Q3 2023 PriceSmart Inc Earnings Call
Okay.
Good afternoon, everyone and welcome to the price Smart Inc's earnings release conference call for the third quarter of fiscal year 2020, which ended on May 31 2023.
After remarks from our company Representatives, Robert price interim Chief Executive Officer, and Michael Mccleary, Chief Financial Officer, you will be given an opportunity to ask questions as time permits as.
As a reminder, this conference call is limited to one hour and is being recorded today Tuesday July 11 2023.
A digital replay will be available following the conclusion of today's conference call with July 18, 2023 by dialing one 870 7674707 Joe.
Mr callers.
14167648692 for international callers and by entering the replay access code 780477, Pat.
For opening remarks, I would like to turn the call over to play Smart Chief Financial Officer, Michael Macquarie. Please go ahead Sir.
Thank you operator, and welcome to <unk> earnings call for the third quarter of fiscal year 2023, which ended on May 31, 2023, we will be discussing the information that we provided in our earnings press release, and our 10-Q, which were both released yesterday afternoon July 10th 2023.
So in these remarks, we refer to non-GAAP financial measures you can find a reconciliation of our non-GAAP measurement of adjusted earnings and our earnings press release, and our 10-Q. These documents are available on our Investor Relations website at investors day at price Mart Dot 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 companys anticipated plans revenues and related matters forward.
Looking statements include but are not limited to statements containing the words expect plan will may should estimate and some other expressions.
All forward looking statements are based on current expectations and assumptions as of today July 11, 2023. These statements are subject to risks and uncertainties that could cause actual results to differ materially including the risks detailed in the Companys. Most recent annual report on Form 10-K quarterly report on Form 10-Q filed yesterday and other filings with the SEC.
Which are accessible on the SEC's website at Www SEC Gov.
These risks may be updated from time to time the company undertakes no obligation to update forward looking statements made during this call now I will turn the call over to Robert price price, Mark <unk> interim Chief Executive Officer.
My sincere, thanks, and appreciation to our employees here in the United States.
And then our 12 countries and one U S territory for their amazing dedication and hard work.
Congratulations for a job well done during the third quarter.
Our Chief Financial Officer, Michael Mccleary will soon provide a detailed narrative for our third quarter results and.
In advance of his remarks, I would like to offer some comments.
Our year over year increase sales performance was supported by significant strengthening of the Costa Rica currency, the Cologne, along with the strong opening of our new location in San Miguel El Salvador.
Improvements in buying and operations and by growth in online sales.
The third quarter results are definitely encouraging however, I want to remind our investors that price smart markets. The countries in which we operate are impacted by a challenging economic and political events outside of our control.
After operating in the region for 26 years.
We have the experience and skills required to successfully operate the club business in the region to U S standards, but we are often face with country specific events that result in risk to our financial results.
We continue to address these risk factors with improved risk prevention systems, along with meeting with government officials as needed.
One final comment relates to the announcement of the company's plan to repurchase stock.
We believe that the decision to repurchase stock is in the best interest of our shareholders.
We also want to assure our investors that our company's balance sheet and cash flow support both the stock repurchase and our plans to continue to grow price smart.
Now Michael will continue with his presentation.
Thank you Robert we had a strong third quarter with both revenues and net merchandise sales exceeding $1 billion.
Net merchandise sales increased by seven 1% or five 6% in constant currency.
Net merchandise sales increased by five 8% or four 3% in constant currency.
For the nine months ended May 31, 2023, total net merchandise sales exceeded $3 2 billion in revenues reached almost $3 3 billion.
Net merchandise sales increased by eight 7% or 9% in constant currency and comparable net merchandise sales increased by six 5% or six 7% in constant currency for the nine months period.
By segment in Central America, where we had 28 clubs at quarter end net merchandise sales increased 11, 8% or six 1% in constant currency with an 11% increase in comparable net merchandise sales or five 3% in constant currency.
All of our markets in Central America had positive comparable net merchandise sales growth.
Our Central American segment contributed approximately 650 basis points of positive impact to our total consolidated.
