PriceSmart Q3 2023 Earnings Call Transcript

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Provided by Quartr
July 11, 2023

There are 5 speakers on the call.

Operator

Good afternoon, everyone, and welcome to PriceSmart Inc. Earnings Release Conference Call for the Q3 of Fiscal Year 2023, which ended on May 31, 2023. After remarks from our company's representatives, Robert Price, Interim Chief Executive Officer under Michael McCleary, Chief Financial Officer. As a reminder, this conference call is limited to 1 hour and is being recorded today, Tuesday, July 11, 2023. A digital replay will be available following the conclusion of today's conference call through July 2018, 2023 by dialing 1-eight seventy seven-six seventy four-seven thousand and seventy for domestic callers or 1-four sixteen-seven sixty four-eight thousand six hundred and ninety two for international callers and by entering the replay access code 7,80,477 pound For opening remarks, I would like to turn the over to PriceSmart's Chief Financial Officer, Michael McCleary.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator, and welcome to PriceSmart Inc. Earnings call for the Q3 of 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 10, 2023. Also in these remarks, we will refer to non GAAP financial measures. You can find a reconciliation of our non GAAP measurement of adjusted earnings in our earnings press release and our 10 Q.

Speaker 1

These documents are available on our Investor Relations website at investors. Kismart.com, where you can also sign up for email alerts. As a reminder, all statements made on this conference call other than statements of historical fact are forward looking statements concerning the company's anticipated plans, revenues and related matters. Forward looking statements include, but are not limited to, Statements containing the words expect, believe, 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.

Speaker 1

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 ks, the 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, PriceSmart's Interim Chief Executive Officer.

Speaker 2

My sincere thanks and appreciation to our employees here in the United States and in our 12 countries and 1 U. S. Territory for their amazing dedication and hard work. Congratulations for a job well done during the Q3. Our Chief Financial Officer, Michael Cleary will soon provide a detailed narrative for our Q3 results.

Speaker 2

In advance of his remarks, I would like to offer some comments. Our year over year increased sales performance was supported by significant strengthening of the Costa Rica currency, the Colon, along with the strong opening of our new location in San Miguel, El Salvador, by improvements in buying and operations and by growth in online sales. The Q3 results are definitely encouraging. However, I want to remind our investors that price smart markets, The countries in which we operate are impacted by 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.

Speaker 2

S. Standards, but we are often faced with country specific events that result in risks 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.

Speaker 2

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 PriceSmart. Now, Michael will continue with his presentation.

Speaker 1

Thank you, Robert. We had a strong Q3 with both revenues and net merchandise sales exceeding $1,000,000,000 Net merchandise sales increased by 7.1 percent or 5.6 percent in constant currency. Comparable net merchandise sales increased by 5.8% or 4.3% in constant currency. For the 9 months ended May 31, 2023, total net merchandise sales exceeded $3,200,000,000 and revenues reached almost $3,300,000,000 Net merchandise sales increased by 8.7% or 9% in constant currency and comparable net merchandise sales increased by 6.5% were 6.7% in constant currency for the 9 month period. By segment in Central America, where we had 28 clubs at quarter end, Net merchandise sales increased 11.8% or 6.1% in constant currency with an 11% increase in comparable net merchandise sales or 5.3% in constant currency.

Speaker 1

All of our markets in Central America had positive comparable net merchandise sales growth. Our Central American segment contributed approximately 6.50 basis points of positive impact to our total consolidated comparable net merchandise sales for the quarter. Costa Rica colon appreciated significantly against the dollar as compared to the same 3 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 7.3% or 6.9% in constant currency and comparable net merchandise sales increased 4.2% or 3.8% in constant currency. All of our markets in this segment had positive comparable net merchandise sales growth.

