PriceSmart, Inc.
Q3 2016 Earnings Call Transcript

Published: 28 Oct 2016

[Operator:]

Good afternoon and welcome to the PriceSmart announces fourth quarter results of operations for fiscal year 2016 conference call. This call is being recorded. [Operator Instructions] I will now turn the call over to Mr. John Heffner. Please go ahead, sir.

[John Heffner:]

Thank you very much. Joining me on the call today will be Jose Luis Laparte, PriceSmart’s President and Chief Executive Officer. Thank you and welcome to our earnings call for the fourth quarter of fiscal year 2016. We’ll be discussing the information that we provided in our earnings press release, which we made available yesterday, October 27, 2016 along with our 10-K. You can find both the press release and the 10-K filing 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, 2016 filed with the Securities and Exchange Commission on October 27, 2016. We assume no obligation and expressly disclaim any duty to update any forward-looking statements 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.

[Jose Luis Laparte:]

Good morning, everyone and thank you for joining us today. Net warehouse sales in the quarter grew 1.3% to 686.4 million and comparable sales ended with a decrease of minus 1.2%. Sales in our non-Colombia market, Central America and Caribbean in aggregate grew 2.2%. We saw good sales - good growth in sales in excess of 5% in Honduras, Jamaica and Guatemala as well as Panama, which benefited from having an additional warehouse club for some portion of the quarter compared to Q4 of fiscal 2015. For Colombia, comp warehouse sales decreased 6% when translated to US dollars at the average rate for the period of 2970 pesos to the dollar. As I mentioned in past earnings calls, our goal has been to have positive local currency sales growth and in this quarter, we saw a comp sales increase of 1.5% with an improving comp trend for each month during the quarter when measuring Colombian pesos. When we look at the results for Colombia with more detail, sales of locally acquired merchandise increased 19.2%, which reflects the results of our effort to convert the items from imports to local resource, while not sacrificing quality in those items and we’re able to realize a reduction on prices versus some of that imports and we’re glad to see the acceptance of our members on the items that have been converted. Sales of imported merchandise had a decrease of minus 12.6% for the quarter. The stabilization of the Colombian peso in recent months at around 3,000 pesos to the dollar has provided an environment where we’re seeing an increase in spending by our Columbian members. Some of the sales trends in the specific markets that we saw in the third quarter continue in the fourth quarter. Soft demand and flat to a slightly down year-on-year sales occurred in Costa Rica, Dominican Republic and Barbados. Economic weakness and government policy are making things difficult for our business in Trinidad that began in Q3 when the government expanded a number of products subject to BAT in February. Q4 sales declined in that market 5% from a year ago, although they were essentially flat when measuring local currencies. I will talk more about Trinidad later in my remarks. In terms of merchandise categories for the quarter, we saw mid-single-digit increases year-over-year in pets, health and beauty, oils and condiments in the food area. In fresh produce, dairy and gourmet daily showed also single-digit increases. For non-foods, we saw softer sales in most of the categories. The standout with single-digit increases were automobile, home furniture and fashion apparel. Warehouse margins in the quarter were 14.7%, flat with last year. Some of you may recall, Q3 wasn't a good quarter for margin, given the level of markdowns we did in that period as well as underperforming our end cap and vendor support areas. Margins in Q4 were 100 basis points higher than Q3. This sequential improvement in margin occurred in both our Colombian and non-Colombian markets. Margins in Colombia are stabilizing after many quarters of year-on-year reductions. Merchandise margins in Colombia this quarter were only 20 basis points below Q4 of last year. Membership income increased 0.7% for the quarter to $11.6 million. We finished the quarter with more than 1,490,000 membership accounts and a 12 month renewal rate of 80%, compared to 86% last year. If we exclude Colombia, the 12 month renewal rate was 87%, which is consistent with our renewal rate in the past few years. If we look at the Colombia renewal rate, the overall 12 month rate is still affected by the large number of non-renewals we experienced in Q2 due to the anniversary of the opening of the three warehouse clubs in the fall of 2014, which will continue to impact the 12 month renewal calculation in Q1. On a monthly basis however, we have seen a steady improvement in renewal rates in Colombia, particularly the last few months of the fiscal year. We are encouraged by the trend and see this as an evidence that with a stabilizing currency coupled with the efforts of our operations and teams, members are increasingly seeing the values that a PriceSmart membership provides. In addition to the improving renewal rates, we continued to see strong sign-ups, especially in our [indiscernible] markets. I will add a few things about membership in Colombia when I talk about our Chia opening. Moving on, operating income for the quarter was 32.8 million, compared to 34.9 million in Q4 of last year. Despite some of the improving trends we have been seeing in local currency sales and recent membership renewals, Colombia recorded an operating loss for the quarter of 1.3 million, which included $802,000 of preopening expense associated with our Chia warehouse club, which