Travel that merchandise sales for the quarter, our Costa Rica colon I appreciated significantly against the dollar as compared to the same three month period a year ago.
And was the primary contributor to the favorable currency fluctuations in this segment.
In the Caribbean, where we had 14 clubs at quarter end net merchandise sales increased seven 3% or six 9% in constant currency and comparable net merchandise sales increased four 2% or three 8% in constant currency all of our markets. In this segment had positive comparable net merchandise sales growth.
Maybe on region contributed approximately 120 basis points of positive impact to total consolidated comparable net merchandise sales for the quarter.
Columbia, where we had nine clubs opened at quarter end net merchandise sales decreased 15, 7% or increase in Europe , 6% in constant currency and comparable net merchandise sales decreased 15, 2% or increased seven 7% in constant currency.
Comparable net merchandise sales decrease in Columbia, driven by the significant devaluation of the Colombian peso contributed approximately 190 basis points of negative impact to total consolidated comparable net merchandise sales for the quarter.
In terms of merchandise categories, when comparing our third quarter sales to the same period in the prior year. Our foods category grew approximately 9% our non foods category decreased approximately 5% and our other business category grew 7% primarily from our foodservice bakery departments.
The decrease in our non foods category was primarily because in the third quarter of fiscal year 2022, we had higher sales as we marked down certain categories of inventory combined with a deliberately more conservative position in similar categories of products this year and a smoother flow of merchandise through our supply chain.
Membership accounts grew two 2% versus the prior year to $1 79 million accounts.
The membership accounts or eight 6% of our total membership base as of May 31, 2023, an increase from seven 1% as of May 31 2022.
We continued with a strong 12 month renewal rate of 87, 1% and our membership income was $16 7 million.
An increase of eight 4% over the same period last year.
Although gross margin for the third quarter of fiscal year 2023, as a percentage of net merchandise sales increased 110 basis points to 15, 3% versus 14, 2% in the third quarter of fiscal year 2022.
In total dollars total gross margin increased $21 5 million or approximately 15, 1% versus the same quarter of the prior fiscal year.
110 basis point increase was primarily due to significant markdowns, we took in the third quarter of fiscal year 2022.
Total revenue margins increased 120 basis points to 16, 8% of total revenue when compared to the same period last year, primarily due to the increase in total gross margin.
The total gross margin rate of 15, 3% in the third quarter of fiscal year 2023 decreased compared to the 16, 1% rate in the first half of fiscal 2023.
This decrease was due to a variety of factors, including the elimination of our clubs with premium reduction and a return of that foreign currency exchange premium and a margin decrease in Columbia, where we strategically decreased sales prices on select items across all of our imported merchandise categories in an effort to reduce the cost burden to our members. During this period of exceptionally high inflation.
Devaluation of the Colombian peso.
Beyond Columbia, We also took actions that resulted in a general blended margin decrease in response to increasingly challenging economic conditions to help alleviate the burden on our members.
The average price per item increased approximately seven 7% year over year down from a high of approximately 10% in Q1 of this fiscal year.
However, we still continue to see the price and FX pressures impact aggregate demand as the average items per basket decreased approximately three 2% compared to the same period of the prior year during the quarter. Our average sales ticket increased four 2% and transactions grew two 8% versus the same prior year period.
Great rates continued to come down and we adjust our merchandise pricing as dynamically as possible to ensure those cost reductions are passed onto our members great rates decreased from approximately $3900 per container last quarter to $2900. During Q3 due to slowing trans Pacific demand from U S imports.
SG&A expenses increased to 12, 9% of total revenues for the third quarter of fiscal year 2023, compared to 12, 4% for the third quarter of fiscal year 2022.
Warehouse club and other operations expenses made up about 40 basis points of this increase.
The net effect of the appreciation of the colon in Costa Rica, and devaluation of the peso in Columbia unexpected has contributed approximately 20 basis points of this increase.
Also a tax receivable write offs impacted this line by approximately 20 basis points or eight cents per share.
General and administrative expenses increased to three 1% of the total revenues for the third quarter of fiscal year 2023, compared to three 8% for the third quarter of fiscal year 2022.
