when you have those type of increases, members and customers, because obviously, that will affect everyone in the market will get a little disappointed and that'll probably discourage them from some purchases. But we believe it fits within reasonable -- within a reasonable increase, Rodrigo, we don't expect that to hit us too much. Obviously, it's hard to tell, and we'll have to see how the market reacts. But I'm not sure there are many alternatives to that VAT increase. Again, we kind of experienced that in the past, and it does hurt a little bit the sales. Hopefully, it's not as bad as we expect.

I guess, proportionately, I mean, the FX has probably put most of that pressure already. So hopefully, that's just marginal. And then just a couple of additional questions real quick. On the distribution center, what's the impact or the net-net impact on the P&L in terms of SG&A versus lease expenses? And if you can just remind me, please, what's the square footage expansion for fiscal year, including the addition of sales floor space in existing stores?

Let me talk on distribution center, and I'll turn it over to Jose Luis for the warehouse club question there, Rodrigo. The -- I think at 322,000 square feet is what our new distribution center will be. And the cost of that -- in our distribution costs, which we show in cost of goods sold. So it won't be in SG&A, it'll be cost of goods sold. The interest expense associated with any financing that we do sort of equates to the rent payments that we're currently paying. So that'll be soft of an offset going forward. In the short term, though, we're going to be -- we continue to have lease expense in the -- in our current location, which we're -- we have an active process to sublet the space. But near the end of the fiscal year, when we move into the new location we're actively trying to sublease that space. We'll probably have some additional lease expense that will flow to our cost of goods sold on our P&L. So that will probably be the case in Q4. But with the plans we have and the activity we're doing, we would hope to have the excess space in our current location sublet in pretty short order. Now your question about warehouse clubs.

Yes, warehouse clubs, we added -- in this fiscal year, we added 2: obviously, the one in Carretera a Masaya in Nicaragua, November, a year ago, so it's going to be anniversaried in a week or 2; and then we just added actually Chia within this fiscal year. So we basically added about -- each one of those who basically have about 55,000 square feet of sales floor space. So it's about 100,000 square feet of additional sales floor space with the addition of those 2 clubs, Rodrigo.

And for next year, I think you said you had 2 big projects on the pipeline?

We haven't numbered them, or at least I haven't. I said we have a few projects. I'm not sure I said 1 or 2. I think I said a few projects. So I can't tell you really how many additional clubs we will open. We have definitely a feel on the pipeline, and hopefully, we will be announcing something in 2017.

No, I mean, on the existing -- on having sales floor space on existing stores.

Sorry, we have -- we're in the process of -- on the ones that we added, we added about 8,000 square feet, yes, 8,000 square feet. We're looking at -- we have a few projects in the pipeline, but we officially don't have permits yet. We hope we can get maybe another 2 probably within the expansions, maybe 3 depending on how fast the process of permits -- permitting moves. Sometimes, it may take you as many 6 months or 8 months just to get the permits for an expansion. So it keeps varying in terms of the timing. We have been working on a few of those projects for a while. And that expansion will probably be similar for every club. We will be adding kind of the same amount, probably increasing parking spaces about 30% to 35% more and about 8,000 square feet of additional sales floor space. And obviously, we reconfigured the fresh area. There are a lot of good additions when we make those expansions, and we think they're going to be pretty positive in growing our sales. But it's too early to know exactly how well many will we be able to accommodate within the fiscal year. And it takes about -- I would say, once you get the permit, it'll probably take about easily 4 months, 3 to 4 months, because it's a little too slow to make those expansions, because you are operating and running the business. So it's not -- even though it's small in scale compared to opening a club, you have to be very careful how you do those expansions not to affect your current operation.

[Operator Instructions] And it appears there are no further telephone questions at this time. I'd like to turn the conference back over to Mr. John Heffner for any additional or closing remarks.

Well, thank you, Ebony, and thank you all for participating. This ends our call. Have a good day and a nice weekend.

And once again, that concludes today's call. Thank you for your participation. You may now disconnect.