PriceSmart, Inc.
Q3 2021 Earnings Call Transcript

Published: 9 Jul 2021

[Operator:]

Good morning/afternoon everyone, and welcome to PriceSmart Incorporated Earnings Release Conference Call for the Third Quarter of Fiscal Year 2021, which ended on May 31, 2021. After remarks from our company's representatives, 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 one hour and is being recorded today, Friday, July 9, 2021. A digital replay will be available following the conclusion of today's call through July 16, 2021, by dialing 1 [phone] for domestic callers or 1 [phone] for international callers, and by entering replay access code of 10156316.

[Michael McCleary:]

Thank you and welcome to the PriceSmart earnings call for the third quarter of fiscal year 2021. 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 08, 2021. You can find these documents on our Investor Relations website at investors.pricesmart.com, where you can also sign up for email 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, will, may, should, estimate and similar expressions. All forward-looking statements are based on current expectations and assumptions as of today, July 9, 2021. 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 maybe 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.

[Sherry Bahrambeygui:]

Thank you, Michael. Good day everyone. Thank you for joining us and for your interest in PriceSmart. Were pleased to report strong results for our third quarter of the fiscal year. And we're seeing continued sales growth as we enter the final quarter of this fiscal year. For the quarter net merchandise sales grew 11.6% and comparable net merchandise sales grew 8.8% compared to the same quarter last year. Our trailing 12 months membership renewal rate was 87.6% as compared to 82.5% for the same period ending May 31, 2020. And our total membership accounts has just about recovered to the level they were shortly before COVID. These third quarter results were achieved in part because of operational efficiencies, digital capabilities, expanding options for our supply chain, and most importantly, our dedicated team that has become quite nimble at adjusting to rapidly changing dynamics brought on by the pandemic. Also contributing for the company's performance are the investments we've made in talent, technology, and analytics. Generally speaking, our access to timely and high-quality information is supporting better decision-making, greater efficiencies and our understanding of members needs and preferences.

[Michael McCleary:]

