Robert Price
Analyst · Kansas City Hospital. Please go ahead, Jon
Thank you very much, Maarten. I'd like to begin by stating that the company overall condition is excellent. We are serving our members well, we have a high renewable rate in our membership. We have a strong balance sheet as Maarten just mentioned in our underlying performance as to the basic business was sound last year very good, except for the fact that the overlay of the tax and Aeropost factors created a general reduction in our earnings. But the underlying business was sound. There's something - I think is very important to emphasize to the investment community and that is the fact that during this last year, we have significantly strengthened our management team. I'd like to specifically mention the addition of our Chief Financial Officer, Maarten Jager, who - we feel is, a tremendously strong addition to the team. I also want to mention, Ana Luisa Bianchi, who is our new Chief Merchandising Officer. Ana Luisa began with the company in Guatemala nearly 20 years ago, and has occupied a number of very important merchandising positions in our company and I believe will have a very positive impact in the buying area. In technology, one of the most important parts of that Aeropost acquisition is the team that is now part of our PriceSmart organization, and that team both in terms of marketing, technology and overall understanding of online business. We hope will be very significant as it plays out with respect to our entire operation for our members. And then, as I mentioned earlier the addition of Sherry, as the new Interim CEO is very, very positive. I really - I worked with Sherry and I feel that the fact that we have worked together, [worked] [ph] together well, will serve the company quite well. I think, the other thing to emphasize about our management team is that we have, I worked with some of the management groups since Price Club days. We and others would come later in terms of by our working relationship, but I have a tremendous respect and regard for the quality of our management team. And I think, it's now a matter of bringing everybody together with a common vision. I also feel very strongly that we have to do a better job of developing the management team, so that people have upward opportunities to grow in this company and to have career improvements for the future, and I think that applies to our back office people as well as to the people in operations. I also want to mention though it didn't happen this past year, but Francisco Velasco, who is our General Counsel, who has just been a tremendous support for the company, and very, very happy with his performance and what he's done for organization. Now, I'd like to talk a bit about the vision - the strategic vision and put it into maybe three buckets: one of which is, the basic business; the second is, what I would call an update of the format; and the third relates to new markets. When we started Price Club over 40 years ago, what we did that was different as we brought a more efficient model in terms of how we bring merchandise to customers. And that efficiency played out in terms of lower prices. And the basic consideration for our success is how do we get products from the manufacturer into the hands of customers in the most efficient manner, consistent with paying people, who work in our organization, proper wages and benefits. That model for us is challenging, because we are dealing in small countries from a distance. And up to this point, we've really focused our entire distribution center, I mean, distribution approach other than local buying out of Miami. We have made a strategic decision to open 165,000 square foot regional distribution center in Costa Rica, to serve Costa Rica, a number of other Central American countries. We believe based on our studies that this distribution center will have a multiple benefit to efficiency. One is, we think that we can get product to the market, less expensively by shipping directly into the market rather than through Miami. The other is that we are going to be transferring many of the functions that are currently performed in the clubs themselves into the distribution center, where we think, we can do that more efficiently. And third, and this relates to some geopolitical global financial considerations, particularly with tariffs that we buy a considerable amount of merchandise from the Far East. And we believe that this regional distribution center will allow us to ship directly into the market into Costa Rica, and not have to deal with some of the tariff problems that could be on the horizon in the United States. So efficiency in the distribution chain will hopefully translate into lower prices and ultimately more sales. The second area of strengthening the basics is in the back office. We have many, many procedures that we are doing not only in San Diego but throughout our company that are very labor intensive. We need to apply technology in a much more aggressive way to make in our back office more efficient, and that is a high priority for us. And then, the final part of the basics is the buying. We have identified that we need to strengthen the buying performance in certain areas, particularly in hard lines as Maarten mentioned in his presentation. We have been seeing negative sales performance in many of our hard lines areas. We don't think that's acceptable. We think, we can do better and that's an area we've identified as a priority. So one thing is strengthening the basics, the second is updating the format. We have a 40-year-old plus format that is great. I have to say it's great, because I kind of thought of it. But at the same time, it needs to be spruced up a bit. And the biggest change is related to technology in the way people are thinking about buying products today, and even in our markets, Amazon is impacting us, because of cross-border commerce. So we recognize that we have to figure out how that sweet spot between the traditional type of shopping that people are used to doing and businesses are used to doing, frankly, not just consumers but businesses because we sell to businesses