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Edited Transcript of PSMT earnings conference call or presentation 7-Apr-17 4:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 PriceSmart Inc Earnings Call

SAN DIEGO Apr 8, 2017 (Thomson StreetEvents) -- Edited Transcript of PriceSmart Inc earnings conference call or presentation Friday, April 7, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John M. Heffner

PriceSmart, Inc. - CFO, CAO and EVP

* Jose Luis Laparte

PriceSmart, Inc. - CEO, President and Director

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Conference Call Participants

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* David Michael King

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

* Jonathan Paul Braatz

Kansas City Capital Associates - Partner and Research Analyst

* Patricio Danziger

* Ronald Cunningham Bookbinder

Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst – Consumer

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Presentation

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Operator [1]

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Good day, and welcome to PriceSmart Inc.'s earnings release conference call for the second quarter of fiscal year 2017, the 6-month period ending on February 28, 2017. (Operator Instructions) After remarks from Jose Luis Laparte, PriceSmart's President and Chief Executive Officer; and John Heffner, PriceSmart's Executive Vice President and Chief Financial Officer, you will be given an opportunity to ask questions as time permits. (Operator Instructions) As a reminder, this conference call is being recorded on Friday, April 7, 2017. A digital replay will be available through April 14, 2017, following the conclusion of the call by dialing (877) 344-7529 for domestic callers or (412) 317-0088 for international callers, and entering replay access code 10102319.

I would now like to turn the conference over to John Heffner. Please go ahead, sir.

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John M. Heffner, PriceSmart, Inc. - CFO, CAO and EVP [2]

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Thank you and welcome to our earnings call for the second quarter of fiscal year 2017. We will be discussing the information that we provided in our earnings press release and our 10-Q, both of which we released yesterday, April 6, 2017. Included in our Q2 earnings, we also released our March sales. You can find both the press release and the 10-Q 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 could cause actual results to differ materially, including the risks detailed in the company's annual report on Form 10-K for the fiscal year ended August 31, 2016, filed with the Securities and Exchange Commission on October 27, 2016. We assume no obligation and expressly disclaim any duty to update any forward-looking statements to reflect the occurrence of events or 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.

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Jose Luis Laparte, PriceSmart, Inc. - CEO, President and Director [3]

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Good morning, everyone, and thank you for joining us today. We finished our second quarter of our fiscal year 2017 with net warehouse sales of $772 million, an increase of 1.8% compared to the second quarter last year. Comparable warehouse sales for the 13-week period ending March 5, 2017, for the 38 warehouse clubs that have opened at least 13.5 months were 2.1% with the same 13-week period last year. It may look unusual for comps sales to be higher than total sales. Keep in mind that Q2 last year, fiscal 2016, included an extra day sales compared to this quarter due to the leap year. 91 days in total compared to 90 days in this quarter -- in the quarter this year. Adjusting for that additional day last year, we estimate that total sales growth will have been 2.7%. Comp sales are measured in equivalent fiscal weeks from period to period.

As reported, net income for the quarter was $27.2 million or $0.90 per share compared to $25.9 million or $0.85 per share a year ago. Similar to the events of the first quarter, this quarter's net income reflects an overall improvement in the financial results of Colombia, good margin performance in many of our other countries and a lower effective tax rate of the sales growth in a number of our non-Colombia countries was flat or slightly negative.

Looking at sales by segment. Warehouse sales in our Central America segment were down 0.2% to $465 million, the [ last ] as a result of Costa Rica experiencing an increase of 4.9%. Panama, Guatemala, and Honduras reported positive growth in warehouse sales. And El Salvador and Nicaragua, were slightly down. The Caribbean had a sales decline of 4.6% when compared to second quarter of last year. Trinidad, our largest market in the segment, was down 9.6%, reflecting the current difficult economic conditions and, to some degree, also, the fact that we limited shipments during that period. While we initially thought that the actions we took in November could have an impact of $8 million to $12 million sales on sales -- $8 million to $12 million on sales, I now think that the impact was far less than that. USVI and Jamaica recorded sales increases in this region. And DR, Barbados, and Aruba also had negative sales growth.

Regarding Trinidad, as a result of the efforts of our in country and corporate teams to source tradable currencies, we have lifted all restrictions on shipments of U.S. product to Trinidad. We are hopeful that we can continue to find an adequate level of foreign exchange to return to what appears to be a slowly improving situation in that country without interrupting again our supply of U.S. merchandise.

