Q3 2022 PriceSmart Inc Earnings Call
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Speaker 2: Part of mean. This is the operator. The price Mark conference call will start momentarily. I repeat: the price marart conference call will start momentarily. Thank you for your patience.
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Speaker 2: Part to me. This is the operator. The price Mark conference call will start in five minutes. I repeat: the price Mark conference call will start in five minutes. Thank you for your patience once again.
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Speaker 2: Good afternoon everyone and welcome to price Mart. Incorporated earnings release conference call for the third quarter of fiscal year 2022, which ended on May 30, first of 2022.
Speaker 2: After remarks from our company's representatives, ms Sherry, bern begggie, Chief Executive Officer, and Michael mccleary, Chief Financial Officer, you will be given an opportunity to ask questions of time permits.
Speaker 2: As a reminder, this conference call is limited to one hour and is being recorded today Tuesday, July twelfth of 2022. a digital replay will be available following the conclusion of today's conference call, through July nineteenth of 2022, by dialing one eight seven seven three four four seven five 2, nine for domestic callers, or one four one two three one seven zero zero 8, eight for entinternational callers, and by entering the replay access code: six two nine one eight 7, one
Speaker 3: You can find these documents on our Investor Relations website at investors pricemark com, or you can also sign up for eno alerts.
Speaker 3: 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 mattersforward-looking statements include, but are not limited to, statements containing the words expect believe plan will may should, estimate and some other expressions. All forward-looking statements are based on current expectations and assumptions of of today, July twelfth, 2020 -two.
Speaker 3: 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 W SEC. 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 beon B price Mark'. Chief Executive Officer.
Speaker 4: Thank you, Michael. Good day everyone and welcome to our third quarter fiscal' 22 earnings call.
Speaker 4: Sales momentum continued during the third quarter and we almost reached our billion dollar Mark again, but came in just shite about 999 million, just like last quarter.
Speaker 4: Sales momentum continued during this third quarter and we almost reached our billion dollar Mark again, but came in just sh about 999 million, just like last quarter. This is a company.
Speaker 4: That is recording sales of significant levels and is moving in the right direction. Net merchandise sales increased by 16% after a negative 2% currency impact, and comparable net merchandise sales increased by 13% after having taken to account a negative 2% impact.
Speaker 4: Membership accounts grew one point seven five through to one point seveny five million. That's a new record and we came in with a strong renewal rate of 89%, although- and I know the topic of interest today will be margins- Although our total gross margin dollars increased 4% over the comparable prior year period, merchandise gross profit as a percent of net merchandise sales was 14%.
Speaker 4: That tend to correlate with discretionary spending.
Speaker 4: And due to the long lead times on many of these items, commitment must be made many, many months in advance, if not, in some cases, about a year.
Speaker 4: So for.
Speaker 5: Many months ago, we made strategic investments in inventory with the goal of remaining in-stock and capturing higher sales.
Speaker 5: Since then, the environment changed significantly. It's been characterized by global supply chain disruption, including Asia, port closures due to COVID-19 container shortages, higher freight and fuel costs, inflation and sharp changes in consumer demands.
Speaker 5: This has disrupted the cadence and the flow of that inventory.
Speaker 5: And inflation has influenced consumer behavior by shifting the demand away from the more discretionary items and more towards the essential items.
Speaker 5: So as a result, we've been experiencing excess inventory, primarily in the area of hard life.
Speaker 5: Now in response, we have taken decisive action. We continue to do so and we are.
Speaker 5: We're working with the goal of swiftly selling through the excess inventory and quickly rebalancing our inventory mix.
Speaker 5: As a result, we have experienced higher than normal markdowns in Q3.
Speaker 5: Now our plan is to handle this quickly and efficiently in order to be well positioned for the holiday season and to sell through almost all of this, possibly by the end of Q4.
Speaker 5: We see this as eight point in time.
Speaker 5: We've gained many new important insights as a result of this.
Speaker 5: And it is our goal and our expectation that we will return to healthy historical margin structures soon.
Speaker 5: So when you look at our growth margin percentage in Q3, it was primarily impacted two significant ways.
Speaker 6: The first.
Speaker 5: Is that there was a reduction of margin percentage of 100 basis points.
Speaker 5: Which represents the markdown taken below cost.
Speaker 5: On what we identified as excess inventory, for that inventory which sold in Q3 and for the excess inventory remaining on the books as of the end of may, which we expect will fell through the end of Q4.
Speaker 5: Many factors could impact that, things that are unforeseen at this point that could make it longer or shorter, But based on what we currently know, everything is being designed to get this merchandise sold by the end of Q4.
Speaker 5: There's another 35 basis points, which relates to the higher cost of fuel, freight and handling, and this is as a result of having to pay the spot rate on some of our freight.
Speaker 5: Which we did not pass on to the member in Q3.
Speaker 5: We do not expect to see this again in the next quarter.
