PriceSmart, Inc.
Q4 2022 Earnings Call Transcript

Published: 2 Nov 2022

[Operator:]

Good morning or afternoon, everyone, and welcome to PriceSmart, Incorporated's Earnings Release Conference Call for the Fourth Quarter of Fiscal Year 2022, which ended on August 31, 2022. 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, Tuesday, November 1, 2022. A digital replay will be available following the conclusion of today's conference call through November 8, 2022, by dialing 1 [phone] for domestic callers or 1 [phone] for international callers and by entering the replay access code 1071897. For opening remarks, I would like to turn the conference call over to PriceSmart's Chief Financial Officer, Michael McCleary. Please go ahead.

[Michael McCleary:]

Thank you, operator, and welcome to the PriceSmart earnings call for the fourth quarter of fiscal year 2022 that ended on August 31, 2022. We will be discussing the information that we provided in our earnings press release and our 10-Q, which were both released yesterday afternoon, October 31, 2022. You can find these documents on our Investor Relations website at investors.pricesmart.com where 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 similar expressions. All forward-looking statements are based on current expectations and assumptions as of today, November 1, 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.

[Sherry Bahrambeygui:]

Thank you, Michael. Good day, everyone, and welcome to our fourth quarter fiscal 2022 earnings call. We had another milestone quarter in Q4. Total revenues exceeded $1 billion for the quarter, and for fiscal year 2022, we exceeded $4 billion in total revenue. Net merchandise sales came in at $990 million, just shy of $1 billion, which represents year-over-year growth of 13.6% after a negative 2.9% currency impact. Comparable net merchandise sales increased by 9.2%, and that's after taking into account a negative 2.7% FX impact. Operating income increased 20% over the same quarter last year. Membership accounts grew to an all-time high of 1.76 million, and our renewal rates were 88.9%, holding strong. If you recall from our last earnings call, like many other retailers, we were in the thick of dealing with the fallout from the global supply chain disruptions. Our team has done a great job of being proactive and executing on the plan to mitigate the impact. We addressed the situation head on, and we selectively adjusted prices in areas where we were having an overstock issue so that we could promptly sell through the overstock categories and swiftly begin to rebalance our inventory mix and restore - begin restoring our intended margins. In turning back to the third quarter, we experienced a decrease in our total gross margin as a percentage of net merchandise sales due to higher than normal markdowns in several of our non-food categories, including furniture and seasonal items. During our last earnings call, we told you that our intention was to take decisive actions to swiftly sell through and hopefully be well positioned for the holiday season by the end of Q4. We gave you our expectation about the magnitude of the impact on our margin for Q3 - excuse me, for Q4, and that it would be about 25 to 50 basis points. Now with the fourth quarter in our rearview mirror, we can see that our plan worked well. Total gross margin for the fourth quarter of fiscal year 2022 as a percentage of net merchandise sales was 15.5%, or a 40 basis point decrease from the fourth quarter for fiscal year 2021. However, in terms of total dollars, the gross margin - total gross margin increased by $15.3 million or approximately 11% versus the same quarter of the prior fiscal year. Now although we've got the situation hopefully behind us for the most part, we do expect our inventory levels to continue to run a bit higher than historical levels in the short term because we still continue - we still are facing long transit times on some of the transoceanic merchandise. However, we are striving to reduce our days on hand of inventory over the next several quarters. Although Q4 was below the margin rate levels we've seen in recent years, we do expect to return to our intended margin rates in fiscal 2023. With that said, we're excited about several merchandise programs we've been running for the holidays as the actions we have taken have allowed us to get our seasonal programs back on to a more normal schedule in this first quarter of fiscal 2023. The Christmas trim program has landed in the clubs. We believe that early sales are indicative of how excited the members are to find these new seasonal items. Also, the