Colombia had a very strong quarter. As I mentioned in the first quarter, the exchange rate between the U.S. dollar and the Colombian peso has stabilized over the past few quarters, which have had a beneficial impact on our business, sales membership and margin. Our total net warehouse sales growth in the quarter was 38.4, which includes the addition of our new warehouse club in Chia that opened on September 1, and the beneficial effect of the stronger currency.

The average exchange rate for the current 3-month period was slightly below COP 3,000 to the dollar compared to last year's average of COP 3,283 to the dollar for the second quarter. On a local currency basis, sales grew 24.4%.

Our 13-week comp growth was 23.4%, which was affected by the cannibalization of our Salitre club in that city of Bogota, that transferred business to the new location in Chia, a municipality in the northern [ circle of Domus ]. In local currency, the comp growth was 10.4%. In a few minutes, I will cover more details on our Colombia business.

Warehouse margins in the quarter were 14.6% compared to 14.2% a year ago, an increase of 40 basis points. Warehouse margins in Colombia increased 285 basis points from the second quarter of last year. While gross margins in Colombia is still below what we see in our more established markets this year, this year-on-year increase in margins in Colombia reflects the improving conditions we are seeing there. The Colombia result alone contributed 33 basis points to the overall company's gross profit margin increase of 40 basis points. The rest of the difference in margin improvement is a result of less markdowns given the positive sell-through of seasonal merchandise purchased for the holiday 2016 and early months of calendar year 2017.

In membership, we finished the quarter with more than 1.5 million accounts, up 3.4% from a year ago and membership income was up 4.9%. The 12-month renewal rate at the end of February was 83%, showing an improvement from the 12-month period ending February 2016 that finished at 81%. Well, actually, it related to the improving renewal rates in Colombia.

If we exclude Colombia, the renewal capture rate was 86% compared to 88% a year ago in the non-Colombian markets, too. At the beginning of February, we raised our membership fee in Colombia, an increase of COP 10,000 in local currency, above $3.30. We have not seen any negative impact on new sign ups or the steadily improving trends in our renewals resulting from that increase. And we see this as an evidence that with the stabilizing currency and our efforts in merchandising and operations, that members are also increasingly seeing the value that our membership provides. To put this in perspective, at the end of fiscal year 2016, our Colombia 12-month renewal rate was only 58%.

Operating income for the quarter was $39.4 million compared to $39.1 million in Q2 of last year. Colombia achieved a positive operating income of $1.1 million compared to a loss of $1.7 million for the same quarter a year ago.

A few additional comments also on Colombian performance. Our Chia club opened in September -- which opened in September 2016, continues growing on the membership base and renewing accounts from our first Bogota club, given the convenient store members that live in the north part of the city. As I mentioned in my initial comments, we believe that our members, and all consumers in general, are more adapted to the new currency level of approximately COP 3,000 per dollar. The fact that we have seen that stability for more than 6 months give us also the ability to improve our prices in all our imported merchandise and also keep less changes on prices compared to the last 2 years where it was hard to keep up with the currency variations. Our buying team in Colombia keeps working on developing local items for that market, and they have even developed a few private label items developed specifically for that market and with a potential for exporting it to other markets in our region. We keep seeing transaction increase in our Colombia clubs and also in our average transaction in both U.S. dollars and also in local currency. Even with improvements that we have in margin compared to last year, we are not losing focus on offering our members great values on exciting items to improve our membership concept in that country and allow members to realize that with a few purchases, they can pay for the price of the [ year announced ] COP 75,000 membership.

Let me highlight a few other items associated with the quarter before I address our March sales results, which we also released yesterday. We are happy that we were able to announce the acquisition of land in Santa Ana, Costa Rica where we will construct our seventh warehouse club in that country. It took a long time for us to reach the point of having all the necessary permits for this site, and construction is underway. We are planning to open it during the first quarter of our fiscal year 2018, hopefully sometime in late September or early October 2017. Unfortunately, I am not in a position to announce any additional warehouse clubs at this time, although our efforts on a number of possible sites continue.

During the quarter, we completed also the acquisition of our new Miami DC. And in the last 2 weeks, we have moved our Miami distribution center, Miami dry distribution center to that new location. This new facility of about 325,000 square feet is located about 1 mile from our existing location. Our new state-of-the-art facility has efficiencies compared to our old operation, clear height of 32 feet, more than 125 dock doors on a real cross dock layout and approximately 100 on property container staging positions. We also moved our administrative offices that were in the old facility. We are very excited about the prospect of this new facility, further enabling our distribution, operation effectiveness and supporting our company's continued growth for many years to come.