Speaker 1

Our Caribbean region contributed approximately 120 basis points of positive impact to total consolidated comparable net merchandise sales for the quarter. In Colombia, where we had 9 clubs open at quarter end, net merchandise sales decreased 15.7% or increased 0.6% in constant currency and comparable net merchandise sales decreased 15.2% or increased 0.7% in constant currency. The comparable net merchandise sales decrease in Colombia, driven by the significant devaluation of the Colombian peso, contributed approximately 190 basis points of negative impact to total consolidated comparable non merchandise sales for the quarter. In terms of merchandise categories, when comparing our Q3 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 and bakery departments. The decrease in our non foods category was primarily because in the Q3 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.

Speaker 1

Membership accounts grew 2.2% versus the prior year to 1,790,000 accounts. Platinum membership accounts are 8.6% of our total membership base as of May 31, 2023, an increase from 7.1% as of May 31, 2022. We continued with a strong 12 month renewal rate of 87.1 percent and our membership income was $16,700,000 an increase of 8.4% over the same period last year. Total gross margin for the Q3 of fiscal year 2023 as a percentage of net merchandise sales increased 110 basis points to 15.3% versus 14.2% in the Q3 of fiscal year 2022. In total dollars, total gross margin increased $21,500,000 or approximately 15.1% versus the same quarter of the prior fiscal year.

Speaker 1

The 110 basis point increase was primarily due to significant markdowns we took in the Q3 of fiscal year 2022. Total revenue margins increased 120 basis points to 16.8 percent 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 Q3 of fiscal year 2023 decreased compared to the 16.1 percent rate in the first half of fiscal twenty twenty three. This decrease is due to a variety of factors, including elimination of our COVID premium, reduction in our Trinidad foreign currency exchange premium and a margin decrease in Colombia 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 and significant devaluation of the Colombian peso. Beyond Colombia, 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.

Speaker 1

The average price per item increased approximately 7.7% year over year, down from the 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 3.2% compared to the same period of the prior year. During the quarter, our average Sales ticket increased 4.2% and transactions grew 2.8% versus the same prior year period. Rate rates continued to come down and we adjust our merchandise pricing as dynamically as possible to ensure those cost reductions are passed on to our members. Rate rates decreased from approximately $3,900 per container last quarter $2,900 during Q3 due to slowing transpacific demand from U.

Speaker 1

S. Imports. SG and A expenses increased to 12.9 percent of total revenues for the Q3 of fiscal year 2023 compared to 12.4% for the Q3 of fiscal year 2022. Warehouse Club and other operations expenses made up about 40 basis points of this increase. The net effects of the appreciation of the cologne in Costa Rica and devaluation of the peso in Colombia on expenses contributed approximately 20 basis points of this increase.

Speaker 1

Also a tax receivable write off impacted this line by approximately 20 basis points or $0.08 per share. General and administrative expenses increased to 3.1% of total revenues for the Q3 of fiscal year 2023 compared to 3.0 percent for the Q3 of fiscal year 2022. The 10 basis point increase is primarily due to increased compensation costs and travel along with certain non recurring expenses related to severance and professional fees. Operating income for the quarter increased 27.5% from the same period last year to $43,100,000 Operating income for the 1st 9 months of fiscal year 2023 increased 19% from the same period last year to $152,400,000 In the Q3 of fiscal year 2023, we recorded a $1,500,000 net loss In total, other expense, net, which includes the net impact of interest expense, interest income and other expenses, which primarily consists of our foreign currency exchange losses. This compares to a $4,700,000 net loss in total other expense net in the same period last year.

Speaker 1

The primary contributor to this $3,200,000 decrease in other expense net is an increase in interest income of $2,700,000 comparatively because of significantly more investments of 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 Q3 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 9 months ended May 31, 2023, the effective tax rate was 32.2% compared to 32.8% for the prior year period. On a go forward basis, we estimate an annualized effective tax rate of about 32% to 33%. Net income for the Q3 of fiscal 2023 was $29,600,000 or $0.94 per diluted share compared to $19,300,000 or 0.6 $2 per diluted share in the comparable prior year period.