The 10 basis point increase was primarily due to increased compensation costs and travel along with certain nonrecurring expenses related to severance and professional fees.
Operating income for the quarter increased 27, 5% from the same period last year to $43 $1 million operating income for the first nine months of fiscal year 2023 increased 19% from the same period last year to $152 4 million.
In the third quarter of fiscal year 2023, we recorded a $1 5 million net loss in total other expense net which includes the net impact of interest expense interest income and other expenses.
Which primarily consist of our foreign currency exchange losses.
This compares to a $4 7 million net loss and total other expense net in the same period last year. The primary contributor to this $3 $2 million decrease in other expense net as an increase in interest income of $2 7 million comparatively.
Because of significantly more investments in surplus cash at higher yields while interest expense and foreign exchange losses were relatively stable when comparing the two periods.
Our effective tax rate for the third quarter of fiscal 2023 came in lower than last year at 28, 9% versus 33, 7% a year ago, primarily related to expected cost savings for CEO compensation for the nine months ended May 31, 2023, the effective tax rate was 32, 2% compared to 32, 8% for the prior year.
Periods on a go forward basis, we estimate an annualized effective tax rate of about 32% to 33%.
Net income for the third quarter of fiscal 2023 was $29 6 million or <unk> 94 per diluted share compared to $19 $3 million or 62 per diluted share in the comparable prior year period.
Net income for the first nine months of fiscal 2023 was $93 8 million or $3 <unk> per diluted share compared to $81 $2 million or $2 63 per diluted share in the comparable prior year period.
Adjusted net income for the third quarter of fiscal 2023 was $31 $9 million or an adjusted $1 two per diluted share.
Adjusted EBITDA for the third quarter of fiscal year, 2023 was $63 2 million.
Adjusted net income for the first nine months of fiscal year 2023 was 103 point.
$3 million or an adjusted $3 32 per diluted share compared to adjusted net income of $79 8 million for an adjusted $2 58 per diluted share in the comparable prior year period adjusted.
Adjusted EBITDA for the first nine months with fiscal 2023 was $215 $6 million compared to $178 3 million in the same period last year.
Moving onto our strong balance sheet, we ended the quarter with cash cash equivalents and restricted cash totaling $236 4 million.
From a cash flow perspective, net cash provided by operating activities totaled <unk> hundred $84 7 million for the nine months ended May 31, 2023 compared to net cash provided by operating activities of $64 three.
$3 million for the same prior year period.
Working capital generated from changes in our merchandise inventory and accounts payable positions for the nine months ended May 31, 2023 contributed $91 $1 million of cash flow compared to the same prior year period average.
Average inventory per club decreased by approximately zero point $5 million or 6% and inventory days on hand decreased by approximately four days or 9% for the third quarter of fiscal year 2023 versus the same period in 2022. The primary driver of the decrease of inventory at year over year is selling through much of our overstock merchandize and a hard line segment.
We took significant markdowns on in the prior year period.
Net cash used in investing activities increased by $136 4 million for the nine months ended May 31, 2023 compared to the prior year, primarily as a result of the net increase in purchases of short term investments primarily in the U S compared to the same nine months period a year ago.
Net cash used by financing activities. During the nine months ended May 31, 2023 increased by $24 $4 million, primarily as a result of a net decrease of proceeds from short term borrowings compared to the same nine month period a year ago.
During the third quarter of fiscal year, 2023 to 100, and Central Bank began limiting the availability and controlling the allocation of U S dollars per conversion 100 inland bureaus to U S dollars as of May 31, 2023, our Honduran subsidiary had approximately $15 $9 million worth of cash and cash equivalents denominated in the periods, which cannot be readily.
Converted to U S dollars for Germany is within the company. We are actively working with our banking partners and government authorities to address the situation.
Lastly, before turning to our growth drivers our board of directors has authorized a share repurchase program of up to $75 million of the company's common stock.
This program underscores our confidence in the business and our expectations for growth altogether with our dividend also delivering returns for our shareholders.
Subject to market conditions, we expect this program to begin toward the end of our fiscal fourth quarter.