Speaker 5: While we generally factor in all transportation in handling costs when calculating merchandising selling price, this last quarter saw a disproportion.
Speaker 5: excusea disproportional amount of these costs that we didn't pass on to our members. The most significant was the swings on spot rate for noncontracted freight rates coming out of Asia.
Speaker 5: There were other factors, including significant increases in U's transportation costs and third-party storage costs and handling expenses, which were requred as a direct result of having the success inventory.
Speaker 5: And there were also some factors that contributed to more margin compression, that were unrelated to inventory, such as a reduction of our coit accool not meet, having that same need to accrue as much of about 17 basis points as compared to last year, and we also took steps to increase compensation of our U's distribution center employees, given the competitive environment.
Speaker 5: But on a ongoing basis. Due to the ongoing supply chain complexities, we do expect our inventory levels to continue to run a bit higher than historical levels.
Speaker 5: But we're really focused on reducing our days on hand of inventory directionally toward more historical levels over the next several quarters.
Speaker 5: To give you an order of magnitude on the margin percentage compression that we expect beyond that which you're seeing in the third quarter.
Speaker 5: We estimate, estimate that going forward as it relates to excess inventory.
Speaker 5: We expect the margin- margin percentage to impression- to continue somewhere in the range of twenty-five and.
Speaker 5: To 50 basis points to approximately Q4.
Speaker 5: To approximately Q4.
Speaker 6: We share this with you because we see this as a point in time.
Speaker 5: We see this as a situation that obviously they weren't happy about, but we addressed.
Speaker 6: As soon as it came to our attention what we were dealing with, and we've been aggressive or proactive in making sure that we do everything we can to sell through these items without delay and get back to our core business with our standard inventory balance and inventory mix and with our more customary margin structures.
Speaker 5: So in order to give some sense of why we believe the.
Speaker 6: Margin compression will be substantially less than you're seeing in Q3. We're sharing with you what is our current best assessment of the range we're likely to see in Q4 of margin compression.
Speaker 5: So now, resulting to the results of our third quarter, our total membership base grew to a record one point seveny five million accounts, representing growth of 7% versus last year. Our welve -month membership renewal rate was 89% and our membership income was a record $15.4 million, an increas of 8% over the same period last year.
Speaker 6: So now we can look a little boward into Q4 for the month ending on June thirtythousand twenty-two.
Speaker 6: Total net merchandise sales was $321.4 million, an increase of 16% over the same period in the prior year, and comparable merchandise sales for the four -week period ended June 26 twenty-two.
Speaker 6: Increased over 12% compared to the comparable period last year.
Speaker 6: Currency fluctuations continued to negatively impact net merchandise and comparable net merchandise sales by 2% and 3% respectively, in the fourth quarter of far June .
Speaker 5: Trinidad also has had significant club closures and of.
Speaker 6: Prohibition or had a significant series of closures and a prohibition on the sale of nonessential merchandise in the prior year. The impact of the increase in trinadout sales. This June versus June 2021 is favorable by 2% and 3% on net merchandiseing comparable net merchandise sales. respectivelyso we're very pleased with the continued strong sales growth and believe that that provides a solid foundation as we had into.
Speaker 6: Driving incremental sales through price Mart Dot com, as well as the technological capabilities that we're creating and investing in with our technology and talent investments.
Speaker 6: Through pricemart com as well as the technological capabilities that we're creating and investing in with our technology and talent investments So.
Speaker 6: With this. We'll start with real estate. We celebrated our fiftieth club milestone with the opening of our portmoreort club in April .
Speaker 5: And that was our second club in Jamaica I was there and.
Speaker 5: The support and reception that we received in Jamaica was pretty.
Speaker 5: The support and reception that we received in Jamaica was pretty impressive.
Speaker 6: We are a big presence in that market and we're very well respected, and we had BU? R of the dignitaries that attended the event in the opening. It was clear that they do see us as providing tremendous value in that market and hopefully that translates into how closely they'll be working with us in the future. So Portmore was very well attended and total new signups.
Speaker 5: Were 25% higher than what we had originally expected in the first month of the opening and our net merchandise sales beat our forecast by over 12% and.
Speaker 6: Now this club was really important to us because Kingston, which has been the only club in that market for a long period of time, has been generating sales and activities that are record breaking out of one club. The pressure on Kingston.
Speaker 6: Was beyond that which we wanted to expose our members to. Lines were getting long, it was very difficult to efficiently get in and out is that club and it was important for us to enhance the experience of the memb. So we opened port more with the expectation of shifting some of those sales over and enhancing the overall experience for our members in Jamaica. What we found so far is yes, sales have shifted.
Speaker 6: Somewhat but not nearly as much as we expected, and Portmore really been doing well in in its own right. So we're very excited about the results in that market so far, what we're seeing so far, and optimistic about the future.
