PriceSmart Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 11, 2024

There are 4 speakers on the call.

Operator

Good afternoon, everyone, and welcome to PriceSmart Inc. Earnings release conference call for the Q3 of fiscal year 2024, which ended on May 31, 2024. After remarks from our company's 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 a reminder, this conference call is limited to 1 hour and is being recorded today, Thursday, July 11, 2024. A digital replay will be available following the conclusion of today's conference call through July 18, 2024 by dialing 1-eight 88 660-six thousand 264 for domestic callers or 1-six 4sixfive seventeen-three thousand 975 for international callers and by entering the replay access code 97, 656.

Operator

For opening remarks, I would like to turn the call over to Price Mart's Chief Financial Officer, Michael McCleary. Please go ahead, sir.

Speaker 1

Thank you, operator, and welcome to PriceSmart Inc. Earnings call for the Q3 of fiscal year 2024, which ended on May 31, 2024. 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, 2024. Also in these remarks, we refer to non GAAP financial measures. You can find a reconciliation of our non GAAP financial measures to the most directly comparable GAAP measures in our earnings press release and our 10 Q.

Speaker 1

These documents are available on our Investor Relations website at investors. Pricemart.com, where you can also sign up for e mail 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, 2024.

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

Thank you, Michael. On behalf of myself and our Board of Directors, congratulations to the PriceSmart team for the excellent sales and earning results in our recently completed Q3. As we enter our final 3 months of fiscal year 2024 and finalize planning for fiscal year 2025, We will continue to focus on improving sales, operating efficiencies and the use of technology further enhance our business performance. PriceSmart is a highly respected and valued brand in all our markets. Our goal is to continue to improve our business operations for the benefit of our members and our employees.

Speaker 2

Thank you to our many shareholders for your continued confidence and support. Now Michael will continue with his presentation.

Speaker 1

Thank you, Robert. We had a strong third quarter as net merchandise sales reached almost $1, 200, 000, 000 and total revenue was over $1, 200, 000, 000 For the quarter ended May 31, 1, 2024, net merchandise sales increased by 11.6% or 9.1% in constant currency and comparable net merchandise sales by 7.8% or 5.6% in constant currency. For the 9 months ended May 31, 2024, total net merchandise sales reached almost $3, 600, 000, 000 and total revenues were almost $3, 700, 000, 000 Net merchandise sales increased by 11.8 percent or 8.3 percent in constant currency and comparable net merchandise sales increased by 8.2% or 5% in constant currency for the 9 month and 39 week periods respectively. By segment, in Central America where we had 30 clubs at quarter end, net merchandise sales increased 11.2% or 8.9% in constant currency with a 7.4% increase in comparable netmerchandise sales or 5.2% in constant currency. All of our markets in Central America had positive comparable netmerchandise sales growth except for El Salvador, which recently opened 2 new clubs, which are not yet included in the comparable net merchandise sales calculation.

Speaker 1

Our Central America segment contributed approximately 4.50 basis points of positive impact to the growth in total consolidated comparable net merchandise sales for the Q3. We opened our 6th warehouse club in Guatemala in November 2023 and our 4th warehouse club in El Salvador in February 2024. In the Caribbean where we had 14 clubs at quarter end, net merchandise sales increased 5.3% or 8 point 3% in constant currency and comparable net merchandise sales increased 5% or 8% in constant currency. All of our markets in this segment had positive comparable net merchandise sales growth. Our Caribbean region contributed approximately 140 basis points of positive impact to the growth in total consolidated comparable net merchandise sales for the Q3.

Speaker 1

In Colombia, where we had 10 clubs opened at the end of our Q3, net merchandise sales increased 33.9 percent or 12.5 percent in constant currency and comparable net merchandise sales increased 19 0.4% and increased 0.5% in constant currency. Columbia contributed approximately 190 basis points of positive impact to the growth in total consolidated comparable net 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 4%, our non foods category increased 17%, our food services and bakery categories increased approximately 24% and our health services including optical, audiology and pharmacy increased approximately 43%. Membership accounts grew 4.8% versus the prior year to almost 1, 900, 000 accounts with a strong 12 month renewal rate of 88.1% as of May 31, 2024. Due to the importance of our Platinum members, during the month of March, we ran a special campaign rewarding our platinum members and encouraging upgrades and sign ups to our platinum membership program.