opened in September. This loss compares to a small profit a year ago, resulting in a year-on-year difference of 1.6 million. This was the largest contributor to the $2 million year-on-year reduction in operating income for the total company. Net income for the quarter was 22.3 million or $0.74 per diluted share, $ 0.01 below the fourth quarter of last year. The net income in the current period contains a beneficial effect of certain tax related items, reducing our effective tax rate and favorably contributing approximately $0.06 per diluted share to our results in the quarter. John will provide some additional information about this in his remarks. Now, let me go through a quick update on the work we're doing to grow sales in some of our warehouse clubs by expanding the sales floor and adding parking spaces. In Q4, we completed the expansion of our Barranquilla club and we are nearing completion of the expansion of our Santa Elena club in El Salvador. In both cases, while adding about 8000 square feet of sales floor and 30% more parking spaces, just in time to improve our members’ shopping experience for the upcoming holiday season. We have a number of additional clubs that are candidates for similar expansion and we are proceeding with permitting process for them. We continue to push forward a number of other sites for additional warehouse clubs in a few of our markets. As you have heard me say before, the timelines to obtain all of the approvals and permits necessary for us to construct and operate a successful warehouse club can be long. Having said that, let me tell you about the warehouse club we just opened. In September, we successfully opened our seventh warehouse club in Colombia, in Chia, a municipality just north of Bogotá. Our grand opening on September 1 was an exciting day and we had sales during the first three days in excess of $1 million. Our shoppers on those days were both new members who sign up in the weeks leading off to our opening along with existing members who have been shopping with us in our Salitre, Bogotá club or even our Barranquilla club. We even had more than 500 members that had purchased a membership at our Salitre club, but have never shopped at any PriceSmart. They made their first purchase at our Chia club. As such, we believe that this new location will not only add new members to our existing base in Colombia, but it will also allow a more convenient location for some existing members, particularly in the northern part of Bogotá. We expect to see those members increase their frequency of visit and shop more with us, which will also contribute to an improving renewal rate. The construction activity associated with the building of our facility that would be the future home of our Miami distribution center is proceeding and reports are that it is even slightly schedule ahead. We currently expect to take possession sometime during second fiscal quarter and begin operation soon afterwards. I would like to come back to Trinidad, which I mentioned earlier in my remarks. Trinidad is providing us somewhat unique challenge as we and other businesses are experiencing a very liquid market with respect to sourcing hard currency in that country. We are currently unable to exchange TT$ for US$ or other tradable currency at the level needed to settle payments, owed to PriceSmart Inc., by our Trinidad subsidiary for the shipments we’re sending to Trinidad. This reduces our ability to deploy that cash for corporate purposes and also exposes us to the financial risk of a devaluation of the TT$. We're doing everything we can to source tradable currencies with our banks. However, until such time, on certain state of tradable currency is resolved, we plan to take a step to limit our exposure. We have made the difficult decision to restrict future shipments of merchandise to Trinidad from our distribution center in Miami to level the generally aligned with our Trinidad subsidiary’s ability to source and pay for the merchandise in US dollars. Although the situation is dynamic, based on recent levels of tradable currency availability, we anticipate reducing planned US shipments to Trinidad by approximately 20% over the next three months. This is likely to result in our Trinidad warehouse clubs running out of certain merchandise, negatively impacting sales in Trinidad, which we estimate to be in the $8 million to $12 million range for the fiscal second - for the second fiscal quarter. These actions do not impact merchandise on hand or currently on route from our Miami distribution center to Trinidad. So, Q1 of this year will not be impacted. Nor do they impact our plans to purchase and stock merchandise we obtained locally in Trinidad. We will increase or decrease shipments from the US in line with our ability to exchange TT$ for other hard currencies and we will continue to seek to maximize the level of tradable currency our Trinidad subsidiary can obtain. Trinidad has historically been a very good market for us with good sales and very loyal members, what we may be dealing with difficulties for several more quarters. One final comment as we finish the month of October and prepare our PriceSmart Club for the upcoming holiday season. In most cases, exciting merchandise we have our members are already either in the clubs or almost. The initial reaction to our seasonal items appears to be good. Across the company, we are ready for the busy season of the year and we will continue to seek opportunities to improve our results, even with the challenges that exist in the markets, either because of soft economy or other factors. We always recognize that we can do better and show the members as we’re there for them to help and save money. Thanks again for joining us today. After John’s remarks, we will take a few questions.