Speaker 5: And our real real estate team has been busy. We've added two clubs. We goted two additional clubs into the construction pipeline. Yesterday we announced that in the spring of 2020 -three we expect to open a smaller format warehouse club located in the city of San M gallon, approximately 100 miles East of the capital city.
Speaker 6: In capital city SANS salvad, San Salvador and El Salvador, and this will be our third club in El Salvador.
Speaker 6: As we find Jun these, what we call a smaller club formats. We're continually finding ways to extract more sales potential.
Speaker 6: What we call a smaller club formats. We're continually finding ways to extract more sales potential with less.
Speaker 5: Less capital expense unless swhere footage overall for our building and I'm excited to see in the most recent iteration we have, we've been able to increase pallet count, increase the proportion of sales floor within the same envelope.
Speaker 6: And so the small format when we reference it I just want to make sure you know it's not a fixed concept. It's one where we're basically saying.
Speaker 6: Can we do more within the real estate footprint that we need in order to have a successful club in a specific market, whether it's urban or secondary, and efforts continue to make that more and more effective, whether by virtue of the features we put in that specific club or should's not to put, or through the enhancement of its capacity to put through merchandise and inventory because of additional support on the distribution by from the distribution center.
Speaker 5: So now we are also compleceeding with the construction of a smaller format warehouse club in the affluent.
Speaker 6: elsew elpla blado, area of miding in Colombia.
Speaker 6: We expect to open this warehouse club which will be our second in club in miding and the company's tenth warehouse club in Colombia. In the summer of 2020. -three.
Speaker 6: Once these two new clubs are open, we'll be operating 52 warehouse puubs and we're actively exploring other options as well.
Speaker 5: Another part of our real estate strategy focuses focuses on the important role of our distribution facilility to optimize efficiencies and reduce risk and also to take some of the.
Speaker 5: The functions and storage that we would normally rely on or historically rely on, coming from the club and shifting it out to a distribution location, where that distribution location could support multiple clubs and allow us to.
Speaker 6: Increase our efficiencicyes, So we're currently analyzing U locations for local distribution centers in several areas that would serve our Central American, Caribbean and Colombia markets.
Speaker 5: We are also reviewing potential sites in the Northern Triangle countries for regional distribution center.
Speaker 6: This would give us a near-term option to create alternative routes.
Speaker 6: For imports from Asia for distribution to our markets and represents further investment in job creation in these important markets.
Speaker 6: Our sustainable packaging plant and turnint it out as another exciting project that we're involved with. It will start our we're planning for it to start about the end of August and it covers many of the company's really important objective.
Speaker 6: one it allows for more neararer sourcing, it brings products producing product by producing products closer to our markets and it supports that.
Speaker 6: It is a form of vertical integration because we would be eliminating intermediaries when with regard to the purchase of packaging and labeling or the services, and with regard to our B two B business.
Speaker 6: As sustainable packaging, in addition to complementing our product offering, we believe we may have a really good market with our business membersit's an item. The packaging is an an item that would serve under our private label, and.
Speaker 6: Have the benefits of what we shared with you about our private label.
Speaker 6: And it's one that we could sell, just not only use for ourselves, but sell to our membery.
Speaker 6: And in terms of ESG, the items that are envisioned to be produced in this packaging facility will be either compostable or will use recyrecyclable inputand that really does support our efforts to improve our performance in a manner that is environmentally responsible.
Speaker 6: andwith regard to the liquidity, liquidity issues and challenges that we've had in Trinidad. This is an opportunity to allow us to generate more U's dollars.
Speaker 6: To support our trinid-out operations by exporting these items to our other markets. So it's a built-in way for us to convert.
Speaker 5: T to U's dollars. This is something that, although we've made great strides on reducing the balance- and Michael can share more about that with you later- but it's a way to do it naturally and not have to seek exchange to U's dollars outside of the ordinary courseice of business.
Speaker 5: S dollars this is something that although we've made great strides on reducing the balance and Michael can share more about that with you later. But it's a it's a way to do it naturally and not have to seek exchange to us dollars outside of the ordinary pice of the business so.
Speaker 6: With regard to membership benefits, which is our second driver, I want to share with you a little bit about what we're doing there. During the first nine months of fiscal 20 and 20- two, our private label sales represented 20- four point two percent of our total merchandise sales. That's up 250 basis points from 20- 20 one point Seven percent in fiscal year 20- one. We've talked about the benefits of private label being.
Speaker 5: A unique differentiator from our competitors that people cannot purchase without the membership, and we usually have an opportunity to offer the same better quality merchandise at a lower price than the leading brand, So that provides greater benefits to the members.
Speaker 1: And.
Speaker 5: Honest second: unfortunately my computer just shut down.
Speaker 5: Michael, do you want to take over your section? And then we can come back to the balance of this.
Speaker 5: Michael, do you want to take over your section and then you can come back to the balance of this. Okay, i'will do that.