Speaker 1

This campaign was quite successful, helping our Platinum accounts to end the quarter at 11% of our total membership base, an increase from 8.6% as of the end of last year's Q3 and 9.6% from this year's Q2. For the quarter ended May 31, 2024, membership income was $19, 300, 000 an increase of 2.2% over the same period last year. We increased the annual membership fee by $5 in substantially all countries during fiscal year 2024. Total gross margin for the Q3 of fiscal year 2024 as a percentage of net merchandise sales increased 30 basis points to 15.6% versus 15.3% in the Q3 of fiscal year 2023. The 30 basis point increase was primarily due to general margin improvement across most of our sales categories.

Speaker 1

In total dollars, total gross margin increased $22, 200, 000 or approximately 13.5% versus the same quarter of the prior fiscal year. Total revenue margins increased 30 basis points to 17.1 percent of total revenue when compared to the same period last year, primarily due to the increase in total gross margin as a percent of net merchandise sales. During the Q3, our average sales ticket grew by 2% and transactions grew 9.4% versus the same prior year period. For the 9 month period, our average ticket grew by 2.3% and transactions grew 9.2% versus the same prior year period. The average price per item increased approximately 3.6% year over year with average items per basket decreasing approximately 1.2% compared to the same period of the prior year.

Speaker 1

Total SG and A expenses increased to 13% of total revenues for the Q3 of fiscal year 2024 compared to 12.9% for the Q3 of fiscal year 2023, primarily due to higher compensation, professional fees and depreciation expense. General and administrative expenses increased to 3% of total revenue for the Q3 of fiscal year 2024 compared to 3.1% for the Q3 of fiscal year 2023. The 20 basis point increase is primarily due to investments in technology and an increase in competition expense from stock grants to executive leadership. Operating income for the quarter increased 15.9% from the same period last year to 49, 900, 000 Operating income for the 1st 9 months of fiscal year 2024 increased 12.7% from the same period last year to $171, 700, 000 In the Q3 of fiscal year 2024, we recorded a $2, 900, 000 net loss in total other expense compared to $1, 500, 000 net loss in total other expense in the same period last year. The increased net loss in total other expense was primarily due to an increase in interest expense of $800, 000 and lower interest income of $600, 000 Our effective tax rate for the Q3 of fiscal year 2024 came in at 30.8% versus 28.9% a year ago.

Speaker 1

The increase in the effective tax rate is primarily related to the cost savings for CEO compensation offset by assets written down in the prior year. For the 9 months ended May 31, 2024, the effective tax rate was 31.3% compared to 32.2% for the prior year period. The decrease in the effective tax rate is primarily related to fewer valuation allowances on deferred tax assets from foreign tax credits that are no longer deemed recoverable. Looking forward into Q4, we expect to end the fiscal year with an annualized effective tax rate of about 31% to 32%. Net income for the Q3 of fiscal year 2024 was $32, 500, 000 or 1 point $8 per diluted share compared to $29, 600, 000 or $0.94 per diluted share in the Q3 of fiscal year 2023.

Speaker 1

Net income for the 1st 9 months of fiscal 2024 was $109, 800, 000 or $3.62 per diluted share compared to $93, 800, 000 or $3.01 per diluted share in the comparable prior year period. Adjusted net income for the Q3 of fiscal year 2024 was $32, 500, 000 or an adjusted $1.08 per diluted share compared to adjusted net income of $32, 500, 000 or an adjusted $1.04 per diluted share in the comparable prior year period. Adjusted EBITDA for the Q3 of fiscal year 2024 was $71, 000, 000 compared to $63, 900, 000 in the same period last year. Adjusted net income for the 1st 9 months of fiscal year 2024 was $109, 800, 000 or an adjusted 3 point $6.2 per diluted share compared to adjusted net income of $106, 100, 000 or an adjusted $3.41 per diluted share in the comparable prior year period. Adjusted EBITDA for the 1st 9 months of fiscal 2024 was $232, 900, 000 compared to $218, 400, 000 in the same period last year.

Speaker 1

Moving on to our strong balance sheet, we ended the quarter with cash, cash equivalents and restricted cash totaling $140, 300, 000 in addition to approximately $99, 900, 000 of short term investments. From a cash flow perspective, net cash provided by operating activities totaled $165, 800, 000 for the 1st 9 months of fiscal year 2024 compared to $184, 700, 000 for the same prior year period. Shifts in working capital generated from changes in our merchandise inventory and accounts payable positions contributed $35, 800, 000 to the overall decrease. Additionally, a net change in operating assets and liabilities contributed $7, 800, 000 of additional cash used. This was partially offset by an increase in net income without non cash items which contributed $24, 600, 000 for the 9 months ended May 31, 2024.