One last item on warehouse sales in Q2. We have been experiencing no sales growing to market where we have a solid and longtime presence and a loyal member base, Costa Rica and Dominican Republic. Both of these countries reported a decrease on comp sales for the second quarter. While I recognize that there are challenges related to large amount of sales volumes in some of these clubs and the traffic congestion in these cities around our clubs, we nevertheless believe that we should be experiencing sales growth in these established markets. As such, we are working in these 2 markets to change those sales trends during the last 2 quarters of this fiscal year. In March, we started to see some positive signs, which have continued in the first days of April.

Now March sales. The total sales for the month of March were $239.9 million, an increase of 5.3% from March last year. For the 4 weeks ended April 2, 2017, comparable warehouse sales for the 38 clubs was 2.9%. Easter or Semana Santa was in March last year and will be in April this year. It is unclear how that may affect -- may have affected the March comparison as we generally experience increased sales in the lead up to -- on the first few days of Semana Santa. But then our warehouse clubs are closed on Good Friday and many of them are closed on Easter Sunday and even some on Easter Monday. We think that there may have been a small positive impact in March of this year because of those closures last year and could have the small opposite effect this month of April. However, we believe that we are well positioned for strong sales during the coming weekend and Semana Santa next week, which may offset some of the effects of the closed days we will experience later this month. In fact, we often view this month combined to mitigate any seasonal shift impact and to better assess the true comp trend.

With that, I will turn things over to John Heffner, before we take your questions. Thank you.

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John M. Heffner, PriceSmart, Inc. - CFO, CAO and EVP [4]

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Thank you, Jose Luis. Let me cover a few additional items. Total SG&A expenses increased 47 basis points in the quarter as a percent of sales. Similar to what we saw in the first quarter, low or negative comp growth resulted in higher warehouse club operations expense ratios in places like Costa Rica, El Salvador, the Dominican Republic and Trinidad, along with additional corporate G&A expenses.

We had interest income of $549,000 compared to $280,000 last year. We have cash on deposit in certain countries, particularly Trinidad, which is allowing us to get some additional income. This was offset by $108,000 of additional interest expense compared to a year ago as we took on $35.7 million of debt in conjunction with the acquisition of the Miami distribution center in the quarter.

Foreign exchange transactions and the revaluation of monetary assets and liabilities resulted in a $915,000 currency gain in the quarter compared to a $552,000 loss in Q2 last year. We generally saw devaluing currency movements across most of our countries during the quarter that resulted in currency gains in those countries that had net U.S. dollar asset positions like Costa Rica and the Dominican Republic. In addition, despite higher transaction costs for converting TT dollars, Trinidad dollars, into U.S. dollars, we took that additional cost into consideration in our pricing model, resulting in an overall net currency gain. The relative stability of the Colombian currency also provided a small gain in the quarter.

The effective tax rate for the period was 30.6% compared to 31.7% last year. This beneficial change was, again, largely attributable to the intercompany transaction between PriceSmart Inc., the U.S. entity, and PriceSmart Colombia related to our ongoing market development efforts in Colombia. We continue to expect to see a benefit of the effect -- to the effective tax rate of approximately 150 to 200 basis points in the upcoming quarter.

From a balance sheet perspective, the company ended the second quarter with cash of $182 million, an increase of $6.6 million during the quarter. Some of the larger actions impacting cash in Q2 included the payment of a $0.35 per share dividend on February 28, the purchase of land in Costa Rica, and the acquisition of the new distribution center in Miami offset with the additional debt we added to finance the DC.

As Jose Luis mentioned, we have now moved much of our non-Col DC operations from our current facility to the new DC. We have agreements in place for subletting most of the vacated space in the old location, however, we will likely recognize a lease liability charge of approximately $450,000 in the third quarter, associated with the difference in cash flows over the remainder of our lease term.

With that, Jose Luis and I would be happy to take your questions. Laura, I'll turn things over to you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Dave King of Roth Capital Partners.

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David Michael King, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [2]

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In terms of Trinidad, it looks like the lower shipments there was -- the impact from that was a little bit less than the $8 million to $12 million, I think, you were originally anticipating. I think the market was down 10% or so in the quarter. I guess how much do you think that the lower shipments weighed? And then with the sourcing of tradable currencies having improved a little bit recently, how should we be thinking about that impact as we move forward?