[John Heffner:]

Thank you, Jose Luis. Let me briefly touch on a few additional items that Jose Luis did not touch on in his remarks with respect to our financial results for the fourth quarter. We had interest income of $527,000, and interest expense of $1.4 million. Last year, interest income was $245,000 and interest expense of $1.7 million. We had cash on deposits to certain countries, providing an increased level of income and on the expense side, we had less interest expense related to hedging activity and more capitalized interest expense in the current quarter compared to a year ago. In total, a year-on-year profit improvement of $552,000. Foreign exchange transactions and the revaluation of monetary assets and liabilities resulted in a net $119,000 currency gain in the quarter, compared to $214,000 gain in Q4 last year. Despite another year of currency volatility, particularly in Colombia, we were able to reduce foreign exchange losses associated with currency fluctuations from $4.4 million in fiscal year 2015 to $899,000 in fiscal year 2016, an improvement of $3.5 million. Having said that, we continue to have exposure to currency fluctuations in many of our countries like Trinidad. As Jose Luis mentioned, our EPS results for the quarter were helped by items that contributed to a favorable tax rate. The effective tax rate for the period was 30.4%, compared to 33.3% last year. This benefit was largely attributable to an intercompany transaction between PriceSmart, Inc., the US entity and PriceSmart Colombia related to our ongoing market development efforts in Colombia. This transaction resulted in a $10.9 million reduction in taxable income in the US entity and an associated $3.9 million reduction in tax expense. The transaction resulted in a corresponding increase in taxable income in Colombia. That additional income however did not generate additional income tax expense in Colombia because the taxable income in Colombia was offset by the [indiscernible] valuation allowances on past accumulated losses in that subsidiary. We expect that the next several quarters will also see a benefit to the effective tax rate by approximately 200 basis points. The improvement in our consolidated tax expense in the current quarter was offset by the establishment of the valuation allowance against the deferred tax assets of our Barbados subsidiary of approximately $2 million. The net effect of these two items was an overall reduction in tax expense in Q4 of $1.9 million, equating to about $0.06 per diluted share. The company ended the fourth quarter with a cash position of $199.5 million, an increase of $42.5 million since the beginning of the fiscal year. For the fiscal year, net cash generated from operations was $140 million. Investing activities during the year of $78 million included a completion of the warehouse club in Managua and Nicaragua earlier in the year, which opened in November. And the construction activity for the Chia Colombia club, which opened in September. In addition, there was spending from maintenance CapEx and the expansion in Chia. From a financing perspective, the largest use of cash was the dividend payment in two installments during the year, totaling $21.3 million. Jose Luis spoke about the progress being made in the construction of the distribution center in Miami. We are arranging financing for up to 75% of the completed value of that project, which will be available at the time of closing, which will likely be in our second fiscal quarter. With that, Jose Luis and I would be happy to take your questions. Operator, I will turn the things over to you.