Speaker 1

Average inventory per club increased by approximately $900, 000 or 10.2 percent and inventory days on hand increased by approximately 1 day or 2.3% for the Q3 fiscal year 2024 versus the same period in 2023. The increase of inventory per club and days on hand is primarily due to a shift in our inventory mix towards more known food items which have longer lead times. Net cash used in investing activities decreased by $48, 400, 000 for the 9 months ended May 31, 2024 compared to the prior year, primarily due to $103, 600, 000 increase in proceeds from settlements of short term investments. This was partially offset by a $45, 300, 000 increase in property and equipment expenditure to support growth of our real estate footprint and a $10, 800, 000 increase in purchases of short term investments compared to the same 9 month period a year ago. We opened 3 additional clubs during the 1st 9 months of fiscal 2024.

Speaker 1

Net cash used in financing activities during the 9 months ended May 31, 2024 increased by 111.2 $1, 000, 000 primarily from the result of the share repurchase program we completed during the Q1, a special $1 dividend payment in April of 20 24 and lower proceeds from long term bank borrowings compared to the same period a year ago. When reviewing our cash balances, it is important to note that as of May 31, 2024, we had $60, 600, 000 of cash, cash equivalents and short term investments denominated in local currency in Trinidad and Honduras, which we could not readily convert into U. S. Dollars. Now on to our growth drivers.

Speaker 1

Starting with real estate, we have purchased land and plan to open our 9th warehouse club in Costa Rica located in Cartago, approximately 10 miles east from the nearest club in the Greater San Jose Metropolitan area. This club will be built on a 6 acre property and is anticipated to open in the spring of 2025. Once this new club is open, we will operate 55 warehouse clubs in total. Additionally, we are currently remodeling several of our high volume clubs, which are in San Pedro Sula Honduras, Santero Dominican Republic and Porto Spain, Trinidad and Tobago, as well as expanding our clubs in San Salvador, El Salvador, Liberia, Costa Rica and Portmore, Jamaica. Finally, we continue to actively seek ways to improve our distribution infrastructure to better serve our members.

Speaker 1

In the Q3, we started using distribution centers run by a 3rd party in 4 different markets: Guatemala, Honduras, Nicaragua and El Salvador. The benefits of opening distribution centers includes reduced Atlanta cost, reduction in lead time and improvement of working capital. Turning now to membership value. As we've highlighted in previous calls, our private label and member selection brand continues to be a significant area of focus based on the good value of Brinkstar members. We offer private label food, household products and apparel under our member selection brand across all markets.

Speaker 1

During the 1st 9 months of fiscal year 2024, our private label sales represented 27.4% of our total merchandise sales. That's up 140 basis points from 26% in the comparable period of fiscal year 2023. We also continue to focus on health services. We currently have 53 locations with optical centers as well as pharmacy centers in all 8 of our warehouse clubs in Costa Rica and 5 warehouse clubs in Panama. We expect to open 2 more pharmacies in Guatemala during fiscal year 2024.

Speaker 1

We currently have 27 audiology centers open and expect to open 1 additional audiology center in each of Panama, Jamaica and Trinidad by the end of fiscal year 2024. Our optical program provides 4 free eye exams with every membership and we performed over 38, 000 eye exams during the quarter. Optical services are also an important component of our contributions to the communities in which our clubs are located. In partnership with Chrysler Anthropocene's Opendiary Treserve Program, Chrysler Autometrists perform free eye exams for children and the charities provide free lenses and frames. Our 3rd growth driver is providing omni channel shopping options for our members, including sales via our app and or our desktop website.

Speaker 1

We currently utilize pricemart.com, our app and other third party last mile delivery services to drive online sales. During the Q3, total net merchandise sales through digital channels increased 27% versus the same period in the prior year and represented a record $65, 900, 000 or 5.5 percent of total net merchandise sales. Total orders placed on pricemart.com and our app increased 21.9% and the average transaction value increased 2.6% versus the prior year period. In the Q3 of fiscal year 2024, we began a country by country rollout of our new e commerce website platform. This platform will allow us to better tailor delivery zones and services for our members, update inventory availability more quickly, improve product discovery and reduce friction in the shopping experience.