toys plan for this season have mostly landed on time, and early sales figures are looking good. Lastly, we have two promotional periods in Q1 of fiscal year 2023. So we're looking forward to those results. Fortunately, supply chain disruptions were relatively tempered during the quarter with our overall supply chain logistics network remaining relatively stable. The flow of merchandise was quite reliable in terms of replenishing our clubs. And this is good considering the fact that shutdowns continued in Shanghai, China, but only had a nominal impact on our sourcing from the region. Also on a positive note, we're seeing relief on shipping costs. The reduction in shipments due to factory closures, combined with slowing demand from U.S. importers, is favorably impacting freight rates, reducing Trans-Pacific spot rates to approximately $15,000 per container. So we're seeing a significant decrease in ocean freight costs. The latest spot rate for October, the rates were as low as $6,000 per container. However, on the other hand, transit days for inbound containers loaded with our merchandise from Asia were 61 days on average for the fourth quarter versus 39 days in the fourth quarter of last year and were also up about a week versus Q3 2022. And as I mentioned before, transit times, especially for merchandise coming from Asia, is impacting our days on hand of inventory. Despite this increase in transit times, the team has planned for these delays, and we've maintained very good in-stock levels during the quarter. Inflation is an important macroeconomic factor that continues to have a significant impact on the cost of our merchandise. And although we do our best to mitigate cost increases as best we can, inflation has resulted in increases in our merchandise selling prices. For the fourth quarter of fiscal 2022, the average sales price per item has increased by approximately 9% compared to the same period of the prior year. For the same comparative period, we've seen the items per basket also decrease. However, transactions on a comp basis has grown by 3.6% this quarter versus a year ago. While on the topic of inflation and macroeconomic circumstances, I'd like to take a moment to talk about Colombia. Over the past year, Colombia has experienced inflation of about - let me clarify. Over the past fiscal year, Colombia has experienced inflation of approximately 11%. And the Colombian peso in fiscal year 2022 decreased, devalued against the U.S. dollar by 16%. And just since August 31 of 2021, the peso has devalued an additional 12%. So we've discussed the pressures we face in Colombia over several prior earnings calls, and these challenges still exist. While there are numerous macroeconomic factors at play, at PriceSmart, we're doing what we can that is within our control. These pressures, of course, impact both revenue and margins. We have been and will continue to take targeted measures to mitigate the FX impact and to maintain the right value equation for our members, which in certain limited cases may mean holding the line on pricing while aggressively managing and improving efficiencies. So let me give you just some examples of levers that we have. And this is not an exhaustive list, but just an example, the types of strategies and business practices that we take into consideration when addressing the FX situation in Colombia. There's a concerted effort to increase local sourcing. That also has the dual benefit of oftentimes providing a secondary source that helps mitigate the supply chain disruptions. We carefully evaluate and adjust appropriately our mix between local and imported products. Another lever is shifting more overhead expense into the Colombian market. Or as we grow, making a concerted effort to incur expenses in local currency and in positions that could help support not just Colombia, but other markets as well. And we can also take a SKU-by-SKU approach to our pricing by doing a thorough pricing analysis to strategically adjust pricing on certain items so that we can protect our members' loyalty and shopping patterns. So in Colombia, the overall margin percentage may be impacted depending on our approach, but the strategy and goal will be to protect and grow margin dollars overall. And separate from margin, we believe that this will translate into a traction of new members and member retention, protecting membership income. In essence, we want to have PriceSmart be a comparatively safe haven for the members' needs during a challenging and difficult environment for us and the members. We learned something important through our experience with the COVID pandemic