Now onto our growth drivers starting with real estate. We are truly excited to have opened our new San Diego club in May which is our third club in El Salvador. This club includes our new sales floor design, which we expect will allow for better space utilization through more efficient pallet positioning on the sales floor. We are very pleased with the initial membership sign ups.
And sales.
We also currently have three warehouse clubs under construction, we have now completed exterior construction of a warehouse club in the outgoing <unk> area of <unk> in Columbia, We are working hard to complete the interior to be ready for our expected opening of the warehouse club at the end of August .
This club will be our second emitting and 10th in Columbia.
In addition, we plan to open our warehouse club in equipment, Guatemala in the fall of 2023.
And a warehouse club in Santana El Salvador in early 2024. Once these three new clubs are open we'll be operating 54 warehouse clubs and we are actively exploring additional locations as well.
Finally, we're currently re modeling and expanding floor of a high volume clubs. These clubs are located in San Salvador, El Salvador, San Pedro Sula, Honduras, Santiago, Dominican Republic, and Poland, Spain, Trinidad and Tobago.
Yeah.
We also remain focused on the important role of our distribution facilities for optimizing efficiencies and reducing supply chain risk and continue to actively seek new distribution center locations as part of our real estate strategy.
An example of this is that we recently signed a new lease to move and expand our domestic distribution center in Panama.
Turning now to membership value.
As we've highlighted in previous calls our private label members selection brand continues to be a high quality good value alternative in these times of high inflation and foreign currency fluctuations during the first nine months of fiscal 2023, our private label sales represented 26% of our total merchandise sales that's up 180 basis points from 24, 2% and the <unk>.
Parallel period of fiscal year 2022.
We expect to expand our suite of wellness services and we currently have 48 locations with optical centers in spec out 50 opened by the end of the fiscal year.
Our optical program provides for free eye exams with every membership and we performed over 35000 eye exams. During the quarter optical is also an important social responsibility contributor to our local communities and in partnership with price plan therapies <unk> vision program eye exams performed by Weizmann Optometrists and priced philanthropy.
These purchases the glasses from our optical centers, and bulky exams and glasses or get into children and their families free of charge. We have provided 40000 screenings eight thousands of exams and 7000 my glasses to date through this program.
We currently have pharmacy centers in all eight of our warehouse clubs in Costa Rica, and two warehouse clubs in Panama and expect to open pharmacies and the remaining five clubs in Panama during fiscal year 2024.
With respect to audiology centers during the quarter, we opened 10, new ideology centers with 24 centers opened at the end of May 2023, we expect to open an additional eight centers in fiscal 2024.
Our third growth driver is our omnichannel shopping options for our members, which reflects all sales in our digital channels, both in our App and our desktop website.
Currently utilized price Mark Dot com and our App in third party last mile delivery services to drive online sales.
During the third quarter total omnichannel sales increased 18% as a percentage of net merchandise sales versus the same period in the prior year and represented four 9% of total net merchandise sales a record for the company.
Total orders increased 29, 4% and the average transaction value increased 11, 1% versus the prior year period.
In May <unk> was recognized by Uber eats as the business of the year and best supermarket for the 2023 edition of the delivering Excellence award in Costa Rica. These two awards recognized our efforts and commitment to provide the best shopping experience and demonstrate our commitment of providing value to our members.
As of May 31, 2023, approximately 58, 6% of our members had created an online profile with Prisma dot com and 15% of our total membership base has made a purchase loan price Mart Dot com. We believe that there are significant growth opportunities in our digital channel and we will continue to invest in this part of the business to provide enhanced omnichannel.
And additional value to our members.
It is also encouraging the nine 5% of our membership accounts are enrolled in our auto renewal option, which is up 150 basis points from 8% in the comparable prior year period. As this brings added predictability to our membership income.
During the third quarter, we released our comprehensive environmental and social responsibility report for fiscal year 2022.
CSR report provides an overview of <unk> commitment to employees members communities and the planet.
It also describes our approach to integrating sustainability and social responsibility into our decision making in operations. The <unk> report is available on our Investor Relations website at investors thought price Mart Dot com under the ESG tab.
