PriceSmart, Inc.
Q1 2021 Earnings Call Transcript

Published: 8 Jan 2021

[Operator:]

Good morning or afternoon everyone, and welcome to PriceSmart Incorporated Earnings Release Conference Call for the First Fiscal Quarter of 2021, which ended on November 30, 2020. 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, January 8, 2021. A digital replay will be available following the conclusion of today's call through January 15, 2021, by dialing 1 [phone] for domestic callers or 1 [phone] for international callers, by entering replay access code 10149960.

[Michael McCleary:]

Thank you and welcome to the PriceSmart earnings call for the first 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, January 7, 2021. You can find both 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, January 8, 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, and Happy New Year, everyone. I hope that you and your families are all safe and healthy. We're pleased to discuss with you today our strong first quarter results. Despite the ongoing challenges caused by the pandemic over the past 10 months, we've seen the best from our team members. They've consistently risen to the occasion with an unwavering commitment to safety of members and employees and to providing our members with the best possible shopping experience. Never before has The Six Rights of Merchandising been more important to our business than they are today. This retail philosophy emphasizes having the right kind of merchandise in the right place at the right time, in the right quantity, in the right condition, and at the right price. Our execution of operational efficiencies, vigilance, and discipline to these core principles is what has led us to the 7.7% growth in net merchandise sales and 3.6% growth in comparable net merchandise sales compared to the year-ago period.

[Michael McCleary:]