Speaker 3: So thanks Sherry, good morning afternoon to everyone and thanks for joining us today to talk about our third quarter results.
Speaker 3: Total revenues and net merchandise sales came in at $1.3 billion and $999 million for the quarter of, respectively increasing to sorry increases of 15% in 16%.
Speaker 3: Over the comparable prior year period respectively. We ended this quarter with 50 warehouse clubs, compared to 57 warehouse cls at the end of the third quarter of fiscal 2021.
Speaker 3: Our comparable net merchandise sales growth for our fiscal third quarter was 13% for the 13 weeks ended may 29- 2022. foreign currency with fluctuations had a negative impact on net merchandise sales and comparable netmerchandise sales growth of 2% and 2%, or approximately $19.1 million and 18 $6 million respectively.
Speaker 3: By segment. In Central America, where we had 27 clubs at quarter-end net merchandise sales increased 13%, with a 10% increase in comparable net merchandise sales.
Speaker 3: Foreign currency fluctuations had a negative impact on both net merchandise and or barrerel net merchandise sales growth in Central America of approximately two pointy percent during the quarter.
Speaker 3: All of our markets in Central America had positive comparable net merchandise sales growth, except for Guatemala, which had a small negative comp due to sales transfers from other clubs following the opening at large new ironda club.
Speaker 3: In the Caribbean region, where we had, excuse me, 14 clubs at the quarter in all of our markets had positive comparable net merchandise sales growth, with total net merchandise sales increasing 21% and comparable net merchandise sales increasing 17%.
Speaker 3: Tr and tobago merchandise sales increased 23% for the quarter and contributed 2% of the total net merchandise sales growth of 16%. The significant, significant improvement versus the priority period was due to COVID-19 closures last year, combined with our decisions to increased 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.
Speaker 3: In Colombia, where we had nine clubs open, at quarter end net merchandise sales increased 25% and comparable net merchandise sales increased 18%.
Speaker 3: These significant growth levels were achieved despite the impact.
Speaker 3: That the devaluation of the columbian peso had on merchandise and comparable net merchandise sales growth in Columbia of approximately 7% and 7% respectively. During the quarter. In terms of merchandise, we saw our food category grew approximately 10% compared to the same quarter in the prior year. Our cleaning beverages and oils and condimants departments flled away with 11%, 33% and 23% growth respectivelyour fresh category grew 14% compared to the same quarter the prior year, led by our poultry seafood.
Speaker 3: And meet departments with 18%, 15% and 11% growth respectively. Our nonfoods category, where we took significant markdowns in several areas, such as sporting goods Garden, patioill and TVs, grew 18% compared to the same quarter in the prior year. Improved conditions in trina debago also boosted sales growth for our nonfoods categories, as these categories have generally performed quite well in this market.
Speaker 3: Finally our other business category rebounded with 16% growth, primarily from our food service and bakery departments, and growth in our optical services and sales.
Speaker 3: Turning to margins, total gross margins on the merchandise sales were 14% for the quarter, versus 16% for the same period last year. As Sherry described, this decrease was from a variety of factors, including pricing actions taken to reduce inventory levels of seasonal and high-qube merchandise, primarily in our nonfoods categories, increased freight and handling costs and a reduction of the premium we applied to our sales prices to offset our co-ver-related operating costs.
Speaker 3: Total revenue margin decreased 220 basis points to 16% of total revenues when compared to the same period last year. This revenue margin decreas is primarily attributable to 1, one hundred and seventy basis point decline in gross margins and a decrease of 40 basis points to the sale of eropost during the first quarter.
Speaker 3: Sg expenses decreased during the quarter by 130 Bas points as a percentage of total revenue, primarily due to the sale of aopos, which lowered warehouse, club and other operating expenses and general and administrative expenses by 50 ty basis points each, for a total of 100 basis points.
Speaker 3: Operating income for the quarter decreased 6% from the same period last year to $36.1 million.
Speaker 3: Other expensse of $2.4 million was primarily driven by $2 million in transaction costs associated with converting trinad dollars into available tradable currencies.
Speaker 3: Our effective tax rate for the third quarter of fiscal 2022 came in higher than last year at 34%, versus 31% a year ago, with our year-to-date rate coming in at 33%.
Speaker 3: This increase in the quarter was primarily related to comparatively unfavorable changes in uncertain tax positions and valuation allowances on our foreign tax credits. On a go-forward basis, we continue to estimate an annualized effective tax rate of 33% to 34%.
Speaker 3: Net income for the third quarter of fiscal 2022 was $19.3 million, or 62 cents per diluted share, compared to $22.5 million, or 73 cents per diluted share, in the comparable prior year period.
Speaker 3: Moving on to the balance sheet, we ended the quarter with cash, cash or colose, and restricted cash to linked $222.7 million.
