PriceSmart - Fourth Quarter Results for FY 2016
Company:
PriceSmart
ConferenceTitle:
FourthQuarterResultsforFY2016
Moderator:
JohnHeffner
Date:
28October2016
Time:
11:00amCT
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. If you
would like to ask a question on today's call please signal by pressing *1 on your
telephone keypad. I will now turn the call over to Mr. John Heffner. Please go ahead, sir.
John Heffner:
Thank you vey 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 will 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 can cause actual results to
differ materially, including the risks detailed in the company’s Annual Report on Form 10K for the fiscal year ended 31 August 2016, filed with the Securities and Exchange
Commission on 27 October 2016. We assume no obligation and expressly disclaim any
duty to update any forward-looking statements that reflect the occurrence of events or
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circumstances which may arise after the date of this call. Now I’ll 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 -1.2%. Sales in our non-Colombian markets, 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 that quarter, compared to Q4 of fiscal year
2015.
For Colombia, comp warehouse sales decreased 6% when translated to U.S. dollars at
the average rate for that period of 2,970 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 our comp sales increase of 1.5 percent 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 items
from imports to locally sourced. While not sacrificing quality of those items, we were able
to realize a reduction of prices versus some of the imports and were glad to see the
acceptance of our members on the items that have been converted.
Sales of imported merchandise had a decrease of -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 are seeing an increase in standing by our
Colombian members. Some of the failed strains the specific market that we saw in the
third quarter continue in the fourth quarter. Soft demand and flat to a slightly down year
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on year sales occurred in Costa Rica, Dominican Republic and Barbados. Economy
weakness and government policy are making things difficult for our business in Trinidad
that began in Q3, when the government expanded the 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 currency. I will speak 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, daily and gourmet daily also show single-digit increases. For non-foods, we
saw softer sales in most of the categories. The standouts with single-digit increases were
automobiles, 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 that were end caps and
vendor support areas.
Margins in Q4 were 100 basis points higher than Q3.
This
equation improvements in margin occurred in both our Colombian and non-Colombian
markets.
Margins in Colombia are stabilizing after many quarters of zero and zero
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 dollars. We finished
the quarter with more than 1,490,000 membership accounts and a 12-month renewal rate
of 80 percent compared to 86 percent 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 due to the anniversary of the opening of
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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
trends and see this as evidence that with the stabilizing currency - coupled with the efforts
of our operations and buying teams - members are increasingly seeing the value that a
high-level membership provides. In addition to the improving renewal rates, we continue
to see strong sign-offs especially in our Bogota and Medellin markets. I will add a few
things about membership in Colombia when I talk about our Chia opening.
Moving on, our 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 which 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 pre-opening
expense associated with our Chia membership 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-dollar current year reduction in operating
income for the [inaudible].
Net income for the quarter was 22.3 million or 70 cents,
74 cents, per diluted share, one cent below the fourth quarter of last year.
The net
income for the current period contains a beneficial effect of certain tax-related items,
reducing our effective tax rate and favorably contributing approximately six cents per
diluted share to our results in the quarter. John will provide some additional information
about this in his remarks.
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Now let me go through a quick update on the work we are 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’re nearing completion of the
expansion of our Santa Elena club in El Salvador. In both cases, we’re adding about
8,000 square feet of sales floor and 30% more parking spaces, just in time to improve our
membership and experience for the upcoming holiday season.
We have a number of additional clubs that are candidates for similar expansion and we’re
proceeding with permitting process for them. We continue to push forward with 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 Bogota. Our grand opening of 1 September was an exciting
day. We had sales in the first three days in excess of 1 million dollars. Our shoppers
from those days were both new members who signed up in the few weeks leading up to
our opening along with existing members who had been shopping with us in our Salitra
[?], Bogota club or even our Barranquilla club.
We even had more than 500 members that had purchased a membership at our Salitra
club but had never shopped at any PriceSmart. They made their first purchase at our
Chia club. As such, we believe that these new locations 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 parts of Bogota. We expect to see those
members increasing their frequency of visits and shop more with us which will also
contribute to an improving renewal rate.
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The construction activity associated with the building of a facility that would be the future
home of our Miami distribution center is proceeding and reports are that it is even slightly
scheduled ahead. We currently expect to take possession sometime during our second
fiscal quarter and begin operations soon afterwards.
