PriceSmart, Inc. (NASDAQ:PSMT) First Quarter 2023 Results Conference Call January 10, 2023 12:00 p. m. Eastern Time
Participating companies
Michael McCleary – Chief Financial Officer
Roberto Price – President
Conference Call Participants
Jon Braatz – Capital of Kansas City
Hector Maya – Scotiabank
Operator
Good morning everyone and welcome to the PriceSmart, Inc. earnings convention convening. for the first quarter of fiscal 2023, which ended November 30, 2022.
Following comments from our corporate representatives, Robert Price, President, and Michael McCleary, Chief Financial Officer, will have the opportunity to ask questions if time permits.
As a reminder, this convention call is limited to one hour and is recorded today, Tuesday, January 10, 2023. There will be a virtual replay after the conclusion of today’s convention call through January 17, 2023, calling at 1-877. -344-7529 for domestic calls or 1-412-317-0088 for foreign calls and entering the playback access code 6032359.
For opening remarks, I’d like to speak with PriceSmart’s CFO, Michael McCleary. Please continue, sir.
Michel McCleary
Thank you, operator, and welcome to PriceSmart’s earnings call for the first quarter of fiscal 2023 ended November 30, 2022. We’ll talk about the data we provided in our earnings press release and our 10-Q, either of which was released late, January 9, 2023. You can locate those documents on our online Investor Relations page in inverter. pricesmart. com, where you can also sign up for email alerts.
As a reminder, all statements made during this convention call other than statements of old facts are forward-looking statements relating to the Company’s plans, revenues, and similar matters. Forward-looking statements include, but are not limited to, statements containing the words “expect, believe, plan, will, possibly, should, estimate and other expressions. “All forward-looking statements are based on expectations and assumptions as of today, January 10, 2023. These statements are subject to dangers and uncertainties that may also only cause actual effects to differ materially, adding the risks detailed in the Company’s most recent Annual Report on Form 10-K, the Quarterly Report filed on Form 10-Q and other documents filed with the SEC. which are available on the SEC’s online page in www. sec. gov. These risks may be updated from time to time. The Company assumes no legal responsibility to update forward-looking statements made in connection with this call.
I will now turn the floor over to Robert Price, Chairman of the Board of Directors of PriceSmart.
Roberto Award
Thank you, Michel. Hello and welcome to our first quarter of fiscal year 2023 effects convention call.
On behalf of myself and our Board of Directors, I would like to express our gratitude to Sherry Bahrambeygui for her leadership over the past 4 years. Sherry’s performance as CEO in some of the most challenging years in PriceSmart’s history was characterized by record earnings and earnings. as well as club expansion, club expansion and launch of online shopping. Our company is in a position to build on Sherry’s achievements. Sherry will remain on PriceSmart’s Board of Directors, where she will continue to make significant contributions to PriceSmart’s long-term success.
I’m excited to get more directly involved in the day-to-day affairs of our business again. I have a very private hobby for PriceSmart. Our activities take place in countries that have significant economic and political challenges. Since the inception of our business in 1996, we have been committed to operating our business with the highest standards similar to our buildings and equipment, our products and, most importantly, to providing an exceptional working environment for our more than 10,000 PriceSmart employees, serving our members in all 12 countries and one U. S. territory. UU in which we operate. PriceSmart’s U. S. shareholders can be proud of the investments they have made in our company.
Now I will pass the call to Michael.
Michel McCleary
Thank you, Robert, and welcome back to this call.
We had another exceptional first quarter with overall revenue and net product sales exceeding one billion dollars. Exchange rates have an effect on 2. 1%.
By segment, in Central America, where we had 27 clubs at the end of the quarter, net product sales increased 10. 1% with an 8% increase in net sales of comparable products. All of our Central American markets recorded positive same-product net sales growth.
In the Caribbean region, where we had 14 clubs at the end of the quarter, overall product sales increased 12. 9% and same-product sales increased 6. 6%. All of our markets in this segment also recorded positive expansion in product sales.
In Colombia, where we had nine clubs open at the end of the quarter, net sales of products were minimized 8. 3% and net sales of equal products were minimized 13. 1%. which impacted net sales of products by 20. 5% and net sales of the same products by 19. 6%. Lower net sales of comparable products in Colombia negatively impacted overall net sales of comparable products for the quarter by approximately 160 basis points.