Speaker 1

Net income for the 1st 9 months of fiscal 2023 was $93,800,000 or 3.01 per diluted share compared to $81,200,000 or $2.63 per diluted share in the comparable prior year period. Adjusted net income for the Q3 of fiscal 2023 was $31,900,000 or an adjusted $1.02 per diluted share. Adjusted EBITDA for the Q3 of fiscal year 2023 was $63,200,000 Adjusted net income for the 1st 9 months of fiscal year 2023 was $103,300,000 or an adjusted $3.32 per diluted share compared to adjusted net income of $79,800,000 or an adjusted $2.58 per diluted share in the comparable prior year period. Adjusted EBITDA for the 1st 9 months of fiscal 2023 was $215,600,000 compared to $178,300,000 in the same period last year. Moving on to our strong balance sheet.

Speaker 1

We ended the quarter with cash, cash equivalents and restricted cash totaling $236,400,000 From a cash flow perspective, net cash provided by operating activities totaled $184,700,000 for the 9 months ended May 31, 2023, compared to net cash provided by operating activities of $64,300,000 for the same prior year period. Distant working capital generated from changes in our merchandise inventory and accounts payable positions for the 9 months ended May 31, 2023, contributed $91,100,000 of cash flow compared to the same prior year period. Average inventory per club decreased by approximately $500,000 or 6% and inventory days on hand decreased by approximately 4 days or 9% for the Q3 of fiscal year 2023 versus the same period and 2022. The primary driver of the decrease of inventory year over year is selling through much of our overstocked merchandise in our hardline segment that we took Significant markdowns on in the prior year period. Net cash used in investing activities increased by $136,400,000 for the 9 months of the 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.

Speaker 1

S. Compared to the same 9 month period a year ago. Net cash used by financing activities during the 9 months ended May 31, 2023 increased by $24,400,000 primarily as a result of a net decrease of proceeds from short term borrowings compared to the same 9 month period a year ago. During the Q3 of fiscal year 2023, the Honduran Central Bank began limiting the availability and controlling the allocation of U. S.

Speaker 1

Dollars for conversion from Honduran Limpuras to U. S. Dollars. As of May 31, 2023, our Honduran subsidiary had approximately $15,900,000 worth of cash and cash equivalents denominated non Piras, which cannot be readily converted to U. S.

Speaker 1

Dollars for Germany use within the company. We are actively working with our banking partners and government authorities to address this situation. Lastly, before turning to our growth drivers, our Board of Directors has authorized a share repurchase program of up to $75,000,000 of the company's common stock. This program underscores our confidence in the business and our expectations for growth, all together 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 Q4.

Speaker 1

Now on to our growth drivers. Starting with real estate, we are truly excited to have opened our new San Miguel Club in May, which is our 3rd 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 3 warehouse clubs under construction.

Speaker 1

We have now completed exterior construction of a warehouse club in the affluent El Poblado area of Medellin, Colombia. 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 2nd in Medellin and 10th in Colombia. In addition, we plan to open a warehouse club in Escuintla, Guatemala in the fall of 2023 and a warehouse club in Santa Ana, El Salvador in early 2024. Once these 3 new clubs are open, we'll be operating 54 warehouse clubs and we're actively exploring additional locations as well.

Speaker 1

Finally, we are currently remodeling and expanding 4 of our high volume clubs. These clubs are located in San Salvador, El Salvador San Pedro Sula, Honduras Santiago, Dominican Republic and Port of Spain, Trinidad and Tobago. We also remain focused on the important role of our distribution facilities for optimizing 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.

Speaker 1

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 1st 9 months of fiscal 2023, our private label sales represented 26% of our total merchandise sales. That's up 180 basis points from 24.2% in the comparable period of fiscal year 2022. We expect to expand our suite of wellness services and we currently have 48 locations with optical centers and expect to have 50 open by the end of the fiscal year. Our optical program provides 4 free eye exams with every membership and we performed over 35,000 eye exams during the quarter.

Speaker 1

Optical is also an important social responsibility contributor to our local communities and in partnership with Price Philanthropy's upper ender Ecoseta vision program. Eye exams are performed by PriceSmart Autometrists and Price Philanthropy's purchase of the glasses from our optical centers. And both the exam and glasses are given to children and their families free of charge. We have provided 40,000 screenings, 8,000 exams and 7,000 eyeglasses to date through this program. We currently have pharmacy centers in all 8 of our warehouse clubs in Costa and 2 warehouse clubs in Panama and expect to open pharmacies in the remaining 5 clubs in Panama during fiscal year 2024.

