PriceSmart, Inc. (NASDAQ:PSMT) Q3 2023 Earnings Call Transcript
PriceSmart, Inc. (NASDAQ:PSMT) Q3 2023 Earnings Call Transcript July 11, 2023
Operator: Good afternoon, everyone, and welcome to PriceSmart, Inc.'s Earnings Release Conference Call for the Third Quarter of Fiscal Year 2023, which ended on May 31st, 2023. 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 one hour and is being recorded today, Tuesday, July 11th, 2023. A digital replay will be available following the conclusion of today's conference call through July 18th, 2023 by dialing 1-877-674-7070 for domestic callers or 1-416-764-8692 for international callers and by entering the replay access code 780477#. For opening remarks, I would like to turn the call over to PriceSmart's Chief Financial Officer, Michael McCleary. Please go ahead, sir.
Michael McCleary: Thank you, operator, and welcome to PriceSmart, Inc.'s earnings call for the third quarter of fiscal year 2023, which ended on May 31st, 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 10th, 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. These documents are available on our Investor Relations website at investors.pricesmart.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 11th, 2023. 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-K, 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.
Robert Price: My sincere thanks and appreciation to our employees here in the United States and in our 12 countries and one US territory for their amazing dedication and hard work. Congratulations for a job well done during the third quarter. Our Chief Financial Officer, Michael McCleary, will soon provide a detailed narrative for our third quarter results. In advance of his remarks, I would like to offer some comments. Our year-over-year increased sales performance was supported by a 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 third quarter results are definitely encouraging.
However, I want to remind our investors that PriceSmart 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 US 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.
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.
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Michael McCleary: Thank you, Robert. We had a strong third quarter, with both revenues and net merchandise sales exceeding $1 billion. Net merchandise sales increased by 7.1% or 5.6% in constant currency. Comparable net merchandise sales increased by 5.8% or 4.3% in constant currency. For the nine months ended May 31st, 2023, total net merchandise sales exceeded $3.2 billion and revenues reached almost $3.3 billion. Net merchandise sales increased by 8.7% or 9% in constant currency and comparable net merchandise sales increased by 6.5% or 6.7% in constant currency for the nine 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.
All of our markets in Central America had positive comparable net merchandise sales growth. Our Central American segment contributed approximately 650 basis points of positive impact to our total consolidated comparable net merchandise sales for the quarter. The Costa Rica Colon appreciated significantly against the dollar as compared to the same three 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.
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 nine 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 net merchandise sales for the quarter. In terms of merchandise categories, when comparing our third quarter 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 food service and bakery departments.
The decrease in our non-foods category was primarily because in the third quarter 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. Membership accounts grew 2.2% versus the prior year to 1.79 million accounts. Platinum Membership accounts are 8.6% of our total membership base as of May 31st, 2023, an increase from 7.1% as of May 31st, 2022. We continued with a strong 12-month renewal rate of 87.1% and our membership income was $16.7 million, an increase of 8.4% over the same period last year. Total gross margin for the third quarter of fiscal year 2023 as a percentage of net merchandise sales increased 110 basis points to 15.3% versus 14.2% in the third quarter of fiscal year 2022.
In total dollars, total gross margin increased $21.5 million or approximately 15.1% versus the same quarter of the prior fiscal year. The 110 basis point increase was primarily due to significant markdowns we took in the third quarter of fiscal year 2022. Total revenue margins increased 120 basis points to 16.8% 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 third quarter of fiscal year 2023 decreased compared to the 16.1% rate in the first half of fiscal 2023. This decrease is due to a variety of factors, including the 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. 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. Freight 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.
Freight rates decreased from approximately $3,900 per container last quarter to $2,900 during Q3 due to slowing transpacific demand from US imports. SG&A expenses increased to 12.9% of total revenues for the third quarter of fiscal year 2023 compared to 12.4% for the third quarter of fiscal year 2022. Warehouse club and other operations expenses made up about 40 basis points of this increase. The net effects of depreciation of the Colon in Costa Rica and devaluation of the peso in Colombia on expenses contributed approximately 20 basis points of this increase. 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 third quarter of fiscal year 2023 compared to 3.0% for the third quarter of fiscal year 2022.
The 10 basis point increase was 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 $43.1 million. Operating income for the first nine months of fiscal year 2023 increased 19% from the same period last year to $152.4 million. In the third quarter of fiscal year 2023, we recorded a $1.5 million net loss in total other expense, net, which includes the net impact of interest expense, interest income and other expenses, which primarily consist of our foreign currency exchange losses. This compares to a $4.7 million net loss in total other expense, net, in the same period last year.
The primary contributor to this $3.2 million decrease in other expense, net, is an increase in interest income of $2.7 million, 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 third quarter 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 the CEO compensation. For the nine months ended May 31st, 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 third quarter of fiscal 2023 was $29.6 million or $0.94 per diluted share, compared to $19.3 million or $0.62 per diluted share in the comparable prior year period.