[Operator:]

[Operator Instructions] And we will take our first question from Dave King with ROTH Capital. Please go ahead.

[Dave King:]

Thanks. Good morning, guys. So I guess first off, a question on currency and the impact to warehouse club gross margins. I guess it seems like Colombia is starting to work in your favor a bit or at least stabilizing and then offsetting that, there are several markets where there are some devaluation at this point. But those are markets you have been in for a while, I guess how are you thinking about the willingness or needs to raise prices in some of those markets. And I guess more importantly, how are you thinking about warehouse club gross margins going forward. It sounds like Jose Luis, you talked about, I think, sequential improvement across markets, not just Colombia in the period. So I guess how should we be thinking about the devaluation in Costa Rica and some of those places and how that will impact you guys going forward? Thanks.

[Jose Luis Laparte:]

Thank you. Let me tell you, Dave, for the most part, I guess we have been dealing currency devaluations through many years in all the countries. I will say that the Colombia factor obviously in the last two years was huge because the devaluation was just in excess of about 50, even, at some point about 60%. In the current markets, where we have seen a slight devaluation, we just were not as worry, obviously it doesn't impart our sales as much as it did at some point in Colombia and we just keep adjusting margins as we find it necessarily, but again, it's not the impact on some of this market hasn't been as drastic. So we don't foresee any big challenge in those markets. Definitely, we may see, if things continue to be worse in terms of devaluation in some of these markets, we may have to raise some of the prices as we keep receiving new merchandise obviously, but we see that also happening in local merchandise, a lot of vendors will be using local imported ingredients, so we may see some prices raised in those markets too. But for the most part, again as I mentioned before, we deal with those things every single year in different markets where some appreciate, some get go the other way and I don't foresee any big changes in our margin.

[Dave King:]

That's great color. Thank you. And then maybe switching gears a bit to Trinidad, probably a question for John, in terms of the 18.9 million of US dollar denominated liabilities that you’ve got there, can you just talk about what that is and whether or not we should expect a big increase in other expense or just help us understand what that risk is and why that was called out?

[John Heffner:]

Sure. What that relates to Dave is, as we ship product from the US into Trinidad, it is they need to settle that payment back to the US entity in US dollars. So the product gets sold in TT$ and they need to convert TT$ into US$ to settle the liability that the subsidiary has back to the US. And the difficulty we’re seeing and that we're pointing out is that there is a very illiquid market, which is, which we've experienced before in Trinidad from time to time but this has continued for quite some time, which is why we wanted to call it out specifically at this point. And that we cannot - we’re having difficulty converting TT dollars into either US dollars or euros or Canadian dollars or any other kind of currency that could be then potentially converted back to US dollars. So what happens is the liability build up as we keep shipping product in there and at some future point if the Trinidad dollar devalues and there are some indication theoretically in economic theory that it very well might. And it has been a little bit at a time that the exact liability will get re-measured and the exposure will present itself as a foreign exchange loss on the P&L. So that's what drives that issue.

[Dave King:]

So it’s not and it’s not a decision whether or not to record it, it’s just going to turn through based on how the currency moves in terms of the..?

[John Heffner:]

It’s the same issue we dealt with in Colombia last year as may recall, so it’s that issue but the difficulty here is unlike Colombia we didn't have the money to pay it back we are building that business, Trinidad generally it’s a lot of cash we just can’t get it translated back into US dollars.

[Dave King:]

And then on the tax, what have you in terms of the 200 basis point savings on sort of the go forward, I guess what I'm trying to just get out is sort of how should we be thinking about you know when we take all the different inputs because I think there is also the valuation allowance you record, I want to say this quarter you know that offset, I guess what’s sort of the right tax rate to be using or assuming kind of over the next few quarters then?

[John Heffner:]

The evaluation allowance that we took was a one-time issues, so I would take that out of the equation. What we're seeing with Colombia to a degree that it has these NOLs and this transaction creates some taxable income there which is offset the society in the US that’s the 200 basis point that we’re probably talking about and it will probably occur for the remainder of the fiscal year until such time as we sort of use that NOLs in Colombia and then that will probably will come back to a more normalized rate, the run rate we’ve sort of been after the last year.