Speaker 1

With respect to Audiology Centers, during the quarter, we opened 10 new Audiology Centers with 24 Centers opened at the end of May 2023. We expect to open an additional 8 centers in fiscal 2024. Our 3rd growth driver is our omni channel shopping options for our members, which reflects all sales in our digital channels, both in our app and on our desktop website. We currently utilize pricemark.com and our app and third party last mile delivery service is to drive online sales. During the Q3, total omni channel sales increased 18% as a percentage of net merchandise sales versus the same period in the prior year and represented 4.9% of total net merchandise sales, a record for the company.

Speaker 1

Total orders increased 29.4% and the average transaction value increased 11.1% versus the prior year period. In May, PriceSmart 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 recognize 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 pricemart.com and 15% of our Total membership base has made a purchase on pricemart.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 an enhanced omni channel experience and additional value to our members.

Speaker 1

It is also encouraging that 9.5% 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 Q3, we released our comprehensive environmental and social responsibility report for fiscal year 2022. The CSR report provides an overview of PriceSmart's commitment to employees, members, communities and the planet. The report also describes our approach to integrating sustainability and social responsibility into our decision making and operations. The full ESR report is available on our Investor Relations website at investors.

Speaker 1

Pricemart.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 is our actions We aim to responsibly use natural resources. For instance, we are currently operating 5 recycling centers, 3 in Honduras and 2 in Guatemala. On average, around £12,000 of recycled material is being collected monthly in each location. You can find more information about PriceSmart's philanthropic and corporate social responsibility efforts on pricemart.org.

Speaker 1

In regards to social well-being, we are proud to announce that PriceSmart has been included in Newsweek's list of top 100 most loved workplaces for 2023. This list recognizes companies that put respect, caring and 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 4 weeks ended July 2, 2023 were up 7.9% or 4.8% in constant currency. The tailwind from the strength of the Costa Rica in Cologne continues to offset the drag from the weakness in the Colombian peso.

Speaker 1

We've also seen Improvement in the Colombian peso exchange rate with U. S. Dollar the past couple of months, especially in June, which has meant that Colombia FX has had less of a negative impact on U. S. Dollar sales during the month.

Speaker 1

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 rights of merchandising arms us with the tools and can do attitude to deliver on the value we promised 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. First question comes from Jon Braatz at Kansas City Capital. Please go ahead.

Speaker 3

Good morning, Robert, Michael?

Speaker 1

Good morning, John.

Speaker 3

Michael, on the gross margins, obviously, I knew that the About the pricing actions that you were taking in Colombia, but you seem to have extended that throughout all your markets. And Couple of questions. Number 1, were those pricing actions in place for the full quarter? And I guess secondly, how long do you see these pricing actions actually remaining in place?

Speaker 1

Yes. Well, yes, we kind of started that towards probably 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, That fine tuning is continuing. I don't know, Robert, if you want to add anything on that.

Speaker 2

Not too much. I think the results in the 3rd quarter Indicate that I mean gross margin pricing is somewhat of an art and we're in so many different markets that we have to Be very nimble in how we think about the pricing to maintain the membership value, Weigh in factoring risk and constantly trying to improve our expense structure so that our bottom line is going to remain strong as we continue to offer better values to our members. And it's a bit of a dance And particularly operating in small markets, just many small markets. 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, that we're Doing it in a way that's going to increase volume and that we do it in a way that also brings the right Profit to the bottom line. Sure.

Speaker 2

It's not quite as formulaistic as you might think.

Speaker 3

Okay. With the Colombian currency showing relative strength here, Would that at all influence any new pricing actions In Colombia, given the strength in the peso?

Speaker 2

Well, Colombia is by far The largest market we operate in.