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Jose Luis Laparte, PriceSmart, Inc. - CEO, President and Director [3]

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Okay, Dave. I think we obviously have to tell and we keep looking at different ways of trying to measure how much the fact that we reduced shipments impacted sales. We think it probably impacted less than we expected. Although, obviously, we did it at the high season, I guess, at the middle of our holiday season. So for sure, there was something that we lost on the sales. Fortunately, we believe that we are now -- we believe completely that we are now back in our regular mood of shipping merchandise and we shouldn't see any more effects. Obviously, we are also -- our corporate team and our local teams have been doing, as I mentioned, a good job in getting more currency, I guess, on paying more of our TT dollars to either U.S. dollars or euros. And we think, in general, things improving on those both sides, either from the shipment perspective or from the trading currency perspective. We do recognize that the economy is still a little bit soft. But we are more optimistic, at this point, to anniversary the VAT increases that we have last year. Obviously, little by little, things are getting better in the economy, and we should start seeing some things, to some degree, improving in the country, no?

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David Michael King, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [4]

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That's great color. And then in terms of gross margin improvements, I guess year-on-year is about 40 basis points or so. John, any sense on how much of that improvement was attributable to currency versus, I think, last year, we had a fair amount of markdowns, if I remember, both in the quarter you just reported but I wanted to say also on the quarter you're in now and the year-ago period. How should we be thinking about that moving forward and what was sort of the impact in the quarter?

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Jose Luis Laparte, PriceSmart, Inc. - CEO, President and Director [5]

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I'll take that one again, Dave. I think definitely, the -- last year, yes, for sure, we had a difficult quarter. A lot of that was -- and related also to Colombia with all the currency changes and the fact that we had to do a lot of markdowns there and in other markets. I think Q2 this year had a much better performance just because, obviously, Colombia helped definitely and we're making a lot of improvement there in margins. And I think we have a cleaner inventory. We had a good holiday sell through. We have a good early start for spring this year. We are now at the middle of cleaning up our inventory for whatever happens, and whatever -- any inventory we need after our Easter period, but was very -- we don't expect to see big changes or swings in our margin in Q3. I think we're going to be basically within our plan. And we think we are in good position to close, obviously, Q3 and Q4, no? Not any items that would be different to report and hopefully, the stability of the current season will continue in most of the countries, which helps us, obviously, keep our prices, I guess, sharp and definitely, just have a good sell through.

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David Michael King, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [6]

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Okay. That's helpful and encouraging. And then maybe one more and I'll step back. In terms of the -- so I appreciate the color on response to the membership increase in Colombia. Just also thoughts around maybe doing the platinum membership, taking it to some other markets, I guess. What are some of the high-level thoughts around the potential there? What kind of -- sort of markets would it make sense? Would it make sense across all the markets? What are you thinking about on that front?

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Jose Luis Laparte, PriceSmart, Inc. - CEO, President and Director [7]

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We are actually getting ready for maybe a couple of countries through relaunching -- to relaunch in a couple of countries. We are basically working on some changes in our point of sales system. And we're happy with what we have seen in Costa Rica. And I believe by the next quarter, for the next call, we'll probably be announcing which countries we'll be doing our rollout of these. We are not looking at doing it right now in Colombia per se. Obviously, we are taking baby steps there. I think we were happy to see the increase in membership, which we needed because, obviously, at conversion, we were way below our goal of [ however rash of ] $35 that we have in the other countries. So even with the increase, we are still below, but it was a good first step to get our members, I guess, into a higher membership. And as I reported, it was pretty much transparent, I think we will continue reinforcing our value proposition there, making sure that members understand, obviously, the membership concepts which, so far, it seems that they are getting there. And then eventually, we may consider platinum even in a market like that one. But at this point, it's not on the list of the markets.

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Operator [8]

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And our next question will come from Ronald Bookbinder of Coker, Palmer.

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Ronald Cunningham Bookbinder, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst – Consumer [9]

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Nice job on the continuing improving comps. On the new distribution center in Miami, was there any extra cost during the quarter as you bought that in January in the quarter didn't end until February?

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John M. Heffner, PriceSmart, Inc. - CFO, CAO and EVP [10]

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I guess the only additional cost we have was the additional interest expense. We closed on the loan during the quarter. Though it would be that small increase in interest expense would have probably been the only thing I could -- we could really attribute to that.

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Ronald Cunningham Bookbinder, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst – Consumer [11]

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Okay. And on Costa Rica, it's great that you're seeing some improvement now in March there. But is it just traffic in the area? Or what was causing the weakness and what are you doing differently now to see improvement?