[Dave King:]

And then maybe one more and then I’ll step back, in terms of Chía, Jose Luis, it sounds like that’s going really well so that’s encouraging and it sounds like that actually may even help in terms of not just the renewal rate recovery just because it’s time but also that may help that itself may also help the renewal rate because you get more members that stay. So that’s all good. I guess the one concern I had should we worry at all about any cannibalization impact on comp on some of the stores that are there, is it going to be meaningful at all in any way?

[Jose Luis Laparte:]

Yes Dave, we definitely - we knew - we started obviously the plan to build Chía, we knew how many members were coming from the Chía area from Sao Paulo, obviously the vicinity of that area and we knew also that there was a risk of losing some of those sales especially for the northern members. But a good sign is - there are a couple of good signs during the month of September and October. So far in October the cannibalization of our Salitre club in Bogotá has been less than what we expected, so that’s a good sign. We did plan for the cannibalization for sure, but it has been a little bit less and the sign of especially in September, the whole month of September, the sign up in our Salitre club where as a strong as they were in July, August before opened in Chía. So both are good indications that even though that Chía is going to take some of the sales, we were able to see less cannibalization than expected not to mention the fact which is important that a lot of members that were just not going that often to Salitre are now having the opportunity of shopping more often in Chía. So I think that combination all in is a good result and we expected that to happen in the city the size of Bogota which obviously the driving distance is a big factor for a lot of members not to be set off.

[Operator:]

[Operator Instructions] We will take our next question from Ronald Bookbinder with Coker Palmer. Please go ahead.

[Ronald Bookbinder:]

Good morning and a nice finish to the year. The memberships have really improved the renewals and you have kept the price of membership in Colombia sort of artificially low not moving it with the currency. When would you consider increasing the membership fee in Colombia or do you want to really nurture that market and grow the base there?

[Jose Luis Laparte:]

Definitely Ronald, we want to continue growing the base for sure. We think it’s a little too early to go through a change immediately. I think we have considered it, we have talked about it, the fact of the matter is if you live in Colombia, you don't really care much about the currency to some degree you sign up to 65,000 pesos and we just - if you think about it, we just opened three of those clubs it’s going to be two years now. So it’s probably a little too early to change the membership price but it doesn't mean that we couldn’t consider in the near future at the same time, it has been something that we have been talking about it but definitely right now we're basically focused on keep growing our base. I think the stability of the currency will help us also in the renewables because at some point during the last year we saw - we had challenges in the renewables because prices were going all over the place with stability we saw. So if things continue as they are with the currency we should be able to follow that trend of good renewables and eventually consider raising it a little bit because it is definitely on the low side and almost about $19 to $20 per membership in Colombia I hope that the answers your question Ronald.

[Ronald Bookbinder:]

And on the gross margin, the gross margin was the highest it has been all year, are you planning for any price cuts or you’re going to wait for the operating margins since you still have some deleverage or carrying some higher SG&A expense. Would you wait for the operating margin to sort of get over that 5.5% before you consider lowering prices to drive more volume?

[John Heffner:]

Ronald, this is John. No I don't think that’s the driver, we are going - we look at the margins I think one of the things that's helping is an improving picture in Colombia which always was a bit of a headwind in our overall margin mix. So as you seen that improve a little bit with the improving environment there. We will take a look at the margins in each of our countries and make the right decisions about that going former independent of as you call the SG&A actions for the company.

[Jose Luis Laparte:]

And I will add Ronald that definitely we came from Q3 where we had a kind of a rough quarter in terms of markdowns. Q4 we definitely ended a lot cleaner and we are heading into the holiday season with pretty clean inventories, so we don't see any reasons why margins should drop. But at the same time we don't have any strategies to just raise, so we should have a pretty good stability in our margins going forward, but it is not driven by - it’s driven more by the market by the competition by things were we can react not necessarily SG&A thing.

