Good afternoon, everyone, and welcome to PriceSmart, Incorporated's Earnings Release Conference Call for the Third Quarter of Fiscal Year 2022, which ended on May 31, 2022. After remarks from our company's representatives, Ms. Sherry Bahrambeygui, Chief Executive Officer; and Michael McCleary, Chief Financial Officer, you will be given an opportunity to ask questions as time permits. As a reminder, this conference call is limited to 1 hour and is being recorded today, Tuesday, July 12, 2022. A digital replay will be available following the conclusion of today's conference call through July 19, 2022, by dialing 1 (877) 344-7529 for domestic callers or 1 (412) 317-0088 for international callers and by entering the replay access code 6291871. For opening remarks, I would like to turn the conference over to PriceSmart's Chief Financial Officer, Mr. Michael McCleary. Please proceed, sir.

Thank you, operator, and welcome to the PriceSmart earnings call for the third quarter of fiscal year 2022 that ended on May 31, 2022. We will be discussing the information that we provided in our earnings press release in our 10-Q, which were both released yesterday afternoon, July 11, 2022. You can find these documents on our Investor Relations website at investors.pricesmart.com, or you can also sign up for e-mail alerts. As a reminder, all statements made on this conference call other than statements of historical fact are forward-looking statements concerning the company's anticipated plans, revenues and related matters. Forward-looking statements include, but are not limited to, statements containing the words expect, believe, plan, will, may, should, estimate and some other expressions. All forward-looking statements are based on current expectations and assumptions as of today, July 12, 2022. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the risks detailed in the company's most recent annual report on Form 10-K and other filings with the SEC, which are accessible on the SEC's website at www.sec.gov. These risks may be updated from time to time. The company undertakes no obligation to update forward-looking statements made during this call. Now I will turn the call over to Sherry Bahrambeygui, PriceSmart's Chief Executive Officer.

Thank you, Michael. Good day, everyone, and welcome to our third quarter fiscal '22 earnings call. Sales momentum continued during the third quarter, and we almost reached our $1 billion mark again, but came in just shy at about $999 million, just like last quarter. This is a company that is recording sales of significant levels and is moving in the right direction. Net merchandise sales increased by 16.5% after a negative 2.3% currency impact and comparable net merchandise sales increased by 12.8% after having taken into account a negative 2.2% impact. Membership accounts grew to 1.75 million, that's a new record and we came in with a strong renewal rate of 88.9%. Although -- and I know the topic of interest today will be margins. Although our total gross margin dollars increased 4% over the comparable prior year period, merchandise gross profit as a percent of net merchandise sales was 14.2%, a decrease of 170 basis points from the same period in the prior year. Now as stated in our earnings release, like many other retailers, we have not been spared the impact of global supply chain disruption and abrupt shift in consumer demand. Our hardlines and other non-food categories are characterized by a higher penetration of imported items that tend to correlate with discretionary spending. And due to the long lead times on many of these items, commitments must be made many, many months in advance if not in some cases, about a year. So for -- many months ago, we made strategic investments in inventory with the goal of remaining in-stock and capturing higher sales. Since then, the environment changed significantly. It's been characterized by global supply chain disruption, including Asia port closures due to COVID, container shortages, higher freight and fuel costs, inflation and sharp changes…

