PriceSmart, Inc.

Good afternoon, everyone, and welcome to Price Smart, Inc.' 's Earnings Release Conference Call for the second quarter of fiscal year 2022, which ended on February 28th, 2022. After remarks from our company's representatives, Ms. Sherry Barambegi, 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, Friday, April 8th, 2022. A digital replay will be available following the conclusion of today's conference call through April 15th, 2022 by dialing 1-877-344-7529 for domestic callers or 1-412-317-0088 for international callers and by entering the replay access code For opening remarks, I would like to turn the call over to Price Smart's Chief Financial Officer, Michael McCleary. Please proceed, sir.

Thank you, and welcome to the Price Smart earnings call for the second quarter of fiscal year 2022. We will be discussing the information that we provided in our earnings press release and our 10-Q, which were both released yesterday afternoon, April 7, 2022. You can find these documents on our investor relations website at investors.pricemart.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, April 8, 2022. 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 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 Sherry Baranbegi, Pricemart's Chief Executive Officer.

Thank you, Michael. Good day, everyone, and welcome to our second quarter fiscal 2022 earnings call. We've had quite a quarter, and with net merchandise sales surpassing a billion dollars for the first time and membership setting historical records, We're feeling very positive about our results. During the second quarter, our total membership base has grown to more than 1.7 million accounts. That represents growth of 7.3% versus last year. Our membership 12-month renewal rate was 89.8%, reaching our highest rate ever, our highest renewal rate ever. Membership income was $15.1 million, an increase of 9.2% over the same period last year. Our headline numbers all grew over the prior comparable period. In terms of the bigger picture, I think it's also worth noting that the results of this quarter are being compared to a quarter last year in which significant growth was achieved relative to the same quarter in FY20 versus the same period last year. Net merchandise sales increased by 12.6%. Comparable net merchandise sales increased by 10.3%. Operating income grew 7.4%, and that's despite currency headwinds, which impacted total and comparable net merchandise sales by 3% and 2.7%, respectively. Earnings grew 11.4% to $31.5 million versus 3%. 28.2 for the same quarter last year. Driven by strong sales, the team at Pricemart has delivered record earnings per share of $1.03 during the second quarter. This is versus 92 cents in Q2 of last year. So now let's look forward a little bit into Q3 during March, ending on March 31, 2022. Total net merchandise sales were $338 million, an increase of 9.9% over the same period in the prior year. And comparable net merchandise sales for the four-week period ending March 27, 2022 week period increased over 9.8% compared to the comparable period last year. We're pleased with the results and believe that our investments in the business and our focus on our pillars of growth are supporting these results and the momentum that we continue to build. Our cash flow is robust. It enables us to accelerate plans and investments to continue to drive growth. And importantly, it enables us to improve how we engage with, how we serve, and how we learn from our members. especially during the most challenging of times, which include the impacts of the pandemic, which continue, significant supply chain disruptions, which are faced by many of us in this industry and others, the effects of the war in Ukraine, and the challenges of an inflationary environment that we haven't seen in decades. Our cash position also ensures that our employees are properly cared for, that they have the opportunity to grow professionally, that they receive competitive wages and excellent benefits. As a result of many of these factors and the performance of the company, in the second quarter, our board of directors increased the annual dividend by 22.9% to 86 cents per share, up from 70 cents per share last year. So now I'd like to turn to our growth drivers. On our last earnings call, I spoke to you about the three major drivers for growth for our company. The first, real estate, which includes opening new clubs, making investments in our distribution network, making sure that we're strategically located in the right places with the right facilities and equipment so that we can maximize efficiencies in the supply chain. The second driver of growth was continually developing new and improving on old ways to enhance the value of the Pricemark membership. And the third driver of growth was to drive incremental sales for the company through our Pricemark.com platform and improved digital capabilities yielding important data to drive incremental sales for the company whether the sales happen online or in clubs, because we believe these two environments should be mutually supportive and synergistic. The Pricemark.com platform and other digital capabilities also allow us to potentially expand in existing markets and or enter new markets, possibly without the immediate need for traditional brick-and-mortar locations and the huge investments that go with that. Starting with real estate, now I want to update you a little bit on what we've done on that first driver of growth. On Monday, we plan to be celebrating our 50th club milestone as we open our second club in Jamaica, located in the area of Portmore near the capital of Kingston. We expect this club to do well and take some pressure off of the Kingston location, which is a very high-producing but impacted club. A good sign is we're already seeing new signups well exceeding our plan for Fort Moore, which indicates to us that this market has significant uncaptured potential. Also, I'm pleased to say that growth by way of a new club in Jamaica is also growth for our people and upward mobility for them professionally. Approximately 18% of our employees in Jamaica were promoted as a result of the new Fort Moore clubs. With regard to real estate, again, we also recently announced that construction has begun on our second warehouse club in Medellin, Colombia. It's located in the El Poblado area. We expect to open in the summer of 2023. We've been searching for a suitable site in this densely populated urban area for a long time. Kudos to the real estate and construction teams for making it happen. We're optimistic that our value proposition will resonate with consumers in this area due to its demographic characteristics, and this will be our 10th club in Columbia. In addition to our curated selection of high-quality merchandise at great prices, both of these new clubs will be outfitted with our additional services in the wellness area. specifically optical and audiology. As