Thank you, Sherry. Good morning or afternoon to everyone and thanks for joining us today. Total revenues in net merchandise sales for the quarter where $895.3 million and $857.5 million respectively, representing increases of 11.9% and 11.6% over the comparable prior year period, respectively. As a reminder, including the clubs we opened in Liberia, Costa Rica in June 2020 and Bogota, Colombia in December 2020, we ended this quarter with 47 warehouse clubs compared to 45 warehouse clubs at the beginning -- at the end of the third quarter of fiscal 2020. Our comparable net merchandise sales growth was 8.8% for the 13 weeks ended May 30, 2021. Foreign currency fluctuations had a negative impact on both merchandise and comparable net merchandise sales of approximately $12 million or 160 basis points and $12 million or 150 basis points respectively. By segment in Central America, where we had 26 clubs at quarter end net merchandise sales increased 17.7% with a 16% increase in comparable net merchandise sales. Nicaragua, Honduras, and El Salvador along with our second largest market Panama contributed approximately 1000 basis points of positive impact on the segment's comparable net merchandise sales. This increase was offset by an 80-basis point negative impact on the segment's comparable net merchandise sales from our largest market Costa Rica. During the quarter, Costa Rica experienced foreign currency exchange headwinds with the Costa Rica and Cologne devaluing versus the comparable prior periods. In the Caribbean region where we had 13 clubs at quarter end, total net merchandise sales declined 2.9% and comparable net merchandise sales declined 2.5%. The Dominican Republic continued its stellar sales performance during the COVID-19 pandemic with double-digit sales growth despite a significant foreign currency devaluation compared to the prior year period. However, this gain was more than offset by weakness in Trinidad where we have four clubs. In Trinidad comparable net merchandise sales declined 21.8% in the third quarter due to the resurgence in code related cases and our continued reduction of us inventory shipments to that market due to the U.S. dollar liquidity situation. We were able to source additional tradable currencies during the third quarter compared to the previous quarters in fiscal 2021. And we continue to work on multiple projects to increase sourcing of U.S. dollars, including exporting goods produced in Trinidad to our clubs and other markets. Due to the current limitations on our ability to sell non-essential merchandise in Trinidad, we have further reduced our inventory shipments of U.S. inventory for the time being. As of the end of our fiscal third quarter, our Trinidad subsidiary had Trinidad dollar denominated cash, cash equivalents and short and long-term investments measured in U.S. dollars of approximately $76.7 million, a decrease of $20 million from our balance of $96.7 million as of the end of our fiscal second quarter. The decrease quarter-over-quarter is due to a combination of improvements in U.S. dollar sourcing and additional reduction of imported merchandise during the third quarter, which resulted in more sources than uses of U.S. dollars during this period. We will continue monitoring closely the evolution of the expected reopening of the Trinidad economy during this current quarter with an eye toward increasing imports into Trinidad as the local market and U.S. dollar liquidity conditions merit. Moving back to segment sales, in Colombia where we had 8 clubs opened during the quarter, net merchandised sales increased 22.4% and comparable net merchandise sales increased 3.6%. The comparable merchandised sales increased contributed 40 basis points of positive impact to total comparable merchandise sales for the quarter. The increase in Colombia during the quarter was primarily due to a foreign currency tailwind, partially offset by increasing COVID-19 restrictions and civil unrest that significantly impacted normal commerce in the market, particularly in the city of Cali. The impact of currency on total on comparable merchandise sales in Colombia was significant that positive 7.1% and 5.9% respectively for the quarter. Currency fluctuations are a constant challenge in Colombia, and although favorable to us this quarter, we continue to take actions to mitigate the impact of any future devaluations, such as the sourcing of locally produced goods and actively managing our sales prices and foreign currency exposure of that. Turning to gross margins, total gross margin on net merchandise sales came in at 15.9% a 200-basis point improvement over the same quarter last year. That 200-basis point increase was primarily driven by approximately 80 basis points of increase due to certain pricing actions we took to offset foreign currency exchange costs and COVID-related operating costs, 50 basis points due to the returning margin of our other business categories such as food services and optical compared to the prior year period. And the remaining 70 basis points is primarily the result of more focused and merchandising strategies and inventory management that resulted in fewer markdowns and spoilage. Total revenue margins increased to 17.8% of total revenues, an increase of 190 basis points versus the same period last year. This is the result of the higher gross margins of 200 basis points that I mentioned previously, partially offset by lower revenue margins from our business in the quarter of 10 basis point. Selling, general and administrative expenses for the quarter were 13.7% of total revenues an increase of 80 basis points versus the same period last year. In total SG&A expenses increased $19.7 million compared to the prior year. Warehouse club and other operations expenses contributed 20 basis points of the increase primarily due to the fact that our new club in Colombia has not yet reached normalized sales levels. General and administrative expenses contributed the other 60 basis points of the increase primarily due to investments to support our talent and technology development. Operating income was $36 million, or 4% of total revenue in the third quarter of fiscal 2021 compared to $24 million, or 3% of total revenue for the same period last year. This reflects the increase in total revenue margin primarily from net merchandise sales of 190 basis points partially offset by the 80-basis point decrease due to deleveraging SG&A expenses over the comparable prior year period. Net interest expense decreased $1 million for the third quarter, primarily due to lower short-term borrowings, compared to the comparable prior year period, when we drew down on short-term lines of credit, as part of our efforts to secure adequate cash to cover contingencies arising from COVID-19 related risks. We repaid all of these borrowings by the end of the third quarter. Other expenses of $2.3 million were primarily related to the cost to convert Trinidad dollars into other tradable currencies. Additionally, the Jamaican dollar appreciated which resulted in an unrealized loss on our net U.S. dollar asset position in that market. Due to our U.S. dollar denominated cash reserves designated to fund the construction of our new Portmore club. Our effective tax rate for the third quarter of fiscal 2021 came in lower than last year at 30.9% versus 38% a year ago, primarily because of higher income in the quarter that reduced the impact of the loss of value of foreign tax credits, compared to the same quarter last year. We continued to estimate that our full year fiscal 2021 effective tax rate will be in the 33% to 34% range. Net income for the third quarter of fiscal year 2021 was $22.5 million, or $0.73 per diluted share, compared to $12.7 million or $0.41 per diluted share in the comparable prior year period. Our balance sheet remains very strong. We ended the quarter with cash, cash equivalents and restricted cash totaling $198.4 million. While cash flow provided by operating activities decreased 94.2 million versus the prior year period. This decrease was primarily the result of the vastly different inventory financing strategies due to the different stages of the pandemic between these two years. In the prior year period, we made a conscious decision to pull back on merchandise levels in the non-food areas, excuse me, whereas in the current period, we have increased our position in these items to meet increased demand and to compensate for supply chain challenges. Additionally, at the beginning of the pandemic, we negotiated temporary extensions of vendor terms to assist in cash management activities. These extended vendor terms have in large part reverted to pre-COVID terms as of the end of the current period. However, we have been able to extend our vendor terms on a permanent basis with a substantial portion of our vendors, especially for long lead time items. Net cash used and investing activities decreased by $20 million compared to the prior year, primarily due to a decrease in construction expenditures and an increase in the net proceeds from short and long-term certificates of deposit related to management of our cash balances in Trinidad. A $190.5 million change from cash provided by to cash used in financing activities is primarily the result of a net decrease in proceeds from long-term debt and net repayments of short-term borrowings. We continue to be vigilant about our cash position and ready to adapt to sudden changes in circumstances. In the prior year period, we executed long-term loans to primarily to finance land purchases and construction of several of our warehouse clubs and increased our short-term borrowings as part of our cash management strategy in the early stages of the pandemic. While some uncertainty and risks remain in our market, we feel confident in our operations and our ability to generate sufficient cash for our needs, while also continuing to invest in the future. Therefore, during Q3 of this fiscal year, we finished paying down the remaining short-term lines of credit, which we had accessed as part of our initial COVID-19 response during the same period last year. In closing, we are very clearly pleased about the results of the current quarter and the momentum that we are gaining as we close out our fiscal year 2021. The investments we have made and are making in our future capabilities, combined with our commitment to our founding principles has been the key to our success. Throughout the company, we stand together as one team focused on delivering a great value proposition to our members in a responsible manner. We are looking forward to our potential for growth for years to come and to your support and engagement in our journey. I will now turn the call over to the operator to take your questions. Operator, you may now start taking our callers questions.