Okay. I'll do that. So thanks, Sherry. Good morning or afternoon to everyone, and thanks for joining us today to talk about our third quarter results. Total revenues and net merchandise sales came in at $1.03 billion and $999 million for the quarter, respectively, increasing -- sorry, increases of 15.1% and 16.5% over the comparable prior year period, respectively. We ended this quarter with 50 warehouse clubs compared to 47 warehouse clubs at the end of the third quarter of fiscal 2021. Our comparable net merchandise sales growth for our fiscal third quarter was 12.8% for the 13 weeks ended May 29, 2022. Foreign currency fluctuations had a negative impact on net merchandise sales and comparable net merchandise sales growth of 2.3% and 2.2% or approximately $19.1 million and $18.6 million, respectively. By segment, in Central America, where we had 27 clubs at quarter end. Net merchandise sales increased 12.7% with a 9.7% increase in comparable net merchandise sales. Foreign currency fluctuations had a negative impact on both net merchandise and comparable net merchandise sales growth in Central America of approximately 2.8% during the quarter. All of our markets in Central America had positive comparable net merchandise sales growth, except for Guatemala, which had a small negative comp due to sales transfers from other clubs following the opening of our new Aranda Club. In the Caribbean region, where we had -- excuse me, 14 clubs at the quarter end, all of our markets had positive comparable net merchandise sales growth with total net merchandise sales increasing 21.4% and comparable net merchandise sales increasing 17.4%. Trinidad and Tobago net merchandise sales increased 22.8% for the quarter and contributed 1.9% of the total net merchandise sales growth of 16.5%. The significant improvement versus the prior period was due to COVID-19 closures last…

All right. Thank you for stepping in, Michael. I think we're now ready to go. So with regard to membership benefits is where we left off, and I shared with you a little bit about private label, we are continuing with our well-being services and are seeing very positive results on the -- especially the optical and the audiology. We currently have 47 locations of -- with optical centers and expect to have 49 open by the end of the year. This service provides the 4 free eye exams with every membership, and we've performed over 88,000 eye exams during the first 9 months of the fiscal year, including close to 1,000 exams and eyeglasses for local school children. So we're very excited about having this service available not only for our members, but to also support our local communities. And with regard to the pharmacy centers in all 8 of our warehouse clubs in Costa Rica, we expect to have pharmacy centers in all 7 of our Panamanian clubs by the end of fiscal year 2023, and we continue to analyze opening pharmacies in additional countries. And they may take different forms based on the regulatory structure, but that is something we're studying at this time. So our third driver of growth is driving incremental sales using pricesmart.com and enhancing efficiencies and opportunities for sales using digital capabilities. And what we have right now is our total e-com sales directly represent 3.6% of total merchandise sales. And when we compare this fiscal -- third fiscal quarter versus the comparable prior year period, online sessions increased 10%, and that led to an increase of online orders of 7%. Meanwhile, the average online order value increased 14%. So we're seeing some really encouraging signs with regard to how our members are…

[Operator Instructions] And the first question will come from Rodrigo Echagaray with Scotiabank.

A couple of questions from my side. I want to clarify, if I understood correctly, you said the non-food categories grew in the teens in the quarter. Did I misunderstand?

Yes, I said 18%, yes. We grew 18%. Sorry, I was on the wrong. I got some technical difficulties of my own. Sorry, yes, it went up 18%.

So I guess what I'm curious to understand is the markdowns in the context of same-store sales in the double digits, also within non-food categories. And I guess when I look at what happened in Q1 or in this -- the first half of the year at some of the retailers in the U.S. that face some similar challenges on excess inventory, there was a much sharper slowdown on the top line, which does not appear to be there, at least, not in Q3 for you guys. So is that -- how should we read that? Is that an expectation that Q4 is going to be extremely challenging?

Rodrigo, are you referring to -- with regard to generating top line sales?

Right. So I'm trying to understand the markdowns in the context of a healthy top line and within that strong sales on the non-food categories, which -- it sounds like that's where you had the excess -- or you have the excess inventory?

Right. Right. So you're perhaps trying to distinguish between the healthy sales growth and sales growth that may be just the result of markdowns below cost, is that --

I guess is that the best way to understand the dynamics in Q3 and the markdowns?