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Jose Luis Laparte, PriceSmart, Inc. - CEO, President and Director [12]

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I would say there was an issue specifically in Q2 with some biggest, I guess, traffic issues. There was a -- they closed, like, a bridge that communicates a big portion of the city with the other one. So that caused a little bit of disruption, no question. We don't expect only to blend in on those kind of events. Although we recognize that it was harder to get to our locations. But I also think, in general, one of the things we are basically making sure we do is that, I think, we probably had a little bit of a slowdown in exciting items in Q1 and Q2 and we want to make sure that going forward, we don't lose that -- the ability to keep shipping, obviously, good merchandise. And I think that's what our business is about. So at the end of the day, we believe that improving in some areas of merchandising should help us get back to where we need to be in a market that is -- we have such a loyal member base, and so important for us. Especially now that we're getting ready with our seventh warehouse in that market. So I don't think it is anything that we can't change. And again, we are pretty optimistic with the initial results, even in just a few days in this month of April. So I think we can get that back and recover some of that lost ground very soon, Ronald.

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Ronald Cunningham Bookbinder, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst – Consumer [13]

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And in Colombia, in local currency, the average ticket was up 7% or over 7%. What are you offering there that's different? Are they just buying more of items that you have? Or have you added new items that is getting excitement going there, too?

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Jose Luis Laparte, PriceSmart, Inc. - CEO, President and Director [14]

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We have been adding a lot of items. In the last year, 1.5 years, there has been a special effort in Colombia in, obviously, looking at local production and I think, obviously, some items take a little longer. But little by little, we are getting those extra items in the cloth, and I think it's just a result of, I guess, we are getting a lot of those new items already in the members' baskets. And that will continue to be our trend going forward, just keep adding some items. I remember seeing last week a few reports on our recently launched coffee under our private label. So great item that just landed in the clubs in Colombia under our private label. And like that, we have many examples of items that are making our selection better. And obviously, also the U.S. inputs slowing that destabilized currency are helping, obviously, improve our stake in both local and U.S. It's all about items at the end, Ronald.

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Ronald Cunningham Bookbinder, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst – Consumer [15]

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And lastly, in the U.S., everybody has been talking about the shift to e-commerce. You guys have an e-commerce program for Colombia, but what are your plans looking long term as moving further into e-commerce?

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Jose Luis Laparte, PriceSmart, Inc. - CEO, President and Director [16]

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Well, we have a couple of things on the works. The first one is we are going to replace our platform, we are going to relaunch our platform very soon. It's been taking a little longer than we expected because it's a more robust platform that will help to support the operation that we are doing in Colombia, which actually members come by, merchants that will sell in the clubs, that's something we are going to launch, hopefully, by the end of Q3, in all our countries. And that's the first step of having a better platform that can support that. And in addition, we're reviewing our strategy in our whole e-commerce. We do believe there is opportunity to do it a lot better. We don't -- I mean, we are looking at what is going on in, specifically, in the U.S. market and the trends that is growing. And we definitely want to be part of that as it keeps getting into our countries. It is not as important yet and obviously, we are in some smaller markets. But we do recognize that retail is changing and we've got to be ready for, I guess, attacking that and competing with other players. We don't have, right now, big players, I guess, in this e-commerce arena. But I mean things are changing, and I want to ready. We will try to do our best on getting that business also. I'm learning now, as everybody's learning in this environment, but we are getting there, Ronald.

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Operator [17]

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And next, we have a question from Patricio Danziger of RWC.

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Patricio Danziger, [18]

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Just wanted to understand, store openings. In the last years, you've been opening 3 stores per year, approximately. And now, the plates have stopped. What is the main reason for these, and do you think you can accelerate that to something around 3, 4 stores per year?

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Jose Luis Laparte, PriceSmart, Inc. - CEO, President and Director [19]

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Okay, Patricio. We don't have -- I guess we happen to be opening, I guess, 3, 4, on average in the last couple of years, obviously, with Colombia that added a few. And we don't necessarily have a goal of 3 per year. Unfortunately, the permit processing, the permits process have been a lot slower. And that's the main reason we haven't been able to announce more openings. As I mentioned in my initial comments, we do have a couple of projects, I guess, on the works for that effort. And hopefully, we will be announcing some of them soon. It's more out of our control at this point. It's not specifically that we slowed down any of our plans on openings. We do have a pretty good idea of different countries and places or places where we want to open new clubs and we will -- we are pretty optimistic that very soon, we can get a little bit more in the pipeline.