In terms of product categories, when we compared our first-quarter sales to the same time last year, our food category grew by about 6%, our non-food category grew by 1%, and our other advertising category grew by 10%, basically due to our food service and bakery departments. Member accounts increased 3. 9% year-over-year to 1. 76 million accounts. 7. 5% more than at the same time last year. We, those club numbers, show that our members remain happy with the price they get and enjoy the PriceSmart grocery shopping experience.
We remain diligent with stock management, strategic downgrades to reduce overstock, and slow movement in the first quarter, primarily similar to furniture and apparel. Total gross margin for the first quarter of fiscal 2023 as a percentage of net sales of products over 20 core issues at 16. 2% compared to 16% in the first quarter of fiscal 2022. In total dollars, overall gross profit increased by $15. 5 million or approximately 10. 3% compared to the same quarter last fiscal year.
Higher total profit margins through 20 basic problems at 17. 6% of overall profit compared to the same time last year, basically due to higher gross product margins. to return to our core business, which has a more popular stock balance sheet and the same margin structure as before.
The smart sales effects in the first quarter, adding for our Smart Week and World Cup events, lessen the threat of additional downgrades in the current quarter. We’ve abandoned the Christmas pieces and are now preparing for spring with water sports, camps, and training programs. , which began landing in December and will bring totally new products to the clubs.
Supply chain disruptions were relatively subdued in the quarter, and our global supply chain logistics network remained relatively robust and reliable. Lockdowns in China are easing in the first quarter, but we remain cautious due to recent COVID outbreaks there. We saw relief in shipping quotes the quarter in our transpacific freight rates, which averaged about $6,400 per container in the first quarter, compared to $11,500 in the last quarter and fees reached $4,000 per container at the end of November.
In addition, transit days for incoming boxes loaded with our products from Asia were reduced to an average of 51 days during the first quarter of fiscal 2023, to 61 days in the fourth quarter of last year.
Unfortunately, inflation remains a macroeconomic factor that has a significant impact on the price of our products, in part due to emerging prices for raw materials, inputs, hard work and packaging expenses. While we do our best to mitigate the accrual of charges, inflation has led to an increase in the selling prices of our products. For the first quarter of fiscal 2023, the average selling price according to item backlog increased 10. 3% compared to the same previous fiscal year During the same comparative constant period, we saw basket parts down 4. 4%, but transactions were up 3% this quarter compared to the previous year.
SG Expenditure
In addition, we had transaction prices of $1. 1 million related to the conversion of Trinidad dollars into available tradable currencies. Our effective tax rate for the first quarter of fiscal 2023 is lower than last year by 33. 3% compared to 34. 1% a year ago. Going forward, we estimate an annualized effective tax rate of 32% to 33%.
We are very proud of our effects this quarter, as our net source of revenue and earnings consistent with consistent percentage were a record for the Company. compared to $30. 5 million or $0. 98 consistent with the diluted percentage consistent with the same consistent period of the previous fiscal year, which included a gain of $0. 05 on the sale of Aeropost.
Turning to the strength of our balance sheet, we ended the quarter with money, money equivalents and allocated money totaling $281. 7 million. From a monetary perspective, net money generated through operating activities totaled $30. 5 million for the 3 months ended November 30, 2022 and net money used in operating activities totaled $13. 3 million for the same time last year.
Changes in current capital generated through adjustments to inventories of our products and accounts payable for the 3 months ended November 30, 2022 generated $29 million in money compared to the same time last year.
This positive replenishment was complemented by another positive replenishment of $11. 3 million in miscellaneous assets and liabilities, primarily due to a reduction in VAT and duties paid in advance, as inventory accumulation was particularly reduced in the current period.
Net money used in the creation of investment activities increased to $9. 4 million during the three months ended November 30, 2022, compared to the previous year, basically due to a net reduction in income from short-term investment agreements. And net money provided through financing activities in the quarter increased through $13. 5 million primarily due to an accumulation of $16. 7 million in long-term debt income, partially offset through net payments of $4. 3 million of short-term loans, compared to the same era 3 months ago in the year.
Let’s now turn to our expansion controllers. Starting with real estate, as we discussed earlier, lately we have two warehouse clubs under construction. In the spring, we plan to open our third club in El Salvador.
In addition, this summer we plan to open our club for the moment in Medellín, which will be our tenth warehouse club in Colombia. Once those two new clubs open, we will put 52 warehouse clubs into operation and are also actively exploring other locations. Both clubs apply our smaller club formats. And as we fine-tune those smaller club formats, we’re locating operational efficiencies that will allow us to increase our productivity in square footage.