well. And the way people want to use technology for shopping online. And of course, regarding the acquisition of the Aeropost team and their technology and logistics, and marketing know-how. They're going to hopefully tie a very important role and helping to make that transition. And I would say even the best of them, and do you want to consider Amazon the best, are struggling with the issue of how do you connect brick-and-mortar to online in a way that really works. And I don't think anybody is totally figured it out, but as we think that's where the real issue is in terms of the future is how you make it, because people are still going to go into stores. They're not going to quit shopping in stores. And - but how do you connect it. In our market, there are other factors that impact shopping behavior such as the fact that traffic is terrible, hard to get to locations and the other thing is for us to define property in many of these highly urban cities is very, very challenging, because of just this unavailability of it. So what we've done is, we've - we're now piloting two new clubs that will open, when we're ready to open them. We've targeted spring time, but it may not be - we may not make it by April or May it depends if we're ready. One is - both of these will be smaller, perhaps 60% of the size of our typical club. One is located in Santo Domingo, and it's in a very high income area of the city, very urban. And the other one is in Panama, in a town - smaller town, which has direct surrounding town is called Santiago. And it is quite rural, and they're very different. And we chose those two communities, because we wanted to learn something about how we could function, how we would use a smaller format in an urban setting, particularly in thinking about Bogota and Medellin and - where it's so challenging to get property. And in secondary cities in existing markets, where we might be able to be successful in operating, but we have to determine how the small concept works. The key is, how we're going to combine, what we fell in the club with the online. And the online - these two clubs will not carry the full selection of products that we have everywhere else. Many of the larger items, major appliances, other hard goods items will be fulfilled from a distribution center like the distribution center in Costa Rica. And we will use the space in the building to maximize the sale of more consumable products. So that the consumer will have the benefit of both the consumable products and the more durable or hard goods, and the choice to get delivery on those online products either in their homes, or in what they call click-and-collect, which has been used pretty successfully by target some other companies. So that, what we're going to be piloting in that market and we told our team that they need to think about these two locations almost like a new business. This is not PriceSmart like, this is something new and different that we're going to rethink, cost structure of operations, the way we merchandise and everything suited us to determine whether or not we can come up with something that's going to respond properly to the new world in which we live. So that's one part of this future vision. The second thing is, that we and - we've already had Costa Rica taken certain products out of our clubs that are big ticket items like appliances and mattresses. And actually, Costco is doing the same thing to make space for more consumable items, we've put in them in the regional distribution center and we will be selling those products, we think more efficiently delivered to our customers, the members than what we sell them - how we were selling them in the club. So we are gradually testing items with their current selection items, but putting them into an online format. The third thing that we're doing and this has to do again with our regional distribution center is that we will be selected items that we don't sell in the clubs. And actually stocking some of those items in the regional distribution center that will be able to be shipped directly to members, who picked up in the club. And those would be tend to be more cube intensive items on the durable or hard good side. And then finally - and then the next thing we're doing is that we are looking at a cross-border selection increase where out of Miami through the Aeropost logistics. We would be able to ship products to our members that we don't currently sell in the clubs. And finally, we are studying and each of these are big projects. We are studying, how we can do, how we can offer our members home delivery or business delivery out of assortments that are in our clubs. So those are the combined ideas that relate to how brick-and-mortar and technology, online shopping can be coordinated in a way that moves this concept ahead and takes cognizant of the kind of world we are living in. The third part of our strategy for growth has to do with new markets. And we are committed to making a more serious effort to try to enter new markets. Our constraints to now have been threefold: one has been the real estate issues that we face even in Colombia concerns and certain big South American countries as to the accessibility of getting the sites we need. The second is making sure that our management team is strong enough to handle what would be a major - addition to current workload. And the third has to do with our distribution system, and that test we're doing in Dominican Republic and in Santiago are partially being done to test concepts that we hope could work in future markets that - new markets that we're not in now. So I think, to sum it all up, but we are going to be focusing on is our strategy is to how do we continue to improve the delivery through our current members through better buying, better efficiencies, lower prices. And how do we take advantage of technology in conjunction with the traditional brick-and-mortar warehouse club business in order to have, perhaps, more opportunities to expand existing markets as well as potentially to enter new markets. So that's kind of the summary is the way I see it. And we're happy to take your questions.