Speaker 3: From a cash flow perspective for the nine months of it may thirty-first 2022, cash provided by operating activities decreased $15.7 million compared to the prior year, which was primarily a result of nonworking capital changes on the balance sheet of $22.3 million.
Speaker 3: These changes were primarily due to prepaid expenses and income taxes, which increased due to higher sales volume, and VAT dayave, which increased due to higher inventory.
Speaker 3: Another contributor to the change in cash flows from operations was our inventory position, which increased 2, four and $61 million as of may thirty-first 2020 -two, versus $336.6 million as of may thirty-first 2021 . As sheri mentioned, this was a dueto comination of factors including purchasing patterns, supply chain disruptions, inflation and the addition of three new clubs.
Speaker 3: We've taken various actions in Q3 and we're taking further actions in Q4 to continue reducing our inventory date long hand.
Speaker 3: Net cash used in investing activities decreased by $32.6 million for the nine months ended may thirty-first 2022 compared to the prior year, primarily due to the decreased in balances of certificates of deposit compared to the same period a year ago. Due to the significant improvement or a decrease in our balance of trunitad dollars on and versus the prior year.
Speaker 3: With respect to trinad, our balance of trinad dollar denominated cash, cash equivalents and short and long-term investments measured in U's dollars improved this year, decreasing $24.1 million from our fiscal year 2021, ining balance of $52.9 million to approximately $28.8 million.
Speaker 3: The $100.3 million change from cash used in to cash provided by paniccing activities for the nine month into may thirty-first 2022 is primarily the result of obtaining additional trin net out related financing in the current year, along with lower net repayments for short-term debt compared to the same nine month period a year ago, when we were repaying short-term facilities.
Speaker 3: Access to the early stage of the COVID-19 pandemic.
Speaker 3: In closing. Although our results for the quarter were hampered by significant markdowns and freight and handling costs we believe that the fundamentals of our business remains strong with continued.
Speaker 3: Sales growth and solid membership acquisitions and renewal rates. The entire pricemark team continues to put in maximum effort to serve our members, despite the significant challenges we face, while staying true to our legacy and working to build the future. 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.
Speaker 3: So that wraps up my section share. Are you ready to finish up your, or should we move on to QA?
Speaker 7: Where you there.
Speaker 1: Okay.
Speaker 1: Okay.
Speaker 1: We still on here.
Speaker 1: Al right. Thank you for stepping in, Michael.
Speaker 1: All right, Thank you for stepping in, Michael. I think we're now ready to go.
Speaker 5: So with regard to membership benefits, where we left off- and I shared with you a little bit about private label, we are continuing with our well-being services and are seeing very positive results on the, especially the optical and the audiology. We currently have 47 locations with optical centers and expect to have 49 open by the end of the year. This service provides before three exams with every membership and we performed over 88 thousand exams during the first nine months of the fiscal year.
Speaker 5: Including close to 1000 exams eyeglasses for local school children. So we're very excited about having the service available, not only for our members, but to also support our local communities.
Speaker 5: And with regard to the up, the pharmacy centers in all eight of our warehouse clubs in Costa Rica. We expect to have pharmacy centers in all seven of our panamanian clubs by the end of fiscal year- two point zero zero two million and 23- and we continue to analyze opening pharmacies in additionions in additional countries and they may take different forms based on the regulatory structure, but that is something we're studying at this time.
Speaker 4: So our third driver of growth is driving incremental sales using pricewk com and enhancing efficiencies and opportunities for sales using digital capabilities and.
Speaker 5: What we have right now is our total e-com sales directly represent 4% of total merchandise sales.
Speaker 5: And when we compare this fiscal third fiscal quarter versus the comparable prior year period, online sessions increased 10% and that led to an increase of online orders of 70%.
Speaker 5: Meanwhile, the average online order value increased 14%, So receives a really encouraging signs with regard to how our members are responding to their online experience with us and pricemark com generally.
Speaker 5: The digital capabilities have also been a great benefit for new member enrollment.
Speaker 5: Now let's put this in context because.
Speaker 5: Of our operating income, approximately one-third or slightly above one-third is represented by membership income.
Speaker 5: And the other two-thirds to net operating income is represented by the profits to honor our sales of sales and services.
Speaker 5: Those goods and services So when we can move the needle on increasing membership value such that it morerants increasing membership fees or we get more reliability in the collection of those fees that that should have a significant impact and that' on our operating income So.
Speaker 5: Right now, what we're able to do- which we didn't before- is sign up our members online, and 14% of new memberships were that were purchased online during the last quarter.
Speaker 5: And online renewals represented 4% of our total renewals.
Speaker 5: So as of May 31 2022, approximately 47% of our members have created an online profile with pricemk com.
Speaker 5: And that, if GI step back, we've basically gone from Zero to almost half of our base, having an online digital prredential in less than two years.
Speaker 5: 12% of our total membership has made a purchase on pricemark com.