Thank you, Sherry. Good morning or afternoon to everyone, and thanks for joining us today. Before I begin, I would like to take this opportunity to also thank our team members for their tremendous efforts and selflessness during this past quarter and holiday season. Our results are a reflection of that hard work and determination. Total revenues and net merchandise sales for the quarter were $877.4 million and $838.4 million, respectively, representing increases of 8.1% and 7.7% over the comparable prior year period, respectively. As a reminder, including the club we opened in Liberia in June 2020, we ended this quarter with 46 warehouse clubs compared to 45 warehouse clubs at the end of the first quarter of fiscal 2020. Our comparable net merchandise sales growth was 3.6% for the 13 weeks ended November 29, 2020. Foreign currency fluctuations had a negative impact on both net merchandise and comparable net merchandise sales of approximately $27 million or 350 basis points. By segment in Central America, where we had 26 clubs at quarter end, including three opened since October 2019, net merchandise sales increased 6.2% with a 0.7% decrease in comparable net merchandise sales. Our Honduras, El Salvador and Nicaragua markets contributed approximately 150 basis points of positive impact to total comparable net merchandise sales despite the impact from the two hurricanes that hit the region during the quarter. This contribution was out by 190 basis point decrease coming from Panama, Costa Rica and Guatemala. Panama and Guatemala experienced sales transfers from recent club openings in most countries during the quarter and the devaluation in the Costa Rica and Cologne resulted in sales decreases in that country versus the comparable period in the prior year. In the Caribbean region, where we had 13 clubs at quarter end, total net merchandise sales grew 10.1%, with comparable net merchandise sales growth of 9.9%. Most of our markets in the Caribbean showed double-digit comparable sales growth when compared to the same period in the prior year, with Trinidad and the Dominican Republic contributing 270 basis points to our total comparable sales growth. Up through this quarter, both markets performed well in the current COVID-19 pandemic despite a significant foreign currency devaluation compared to the prior year period in the Dominican Republic. However, I would like to note that in Trinidad, although sales were very strong during the quarter, we are continuing to experience challenges in converting Trinidad dollars to U.S. dollars. As a result, during the first quarter, we began limiting shipments of goods from the U.S. to Trinidad. We are already seeing the impact in our December sales, and we expect to continue limiting shipments during the second quarter of fiscal 2021. Therefore, our Trinidad club is not currently carrying their usual mix and quantity of merchandise. We believe this reduction in imported merchandise will negatively impact sales in Trinidad in our second fiscal quarter by an estimated $14 million to $18 million. We plan to increase or decrease shipments from the U.S. to Trinidad in line with our ability to exchange Trinidad dollars or other hard currencies. However, we are also seeking other opportunities to reduce our net use of U.S. dollar in Trinidad, such as by shifting the purchase of certain goods to local sources and seeking to increase exports of locally sourced items. In Colombia, where we had seven clubs opened during the quarter, net merchandise sales increased 8.7% and comparable net merchandise sales increased 8.6%, contributing approximately 100 basis points of positive impact to total comparable sales. Average ticket growth compared to the prior year three-month period is the primary driver of the increase in Colombia as COVID-19 restrictions led to members buying more merchandise and fewer trips to our warehouse clubs compared to the prior year period. The impact of currency on total and comparable net merchandise sales in Colombia was significant at negative 10.7% and 10.5%, respectively for the quarter. Currency devaluation continues to be a challenge in Colombia, but we are employing different approaches in an effort to mitigate the impact, such as sourcing of locally produced goods and actively managing our foreign currency exposure there. Turning to total gross margins, total gross margin on net merchandise sales came in at 16.1%, a 120 basis point improvement over the same quarter last year. A 120 basis point increase was primarily driven by a 60 basis point increase from certain pricing actions we took to offset foreign currency exchange costs and risks. In particular, we have implemented a liquidity premium in Trinidad on our U.S. imported items. The other 60 basis points increase came from more focused merchandising strategies and inventory management. Total revenue margins increased to 18% of total revenue, an increase of 110 basis points versus the same period last year. This is the result of the higher total gross margins of 120 basis points that I mentioned previously and higher revenue margins from our casillero and marketplace business in the quarter of 20 basis points, partially offset by 20 basis points from lower membership income and 10 basis points from Trinidad margin dollars as a percentage of total revenue from our export sales business. Selling, general and administrative expenses for the quarter were 12.9% of total revenues, a decrease of 20 basis points versus the same period last year. In total, SG&A expenses increased $6.7 million compared to the prior year, but decreased as a percentage of total revenue. Warehouse club and other operations expenses contributed 10 basis points of the decrease as a result of lower warehouse club operations expense ratios across all of our markets. General and administrative expenses contributed the other 10 basis points of the decline. The overall improvement is primarily a result of leveraging our consolidated revenue growth. However, we continue to make investments to support our technology and talent development. Operating income was $44.5 million or 5.1% of total revenue in the first quarter of fiscal 2021 compared to $30.7 million or 3.8% of total revenue for the same period last year. This reflects the increase in total revenue margin, primarily from net merchandise sales of 110 basis points and a 20 basis point increase due to leveraging SG&A expenses over the comparable prior year period. Net interest expense increased $1.2 million for the first quarter, primarily due to higher average long-term loan balances to fund our capital projects and draw downs on our short-term lines of credit as part of our COVID-19 related efforts to secure cash. Other expenses of $1.5 million are primarily from cost to convert Trinidad dollars into other tradable currencies, and a strengthening of the Jamaican dollar 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 fourth quarter of fiscal 2021 and came in slightly higher than last year at 32.9% versus 32.2% a year ago. In our Q4 fiscal 2020 conference call, we estimated that our full year fiscal 2021 effective tax rate would be 35%. However, due to our strong Q1 results, we now expect the full fiscal year 2021 effective tax rate to be approximately 34%. Net income for the first quarter of fiscal 2021 was $27.7 million or $0.90 per diluted share compared to $19.7 million or $0.64 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 $212.4 million, an increase of $97.3 million versus the same period a year ago. From a cash flow perspective, the $33.9 million shift from net cash provided by to net cash used in operating activities was primarily due to decreases in working capital as our temporary extension of vendor terms negotiated as part of our initial COVID response began expiring during the quarter. It is important to note that many of these extended vendor terms will continue to revert to pre-COVID terms during the second and third quarters of fiscal 2021. Our experience with the temporary vendor term extensions has provided an opportunity to revisit terms on a more permanent basis. Net cash used in investing activities increased by $4.6 million compared to the prior year, primarily due to the increase in investments in certificates of deposit of Trinidad dollars we have on hand, while we work actively to convert those Trinidad into U.S. dollars as availability allows offset by less instruction expenditures. The $59.5 million change from cash provided by to cash used in financing activity is primarily the result of a net decrease in proceeds for long and short-term borrowings. We continue to be vigilant about our cash position and sensitive to any changes in circumstances. While some uncertainty remains in our markets about the extent and duration of the pandemic, we have confidence in our ability to continue our operations successfully while also continuing to invest in the future. In this context, we currently expect to completely pay down our remaining short-term lines of credit, which we access as part of our initial COVID-19 response during the second and third quarters of this fiscal year. To wrap up, we are very pleased with our strong start to fiscal 2021. We believe our commitment to The Six Rights of Merchandising and the investments that we are making in talent, real estate and our digitally enabled omni-channel platform has positioned us well for the future. In addition, our balance sheet, liquidity and cash flow remains strong, providing a solid foundation for driving same-store sales and future growth, which we believe will benefit our members and stockholders alike. Thank you all for your support during these times of uncertainty. We believe that we are on the right path for continued success. I will now turn the call over to the operator to take your questions. Operator, you may now take our callers questions.