[Michael McCleary:]

Thank you, Sherry. Good morning or afternoon to everyone, and thanks for joining us today to talk about our fourth quarter results. Total revenues and net merchandise sales came in at $1.02 billion and $990 million for the quarter, respectively, increases of 12.3% and 13.6%, respectively, over the comparable prior year period. We ended this quarter with 50 warehouse clubs compared to 47 warehouse clubs at the end of the fourth quarter of fiscal 2021. Our comparable net merchandise sales growth for our fiscal fourth quarter was 9.2% for the 14 weeks ended September 4, 2022. Foreign currency fluctuations had a negative impact on net merchandise sales and comparable net merchandise sales growth of 2.9% and 2.7%, or approximately $24.8 million and $24.9 million, respectively. By segment, in Central America where we had 27 clubs at quarter end, net merchandise sales increased 11% with a 7.7% increase in comparable net merchandise sales. Foreign currency fluctuations had a negative impact on net merchandise and comparable net merchandise sales growth in Central America of approximately 3.4% and 3.2%, respectively, during the quarter. All of our markets in Central America had positive comparable net merchandise sales growth, except for Guatemala, which is experiencing sales transfers from other warehouse clubs to our new Aranda club. In the Caribbean region where we had 14 clubs at quarter end, total net merchandise sales increased 22.1%, and comparable net merchandise sales increased 15.7%. Trinidad and Tobago net merchandise sales increased 26.5% for the quarter and contributed 2.1% of our total net merchandise sales growth of 13.6%. The significant improvement in Trinidad versus the prior period was largely due to COVID-19 closures and restrictions last year, combined with our decisions to increase imported inventory levels in the current period to meet current demand, which has helped to increase sales as our ability to source additional U.S. dollars has improved. In Colombia where we had nine clubs open at quarter end, net merchandise sales increased 7.6%, primarily due to opening a new club in Q1 2022, and we had comparable net merchandise sales increase by 2%. Foreign currency fluctuations had a negative impact on net merchandise and comparable net merchandise sales growth in Colombia of approximately 11.3% and 10.7%, respectively, during the quarter. In terms of merchandise, we saw our foods category grow approximately 9% compared to the same quarter in the prior year. Our beverages, snacks and cookies and oils and condiments categories led the way with 22%, 17% and 15% growth, respectively. Our fresh category grew 11% compared to the same quarter in the prior year, led by our gourmet foods, poultry and seafood departments with 21%, 15% and 11% growth, respectively. Our non-food categories grew 9% compared to the same quarter in the prior year, albeit we experienced some margin compression on those sales for the categories of excess inventory we had at the end of the third quarter. In addition, improved conditions in Trinidad and Tobago boosted sales growth for our non-food categories as these categories have generally performed quite well in this market. Finally, our other business category rebounded with 11% growth, primarily from our food service, bakery and optical departments. Turning to margins. Total gross margins and net merchandise sales were in line with expectations at 15.5% for the quarter versus 15.9% for the same period last year. As Sherry described, we spent the quarter working through the overstock positions in some of our non-food categories as we focused on getting back to our core business and a more standard inventory balance and customary margin structures. We still have some excess inventory in some of our apparel categories, where we expect to be able to work through this inventory while generally returning to our pre-Q3 overall margin rate. Total revenue margins decreased 80 basis points to 16.9% of total revenues when compared to the same period last year. This revenue margin decrease is primarily attributable to a 40 basis point decline in merchandise gross margins and a decrease of 30 basis points due to the sale of Aeropost during the first quarter. SG&A expenses decreased during the quarter by 100 basis points as a percentage of total revenue, primarily due to the sale of Aeropost, which lowered warehouse club and other operating expenses by 60 basis points and general and administrative expenses by 40 basis points for a total of 100 basis points of impact on SG&A expenses. Operating income for the quarter increased 20% from the same period last year to $39 million. Other expenses of $1.4 million was primarily driven by $1.6 million in transaction costs associated with converting Trinidad dollars into tradeable currencies. Our effective tax rate for the fourth quarter of fiscal 2022 came in lower than last year at 34.2% versus 35.5% a year ago with our full fiscal year 2022 rate coming in at 33.2%. The decrease in the effective tax rate is primarily related to the favorable impact from changes in income tax liabilities from uncertain tax positions. On a go-forward basis, we estimate an annualized effective tax rate of 32% to 33%. Net income for the fourth quarter of fiscal 2022 was $23.3 million, or $0.75 per diluted share, compared to $19.5 million, or $0.63 per diluted share, in the comparable prior year period. Moving on to the strength of our balance sheet. We ended the quarter with cash, cash equivalents and restricted cash totaling $251.4 million. From a cash flow perspective for the 12 months ended August 31, 2022, cash provided by operating activities decreased $5.3 million compared to the prior year, which was primarily a result of net changes in operating assets and liabilities. Specifically, changes in various components of working capital and non-current assets resulted in a $13.8 million use of cash for fiscal 2022 compared to providing $13.1 million of cash in fiscal 2021. Another contributor to the change in cash flow from operations was our inventory position heading into the peak holiday season, which increased to $464.4 million as of August 31, 2022, versus $389.7 million as of August 31, 2021. This was due to a combination of factors, including purchasing patterns, inflation, pending pockets of excess inventory and the addition of three new clubs. Our total - our goal is to decrease our inventory days on hand as we continue to right size our inventory balance. Net cash used in investing activities decreased by $42 million for the 12 months ended August 31, 2022, compared to the prior year, primarily due to the decrease in the current period of purchases of certificates of deposits due to improved availability of U.S. dollars in Trinidad. With respect to Trinidad, our balance of Trinidad dollar denominated cash, cash equivalents and short and long-term investments measured in U.S. dollars further improved this year, decreasing $27.9 million from our fiscal 2021 ending balance to approximately $25 million. Net cash used in financing activities decreased by $82.9 million, primarily due to lower net repayments of short-term debt compared to the same 12-month period a year ago when we were prepaying short-term facilities accessed at the early stages of the COVID-19 pandemic and obtaining additional financing. In closing, although our results for the quarter were impacted by some continued margin compression, we believe that the fundamentals of our business remain strong as evidenced by our strong sales growth and solid membership signups and renewal rates. We are proud of the entire PriceSmart team for working through the recent merchandise challenges and positioning us for a strong 2023. We are excited about the upcoming holiday season, and we believe our value proposition, the investments we are making in our team and technology, and how we conduct our business resonates with our members and within our communities. Before I turn the call over to the operator, I want to remind everyone, as we look forward to our fiscal 2023 first quarter results, that when comparing these results to the prior year, in the first quarter of fiscal 2022, we recorded a non-recurring gain from our disposal of Aeropost, which positively impacted earnings by $0.05 a share. With that, I will turn the call over to the operator to take your questions.