Speaker 5: And the average online purchase on pricemark com in Q3 was 32% higher than the average ticket for in-club purchases.
Speaker 5: Our omnchannel members- those who shot both online and in club- made approximately three more orders spend in club only members during the third quarter and orders for this category of member grew 14%, with the average spend for this group growing 25% compared to the prior year fiscal third quarter.
Speaker 5: Now we recognize that these omn-ichannel members historically tend to be higher spending members anyway, So we take that into account when looking at this. But even when we compare that set of members against themselves, we're seeing growth.
Speaker 1: Now also encouraging is that 8% of our total membership base, that one point seven five million membership accounts, is enrolled in our Auto renewal option.
Speaker 5: And we do have credit cards on file with many of those online Auto renewal members.
Speaker 1: We're being challengge on everything today's sun getting political scam calls my while we're doing this. This conference call So.
Speaker 1: We're being challengge on everything today's on getting political scam calls while we're doing this. This conference call So.
Speaker 5: The increase in online Auto renewals with credit cards effectively takes.
Speaker 5: A portion of our operating income and puts it in a much more liable, predictable state.
Speaker 5: Because that income can be measured and it can be extrapolated out for a period of time, at least a year.
Speaker 5: And the odds of that income being repeated for the following year is higher. When you have them set up for auto renewal and you have their credit cardso, that allows for a component of our income to become more reliable and more predictable, which is obviously something that is a great benefit in a climate where we're dealing with a lot of change in a lot of unpredictable variables that impact our sales.
Speaker 4: So the goal is for us to continue to increase that so that we can project out in a more reliable manner and also enhance the, the capture of and reduce any leakage of, the renewal of the membership feenow with regard to ESG and our commitment to sustainability. That remains strong and despite headwinds on the horizon concernings inflation, the global economy and persistent effects of the P.
Speaker 5: And had encouraging results, and gl to have two more in in Honduras by the end of the fiscal year. Now these are centers where members of the community can bring their own recycling and actually in some cases get paid for the the materials.
Speaker 5: Lastly, only subject of ESG price Mark, continues to invest in its relationships both with the's administration and the governments of the markets that we operate in. We were a participant in the Sumit of the americaslast month, had the opportunity to moderate a panel with three of the Presidents in three of three Presidents of three of our marketsand we are engaging with them.
Speaker 5: To make sure that we're strengthening our relationships that there's good communication and access and so that we can have a better.
Speaker 5: Sight line to what is going on in our markets and also make sure that those markets recognize us at the highest levels in terms of the value that we bring to those countries in those communities. So I just want to say thank you to our teams especially want to call out buying and finance to really.
Speaker 5: Shifted their focus to addressing our inventory issue. So that we could address it very quickly and proactively. But we also have to recognize that logistics and operations also have been real troopers in managing the inventory in a way that we can sell it through quickly and hopefully get back to what is our normal C of inventory flow by the end of the fourth quarter. So I want it takes a team I want to thank you all and.
Speaker 5: Thank you for your patience with the computer gllimpses and I hope you have a good day.
Speaker 2: We will now begin the question-and-answer session. To ask a question, you may press star than one on your touchstone phone. If you're using a speaker phone, please pick up your handset before pressing the Keys. And to withdraw your question, Please press star than two and at this time'll pause momentarily to a and bar roster.
Speaker 2: First question will come from Rodrigo. Each OK arreay with scooltiship Bank. Please go ahead.
Speaker 8: Thank you, HI Sherry, and I call a couple of questions from my side. I want to clarify.
Speaker 8: If I understo correctly, you said the nonfood categories grew in the canens in the quarter. Did I misunderstand?
Speaker 1: Thankyou. Yes, I said 18%, yet corteen percent toks im on.
Speaker 3: Sorry I was on the wrong. I got some tical digital D the my own. Yes, sorry. Yes, one up 18%.
Speaker 8: guid So I guess what I'm curious to understand is the markdowns in the context of sensor sales in the doubleds also within nonfood categories and I guess when I look at what happened in Q1 or in this the first half of the year. At some of the retailers in the U's that face some similar challenges on excess inventory there was a much sharper slowdown on the top line which.
Speaker 8: Does not appear to be there, at least not in Q3 for you guys. So that how should we read that? Is that an expectation that Q4 is going to be extremely challenging?
Speaker 1: redergare you re referring to with regard to generating top line sales.
Speaker 8: Right So I'm trying to understand the markdowns in the context of a healthy top line and within that strong sales on the nonfood categories which.
Speaker 8: It it sounds like that that's what you had excessing or you have excess inventotory right right. So I you're perhaps trying to distinguish between the healthy sales growth and sales growth that may be just the result of markdown. Below. Cost is that and I guess I guess I guess is that the best way to to understand the dynamics in in Q3. In the markdown well I I mean certainly one could look and say.