I would like to come back to Trinidad, which I mentioned earlier in my remarks. Trinidad
is providing a somewhat unique challenge as we and other businesses are experiencing
a very liquid market with respect to sourcing hard currency in that country.
We’re
currently unable to exchange TD dollars for U.S. dollars or other tradable currency at the
level needed to settle payments owed to PriceSmart Inc. by our Trinidad subsidiaries for
the shipments we are sending to Trinidad. This reduces our ability to deploy that cash for
corporate purposes and also exposes us to the financial risk and devaluation of the PT[?]
dollar.
We’re doing everything we can to source tradable currencies with our banks. However
until such time that the uncertain state of tradable currency is resolved, we plan to take
steps 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 levels that
generally align with our Trinidad subsidiaries’ ability to source and pay for the
merchandise in U.S. dollars. Although that situation is dynamic, based on recent levels of
tradable currency ability we anticipate reducing planned U.S. 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 to 12 million-dollar
range for the second fiscal quarter. These actions do not impact merchandise on hand or
currently en route to our Miami distribution center to Trinidad. So Q1 of this year will not
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be impacted. Nor will they impact our plans to purchase and stock merchandise we
obtain locally in Trinidad. We will increase or decrease shipments from the U.S. in line
with our ability to exchange TD dollars for other hard currencies and we will continue to
seek to maximize the level of tradable currency our Trinidad subsidiaries can obtain.
Trinidad has historically been a very good market for us, with good sales and very loyal
members. We may be dealing with these 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 for our
members is either already in the clubs or almost there.
seasonal items appears to be good.
The initial reaction to our
Across the company, we’re 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 a soft economy or other
factors.
We always recognize that we can do better and show the members that we are there for
them, to help them save money. Thanks again for joining us today. After John’s remarks
we will take your 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 have cash on deposit in
certain countries providing an increased level of income and on the expense side, we
have 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.
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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 dollars in fiscal year 2015, to $899,000 in fiscal year 2016, an improvement of
3.5 million dollars.
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 favourable 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 inter-company transaction between PriceSmart Inc., the U.S. entity and PriceSmart
Colombia, related to our ongoing market development efforts in Colombia.
This transaction resulted in a 10.9 million-dollar reduction in taxable income in the U.S.
entity and an associated 3.9-million-dollar 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 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 a valuation allowance against the
deferred tax assets of our Barbados subsidiary of approximately $2 million. The net
effect of these two items was overall reduction in tax expense in Q4 of $1.9 million,
equating to about 6 cents per diluted share.
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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 the completion of the warehouse club in Managua, 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 for
maintenance cap-backs and the expansion in Barranquilla.
From a financing perspective, the largest use of cash was the dividend payment in two
instalments during the year, totalling $21.3 million. Jose Luis spoke about the project
being made and the construction of the distribution center in Miami. We are arranging
financing for up to 75% of the completed value of the 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’ll turn things over to you.
Operator:
Thank you. If you would like to ask a question, once again please signal by pressing *1
on your telephone keypad. If you are using a speaker phone make sure your mute
function is turned off to allow your signal to reach our equipment. Once again, press *1 to
ask a question. We’ll pause for just a moment to allow everyone an opportunity to signal.
We’ll take our first question from Dave King with Roth Capital. Please go ahead.
Dave King:
Thanks. Good morning, guys.
John Heffner:
Hello, Dave.
Dave King:
I guess first off, question on currency and the impact to warehouse club cost margins, I
guess. It seems like Colombia is starting to work in your favor a bit, or at least stabilize
and then offsetting that there’s several markets where there’s some devaluation at this
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point, but those are markets you’ve been in for a while. How are you thinking about the
willingness or need 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 sequential improvement in the cross markets, not
just Colombia, in the period. How should we be thinking about the devaluation in call it
Costa Rica and some of those places and how will that impact you guys going forward?
Thanks.
Jose Luis Laparte:
Thank you. Let me tell you, Dave, for the most part we are, I guess we have
been living with currency devaluations through many years in all the countries. I would
say that the Colombia factor over the last two years was huge because the devaluation
was just a nexus of about 50 and at some point about 60%. In the current markets where
we have seen the slight devaluation we just, we’re not as worried, obviously it doesn’t
impact 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 as bad or the impact in some of these markets hasn’t been a threat.