We believe that one of the fastest and most effective tactics to increase sales and profitability is to increase the length of our warehouse clubs and the number of parking spaces in our high-volume locations. For example, lately we are preparing to transform and expand one of our clubs in San Salvador, El Salvador.
As discussed above, our real estate strategy also emphasizes the vital role of our distribution services in maximizing power and reducing supply chain risk. Sales area in clubs and create opportunities for the fulfillment of e-commerce orders.
Now let’s move on to the membership price. One of the things that continues to excite members is the scavenger hunt in our stores. Our team of buyers selects parts from all over the world, looking for wonderful prices on the merchandise. This scavenger hunt opportunity drives traffic to our clubs and generates more sales. Opportunities.
A domain in which we give an exceptional price to our members are our personal brand products under the banner of variety of members. During the first quarter of fiscal 2023, our personal brand sales accounted for 25. 9% of our overall product sales, a cumulative of 230 core issues compared to 23. 6% in the same era last year of fiscal 2022.
Another domain of the club fee is our wellness offering, which includes optics, audiology and pharmacy. Lately we have 47 locations with optical centers and plan to open 51 by the end of the fiscal year. Our optical program provides 4 loose exams for each member. and performed more than 33,000 eye exams in the quarter.
Optics is also a vital contributor to the social duty of our local communities. Through our partnership with Price Philanthropies’ Learn and Grow program, we have provided approximately 13,000 screenings, 3,500 screenings and 3,100 eyeglasses to local school youth since the program’s inception. We are very pleased to be able to provide the service to our local communities.
Lately we have pharmacy centers in our 8 warehouse clubs in Costa Rica and now we have opened pharmacies in two warehouse clubs in Panama. As for audiology centers, by the end of November 2022, we operate 14 and plan to open 16 more centers in fiscal year 2023.
Our third driving force of expansion is our e-commerce channel. In the first quarter, overall e-commerce sales accounted for 3. 9% of overall product sales. As a result, we continue to see encouraging symptoms of how our members are responding to their online experience with us and PriceSmart. com in general.
As of November 30, 2022, approximately 55. 1% of our members have created an online profile with PriceSmart. com. We have significant expansion opportunities in our virtual channel. 13. 6% of our overall member base made an acquisition in PriceSmart. com. The average online purchase in PriceSmart. com in the first quarter was 37. 8% higher than the average ticket price for club purchases. We will continue to invest in this component of the industry to deliver an enhanced omnichannel experience to our members.
It’s also encouraging that 8. 7% of our member accounts are enrolled in our auto-renewal options. This club option makes it imaginable to make a component of our income more reliable, which is evidently very advantageous in a climate where we are faced with many unpredictable variables. that have an effect on our sales.
Now let’s move on to ESG. The Company’s movements and practices aim to use natural resources responsibly and focus on environmental and social well-being. During the last call, we announced that we plan to open 30 recycling centers this year.
And I’m pleased to say that our progress has been good, as we opened more collection centers in Guatemala in December and plan to be fully deployed in that market this month, as well as open one in El Salvador. In perspective, our initial pilot site at our club in San Pedro Sula, Honduras produces an average of around 15,000 pounds of recycled raw fabrics per month.
In addition, we continue to work with global networks of food banks where the company donates unsaleable goods yet to be consumed to participants through banks. Lately we have systems in place in Guatemala and Costa Rica that are fully operational, with plans to start in El Salvador, Colombia, Panama and Nicaragua within the next two quarters. We continue the philanthropic project in the PriceSmart communities. PriceSmart and the Price Philanthropies Foundation created the PriceSmart Foundation to serve as a philanthropic spouse of our company.
The core principles of the PriceSmart Foundation are to advertise youth career advancement and education, economic advancement and underfunded communities, and to fund projects that build environmental and network resilience. The Foundation is a separate and independent legal entity from PriceSmart, Inc. and Price Philanthropies. Foundation and has its own Board of Directors. PriceSmart has budgeted to provide a partial investment that includes in-kind donations of staff time and money taking to non-governmental organizations involved in its project and to the base itself.
Our commitment to sustainability and social reasons remains strong and we are committed to fostering a safe and healthy environment for our employees, members, suppliers, communities and the world around us, who are part of the PriceSmart family.
Looking ahead to the current quarter, we are pleased to report strong holiday sales with our net sales of products the same for the four weeks ended January 1, 2023, up 10. 4%, adding a negative currency effect of 0. 7%. We would also like to note that, as stated in our 10-Q presented yesterday, we expect to take a rate in the current quarter due to the CEO transition, which will reduce EPS by approximately $0. 23.