[Operator:]

We will now begin the question-and-answer session. Our first question today comes from Rodrigo Echagaray with Scotiabank.

[Rodrigo Echagaray:]

Happy New Year and congrats on the results. I know you touched on December sales, but can you go over the main drivers of same-store sales in December? And also any thoughts on how sustainable that gross margin expansion in the previous quarter would be in the context of December sales, please?

[Sherry Bahrambeygui:]

Well, Happy New Year, Rodrigo. December sales, the same-store sales as we've mentioned before were impacted by the fact that we had additional clubs that were transferring sales from existing clubs, and I think it's also important to remember that this December is comping against a holiday season last December where there was no COVID. So, what we did is when the pandemic first came about, we did cut back on some seasonal and some items that we felt would be more discretionary and that did impact sales to some degree, and as people shifted a lot of their focus to essentials during this holiday season, we think that may have had something to do with it. In terms of the margin, our effort is always to try to continue to find the inefficiencies in the process and eliminate them and reduce them so that we can provide the best value to the member possible. Our margins, when you think about it, it's difficult to assign a specific margin to all areas of our business. As you understand, for example, our other business has a higher-margin structure, and we're doing more efforts to source and vertically integrate so that we can provide better quality merchandise and services to our members at a lower cost, but that might require a different margin structure. So, while our mandate is to continually drive the best possible value for the member in terms of pricing, the margin structure may vary among the different areas of our business as we become more dynamic and more entrepreneurial and find better ways to source better materials, better merchandise, and better services for our members.

[Rodrigo Echagaray:]

Got it. So, it sounds like it's definitely a structural change in that direction. I guess the other question is related to the in-country distribution efforts, which seems to be very important and which makes sense to me. Just wondering what's the -- if we think about 10 years down the road, how do you foresee the whole distribution platform shaping up? I mean do you foresee having many more distribution centers in country and a lower inventory being held in Florida?

[Sherry Bahrambeygui:]

We believe that having distribution centers in country provides tremendous benefits for a number of reasons. Previously, when most of our imports would come from and still come from China and go through Miami, there would be longer lead times often, and when there's basically one direction of flow, there's more risk involved. By having multiple distribution centers throughout our markets and as we gain leverage and concentration in various markets, it gives us optionality that allows us to go direct. That's one. The other is that we're finding more and more opportunities in our markets to be able to source merchandise, quality merchandise to support our efforts to vertically integrate and expand our private label and to curate unique and exciting items that can then be shared amongst our different markets. And so having the merchandise closer to our retail operations is certainly a benefit and also the ability to hold merchandise and distribution centers and pulse them into the clubs as opposed to trying to thread the needle with long lead times and get the exact right amount directed to each and every club, it does provide an opportunity for us to be more efficient. So, we see some significant benefits in expanding our distribution center and basically decentralizing the structure in a way that we've got more presence among our various markets, and then there's also the online part of it as well, which benefits from having these regional distribution centers.

[Rodrigo Echagaray:]

Yes, that was exactly my question so that makes more sense as well from that perspective.