Speaker 1

I

Speaker 2

mean, Colombia as a 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 Colombia is extremely important 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 more intent in Colombia than any place else we operate because we are Operating against major chains in South America that are very, very Strong competitors. But the other thing, I don't know whether you're aware of this or not, but the largest retailer in Colombia, Exito, Has made an announcement recently that they're for sale. And not that we're not interested obviously in that, but what I the reason that's relevant is because We think given the strengthening of the peso and some disruption in terms of Exitos situation.

Speaker 2

This is the time to really and also with the opening of Elfovado, this is the time to really be aggressive About solidifying and growing our position in Colombia because honestly for our future at this time, the market that offers us the most Expansion opportunity in terms of sales is Colombia. So I think we our mentality is that we want to be strong in Colombia and also the imports That we bring in

Speaker 1

from

Speaker 2

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 imported merchandise.

Speaker 3

Okay. That's good. Michael, on the Honduras situation, do you see that potentially Morphing into something like we saw in Trinidad where you begin to restrict the imports there and raise prices to offset currency issue.

Speaker 1

Well, yes, this is kind of new to this quarter, so we're monitoring it actively. Obviously, you can I can see by the numbers that we disclosed about the cash on hand is not near as extreme as it got to at one point in Trinidad, but we did it was important to call it out? So I think it was somewhere around $15,000,000 versus a peak of about $100,000,000 in Trinidad. But at this point, we're monitoring it. We haven't Taken any actions to restrict flow of merchandise at this point, and we're just working with the banks and The local officials to continue to monitor this and we'll see as we go forward.

Speaker 3

Okay. One last question On the repurchase program, dollars 75,000,000 I think domestically you hold $42,000,000 in cash. I think that was in the 10 Q. Let us For the sake of convenience, let's say you were looking to complete this repurchase over the next year. Would that mean you would most likely have to repatriate some money from your markets down south?

Speaker 3

Or Would you borrow money or would there be enough domestic cash flow to, let's say, pay the dividend and make any CapEx spending and do the complete repurchase?

Speaker 1

Let me put it this way. We're not expecting to enter into any debt or to fund the buyback and or any From moving funds around between the countries, anything significant. So I think we can fund it with the existing cash flows. All right.

Speaker 3

Thanks, Mike.

Speaker 1

Thank you, John.

Operator

Thank you. Next question comes from Victor Cardenas of Scotiabank. Please go ahead.

Speaker 4

Congratulations I also have a question in regards to the repurchase program and in particular with Just to understand a little bit about the rationale and as opposed to using other alternatives like a special dividend And any other soft guidance regarding the timing and the size of the repurchase? I think that you mentioned that in Q4, the program may be starting to make the first repurchases. We're looking into understanding the rationale as to other alternative and also some soft guidance on the sizes of The repurchases, if I may.

Speaker 2

As I I think I mentioned, we've never in the history of PriceSmart 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're hoping to accomplish by this is to provide Some opportunity for certain stockholders who might want to go beyond the dividend in terms of cash

Speaker 1

Benefits

Speaker 2

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 It's going to work until it's out there. But the other thing is, we're a very thinly traded stock. And what's been the pattern Is that we release earnings and then when it's good, the stock jumps up for a few days and then it goes back down And then we're back in this kind of pattern where there isn't much going on. And I think that by having With the stock repurchase program in place, I think we can provide a little more stability and Put some kind of a little more well, I guess it would be stability into the pricing of the stock because We are an unusual company.

Speaker 2

I mean, 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 don't know what's going to happen.

Speaker 2

I think the most important thing though, we have the cash to do this, number 1. And number 2 is that looking beyond the repurchase, 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 in a learning phase really here, and I don't know how to predict exactly how this all plays out, but we will see.

Speaker 4

Thank you, Michael. Thank you, Robert.

Speaker 1

Is that it?

Operator

Thank you. There are no further questions at this time. I will now turn the call back for closing comments.

Speaker 1

Okay. Thank you, everybody. We hope you all have a good day. Thank you for joining us today. Bye bye.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.

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PriceSmart Q3 2023
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