Environmental and social responsibility continues to be an important component of how we approach our business and an important component of those efforts as our actions and practices that aimed to responsibly use natural resources. For instance, we are currently operating five recycling centers three in Honduras and two in Guatemala on average around 12000 pounds of recycled material is being.
Collected monthly in each location you can find more information about price Marty philanthropic and corporate social responsibility efforts on price Mart Dot org.
With regards to social wellbeing, we are proud to announce that price of corn has been included in Newsweek's list of top 100, most loved workplaces for 2023. This list recognizes companies that put respect carrying an appreciation for their employees at the center of their business model and in doing so have earned the loyalty and respect of the people who work for them.
We have continued to strengthen our commitment to people first and this achievement results from a joint effort of our leadership team together with every one of our employees.
Looking forward a little into Q4, our comparable net merchandise sales for the four weeks ended July <unk> 2023 were up seven 9% or four 8% in constant currency.
Tailwind from the strength of the Costa Rica, Cologne continues to offset the drag from the weakness in the Colombian peso. We've also seen significant improvement in the Columbian peso exchange rate with U S dollar.
The past couple of months, especially in June which has meant that Columbia FX has had less of a negative impact on U S. Dollar sales during the month.
In closing our people first culture is what drives our efforts to succeed we are continuously working on enhancing employee engagement and building a positive work environment and culture across all countries we operate in.
This culture combined with our commitment to the foundational fixed rates of merchandising arms us with the tools and can do attitude to deliver on the value we promise to our members and has resulted in another successful quarter. Thank you for joining our call today I will now turn the call over to the operator to take your questions operator.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed.
By the one on your Touchtone phone.
With me Tom Panther acknowledging your request.
And as a speaker phone please lift the handset before pressing.
Next question comes from Jon Braatz, Kansas City Capital. Please go ahead.
Good morning, Robert Michael.
One John .
Michael.
Gross margins.
Obviously.
I knew that.
About the pricing actions.
You were taking in Columbia, but you seem to have extended debt.
Throughout all your all your markets and a couple of questions number one where those pricing actions in.
In place for the full quarter.
And I.
I guess secondly.
How long do you do you see these pricing actions actually remaining in place.
Yeah.
Yeah, well, yeah, we kind of started that towards.
End of end of Q2 early Q3.
Just a variety of actions kind of sharpening our pencils, a little bit on price points.
And at this point clothes clothes.
That fine tuning is continuing and I don't know Robert if you want to add anything on that.
Not too much.
I think the results in the third quarter.
Indicated I mean gross pricing.
As somewhat of an art and we are in so many different markets that we have to.
Be very nimble in how we think about the pricing to maintain the membership value.
Wei and factoring in risk.
Constantly trying to improve our expense structure, so that our bottom line.
It's going to remain strong as we continue to offer better values to our members and its a bit of a dance and particularly operating in small markets.
Many small market so.
I wouldn't want to leave the impression that we're locked in to any particular.
Number, but we are.
This is just a constant.
Effort to make sure that we're delivering value.
They were.
We did it in a way that's going to increase volume.
We do it in a way that also brings us the rate.
Profit to the bottom line, it's not quite as formulary stick as you might think okay.
With the Colombian currency.
Showing relative strength here.
Would that at all influence any.
Any new pricing actions are in Columbia, given given the strengths in the in the peso.
Well.
Yes.
Columbia is by far.
The largest market we operate in.
Let me.
GDP is probably close to.
The same as all our other markets combined.
So for us.
To be able to continue to gain market share in Columbia is extremely important and looking to the longer run. The other so one thing I would say is that I think and the competition level by the way is much much more intense.
Columbia than any place else, we operate because we are.
Operating against me.
Major.
James.
In South America that are very very strong competitors, but the other thing I don't know, whether youre aware of this or not but.
The largest retailer in Columbia <unk> Joe.
Yes.
Announcements recently that they're for sale and.
We're not interested obviously in that.
The reason that's relevant is because.
We think given the strengthening of the peso.
And some disruption in terms of exit chose situation. This is the time to really.