Well, I mean, certainly, one could look and say, sales were impacted by the fact that merchandise was marked down significantly, but there are a number of different factors. One is our top line sales have been consistently growing. And just to give you some context, approximately 17% of our sales in Q3 were for non-food. Of that, about two-thirds of it was in hardlines and approximately one-third within softlines. And it was only with respect to a portion of the hardlines that we had this excess inventory. And I think, Michael, have you quantified that as of the end of May, the amount of excess inventory, what we deem to be excess in the hardline? Is that --

Yes, we're -- yes, we've increased our days on hand targets because of all the supply chain complexities. But when you carve that out, we're estimating that we're probably about $20 million to $30 million higher than we would like to be in general as of the end of Q3 for - between hardlines and softlines. But I think to your question about markdowns and does that signal a slowdown, I mean we did -- Sherry did share the June comps, right, 11.8%. So you do have an indicator of the direction of sales -- that sales are headed, at least for the first month of the quarter. And I think Sherry has also emphasized that we've really been trying to clear out this problem and that doesn't necessarily mean that there's going to be a slowdown. We're just trying to work through some of the backlog we have of overlapping programs and most importantly, just cleaning things up, so that when the red and green starts hitting at the beginning of the fiscal year that we have space for it, and we're out of this stuff that's kind of accumulated. So I don't think we're directly linking markdowns to a slowdown in growth at this point. I mean, obviously, at some point, the higher ticket items, housing inflation impact, but -- and we're especially focused on those. The current quarter, we're working on a furniture program, which has some higher ticket items, and we have to keep an eye on those, but we're not directly projecting a slowdown at this point.

Now to fill that in a bit, Rodrigo, if your question is with regard to the excess inventory, I’ll reiterate what Michael is saying is we don't see the excess inventories being a cause for a slowdown. There are other factors our business is facing. I mean -- and we can't really predict other than FX as providing major headwinds, Colombia's FX, Costa Rica's FX. Whether or not that results in a slowdown remains to be seen, I mean we have been operating with significant FX headwinds more so than historically, I think, for a couple of years now and we've managed to continue to grow sales. So clearly, we have to continue doing what we do best, and we know we're in tough markets with currencies that fluctuate and at least more recently, over the past few years, don't fluctuate in our favor very often, but we're still delivering sales growth and healthy comps and that is through all the multitude of decisions we make along the way in order to achieve those sales. So I can't answer -- I couldn't answer to you whether or not there will be a slowdown because, again, there are so many factors that are beyond our control. All I can tell you is that we're very conscious of them, and we're trying to make the right business decision every day to be able to keep the members happy, keep the memberships renewing, grow the membership base and generate those sales.

Got it. And so I guess maybe a better way to ask that same question is, would it be fair to say that the expectations were much higher for certain hardlines in terms of top line for Q3, and that's where the excess inventory came from just on the expectations front rather than weakness on the top line in terms of consumers already adopting?

To the extent, we're not clear about it. There's no doubt, I mean, when we were making these -- remember, these hardlines usually have long lead times. And the decisions regarding consumer preferences and what we anticipate the market will demand are made nine months -- six months, nine months, 12 months in advance of the time that the consumer will actually be in a position to transact. So in an environment where things are shifting pretty significantly back and forth, we did take a point of view. And we took a point of view that we are going to make a strategic investment in more inventory with the expectation that we would be able to capture higher sales and be able to sell these items. After that is really when a number of these other factors came together and sort of created a perfect storm, even though some of it was ongoing, but we saw the Asia club -- Asia port closures increasing more extensively. What would happen is we'd have merchandise there, ready to go, it was seasonal. No one was there to put it on the ship to us. But then we'd have the next season coming up on the heels of the prior season's merchandise. And by the time the first season got to the clubs, it was almost -- it almost ran out of time in the schedule, so we have 2 rotational seasons backed up. That's the kind of challenge that we didn't -- we couldn't predict. It was caused again by the supply chain disruption, the unexpected closures, the unavailability of containers, but that's what we were faced with at a time when we basically took a point of view that we want to have the in-stocks, and we want to push for the sales. Now as it turns out, looking back, had we known all these other things would happen as well, We probably wouldn't have taken that same point of view.