We don’t foresee any big challenge on those markets. We’ll just be, definitely we may
see if things continue to be worse in terms of the valuation in some of these markets we
may have to raise some of the prices as we keep receiving new merchandise obviously.
We see that also happening in local merchandise, a lot of vendors will be using local or
imported ingredients. We may see some prices raising in those markets too.
For the most part, again as I mentioned before, we deal with those things every single
year in different markets, where some appreciate, some I guess go the other way, and I
don’t foresee any big changes in our margins.
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Dave King
Okay, that’s great color, thank you.
Then maybe switching gears a bit, to Trinidad.
Probably a question for you John, in terms of the 18.9 million of U.S. 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 it was called out?
John Heffner
Sure, what that relates to, Dave, is we ship products from the U.S. into Trinidad. They
need to settle that payment back to the U.S. entity in the U.S. dollars. So that product
gets sold in TT dollars and then you can convert TT dollars into US dollars so then settle
the liability that the subsidiary had back to the U.S.
The difficulty we’re seeing that we’re pointing out is that there is a very illiquid market,
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. We are
having difficulty converting TT dollars into either U.S. dollars or Euros or Canadian dollars
or any other kind of currency that can be then eventually converted back into U.S. dollars.
What happens is the liabilities build up as we keep shipping product in there. At some
future point if the Trinidad dollar devalues - and there’s some indication theoretically in
economic theory that it very well might and it has been a little bit at a time - that liability
will get re-measured and the exposure will present itself as a foreign exchange loss on
our PNL. That’s what drives that issue.
Dave King:
Okay, that helps. So it’s not and it’s not a decision whether or not to record it, it’s just
going to run through based on we know how the currency moves in terms of -
John Heffner:
It’s the same issue we dealt with in Colombia last year as you may recall. It’s that issue,
but the difficulty here is there’s - unlike Colombia that didn’t have the money to pay it back
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because we were building that business, Trinidad generates a lot of cash, we just can’t
get it translated back in to US dollars.
Dave King:
Right, okay. That helps, thank you. Then on the tax, what have you in terms of the two
hundred basis points the savings on sort of a go forward? I guess what I’m trying to just
get out of this how should we be thinking about the - we know when we take all the
different inputs because I think there’s was also the valuation allowance you’ve recorded,
I want to say it was this quarter, you know that offset. What’s sort of the right tax rate to
be using or assuming, over the next few quarters then?
John Heffner:
Sure, yes the valuation allows - that we took was a onetime issue so I would take that out
of the equation. What we’re seeing with Colombia to the degree that it has these NOL’s
and this transaction creates some taxable income there which is offset with the flipside
being in the US. That’s a few hundred basis points that we’re probably talking about. It
will probably occur for the remainder of the fiscal year until such time as we sort of use up
those NOL’s 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:
Okay. Then maybe one more then I’ll step back. In terms of Chia, Jose Luis, it sounds
like that’s going really well, so that’s encouraging. It sounds like, that actually may even
help in terms of well, not just the renewal rate recovering just because of time but also
that may help, that itself may also help the renewal rate because you get members that
stay. That’s all good. I guess the one concern I had was 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 things – since we started over this plans to
build Chia, we knew how many members were coming from the Chia area, from St. Paul
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from that vicinity of that area. We knew also that there was a risk of losing some of those
sales especially for the northern Bogota members. But a good sign is, there are a couple
of good signs during the month of September and October, so far in October that
cannibalization of our Salitra club in Bogota has been less that what we expected so
that’s a good sign.
We did plan for some cannibalization for sure, but it has been a little bit less and the sign
ups especially in September, the whole month of September the sign ups in our Salitra
club were so strong that they were in July/August before opening Chia. Both are good
indications that even though the Chia’s 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 Salitra, are now having the possibility of shopping more often in Chia. I think
that combination all in is a good result and we expected that to happen in a city the size
of Bogota which obviously the driving distance is a big factor for a lot of members not to
be [inaudible].
Dave King:
Okay. Fantastic that’s great to hear. I’ll step back and good luck with fiscal ‘17.
Jose Luis Laparte:
Thank you Dave.
Dave King:
Thank you.
Operator:
As a reminder it is *1 if you would like to ask a question. We’ll take our next question
from Ronald Bookbinder with Coker and Palmer. Please go ahead.
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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 the 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 really want to 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. 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 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 doesn’t mean we wouldn’t
consider in the near future.