Net income for the first nine months of fiscal 2023 was $93.8 million or $3.01 per diluted share compared to $81.2 million or $2.63 per diluted share in the comparable prior-year period. Adjusted net income for the third quarter of fiscal 2023 was $31.9 million or an adjusted $1.02 per diluted share. Adjusted EBITDA for the third quarter of fiscal year 2023 was $63.2 million. Adjusted net income for the first nine months of fiscal year 2023 was $103.3 million or an adjusted $3.32 per diluted share compared to adjusted net income of $79.8 million or an adjusted $2.58 per diluted share in the comparable prior-year period. Adjusted EBITDA for the first nine months of fiscal 2023 was $215.6 million compared to $178.3 million in the same period last year.
Moving on to our strong balance sheet, we ended the quarter with cash, cash equivalents and restricted cash totaling $236.4 million. From a cash flow perspective, net cash provided by operating activities totaled $184.7 million for the nine months ended May 31st, 2023 compared to net cash provided by operating activities of $64.3 million for the same prior-year period. Shifts in working capital generated from changes in our merchandise inventory and accounts payable positions for the nine months ended May 31st, 2023 contributed $91.1 million of cash flow compared to the same prior-year period. Average inventory per club decreased by approximately $0.5 million or 6% and inventory days on hand decreased by approximately four days or 9% for the third quarter of fiscal year 2023 versus the same period in 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 $136.4 million for the nine months ended May 31st, 2023 compared to the prior year, primarily as a result of the net increase in purchases of short-term investments, primarily in the US compared to the same nine-month period a year ago. Net cash used by financing activities during the nine months ended May 31st, 2023 increased by $24.4 million primarily the result of a net decrease of proceeds from short-term borrowings compared to the same nine-month period a year ago. During the third quarter of fiscal year 2023, the Honduran Central Bank began limiting the availability and controlling the allocation of US dollars for conversion from Honduran lempiras to US dollars.
As of May 31st, 2023, our Honduran subsidiary had approximately $15.9 million worth of cash and cash equivalents denominated in lempiras, which cannot be readily converted to US dollars for general 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 million of the company's common stock. This program underscores our confidence in the business and our expectations for growth, altogether 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 fourth quarter.
Now onto our growth drivers. Starting with real estate, we are truly excited to have opened our new San Miguel club in May, which is our third 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 three warehouse clubs under construction. 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 second 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 three new clubs are opened, we will be operating 54 warehouse clubs, and we are actively exploring additional locations as well. Finally, we are currently remodeling and expanding four 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 efficiencies and reducing supply chain risks 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. As we've highlighted in previous calls, our private label Member's Selection brand continues to be a high quality, good value alternative in these times of high inflation and foreign currency fluctuations. During the first nine 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 provide four free eye exams with every membership and we performed over 35,000 eye exams during the quarter.
Optical is also an important social responsibility contributor to our local communities and in partnership with Price Philanthropies' Aprender y Crecer vision program, eye exams are performed by PriceSmart optometrists and Price Philanthropies purchases the glasses from our optical centers and both the exams 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 eight of our warehouse clubs in Costa Rica and two warehouse clubs in Panama and expect to open pharmacies in the remaining five clubs in Panama during fiscal year 2024. With respect to audiology centers, during the quarter, we opened 10 new audiology centers, with 24 centers open at the end of May 2023.
We expect to open an additional eight centers in fiscal 2024. Our third growth driver is our omnichannel 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 pricesmart.com and our app and third-party last-mile delivery services to drive online sales. During the third quarter, total omnichannel 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. 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 31st, 2023, approximately 58.6% of our members had created an online profile with pricesmart.com and 15% of our total membership base has made a purchase on pricesmart.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 omnichannel experience and additional value to our members. It is also encouraging that 9.5% of our membership accounts are enrolled in our auto renewal option, which is up a 150 basis points from 8% in the comparable prior-year period as this brings added predictability to our membership income.
During the third quarter, we released our comprehensive Environmental and Social Responsibility Report for fiscal year 2022. This ESR 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.pricesmart.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 and practices that aim to responsibly use natural resources. For instance, we are currently operating five recycling centers, three in Honduras and two in Guatemala.
On average around 12,000 pounds 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 pricesmart.org. 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 four weeks ended July 2nd, 2023 were up 7.9% or 4.8% in constant currency. The tailwind from the strength of the Costa Rica Colon continues to offset the drag from the weakness in the Colombian peso. We've also seen significant improvement in the Colombian peso exchange rate with the US dollar the past couple of months, especially in June, which has meant that Colombia FX has had less of a negative impact on US dollar sales during the month. 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 Six Rights of Merchandising, arms us with the tools and can-do attitude to deliver on the value we promise 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?
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