PriceSmart, Inc. (PSMT) Q4 2013 Earnings Report, Transcript and Summary

Good day and welcome to PriceSmart, Incorporated’s Earnings Release Conference Call for Fourth Quarter and Full Year of Fiscal Year 2013, the 3 and 12-month periods ending on August 31, 2013. All participants are currently in a listen-only mode. After the remarks from Jose Luis Laparte, PriceSmart’s President and Chief Executive Officer; and John Heffner, PriceSmart’s Executive Vice President and Chief Financial Officer, you will be given an opportunity to ask questions as time permits. (Operator Instructions). As a reminder, this conference call is being recorded on Thursday October 31, 2013. A digital replay of this call will be available through November 30, 2013 by dialing 888-203-1112 for domestic callers or 719-457-0820 for international callers. The passcode is 5817132. I would now like to turn the conference over to John Heffner. Please go ahead, sir.

Thank you and welcome to our Q4 and full-year 2013 earnings call. I hope you will find this to be a useful forum to review the information that we provided in our earnings press release and 10-K filing which we released yesterday, October 30, 2013. You can find both the filing as well as the earnings press release 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, 2013 filed with the Securities and Exchange Commission on October 30, 2013. 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 in our conference call for the fourth quarter and fiscal year 2013 results. I would like to start with an update on warehouse sales for the fourth quarter. We ended the quarter with sales of $558 million resulting in a 13.9% sales growth versus the fourth quarter of last year. Comparable warehouse sales growth for the quarter was 9.3%. During the quarter, the Latin America segment had sales growth of 17.1% which included the addition of the two Cali Columbia locations, which opened on Q1 and Q3. The Caribbean segment had sales growth in the quarter of 7.5%. There was no change in the number of clubs in the Caribbean. We saw a small positive growth in the single club island market and a stronger growth in our larger Trinidad market. In terms of merchandize categories for the quarter, we saw comp increases in the low double-digits for the areas of food, fresh and other business, which includes food service and bakery. Our non-foods area had low single digit comp growth. Membership income for the quarter was $9 million, an increase of 24% over last year. We finished the quarter and the fiscal year with 1,950,000 active accounts, representing an increase of 13.5 over last year. The increase in the annual fee in most markets, which took effect in June 2012, along with the platinum membership introducing Costa Rica in November 2012, contributed 10.7% to the increased membership income of the fourth quarter. The membership renewal rate for the year was 85%. And although it is lower than the 88% from last year, as we explained our last call, we have now cycled through a full 12 months of renewals and the increased membership fees. It is likely that the increase…

Thank you, Jose Luis. You all have the numbers from our release in filing yesterday so I will not go over them in great detail. And Jose Luis has already addressed net warehouse sales and membership. I would like to highlight a few other items in our financial results specific to the fourth quarter and the fiscal year just completed. Warehouse gross profit margin as a percent of net warehouse sales were 15.1%, a reduction of 25 basis points from Q4 of fiscal year 2012. Warehouse gross profit margins were up 69 basis points from the third quarter. Contributing to the sequential lines in gross profit margin percent were increased vendor rebates including volume related rebates and promotional income which we apply as a reduction to cost of sales as well as some reduced per year cost of distribution. For the full year, warehouse gross profit margins of 14.8% were 10 basis points below fiscal year 2012. Warehouse club operations expenses for the quarter were 8.9% of sales, a 39-basis point improvement in Q4 of last year despite having two additional warehouse clubs in operation in the current quarter compared to Q4 of last year. The company experienced good operating expense leverage relative to sales in nearly all categories of spending. For the full year, warehouse club operations expense decreased 31 basis points to 8.7% of sales. General and administrative expenses that is the expenses associated with the company’s corporate and U.S. buying functions were 2.2% of net warehouse sales in Q4 of fiscal year 2013 compared to 2.1% in Q4 last year. Operating income in the quarter were $33 million or 5.8% of sales for the full year operating income of $128 million or 5.7% of sales. The revaluation of monetary assets and liabilities which we report as currency gain or loss, had little impact on the quarter’s results and a positive $95,000. Last year’s Q4 had a positive $250,000. For the full year the company recorded a net currency loss of $954,000 compared to a loss of $525,000 in fiscal year 2012. As reported in our earnings release, net income for the quarter was $20.8 million or $0.69 per share compared to $0.58 per share in the year ago quarter. The company ended the year with $121.9 million in consolidated cash and cash equivalents, up $30 million from the end of fiscal year 2012. The growth in cash resulted from the company generating $130.6 million in operating cash during the fiscal year, investing $71.8 million in the acquisition of land, fixtures, equipment and warehouse club construction and improvements and using $21.8 million in financing activities most notably the payment of to $0.30 dividends during the year totaling $18.1 million. With that, Jose Luis and I would be happy to take your questions. Operator?

(Operator Instructions). And we will hear first from Dave King with Roth Capital Partners.