[Ronald Bookbinder:]

And looking at the comps, the comps have finally turned positive and moving in the right direction. For the quarter how was traffic versus ticket?

[Jose Luis Laparte:]

For the quarter we actually had - we were 1.3% growth, our average sales were down 1.5 and our transactions were up 2.8%. So we got more coming out of the transactions. The average ticket has been suffering a little bit more, you can - obviously mix there the fact that - some of the fact there is some compression in prices. But other than that we are pretty glad to see transactions, a strong transactions, now we will figure out how to keep working on getting obvious price compression continued in some categories which does affect us for sure as it has been affecting a lot of other retailers. It’s good to see, we're probably lowering some of our prices and members get advantage of that but we will figure it out later on how to keep improving our average sales but at least the transactions are out of there with higher transactions.

[Ronald Bookbinder:]

And lastly, you've opened the store in Chia, do you foresee any other store openings in fiscal ‘17?

[Jose Luis Laparte:]

For fiscal year 2017, no, I say that because obviously we haven't started any construction in this fiscal year that would be on time to be opened on fiscal year 2017, but I will say that we have a few projects in place a couple of we can announce and we can start construction very soon. So we are very pretty optimistic that we will be announcing a couple of projects soon but the chances for opening in fiscal year 2017 are definitely very low because we can't build them as fast but for sure we still have a hope that we can get something for the calendar year 2017, ready for the next holiday season, Ronald, that's how we are hoping.

[Ronald Bookbinder:]

So probably early fiscal ‘18?

[Jose Luis Laparte:]

That is correct. Yeah.

[Operator:]

And we will take our next question from Patricio Danziger with RWC Partners. Please go ahead.

[Patricio Danziger:]

I see that you normalized gross margins this quarter after the weak third quarter but I'm also seeing the operating margin is a little bit lower than in past years, it was about 5% to 5.5%. Can you comment on that, I mean if you plan to get to 5% level or 5.5% level that you got in on the prior quarters?

[John Heffner:]

Patricio, this is John, let me address that and maybe Jose Luis can add something. What we saw in our SG&A we have about five warehouse clubs in our results this year that we are not in the prior year in the same way either in total or partially. And what we saw is that when we add those club we add a quantum of cost associated with that and the incremental sales that we got for those clubs in their first year or the beginning didn't fully offset those costs relative to what we see with more mature club. So if you think about it mature clubs have a certain rate of expense, these new clubs come in and they have a good deal of the same expense because fixed cost but the incremental sales that we’re adding for those clubs in their first year of operation is not the same level. So has a tendency to have an impact on our SG&A or hardware expense as a percent of sales in the short term. So our goal obviously over time is to, as those sales increase and as we manage your expenses as we do, we would see the improvement over time for those clubs.

[Patricio Danziger:]

You mentioned that you see an improvement in Colombia, do you mind telling us the sales growth in local currency?

[Jose Luis Laparte:]

In local currency for the quarter we ended positive 1.5% for Q4, Patricio.

[Patricio Danziger:]

That is taking into account that you opened, I mean you have a lot more stores this quarter than last year?

[Jose Luis Laparte:]

No, Q4 it was comparable sales growth counting only our six warehouse clubs with six warehouse clubs, we didn't open Chia until September 1st, so 1.5 is comparable same-store number.

[Operator:]

[Operator Instructions] And we will move next to Rodrigo Echagaray with Scotiabank. Please go ahead.

[Rodrigo Echagaray:]

I have a couple of questions. I mean, really great to see that the FX in Colombia is stabilizing which helps margins and returns and everything around that operation. But we are about to probably hear back from the government on the tax reform which on the one hand appears to be possibly reducing the corporate taxes but may be increasing the BAT. So I don't know if you can assure some color on that if you are preparing for that in any way or may be too early until that is passed on Congress or what you’re thoughts on that?