At the same time, it’s 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 renewals because at some point during the last year, we
saw we had challenges in the renewals because prices were going all over the place in
the stability.
If things continue as they are with the currency we should be able to follow that trend of
good renewal and eventually we’ll consider raising it a little bit, because it definitely on the
low side at almost about nineteen to twenty dollars per membership in Colombia no. I
hope that answers your question Ronald.
Ronald Bookbinder:
Oh yes. On the gross margin, the gross margin was the highest it’s been all
year. Are you planning for any price cuts or are you going to wait for the operating
margin since you still have some deleverage or carrying some higher SG&A expense.
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Would you wait for the operating margin to sort of get over that 5.5% before you would
consider lowering prices to drive more volume?
John Heffner:
This is John. No I don’t think that’s the driver, we work the, 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. As we’ve seen that improve a little bit with
the improving environment there, we’ll take a look at the margins in each of our countries
and make the right decisions about that going forward sort of independent of, as you call
the SG&A actions for the company.
Jose Luis Laparte:
Yes 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’re
heading into the holiday season with pretty clean inventory so we don’t see any reason
why margins should drop. But at the same time, we don’t have any strategies to raise
rate them. We should have pretty good stability in our margins going forward but it’s not
driven by, it’s driven more by the markets, by the competition, by things where we can
react, not necessarily a G&A expense.
Ronald Bookbinder:
Looking at the comps, the comps have finally turned positive and moving in the
right direction. For the quarter, how was traffic verses ticket?
Jose Luis Laparte:
For the quarter we actually had, I have it right here, we were at 1.3% growth,
however our 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, some of the fact that there is some compression in
prices. Other than that, we’re pretty glad to see transactions, strong transactions so we’ll
figure out how to keep working on getting that.
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Obviously as price compression continues in some categories which does affect us for
sure, it’s been affecting a lot of older retailers. It’s good to see we’re probably lower in
some of our prices and members get advantage of that, but we’ll figure it out later on how
to keep improving our average sales but I believe that transactions are out of there, with
higher transactions.
Ronald Bookbinder:
Okay, 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 and I say that because we haven’t started any
construction in this fiscal year. That would be on time to open on fiscal year 2017, but I
will say we have a few projects in place that hopefully we can announce and we can start
construction very soon. We’re actually pretty optimistic that we will be announcing a
couple of projects soon. The chances for open 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 that calendar year 2017 ready for the next holiday season Ronald. That’s
our hope.
Ronald Bookbinder:
So probably early fiscal 18?
Jose Luis Laparte:
That is correct, yes.
Ronald Bookbinder:
Okay great. Okay well, good luck with the holiday season. Thank you very
much.
Jose Luis Laparte:
John Heffner:
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Thank you Ronald.
Great thanks Ron.
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Operator:
And we’ll take our next question from Patricio Danziger RWC Partners. Please go ahead.
Patricio Danziger
Hi, good morning, thank you for taking my questions. I see that you normalize
gross margins this quarter after the weak third quarter, but I’m also seeing that operating
margin is a little bit lower than in past years, that was about 5 to 5.5%. Can you comment
on that, I mean if you plan to get to the 5% level or 5.5% level that you got in 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 were not in the prior year in the same way. Either in total or partially and what we
saw is that when we add those clubs 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 clubs.
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.
It has a tendency to have an impact on our SG&A or our warehouse expense as a
percent of sales in the short term. Our goal obviously overtime is to, as those sales
increase and we manage our expenses as we do we would see that improvement
overtime for those clubs.
Operator:
And caller does that answer your question?
Patricio Danziger:
Okay thank you. Yes thank you very much if I - appreciate it. You mentioned
that you see an improvement in Colombia. Do you mind telling us the sales growth in
local currency?
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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 open, I mean you have a lot more stores this
quarter than last year right?
Jose Luis Laparte:
No, that Q4 was comparable sales growth, counting only our six warehouse
clubs with six warehouse clubs. We didn’t open Chia until 5 September so that 1.5 is
comparable same stores number. 1.5.
Patricio Danziger:
Thank you very much.
Jose Luis Laparte:
You’re welcome Patricio, thank you.
Operator:
And as a reminder everyone it is *1 if you would like to ask a question and we’ll move
next to Rodrigo Echagaray with Scotiabank. Please go ahead.