Dave, good morning. Dave King – Roth Capital Partners: I guess, first off, I appreciate the color Jose Luis on the store growth outlook for Columbia. I guess just a follow-up to that, a little more color there. I was curious as to maybe we can get an update in terms of how you’re thinking about that, your willingness to look at larger formats, is that still the case? To what extent are you looking at maybe leasing stores versus buying. And then sort of a longer-term question, to what extent are you evaluating any new markets beyond Columbia, other Latin American countries etcetera?

First of all thank you, Dave for the question. And definitely in Columbia and I wouldn’t say that we are necessarily looking at expanding our format. I think the format that we have which is either the one that we just opened in treasuries in Costa Rica is probably kind of that will grow in format which is only 500 meters bigger than our regular, I guess warehouse clubs. So that’s pretty much the format that we believe is our vehicle of growth for the upcoming years not only in Columbia but anywhere where we do business now. So that would be kind of our format going forward. It’s possible if only the land allows us to put that. As we have in terms of leasing or buying as we reflected before in our reports, we do have a preference of buying but we definitely we are considering when – if needed we will consider leasing land or leasing opportunities in terms of growth. So, we’re not necessarily saying we wouldn’t be considering our lease opportunity. Obviously, as I mentioned in past calls date, we’re basically looking at the bigger cities obviously the Tres Rios, Bucaramanga, different sized cities in Columbia that have the opportunity to have a PriceSmart, we definitely are pursuing that all of those site opportunities in those markets. At this point, I can’t say anything as far as our new market per say now. We’re really busy with our opportunities definitely in Central America, which is – and the Caribbean. And obviously Columbia keeps us busy at this point with the opportunities for expansion. Dave King – Roth Capital Partners: Okay, that helps. Then maybe just a follow-up to that then. To what extent are you – I mean, are you seeing more opportunities out there, or is it still kind of the same existing opportunities you see in Columbia in terms of what’s out there? And then to what extent are you allocating more people, if at all, to the real estate acquisition side, just to help us get some comfort in terms of how to think about the store growth opportunity going forward.

Yes, Dave. In terms of resources, we believe we have the amount of resources as far as our real estate resources. I don’t think it is a matter of resources. It is more as we have said in the past the availability of land, good land and land with the right zoning. And obviously getting the permits in these big cities is more of a challenge. So, obviously we pursue all the angles and we’re pursuing hard as much as we can on all the opportunities. But definitely, I wouldn’t say it’s a matter of resources. I don’t know if the conditions have changed. Probably, I don’t think it’s harder than it was before when we started doing business, it’s probably equal in terms of the conditions, it hasn’t been harder. It’s challenging but I wouldn’t describe it as being much more difficult. Dave King – Roth Capital Partners: Okay. That helps. And then separate question, in terms of kind of thinking about margins and abilities to pass good margins back into price to drive volume. Warehouse club gross margin of 15.1% of AORs came in higher than the long-term target range that you guys are at. But at the same time I think operating margin was more towards the midpoint. I guess my question is somewhat theoretical in the sense that how do you think about those two versus each other, which is kind of the priority in terms of how you think about the ability to drive it back in the price with one higher than range, one being already kind of within the range? Thanks.

Dave, yes, I think as we’ve talked before I think our EBIT margin is or operating profit margin is more operative I guess approach. Because to the degree that we can leverage our operating expenses with more volume and that becomes a smaller percentage of sales that allows us to reduce our gross margin percent and maintain our operating margin percent in that sort of mid-five range. On a sequential basis our gross margins did to go up from 14.4 in Q3 and 15.1. In the short term we benefited from increased vendor rebates and promotional income as well as lower per unit distribution costs. On a year-over-year basis margins decreased 25 basis points and I think the year-over-year comparison is more consistent with our business model. Dave King – Roth Capital Partners: Okay. That helps. Thanks guys.

Thank you Dave.

(Operator Instructions). Moving on to David Strasser with Janey Capital Markets. David Strasser – Janey Capital Markets: Thank you very much. A quick question. In Barranquilla, as you finish your second year, did you have a fairly significant comp in that market, does it – and by, does it – is there clearly opportunity for more stores in that market?

Well, we don’t I disclose comps, I guess per unit basis. But I can tell you that we are pleased, David with the results at Barranquilla. After two years I think that there are a lot of learnings. And obviously every day we keep learning more about the Barranquilla that Columbia market. And definitely we are pleased with the results. And again although we don’t disclose specific growth, we’re happy with what we’re getting right now with particularly with renewals with members really enjoying the PriceSmart experience. David Strasser – Janey Capital Markets: Fair enough. That’s where I was going with it anyway, but thank you. So when you look at other markets, like the Costa Rico one, a couple of questions about that. I mean, how much cannibalization do you think would be acceptable, do you think it’s going to be when you opened that? And as you look, I mean, having been down there and seeing Panama and Costa Rica, it does seem like at some point you run up against just parking lot problems and where cannibalization might probably is a good thing. And in some of these bigger markets of yours, do you think there’s a lot more opportunities for more fill in markets in, say, Costa Rica or Panama?