Speaker 4: Sales were impacted by the fact that merchandise was marked down significantly, but there are a number of different factors. one is our top.line: sales has beeninconsistently growing.
Speaker 4: And just to give you some context. 17- approximately 17% of our sales in.
Speaker 5: And Q3 were for nonsuit of that.
Speaker 5: About two -thirds of it was in hard l.
Speaker 5: And approximately one-third within soft line, and it was only with respect to a portion of the hard line that we had the excess inventory. I think likely have you quantified that as of the end of may, the amount of excess inventory, what we deemed to be access in the hard line?
Speaker 3: Yes we're. Yes, we've increased our days on-hand targets because of all the supplychain complexities, But when you carve that out, we're estimatinging that we're probably about 20 to three million higher and we would like to be, in general, as of the end of, as of the end of Q3, for between hardlines on soft lines.
Speaker 3: But I think you know your question about markdowns, and does that signal a slowslowdown? I mean we, we did share, did share the June comtrright and 12%, So do have an indicator of the direction of sales, that sales are headed, at least through the first month of of of the quarter and, and as else I think shaher's also emphasized that- we've really been trying to clear out this problem and that doesn't necessarily mean that there's going to be a slowdown. We're just trying to work through some of the backlog we have of overlapping pro.
Speaker 3: Programs and, most importantly, just cleaning things up so that when the red and green starts hitting at deperiinning of the fiscal year that we have space for it and we're out of this stuff. That's kind of a camulated. So I don't think we're directly linking markdowns to a slowdown in growth at this point. I mean obviously at some point to her ticket items, how some inflation impact. but- and we're especially focused on those, the current quarter- we're working on a urnure program.
Speaker 3: Which has some higher ticket items, and then we have to keep an eye on those. But we're not directly projecting a slowdown at this point.
Speaker 5: Now to fill that in a bit rodriico, if your question is with regard to the excess inventory, I reiterate: what Michael's saying is is we don't see the excess inventoryries being a cause for a slowdown. There are other factors our business is facing, I mean, and we CAn't really predict, other than FX. Is providing major head wind, Colombia's FX, postto Rico's fs?
Speaker 5: Whether or not that resullt in a slowdown remains to be seen. I mean, we have been operating with significant FX headwinds, more so than historically, I think for a couple of years now- and we ve managed to continue to grow sales.
Speaker 5: So clearly we have to continue doing what we do best and we know here, in tough markets with currencies that fluctuate- and at least more recently over the past few years, don't don't fluctuate in our favor very often, but we're still delivering sales growth and healthy comps, and that is through all the a multitude of decisions we make along the way.
Speaker 4: In order to achieve those sales. So I CAn't answer. I couldn't answer to you whether or not there will be a slowdown because again, there are so many factors that are beyond our control. All I can tell you is that we're very conscious of them and we're trying to make the right business decision every day to be able to keep the members happy, keep the membershipips renewing, grow the membership base and generate those sales.
Speaker 8: Got it. I guess maybe a better way to ask that same question is: would it be fair to say? And then expectations were much higher for cercertain hard lines in terms of top line for Q3 and that's where the excess inventory came from, just on the expectations front, rather than weakness on the top line in terms of question. Question already adapptting.
Speaker 4: To the extent we were not clear about it, there's no doubt I mean when we were making these. Remember, these hardlines usually have longlead time and the decisions regarding consumer preferences and what we anticipate the market will demand are made nine months, six months, nine months, 12 months, in advance of the time that the consumer will actually be in a position to transact. So, in an environment will things are?
Speaker 4: Shifting pretty significantly back and forth we did take a point of view and we took a point of view that we.
Speaker 4: Are going to make a strategic investment and more inventory, with the expectation that we would be able to capture higher sales.
Speaker 4: To make a strategic investment in more inventory with the expectation that we would be able to capture higher sales and.
Speaker 4: And be able to sell felt these items after that is really when a number of these other factors came together and sort of created the.
Speaker 4: Perfect storm, even though some of it was ongoing, but. But we saw the Asia club, Asia port closures increasing more extensively. What would happen is we'd have merchandise there ready to go- it was seasonal, no one was there to put it on the shift, defended to us. But then we'd have the next season coming up on the heels of the prior season merchandise and by the time the first season got to the clubs.
Speaker 4: It was almost. It almost ran out of time in the schedule So we'd have 2, two rotational seasons backed up. That's the kind of challenge that we didn't, we couldn't predict. It was caused again by the.
Speaker 4: Supply chain disruption, the unexpected closures, the availability of containers, but that's what we were faced with.
Speaker 4: At a time when we basically took a point of view that we want to have in stocks.
Speaker 4: And God, we want whichush for the salke. Now, as it turns out, looking back, have we known all these other things would happen as well? We probably wouldn't have taken that same point of view. You know I, it T make sense. yeah, know for sure, I think I I I, I get it, I. he made that by sense. yeah, I think it's important to recognize.