[Operator:]

Thank you. Today's first question comes from Jon Braatz with Kansas City Capital.

[Jon Braatz:]

Sherry, obviously the situation in Trinidad is very fluid and I was wondering if there's been any change in Trinidad from the end of the quarter to where we are currently any difference, any change in that situation?

[Sherry Bahrambeygui:]

There has been a slight easing of the restrictions on the sale of goods in our clubs because the government released an amendment to their order, that is now allowing us to include things like construction products and hardware and paper and school supplies and essential things for business to be able to continue functioning. We still have significant items that we're not allowed to sell at this point. But what we're seeing currently is the pace of the spread of the virus is reducing. And the government is looking for ways to start opening things up on a gradual and measured basis. So we're hoping to see more flexibility pretty soon, but until we hear from them directly, we don't know. So it's -- we get very short notice, and we're at the ready, when they tell us, there's something as issued that says, you can now sell this or that and we make sure that we make the adjustments necessary to make them available for our members. Also, we are taking into consideration that in Trinidad, whenever you see these kinds of restrictions, there builds a pent-up demand. And so we're focusing on that to make sure that even though we may not be able to sell certain key items at the moment, we want to be really prepared to provide those items that the most compelling value as soon as the opportunity is given to us. So we're standing by and we're doing everything we can to recapture what we may have lost as a result of the restrictions.

[Jon Braatz:]

Okay. To the extent that maybe things open up again, with oil prices up and Trinidad being a energy sensitive country. Would you see maybe some improvement in the illiquidity situation, the conversion situation? Would you see that improving a little bit?

[Sherry Bahrambeygui:]

Well, generally speaking, whenever there's improvements to an economy, one would expect that that would lead to some improvement in terms of liquidity. But Michael, I think you might be able to provide a better answer to that.

[Michael McCleary:]

Yes. We're seeing very positive signs in this calendar year, especially versus the end of the last calendar year. Historically, in Trinidad there has tended to be a fall-off in liquidity in the second half of the year. So we don’t want to get ahead of ourselves. But as you saw during the quarter, we did reduce substantially our dollar balance, partly because of the additional restrictions as part of our intention to start shipping in more merchandise. So we're keeping an eye on it. We're hopeful, I think certainly a big part of the Trinidad economy is based on natural gas and others. Oil prices are certainly a bellwether if you will. And I think that's a good sign. And we're hopeful that when things start to open up, the economy will improve, and we can continue to improve our liquidity situation there and continue to ship and more merchandise.

[Jon Braatz:]

Okay. Sherry, one last question. This year, you spent heavily on technology on people and to improve that piece of your business? And certainly, I expect you to continue to invest in that area. But will the pace of spending ease a little bit -- could we possibly see some leveraging of those costs next year, compared to this year? Or will the spending still be at a pretty significant pace?

[Sherry Bahrambeygui:]

Well, the approach we're taking to our spending is to make sure that we are investing appropriately to build the capacities we need. We've already seen the benefits, for example, certain technology tools that have been developed for us and how that has really protected us especially in this very volatile environment and has captured sales that we might have otherwise not been able to get. And although, we're watching the spending with each of these tools come significant benefits for us to be able to drive sales. So we're going to look at it in a measured way. But we really feel that by making these appropriate investments, we're building the foundation for growth in the long-term and we don't want to be penny wise and pound foolish.

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

[Sherry Bahrambeygui:]

Well, I want to thank everybody, I hope people are safe and doing well and weathering our current environment wherever you are, and we really appreciate your interest and support of our business PriceSmart and look forward to talking to you next quarter.

[Operator:]

Thank you. This concludes today's conference call. You may now disconnect your lines and have a wonderful day.