No, that makes sense. Yes, for sure. I think I get it. It may makes sense.

Yes, I think it's important to recognize, again, we're not happy about it, but it's a point in time. It's a point in time where these different variables came together and resulted in the current situation with excess inventory and we are, as a result, addressing it directly and as quickly as we can to get back on track. And we don't see it as a development that should continue on an ongoing basis or something that we have an issue with in terms of our ordinary course of business and how we do business and make decisions.

That makes sense. And just another question to clarify. If I understood correctly, the expectation is that, roughly speaking, the impact on gross -- consolidated gross margins in Q4 is upwards to 50 bps just on the excess inventory issue, if I understood correctly.

We're estimating within a range of 25 to 50 basis points to account for the rest of the merchandise that has not yet been sold and the compression on that merchandise has not already been accounted for in your Q3 numbers -- in our Q3 numbers, which you see. And that the residual that would be about 25 to 50 basis points, which again we've got to have more sales information in terms of trends, but we think we should be out by the end of Q4.

And given that we have these short-term challenges, and then also when we include the excess margin that came from [indiscernible] that is, I guess, normalizing or should normalize. When we look at the gross margins over time, what should be the reasonable gross margin expectation for the future? And I know you don't give guidance. I'm not looking for guidance, but I guess I'm trying to understand what's the -- where do you feel comfortable in terms of gross margins, given those 2 issues that are kind of impacting the visibility on the gross margins?

This is an area that comes up over and over again. And I personally have wondered how someone in your position can rely solely on a gross margin percentage because knowing what we know about how our business operates and how it's evolved, I think we talked about this before, historically, almost all of our sales were the result of purchasing merchandise, marking it up, getting it to the clubs and selling it. As a business, we've intentionally evolved and have developed new capabilities and have expanded ways that we think we can either create greater value or create efficiencies. And as a result, we've got more than just purchasing items and then getting them to the club. And the examples are the produce distribution center -- I mean, I'm sorry, our farm program, direct farm program. We've invested our own people in identifying and teaching farmers food safety and helping identify what they need to be able to provide a reliable source of produce to a company like ours, we've invested in a produce distribution center. We've invested in teaching them food safety and handling. That is more like getting involved in actually creating or a business that then supplies us. And as a result, the margin structure on that program is different. It's higher. But we only will do something like that if we feel, ultimately, the product that comes from that is going to be as good, if not better quality, and a better price for the member. And in that circumstance, there's -- and will still remain very competitive and maintain our typical comp umbrella. So in that circumstance, you're going to see a higher margin percentage that's applied to that specific function.

Yes, that makes sense. Efficiencies that were not there before should be accounted for, but tough to put a number around that. But I guess I do have a good perspective with these comments in that not necessarily going back to a 16% range, necessarily make sense just because that used to be the gross margin, especially after these investments have been made.

But in some cases, the gross margin may be higher in certain ways of our business. So for example, private label. As we're expanding private label, what we're really doing is we're getting more involved in product development ourselves. That requires more expertise. It's more investment on our part, it's more involvement further up in the supply chain. Once again, that would, in some cases, merit a different margin structure. But the bottom line is we have to always tie it back to, are we giving the greatest value we can to the member? Do we have a healthy comp umbrella? Have we squeezed out the inefficiencies. And all eyes are on that effort, but we recognize that when we have to participate so much more than just identifying the merchandise and then -- and getting it to the club that the shareholders must have a return on the investment that it requires from us to be able to create that opportunity and make it available.

That is all the time we have for today's call. I would now like to turn the call back over to management for any closing remarks.

We do not have -- can you hear me? Okay. We want to thank our shareholders and our employees for continuing to stand strong with us as we navigate some choppy waters. But again, this was a limited time, limited scope situation in our view. And our focus remains on the medium-term and long-term growth of the company and continuing to invest in that and make sure that we are doing our best for the future. So thank you for being with us today.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.