And also with the opening of the vessels a lot of this is <unk>.
<unk> to really be aggressive about solidifying and growing our position in Columbia, because honestly for our future at this time the market that offers us the most expansion opportunity here as a sales as Columbia. So I think we our mentality is that we want to.
Strong in Columbia, and also the imports that we bring in from around the world distinguish us from.
Other competitors in the market and I think now that the.
Peso is stronger we have an opportunity to even become a bigger factor with our with our imported merchandise. Okay. That's good.
Michael.
Honduras, such a situation do you see that potentially morphing into something like we saw in Trinidad where you begin to restrict restrict imports there and raise prices to offset the currency issue.
Well.
This is kind of new to this quarter. So we're monitoring it actually obviously you can see by the numbers that we disclosed about the cash on hand is not near as extreme as it got to a one point in in Trinidad, but we did think it was important to call. It out. So I think it was somewhere around $15 million versus a peak of about $100 million in Trinidad but at this point we're monitoring.
We haven't taken any actions to restrict flow of merchandize at this point and.
And we're just working with the with the banks and.
The local officials to continue.
We continue to monitor this and we will see as we go forward. Okay. One last question on the on the repurchase program $75 million I think domestically you hold $42 million in cash and I think that was in the 10-Q.
Let's just for the sake convenience, let's say you you were looking to complete this repurchase over the next year.
Would that mean, you would most likely have to repatriate some money.
From Columbia markets down South or would you borrow money or.
Would there be enough domestic cash flow too.
They pay the dividend and make any capex spending in the end.
All.
Do the complete repurchase.
So let me put it this way we're not we're not expecting to enter into any debt or to fund the buyback and or <unk>.
Any tax leakage from from Logan excellence around between the countries or anything so that's getting so alright, we can fund it with existing cashless alright. Thanks, Michael.
Thank you John .
Thank you. Your next question comes from Victor Cardenas at Scotia Bank. Please go ahead.
Congratulation on their itself Barbara and Michael and Thank you for taking my question I know you'll ask a question in regards to the repurchase program and in particular with the just understand a little bit.
About the rationale and as opposed to using other alternatives like a special dividend and any other guidance regarding the timing and the size of the repurchase of how it seemed like you mentioned that in Q4.
The program may be starting to make their first purchases by looking into understanding the rationale as to other alternative and also something.
Some soft guidance on devices off that.
We purchase if I may.
Oh.
As I think I mentioned, we've never.
And the history of <unk>.
Price Mart.
Entered into a repurchase program. This is the first time.
And I think partly it's going to be a learning experience for us because.
What we are.
Hoping to.
Accomplished by this is to provide.
Some opportunity for certain stockholders, who might want to go beyond the dividend in terms of cash.
Cash.
Benefits.
And sell some of their stock.
But the other thing in my mind is.
It is certainly a learning experience because we really don't know how this is going to work until it's out there, but the other thing as you know, we're a very thinly traded stock.
What's been the pattern.
Yes.
We released earnings and.
And then when it's good stock jumps up for a few days.
Then it goes back down and then we're back in this kind of pattern, where there isn't much going on.
I think that by having.
This stock repurchase program in place.
We can provide a little more stability.
And.
Put some kind of.
Little more.
I guess it would be stability into the pricing of the stock because.
We are an unusual company I think we don't trade very much and we're not a U S company in terms of nobody can go in and actually see what we're doing unless you live in one of our countries and so I think.
We're going to learn I mean, we.
I don't know what's going to happen.
The most important thing, though we have the cash to do this number one.
And number two is that looking beyond the repurchased eight the real focus has to be on running this company well.
And if we run the company well.
We will have good results for the shareholders in terms of the stock price and I think.
That's where we're that's our bottom line, but we're.
We're in a learning phase really here and I don't know how to predict it.
Xactly how this all plays out, but we will see.
Thank you Michael.
Thank you Robert.
Is that it.
Okay.
Thank you there are no further questions at this time I will now turn the call back over for closing comments.
Okay. Thank you everybody. We hope you all have a good day. Thank you for joining us today Goodbye.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask you. Please disconnect your lines.