Rodrigo Echagaray:
Thank you, thanks John and thanks Jose Luis for your time. I have a couple of
questions. I mean obviously great to see the FX in Colombia is stabilizing which helps
margins and returns and everything around that operation. But we’re about to probably
hear back from the government now on the tax reform which on the one hand appears to
be possible reducing the corporate taxes but maybe increasing the VAT. I don’t know if
you can, you know share some color on that if you are preparing for that in any way or
maybe too early until that is passed on congress or what are your thoughts on that?
Jose Luis Laparte:
Yes, let me talk about the [inaudible]. Yes, we have been hearing the possibility
of the fact that they will probably raise it for some of the products and obviously it’s hard
to say how we can prepare. I know obviously it hits us sometimes in the other markets
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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 increases, members and customers because
obviously that will affect everyone in the market will get a little disappointed and probably
discourage them from some purchases.
But we believe it fits within a reasonable
increase Rodrigo we don’t expect that to hit us too much, obviously it’s hard to tell and
we’ll have to see how the market reacts. I’m not sure there are many alternatives to that
VAT increase, no. 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, no.
Rodrigo Echagaray:
Yes I guess, proportionally, I mean the FX has probably put most of that pressure
already so hopefully that’s just marginal. Then just a couple additional questions real
quick, on the distribution centre, what’s the impact or the nett impact on the PNL in terms
of SG&A versus lease expenses and if you can just remind me please what the square
footage expansion for fiscal year including the addition of [inaudible] space in the existing
stores?
John Heffner:
I’ll take the answer for the distribution centre, I’ll turn over to Jose Luis for the warehouse
club question there, Rodrigo. I think it’s 322,000 square feet …
Jose Luis Laparte:
John Heffner:
Correct.
….with our new distribution centre it will be. The costs of that are in our distribution cost,
which we show in costs of goods sold. It won’t be in SG&A it’ll be in costs of goods sold.
The interest expense associated with any financing that we do is sort or, equates to the
rent payments that we’re currently paying, so they’ll be sort of an offset going forward. In
the short term though we’re going to be, we [inaudible] to have lease expense in our
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current location which we’ve an active process to sub-let the space. But near the end of
the fiscal year when we move into the new location, we’re actually trying to sub-lease that
space.
We’ll probably have some additional lease expense that will flow to our costs of goods
sold on our PNL. That will probably be the case in Q4 but with the plans we have and the
activity we’re doing we would hope to have the excess space in our current location sublet in pretty short order. Now your question about warehouse clubs.
Jose Luis Laparte:
Yes, warehouse clubs. We added, in this fiscal year we added two. Obviously
the one in [inaudible] Managua in Nicaragua in 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.
We basically added about, it’s one of those who basically have about 55,000 square feet
of sales floor space, so it’s about 100,000 square feet of additional sale floor space with
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 haven’t numbered them 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 few on the pipeline and
hopefully we will be announcing something [inaudible].
Rodrigo Echagaray:
Oh no I mean on the existing, on adding sale floor space on existing stores.
Jose Luis Laparte:
Ahh sorry, we have - we’re in the process of the one’s that we, we added about
8,000 square feet. We’re looking at - we have a few projects in the pipeline but we
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officially don’t have permits yet. We hope we can get maybe another two probably with
expansions, maybe three, depending on how fast the process of permitting moves.
You know, sometimes it may take you as many as six months or eight months just to get
the permit for an expansion. 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 will be having kind of the same amount. Probably increasing parking
spaces about 30 to 35% more and about 8,000 square feet of additional sale floor space
and obviously we re-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. It’s too early to know exactly how many
we will be able to accommodate within the fiscal year. It takes about - I would say once
you get the permits it will probably take about easily three to four months. Because it’s a
little slow to make those expansions because you are operating and running the business
so it’s not a - even though it’s a small in scale compared to opening a club, you have to
be very careful how you do those expansions, not to affect your current operations, no.
Rodrigo Echagaray:
Great, thanks very much.
Jose Luis Laparte:
Okay, thank you Rodrigo.
Operator:
Once again ladies and gentlemen it is *1 if you would like to ask a question. We’ll pause
for just another moment to allow everyone an opportunity to signal. 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 Ebony, and thank you all for participating. This ends our call. Have a
good day and a nice weekend.
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Operator:
Once again, that concludes today’s call. Thank you for your participation. You may now
disconnect.
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