[Jose Luis Laparte:]

Let me talk about the BAT because we have been hearing a possibility of - the fact that they would probably raise it for some of the products and obviously it had to we can prepare I know obviously it is sometimes in the other markets what we have experienced as we did in Jamaica a few years ago and in Trinidad just recently, obviously when you have those type of increase, members and customers because obviously that will affect everyone in the market, we will get little bit disappointed and [indiscernible] from some purchases. But we believe it fits within reasonable - within a reasonable increase, Rodrigo, we don't expect that to hit us too much, although it has tail and we have to see how the market reacts but I'm not sure there are many alternatives to that BAT increase, again, we kind of experienced that in the past and it does hurt a little bit the sales, hopefully it’s not as bad as we expect.

[Rodrigo Echagaray:]

Proportionally the FX has probably put most of the pressure already so hopefully that is marginal. Then just a couple of additional questions real quick. On the distribution center, what is the impact or the net-net impact on the P&L in terms of SG&A versus lease expenses? And if you can just remind me please what’s the square foot expansion for fiscal year including the addition of self-space in existing stores?

[John Heffner:]

I will talk about distribution center and I will turn over to Jose Luis for the warehouse club question there, Rodrigo. I think it’s 322,000 square feet with our new distribution center will be and the cost of that in our distribution cost which we show in cost of goods sold. So it won’t be in SG&A, it will be cost of goods sold. The interest expense associated with any financing that we do is sort of equated to the rent payments that we’re currently paying. So it will be sort of an offset going forward. In the short term though we are going to be, we continue to have lease expense in our current location which we are - we have an active process of sublet the space but near the end of the fiscal year when we move into the new location we are actively trying to sublease that space, we will probably have some additional lease expense that will flow to our cost of goods sold on our P&L. So that will probably be the case in Q4 but with the plans we have and the activity we are doing we would hope to have the excess space in our current locations sublet in pretty short order. Now your question about warehouse clubs.

[Jose Luis Laparte:]

Yeah, warehouse clubs, we added in this fiscal year, we added two obviously the one in Carretera a Masaya, Nicaragua at November a year ago, so it’s going to be anniversary in a week or two. And then we just added actually Chia within this fiscal year. So we basically added about - it’s one of those who basically have about 55,000 square feet of sales floor space, it’s about 100,000 square feet of additional sales force with the addition of those two clubs, Rodrigo.

[Rodrigo Echagaray:]

And for next year, I think you said you had two big projects on the pipeline?

[Jose Luis Laparte:]

We have a number then, or at least I haven’t, I said we have a few projects, I’m not sure I said one or two I think I said a few projects so I can't tell you really how many additional clubs we will open, we have definitely a view on the pipeline and hopefully we will announcing something.

[Rodrigo Echagaray:]

Oh no, I mean on the adding sales floor space on existing stores?

[Jose Luis Laparte:]

Oh sorry, we have - we are in the process on - the ones that we added we added about 8000 square feet. We are looking at - we have a few projects in the pipeline, but officially don’t’ have permit yet, we hope we can get maybe another two probably within expansion, maybe three depending on how fast the process of permitting moves. Sometimes it may take you as many as six months or eight months just to get the permit for an expansion. So it keeps varying in terms of the timing, we have been working on a few of those projects for a while and that expansion will probably be similar for every club, we would be having kind of the same amount probably increasing parking spaces about 30% to 35% more and about 8000 square feet of additional sales floor space and obviously we have configured a fresh area. There are a lot of good additions when we make those expansions and we think they’re going to be pretty positive in growing our sales. But it’s too early to know exactly how many we will be able to accommodate within the fiscal year and it takes about, I would say once you get the permits, you will probably take about easily 3 to 4 months because Salitre is slow to make those expansions because we are operating and running the business, it’s not - even though it’s small in a scale compared to opening a club you have to be very careful how you do those expansions not to affect your current operation.

[Operator:]

[Operator Instructions] And it appears there are no further telephone questions at this time. I'd like to turn the conference back over to Mr. John Heffner for any additional or closing remarks.

[John Heffner:]

Well, thank you, Avony and thank you all for participating. This ends our call, have a good day and a nice weekend.

[Operator:]

And once again that concludes today’s call. Thank you for your participation, you may now disconnect.