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Operator [20]

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And the next question will come from Jon Braatz of Kansas City Capital.

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Jonathan Paul Braatz, Kansas City Capital Associates - Partner and Research Analyst [21]

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One of my questions was just answered but, Jose, has there been any -- when you talk a little bit about the weakness in Costa Rica and Dominican Republic, has there been any change in sort of the competitive landscape? Any new players in those markets?

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Jose Luis Laparte, PriceSmart, Inc. - CEO, President and Director [22]

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Not necessarily new players. I would say the only thing that has changed in Costa Rica, I would say none necessarily new players. I mean, things are business as usual, I would say. I guess it's nothing -- no one new coming in the market. I think it's just a little bit of more, I guess, competition from, I guess, other guys opening more stores or places in the country. And that is actually -- it's happening more in DR, where, in the last few years, they have been very aggressive in terms of supermarket competition have got very difficult in that market. And obviously, they have been opening more stores. That will probably apply more for the Dominican Republic and that has been definitely showing. Not necessarily new players, but more stores of the current players in different places of the city. And that, combined with the profit, makes it a little bit harder sometimes for our members to get access to us, no? But believing in our concept, obviously, we are trying to make the changes we need and try to improve and give the members a reason to shop with us and eventually, would be also with our e-commerce platform, hopefully, that they will also be able to shop online. We don't know. So we're trying to get in different -- I guess getting different efforts to try to improve the performance in those. But there is not necessarily new market players in any of those markets.

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Jonathan Paul Braatz, Kansas City Capital Associates - Partner and Research Analyst [23]

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Okay. I guess the same question but for the Colombian market. Any changes in the competitive landscape there?

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Jose Luis Laparte, PriceSmart, Inc. - CEO, President and Director [24]

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No. Colombia has been actually -- the only change that we have seen there, there are a couple of new players that started basically at the same time we opened. There were a few chains that opened these small stores that are competing big time, one in [ Geronimo ] markets out of Portugal, they have opened a lot of stores in that market. There is also a concept called [ De Uno, D1, ] that has been opening a lot of small format stores in those markets. I think they are going after the same business, obviously, small mom and pop stores. But we haven't seen any effect to our business. I guess there also will be the kind of the new competitors. The rest of the competitors are pretty much the same, as we have seen through the years. And I think we have been actually learning how to compete with each other, I think the big hypermarkets there, either Exito or Jumbo or Alkosto. All those guys have probably been learning how to compete also with the new guy, which is us. And I think we are -- nothing has changed. I think this is still competitive market for sure. But nothing that will be so much different at this point in that market, Jon.

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Jonathan Paul Braatz, Kansas City Capital Associates - Partner and Research Analyst [25]

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Okay. John, one question. You had mentioned that you expect the tax rate to be 150, 200 basis points lower. When I look at last year's third quarter and fourth quarter tax rates, they were 35% and 30.5%, respectively. Are you talking about 150, 200 basis points reduction specifically for those -- both those quarters or sort of as an average? Or can you clarify that a little bit?

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John M. Heffner, PriceSmart, Inc. - CFO, CAO and EVP [26]

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Sure. Yes, literally, I think, I was referring to sort of the run rate as we're going into the third quarter here. In the fourth quarter last year, we had a very low tax rate because that was the first quarter we got the impact that -- of the intercompany transaction between the U.S. and Colombia. So we're sort of comping, if you will, in the next quarter against the period when we didn't do that. So once we get to the fourth quarter, we'll have anniversary-ed this issue. So the -- my comments are specific to the third quarter.

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Jonathan Paul Braatz, Kansas City Capital Associates - Partner and Research Analyst [27]

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So basically, John, sort of a lower tax rate in the third quarter year-over-year but a more comparable year-over-year in the fourth quarter?

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John M. Heffner, PriceSmart, Inc. - CFO, CAO and EVP [28]

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That's correct, yes.

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Operator [29]

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(Operator Instructions) And showing no additional questions, I would like to turn the conference back over to John Heffner for any closing remarks.

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John M. Heffner, PriceSmart, Inc. - CFO, CAO and EVP [30]

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Well, thank you, Laura. No closing remarks on this end. This will end our call. Thank you for participating with us today. Have a good day and a nice weekend.

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Jose Luis Laparte, PriceSmart, Inc. - CEO, President and Director [31]

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Thank you.

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Operator [32]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.