Yes. Well, the opening of Brazil, this kind of the answer that we have to that question. We were suffering definitely at that. There are couple of locations that I’ve described during my script, we definitely were suffering with members, finding space to park especially over the weekends, sometimes holidays and weekends was a little hard. So, the Brazil’s club gives us the opportunity to take some of those sales, make the existing club, the existing or old club more friendly club for the members, more accessible. And in addition obviously it shows us that there is still opportunity for members that we were not necessarily attracting. These specifically talking about Costa Rica and this club in Tres Rios, Cartago. It is Brazil, as we call it internally. But it’s not only approaching that region but also the, I feel it’s very close which is Cartago. And we definitely – I think we gained both. We give a break to the existing Supporter club by taking some kind of a license, which we believe long term is the right thing to do, even though it’s going to hurt our comps at this point. But long-term we believe it is the right thing to do to keep growing in a market like as you described, have still good opportunities. Panama is in probably similar conditions in some of the parking lot situations. And we’re basically studying all the opportunities in the cities where we are currently making business. We have a lot of history. We know a lot of the operatives that our members are coming from. So that helps us when we design or decide to go to a new club, we know how much of the sales work or we think we know how much of the sales will…

Yeah, well, specifically the one that we just opened we think it’s going to probably be as much as a 1% impact to our total comp. So that’s kind of the effect of that one. We’ll have to see in the next couple of months as I guess at new members or all members decide exactly where you think that they would be shopping. But at this point, at least, we believe with our internal calculations that it can probably be as much as a 1% of our total comp growth. David Strasser – Janey Capital Markets: Thank you very much.

No, problem. Thank you, David.

Now we’ll hear from Ronald Bookbinder with Benchmark. Ronald Bookbinder – Benchmark: Congratulations on another strong quarter. I was wondering about the online effort for Bogotá. Why is it only for Bogotá and not all of Columbia?

The main reason for starting in only right now with Bogotá is, we want to understand the fact, we want to be right. I know that – first of all we have a lot of members from Bogotá visiting. I guess, they could probably go to Barranquilla, Cartagena on occasion or on weekends. And they kind of experience the PriceSmart experience of shopping with us. So, we have a good base of members from Bogotá. I know that we have learned it’s in a limit of necessarily for expanding towards this place. Now it’s just a matter of I guess walking before running, but that’s just a case. Ronald Bookbinder – Benchmark: Is this your first large online effort?

On that type of, we have been doing online business in other ways but more with the merchandize that we ship from the U.S. basically. And obviously the lead time is more two to three weeks at the best because obviously we ship. Once a member orders it goes to our distribution center in Miami and get to the country. So it is a longer lead time. We also have a different program in El Salvador that we use for it’s called Amigo Familia Y Amigos, friends and family. And basically that program is for some people that want to shop for their relatives in El Salvador. Now people in the U.S. that can shop for their relatives in El Salvador. And that’s been in place for probably almost more than one year or close to two years. So, we have different approaches when it comes to online business. This one in particular is kind of new and unique for given the size of the Bogotá filling, given the size that we didn’t have presence there. But there was a good ability. And reality is, we – this came up because we knew how much business we were getting in Barranquilla in particular with members that were shopping from Bogotá. And they were using this delivery service company that we have in the club. So that gave us the indication of these opportunities that was there because, all these members were doing it, without the online facility that were just going to Barranquilla shopping. And they will send it to the addresses in Bogotá. So, it came as an idea to make it easier for those members to have access to our merchandize. And that merchandize we have on hand at the club, so as I mentioned in my script, it is at 24 to at the most 48-hour deliver to the destination. And the member paid for, they get the same prices that they get at the club except for the delivery fee that is very refundable. So, it’s a good opportunity and again it’s not only now limited to Bogotá but nothing stops that as we improve it and as we make sure we’re ready to probably launch it in other cities. Ronald Bookbinder – Benchmark: And you could launch it sort of system-wide throughout Central America and the Caribbean?

Yes, pretty much. We haven’t gone in that way but yes. Once we have these days the ability through our systems, yeah, there are nothing the stuff that’s ongoing. I think the key is finding a good delivery company because we’re not handling our delivery, we just lead to a third party. And they are the ones doing it. So, from our side, we would probably need to do it and that’s the reason which is going to be that hard. And at the end of the day, finding a good delivery company that can guarantee us that we can provide a good service at a reasonable in terms of delivery. But yeah, it has definitely a scale to grow if we want to do it in other cities in Central America or the Caribbean. Ronald Bookbinder – Benchmark: And are these sales incorporated in the store comps?

Yes, those sales are hard to cover. They go to one of our clubs in Columbia.

Clearly there are, it’s coming through Cali so that’s not in the comps right now. But they are sales. They will be, they’re in the club sale in one of our clubs.

Yeah. The club actually third in those sales is Cali, one of our Cali locations is the ones that are being, those needing the merchandizing I’m telling it. Ronald Bookbinder – Benchmark: Okay, great. Thanks very much.

Thank you.

And right now, there is no additional questions in the queue. I will give one final reminder. (Operator Instructions). And with no further questions, I’ll turn the call back over to Mr. Heffner for closing remarks.

Well, thank you Jake. And thank you all for participating with us today. This ends the call. Thank you.

Ladies and gentlemen, this does conclude your conference for today. Thank you for your participation. Thank you for calling.