Speaker 1

As of May 31, 2024 approximately 63% of our members had created an online profile with pricemark.com or our app And 17.3% of our total membership base has made a purchase on freshmart.com or our app. We believe that there are significant growth opportunities in our digital channel and we will continue to invest in this part of our business to provide an enhanced omni channel experience and additional value to our members. Additionally, we are continuing the work on implementation of RELX to modernize our ordering and inventory management. We started this project in 2023 and it is currently proceeding as planned and we expect it to be completed by the end of fiscal year 2025. As a result of this implementation, we anticipate improved sales and efficiencies due to enhanced in stock positions, diminished spoilage and an optimally streamlined inventory flow.

Speaker 1

During the Q3, we released our comprehensive environmental and social responsibility report for fiscal year 20 23. This report showcases our commitment to environmental and social responsibility. The full ESR report is available on our Investor Relations website at investors. Pricemart.com under the ESG tab. Environmental and social responsibility continues to be an important component of how we approach our business and add value to the membership.

Speaker 1

We do our best to incorporate practices that use natural resources responsibly. Just to give a quick update, we currently have 7 recycling centers open with 2 in El Salvador, 3 in Honduras and 2 in Guatemala. Each location collects an average of around £30, 000 of recycled material monthly with the Tegucigalpa locations collecting around £50, 000 per month. Looking ahead, we plan to expand this successful program by opening 4 additional recycling centers in the Dominican Republic during fiscal year 2025. You can find more information about PriceSmart's philanthropic and corporate social responsibility efforts on pricemart.org.

Speaker 1

Looking forward a little into our current Q4, our comparable net merchandise sales for the 4 weeks ended June 30, 2024 were up 6.4% or 6.1% in constant currency. In closing, it was a great result for our Q3 and we are proud to see that our members recognize the value proposition we offer as evident by strong sales growth and renewal rates. We expect a solid performance in the Q4 to round out our fiscal year and we are thankful for the ingenuity and hard work of all our employees who make it possible. Thank you for joining our call today. I will now turn the call over to the operator to take your questions.

Speaker 1

Operator, you may now start taking our caller's questions.

Operator

Thank you. Your first question comes from Jon Braatz from Kansas City Capital. Please go ahead.

Speaker 3

Good morning, Robert and Michael.

Speaker 2

Good morning. Good morning,

Speaker 3

John. Most recently, the Colombian currency has weakened quite a bit and I don't know if it will continue or not, but have you seen any change in consumer behavior in Colombia and have you made any changes in pricing like you did maybe a year and a half ago? Or is it too soon to do something like that?

Speaker 2

Why do you say it's weakened?

Speaker 3

Well, it has weakened. It was it's at 4, 000 now and it was at 3, 600 or something like that. So, it's weakened a little bit.

Speaker 2

Yes. I mean, it's I think it's kind of hung in around 3, 900 to 4, 000 for a while.

Speaker 1

Yes.

Speaker 2

Well I wouldn't say it's particularly weakened. I mean, that's pretty much what we would have expected is and hope for is around 4, 000. I don't think it really impacted our general approach to how we price merchandise. I mean, I think we're feeling pretty good about the fact that it's around $4, 000 and that it's made it probably a little more positive for imports.

Speaker 3

Yes, okay. Okay, that's good. And Michael, when you think about the additions and the expansions at your existing stores, When you add everything up, how much of a square foot increase is that in terms of those expansions? How much are you expanding those facilities by?

Speaker 2

Maybe I can take it. We have what, 4 locations that are being expanded? Yes. 3 or 4. 3 or 4.

Speaker 2

Are you asking that as a percent of those individual locations? Yes.

Speaker 3

Yes. That'd be great.

Speaker 2

Oh, I would guess I'm not sure we thought about it quite like that, but I would guess maybe 15% to 20% more sales floor.

Speaker 3

Okay. And then when you do that, what new merchandise do you put in there? What's additive?

Speaker 2

Yes. It's not necessarily that you put more SKUs in. What happens is that the ability to display the products with better facing

Speaker 1

Okay.

Speaker 2

They improve so that you have a bigger impact for each item and less labor related to stocking and handling the item. It improves the efficiency and I think for the member it presents a more compelling individual item value than the issue we have where we are trying to fit items into a more limited space. It just seems to make it more both efficient and impactful.

Speaker 3

Okay, very good. That's all I have. Thank you.

Speaker 2

Thank you. Thanks, John.

Operator

There are no further questions. I will now turn the call over to Michael.

Speaker 2

Okay. Thank you, everybody. We hope you have a good day. Take care. Bye bye.

Operator

Ladies and gentlemen, this concludes the call for today. Thank you for calling in. Please go ahead and disconnect your lines.

Powered by Quartr
Earnings Conference Call
PriceSmart Q3 2024
00:00 / 00:00