[Sherry Bahrambeygui:]

Yes, right.

[Rodrigo Echagaray:]

Great, well, that's it on my end. Thank you. Happy New Year and congrats on the results.

[Sherry Bahrambeygui:]

Thank you, Rodrigo. Happy New Year to you too.

[Operator:]

Our next question comes from Jon Braatz with Kansas City Capital.

[Jon Braatz:]

Looking at Trinidad, Michael your net asset position -- monetary asset position at the end of the fourth quarter was $4.8 million. You went to a net monetary liability of $14.4 million, and if you look at your strategy, what you're doing in Trinidad, it sounds like you're limiting sales, but you're increasing prices to compensate for the additional risk. Given that strategy, would your net monetary liability position increase in the subsequent quarters or would it stay about the same?

[Michael McCleary:]

Jon, yes, good question. Actually, I wouldn't say we're trying to limit sales in Trinidad. I'd start out there. We're limiting the exports of U.S. goods into Trinidad to the extent local items. We certainly are doing our best to do that, and as long as it defies -- complies with our quality and pricing philosophy. But as far as the liability itself, that's, I think, generally we're trying to maintain a balance around that level within a range, right, because we're essentially saying that the exports from the U.S., which would generate more liability should be in line with what we're able to convert into U.S. orders. It's not a perfect equation because -- and things like that, but we're generally toward trying to manage that within, let's say, a regional liability within a reasonable range.

[Jon Braatz:]

Okay. With the strengthening energy markets is the situation in -- would you think the Trinidad situation might improve a little bit with that country being heavily tied to the energy sector?

[Michael McCleary:]

Certainly, that's their number one source of U.S. dollars is energy sector. There's several different levels of the energy sector that they participate in. And so -- but yes, definitely rising consumption in resin prices in the energy sector should definitely help. At the same time, as I mentioned, we're also looking to increase our ability to export goods out of Trinidad, if we can buy them in Trinidad dollars and export into other markets and sell in U.S. dollars, that gives us more U.S. dollars to be able to import merchandise to some of our clubs.

[Jon Braatz:]

Yes. Yes. Okay. Okay. On the gross margin front related to Trinidad, that was up, that accounted for about you said about 50 basis points improvement in your overall gross margin. With the strategy in place the way it is, would you continue to expect a bump in consolidated gross margins related to your actions in Trinidad?

[Michael McCleary:]

Yes. I mean it's obviously kind of anathema to the business model to be charging this premium, but also at the same time, we're facing a risk here that we haven't faced one before. But generally, we thought it was prudent to price ahead of it. So hopefully, as long as we thought it was important to call it out as a component because to the extent that this situation ends up resolving itself, and we would hope that premium would go down, but we do foresee it for the foreseeable future and all these situations start to set.

[Jon Braatz:]

Okay, one last question. Sherry, you mentioned in December, there were some additional lockdowns, if you want to call it and things that restricted your hours of operation. Has that improved or worsened as we moved into the New Year? Have things changed at all?

[Sherry Bahrambeygui:]

It varies from market to market, but we are seeing additional, as a result of a rising cases, additional restrictions. For example, governments have been keeping people home, especially because of the holidays for Christmas and New Year's that whole weekend, a couple of our markets restricted people from any circulation, and we're concerned about large gatherings and rapid spread. So, we see this as an ongoing dynamic that we just have to be prepared for and utilize our alternative modes of shopping and different ways to get merchandise to our members. But certainly, it's not resolved here and it's not resolved there, so it's still an ongoing dynamic.

[Jon Braatz:]

Okay. Is it more Panama and Colombia that has been impacted the most?

[Sherry Bahrambeygui:]

That's where we've seen it the most.

[Operator:]

This concludes our question-and-answer session, and I'd like to turn the call back over to Sherry Bahrambeygui for any closing remarks.

[Sherry Bahrambeygui:]

Just wanted to thank everyone for your steadfast commitment and to our company and most especially to thank our employees who have really demonstrated a tremendous commitment to each other and to taking care of our members, so wishing everybody a good start to the New Year.

[Operator:]

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