In closing, I would like to reiterate that we are determined to concentrate on the basic concepts that have characterised the club’s activity since its inception in 1976, and I make sure we have the right merchandise, at the right price, in the right quantity. , in the right conditions, in the right position, at the right time. PriceSmart has a unique business style in the markets we serve, which has been followed through our members and continues to grow. At PriceSmart, we have a very committed business style and talented team, and I need to thank all of our painters for their hard paints and determination to PriceSmart.
That said, I will pass the call to the operator to answer your questions. Operator, you can now start answering questions from our interlocutors.
Q&A session
Operator
[Operator Instructions] The first will come from Jon Braatz of Kansas City Capital. You can now continue.
Jon Bratz
Hello Roberto, Michel.
Michel McCleary
Hi Jon.
Jon Bratz
Mike, I have a query for you. Listen, going back to Colombia, obviously, it’s a very complicated situation. Adherence was reduced sequentially, compensations were low. One of them was that it can keep the values solid and that can have an effect on gross margin. I guess two queries. First, have you already followed new pricing methods in Colombia?And if so, how far can it go in terms of maintaining value and negatively impacting gross margins?
Roberto Award
Jean, that’s Robert. Let me start, I just need to say hello to everyone on the call, including, of course, our painters at PriceSmart. I need to thank you for all the smart paints you do. on how we need to manage the sales scenario in Colombia. We have a big investment there. We have probably invested more money in Colombia perhaps than in any other country. We are in terms of real estate. And I think the time has come for us to try to build that market. And even though the economy there is weak and, of course, we also suffer because a giant component of our strength lies in imports and imports are affected by currency exchange.
I believe that we cannot be passive. And it’s a long road in terms of how we think about Colombia and the long-term of that country. So, I don’t know the precise numbers, but I hope there will be an effect on margins, but we also hope that our suppliers will help us in terms of more competitive prices, especially in imports so that we can start expanding sales volume at this time. So I don’t think it’s a major detail in terms of having an effect on margins. , however, I don’t think we’ll be more competitive in how we expand sales in Colombia.
Jon Bratz
Have you already set something up?Or are you thinking about it?
Roberto Award
Well, we’re doing more, we haven’t implemented anything yet, but we’re doing more than thinking. We are making plans and working with John Hildebrandt, our new president; and Ana Luisa, who is our leading trader, to try to expand a strategy that, and we will do it gradually. We’re going to review things and make sure what we do has an impact.
The other thing to keep in mind is that we have a location at the moment that opens up in Medellin, and we need that location to open up well. So, what we need to do is start implementing more competitive sales methods before this opening.
Jon Bratz
Everything is fine. Everything is fine. Secondly, it commented that its December blends increased by 10. 4%, which is a bit more advanced than the last quarter and so on. Did you see an improvement in skills in Colombia in December?
Roberto Award
Mike, do you want to answer that?
Michel McCleary
Colombia I don’t have.
Roberto Award
I can do that. I would say, in local currency, yes. But in translated dollars, no.
Jon Bratz
Yes, that’s fine. Very well. That’s right. Everything is fine. Very well. That’s all I have at the moment. Thank you.
Michel McCleary
thanks jon
Roberto Award
Well, thanks for having more questions.
Operator
Our next one will be Hector Maya of Scotiabank. You can now continue.
Hector Maya
Hello thanks. Thank you very much for this opportunity and also for your time. I sought to know the surprises about the CEO position, how many transitions will it be?How long do you think it might take and how complicated would it be to outline a candidate to fill?And is this user more likely to be from outside the company or from inside?
Michel McCleary
Hi Hector, it is very difficult to listen to you, it is a bit confusing, but I understood that your query is similar to the CEO transition. And I think about how long we expect the interim position to last and what the replacement strategy is. , is something along the lines?
Hector Maya
Yes. Yes. Thank you. What if you are, and if you think you’re more likely to be a stranger to the company or from within?
Roberto Award
Everything is fine. So, it’s a very, very important factor and a very important issue for the company. So, what we’ve been with: our technique is to talk about this with the board and take our time to make sure we find a smart answer, because the board has to be concerned and it’s a key duty of the board is the direction of this business and the solution of that needs to be done in a way that’s smart because there’s a very complicated factor to get to the position. CEO: So, we’ll take our time, make sure we get it right, but it will be a duty of the Council.
Hector Maya
Merci. Et in that note, I also sought to know if the company’s long-term strategy could be replaced with this move and given the implications of David Price’s appointment as executive vice president and chief people officer.