Speaker 6: Again we're not happy about it, but it's a point in time, it's a point in T where these different variables came together and resulted in the current situation with excess inventory, and we are, as as a result, addressing it directly and as quickly as we can to get back on track, and we don't see it as a development that.
Speaker 6: Continue an ongoing basis, or something that we we have an issue with in terms of our ordinary course of business and how we do business and make decisions.
Speaker 8: Got it not. That makes sense. And just another question to clarify: if I understood correctly, expectation is that, roughly speaking, the impact on gross consolidated gross margins in Q4 is awards to 50 bps, just on the excess inventory issue, if I understood correctly.
Speaker 4: We're estimating within a range of 25 to 50 basis points to account for.
Speaker 4: The rest of the merchandise that has not yet been sold and the compression on that merchise is' not already been accounted for in your Q3 numbers in our Q3 numbers which you see got again that the residual that would be about 25 to 50 basis points which again we've we've got to have more sales information in terms of trends. But we think we should be out. By the end of Q4 got it and given that you know we have these.
Speaker 8: Short term challenges, and then also when we include the excess margin that came from anita, that is guess not normalizing, or should normalize, like when we look at the gross margins over time.
Speaker 8: What should be the reasonable gross margin expectation for the future and I know you don't give guidance. I'm not looking for guidance. But I guess. I'm trying to understandwhat's thewhere do you feel comfortable in terms of gross margins given those those two issues that are kind of impacting the visibility on the gross margins. There is an area that we.
Speaker 6: Comes up over and over again and I personally have have wondered how someone in your position can rely Leon a growross margin percentage.
Speaker 6: Because knowing what we know about how our business operates and how it's evolved.
Speaker 4: I think we talked about this before. Historically, almost all of our sales were the result of purchasing merchandise, marking it up, getting it to the clubs and selling it. As a business we've intentionally evolved.
Speaker 6: And have developed new capabilities and have expanded ways that we think we can either create greater value or create efficiencies and, as a result, we've got more than just.
Speaker 6: Purchasing items and then getting them to the club, and the examples are the produce distribution center. I mean, I'm sorry, our our farm program, direct farm program. We've invested our own people in.
Speaker 6: Identifying and teaching farmers food safety and helping identify what they need to be able to provide a reliable source of produce to a company like ours. We've invested in produce distribution center. We've invested in teaching them food safety and handling that is is more like getting involved in actually creating or a business that then supplies us.
Speaker 6: And as a result, the more the margin structure on that program is different, it's higher.
Speaker 6: But we only will do something like that if we feel ultimately, the product that comes from that is going to be.
Speaker 6: As good, if not better quality.
Speaker 6: And a better price for the member. And in that circumstance there's and when, we'll still remain very competitive and maintain our typical bumbrella. So in that circumstance you're going to see a higher margin percentage that's applied to that specific function. Have that exam sense efficiencies that we're not there before, should we?
Speaker 8: Accounted for but tough to put a number around that drug. I do have a good perspective with these comments in that necessarily going back to the 16% range necessarily make changes- because I used to be the growross margin, especially after these investments have been made.
Speaker 9: But in some cases, in some cases, the gross margin may be higher in certain wayshas of our business. So, for example, private label. As we're expanding private label, what we're really doing is is we're getting more involved in product development ourselves. That requires more expertise, it's more investment on our parts, more involvement further up in the supply chain. Once again, that would in some cases merit a different margin structure, but the bottom line is we have to always tie it back to.
Speaker 6: Are we giving the greatest value we can to the member? Do we have a healthy comp umbrella? Have we squeezed out the inefficiencies?
Speaker 6: And all eyes are on that effort. But we recognize that when we have to participate, so much more than just.
Speaker 6: Identify the merchandise and getting it to the club that this shareholders.
Speaker 6: Must have a return on the investment that it requires from us to be able to create that opportunity and make it available.
Speaker 8: Got I took a a lot of of your time. Thank you so much. Our pleasure. Thank you and congratulations, rogrigo. Thank you, Thank you.
Speaker 2: That is all the time we have for today's call. I would now like to turn the call back over to management for any closing remarks.
Speaker 6: We do not have, then you can you hear me?
Speaker 10: Okay we we want to thank our shareholders and our employees for continuing to.
Speaker 10: Stands strong with us as we navigate some choppy waters. But again, this this will a a limited time, limited scope situation in our in our view and our focus remain. Our focus remains on the medium term and long-term growth of the company and continuing to invest in that and make sure that we are.
Speaker 10: Wrong with us as we navigate some choppy waters. But again, this this will a a limited time, limited scope situation in our. In our view, and our focus is remain. Our focus remains on the medium term and long-term growth of the company and continuing to invest in that and make sure that we are doing our best for the future.
Speaker 4: So thank you for being with us today. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.