[Operator:]

The first question today comes from Jon Braatz with Kansas City Capital. Please go ahead.

[Jon Braatz:]

Good morning, Sherry, Mike.

[SherryBahrambeygui:]

Good morning.

[Jon Braatz:]

Sherry, I appreciate the color on Colombia and the levers you can pull and so on, but the currencies depreciate quite a bit. Generally speaking, in broad terms, what are you seeing from the consumer and consumer behavior in Colombia as a result of the weakness in the Colombian peso? How is that affecting the consumer in Colombia?

[SherryBahrambeygui:]

Well, just like you would expect, there is a bit more conservatism, and their shopping patterns are tilting more towards the essentials and basic goods. We're seeing fewer items in the basket, and people are being much more measured. But our - I mean, we've given you the results of our overall performance there. I do believe there's an opportunity for us, and we've seen it in certain circumstances in the past, where when people become more disciplined about their spending, we play an even more important role, because we're known in our communities to not gouge, not play a high-low game. If we make a mistake, we make it in favor of the member. And we work extremely hard to get the best value we can for our members. So there's a conservatism, absolutely, and we're seeing it, but we're seeing it in other markets as well. But we're also seeing that we're very well received. I mean if you look back, our membership base has grown there. We went through a period a couple years ago where there was some retracting and - but now, we've been building again for FY 2022, but 2023 has some challenges. It may be challenging. I mean that's just the reality. So it's our job to do everything we can. And there are opportunities, which is amazing. There are opportunities where - like looking at our categories and our SKUs one by one, something that I don't think we've done in the past, go to that level. But we can be very strategic about our pricing structure on items and continue to earn the base and the trust of the members so they continue to not only shop with us, but rely on us and perhaps even win more business from them.

[Jon Braatz:]

Okay. Sherry, you mentioned - you talked about your September sales. And there was a little bit of relative softness in the comps versus what we saw in the fourth quarter. Is that more broad based, or is that something more isolated to the issues that we're seeing in Colombia?

[SherryBahrambeygui:]

Well, Colombia had a significant - was a significant part of that. But we've had - I think Michael just shared with you, in Central America, we had pretty strong positive comps in all markets except for the Guatemala and - let's see here.

[Jon Braatz:]

Okay. Yes, go ahead.

[SherryBahrambeygui:]

Let me see if Michael's got…

[Michael McCleary:]

Yes, we did disclose in the 10-K a little bit of flavor about kind of recent results in Colombia. There's a little bit of extra flavor for Q4 and September and --

[Jon Braatz:]

Okay. I must have missed that one. Speaking of the 10-K, Mike, there was a little sentence in there that says about your export sales and how you might be exploring opportunities in other markets beyond the Philippines. And I don't know if you've mentioned that before, I don't recall, but is there something - is there a new opportunity there you're working on?

[SherryBahrambeygui:]

We are. Jon, we have a pretty seasoned executive who is looking for opportunities for us to be able to sell through either a licensee or sell in other markets. And we - it's not material yet in terms of these new opportunities, so I prefer to wait and report on it when we've got some good results to share with you. But there are some - there's some progress that's being made on two fronts, and one is a very new idea, but that will allow us to have some additional income in the U.S. when we generate sales and profits through the export sales.

[Jon Braatz:]

Okay. All right. Thank you very much.

[SherryBahrambeygui:]

All right. Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Sherry Bahrambeygui for any closing remarks.

[Sherry Bahrambeygui:]

I want to thank all of you and our employees and our investors for being part of our endeavor here to continue to bring good value to the members and do good things in our markets, especially during challenging times. We're very proud of our results, and we're committed to doing the very best we can as we go into 2023. So, hope you all have a good day.

[Operator:]

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