Roberto Award
Sorry, I discovered something about David Price and EVP, but I didn’t perceive the rest. Hector, I’m sorry, we’re having a lot of problems.
Hector Maya
If there are long-term strategic prospects for the company that can simply change, given the appointment of David Price as executive vice president and chief of staff.
Michel McCleary
So, there will be adjustments in the company because of the appointment of David Price, is that his name?
Hector Maya
Sorry, I don’t know if you can check anything else here.
Michel McCleary
I’m having a lot of problems. Let me tell you one about David Price.
Hector Maya
Is it now? Forgive me.
Michel McCleary
He’s my son, you know, and he tells me I’m too old to perceive generation, so he has to teach me about generation. So, that’s all I hope those young people can provide in a much more applicable and expert way. Information about the generation that an old man like me.
Hector Maya
I compris. Merci. Je I don’t know if I heard the answer correctly because I have disorders here, probably in a precedent. Merci. Et the last consultation would be operational. If you can give us more color in the other categories of expenses, basically in our currency it affects those [indistinguishable] if we think that this point of review is really extensive [indistinguishable]. Thank you.
Michel McCleary
Very well. Hector, is. . . Sorry, but we just had. . . I heard ex-operative expenses and. . .
Roberto Award
It would be higher in Spanish. Do you want to see it in Spanish?
Michel McCleary
Alone. . . No, I think that’s the line of communication. I think it’s more about the lines of communication, they just coded. Please try again, Hector, please?
Hector Maya
I am sorry. About the extended category, basically FX has an effect on the nearest line. We have noticed that they are very extensive compared to the old levels. So which generation gives us the most important points about this?
Michel McCleary
I heard something about FX and anything about expenses, is it the point of FX expenses in operating income?Is that it?
Hector Maya
Yes. That’s it.
Michel McCleary
Everything is fine. Yes, smart question. The main detail, the most important detail of the FX line is still the Trinidad FX premiums that we have been talking about for probably 3 years, as a vital detail. The other component is similar to a rare circumstance we had this quarter. compared to other quarters where we had strong appreciation in Costa Rica, which worked against us. You may remember that we have had similar cases in the past, where we have a giant dollar balance, which over time is the devaluation of the Costa Rican colon, because you expect it to rise more in price.
But especially this quarter, we had a significant devaluation of 8%. At the same time, we had no depreciation in Colombia, where we have a passive position. Therefore, we protect all of our long-term financing through local currency loan swaps, but our current capital has a tendency to vary between the dollar and the local currency.
So we had a kind of much higher typhoon of the devaluation of the Trinidad premium in Colombia, as well as the devaluation in the Dominican Republic. And then the counterintuitive assessment in Costa Rica worked against us the quarter.
Hector Maya
They gave it to me Thank you very much. I will revise to edit again later [indistinguishable]. Thank you.
Michel McCleary
Everything is fine. Thank you, Hector.
Operator
Now we’ll take over from Jon Braatz with Kansas City Capital. You can now continue.
Jon Bratz
Michael, you’ve done a smart job on the expense line, operating expenses. And one of the things you’ve said in the afterlife is that you’re going to continue to invest in generation and so on. What if those expenses were moderate?the fourth compared to some beyond the quarters?
Michel McCleary
No, I wouldn’t say he’s moderate. I mean, obviously, when we’ve talked about this before, when sales happen and as a percentage of sales, it doesn’t distort things as much as when sales happen a little more slowly. But no, I wouldn’t say we. I have moderated.
Jon Bratz
Everything is fine. So to the extent that revenues are growing, say, in middle digits, do you think that those expenses, those expenses, the generation expense can grow at a slower rate?
Michel McCleary
I would say, to be determined, Jon. Je means, we have a lot, Robert alluded to that before. We have a lot to do in the virtual box and we have commitments to continue on this path and it is consistent the reevaluation within the control and within the board of track and pace managers. There is much to be done and we do our best to balance that, but there may be imbalances to the extent that sales expansion runs counter to our stated purpose and will continue down that path.
Jon Bratz
Everything is fine. Very well. Very well. Thank you so much.
Michel McCleary
thanks jon
Operator
This concludes our question and answer session. I would like to return to Michael McCleary’s lecture for any final remarks.
Michel McCleary
Everything is fine. Thank you all for joining us and we look forward to speaking with you next quarter. Take care of yourself. Goodbye.
Operator
The convention is now closed. Thank you for attending today’s presentation. You can now log out.