I mentioned before, we're progressing on a very active pipeline for new locations in terms of clubs, and we will be able to share more about that as plans and permits are finalized. Another part of our real estate strategy focuses on the important role of our distribution facilities to optimize efficiencies and strive to reduce risk. We expect to soon have a distribution center in Trinidad that could also be used to export merchandise to our other markets. We're actively identifying opportunities for a new distribution center in northern Central America, and we're working on expanding our distribution footprint in Colombia. We also are increasing our produce distribution centers, or we refer to them as PDCs throughout the company. We have four in operation at this time, and they include Costa Rica, Panama, the Dominican Republic, and the most recent one in Colombia, which we opened last month. These PDCs not only support local agriculture and create jobs in and around our communities, but they also allow us to source directly and provide fresh produce to the clubs, allowing our members to benefit from more competitive pricing and also reducing costs. spoilage, and other waste that leads to greater efficiency. We're targeting two additional PDCs at this time, and they're likely to be in Guatemala and in Trinidad, but they are currently still in the planning phase. With regard to logistics and distribution, again, a key area of real estate and the importance of real estate for us, as everyone knows, supply chain disruptions remain pervasive, whether because of COVID or oil prices or other factors, especially with regard to those exports from Asia. This has adversely impacted our suppliers' ability to deliver merchandise and our ability to secure transportation services from Asia and within the United States. But fortunately, our overall supply chain logistics network has remained relatively stable and reliable in its ability to replenish merchandise in our clubs. Effective collaborations and careful planning all throughout our supply chain has resulted in our ability to maintain good in-stock positions during our second quarter. Average freight costs from Asia were also lower during the second quarter versus the first quarter of fiscal year 2022. But, you know, we have to remain proactive and vigilant. We certainly believe that we're still facing a continuing volatile and unpredictable future in terms of the overall supply chain. We've recently added a new contracted carrier to our network that is expected to further reduce the average freight rate during the third quarter of fiscal 22. And we continue to remain very focused on this very important part of the business in these times. We're also increasing our efforts to nearshore select items without compromising on any of our quality or value, which will also allow for more reliability and diversification of our supply chain. Some examples I can share with you are textiles and domestics. For example, we're sourcing wonderful quality pillows from Guatemala and towels from El Salvador. We're looking at sparkling water, pork, and frozen fruits and vegetables, just to give you an example. In addition, we are actively including local and regional suppliers and including them in our bidding process as we develop additional products that will carry our private label brand member select. A recent example is that... is the selection of a local vendor in Trinidad for our member-select copy paper that will be sourced from Trinidad and is expected to be exported to all of our markets. Other than the benefits I've mentioned, that alone creates an export item that is developed largely utilizing TTs while generating income that is more easily converted to U.S. dollars. So this specific example also contributes to helping in our situation in Trinidad with TTs that may not be readily exchangeable to U.S. dollars. So we are also exploring additional alternatives and ways that we can replicate this type of business initiative to be able to solve for many varied challenges that we're facing. You know, I have to congratulate our merchandising and distribution and logistics team and their great collaboration in handling these challenges and turning them into opportunities to make our business even stronger despite the additional challenges. So now let's turn to what we're doing to enhance the benefits of a Pricemart membership. First, we are continuing to expand our private label offerings. During the first six months of fiscal 22, our private label sales represented 23.5% of our total merchandise sales. That's up 200 basis points from 21.5% in fiscal year 2021. That is a 9.3% increase in penetration of total sales versus FY21 for our private labels. There are several benefits to investing in our private label offering, in addition to what I've shared above. The opportunity to offer the same or better quality merchandise often exists at a lower price when we develop our own private label merchandise. We've got greater control of the supply chain. When we source locally or regionally, there are potential savings in transportation. Local sourcing for private label can generate more jobs in our market. We also have, in some cases, the benefits of a natural currency hedge. It's a differentiator for Price Mart because Price Mart's private label member select is not available through other major retailers in the countries where we operate. And sourcing our own merchandise gives us the opportunity to squeeze out inefficiencies and is also in line with one of our goals to increase our direct participation in the production to ensure our high-quality standards are as good, if not exceed the leading brand product. Our private label sales and domestics have grown over 180% through our new member-select towels, pillows, sheets, and blankets. We've also introduced new SKUs of cookware, food storage, mixing bowls, Those have been very well received and have shown the kind of sales that give us confidence that we're on the right track with expanding our private label offering. As I said before, our brand carries significant goodwill and trust amongst our members. It communicates high standards, reliability, and value. Our private label team of merchants has been another key area of investment for the business. because talent is important. Over the past two years, we've expanded this team from six to 11 people. Although we still maintain a limited number of SKUs as part of the overall business discipline, the SKUs we have been adding or replacing have contributed to this overall delivery of sales of $230 million during Q2. So job well done by our private label team and the related teams during Q2, and we plan to grow even more with our private label product development, sourcing, and sales. We believe our wellness program is another value driver for our membership. We currently have decided to expand audiology to about 30 locations by the end of this fiscal year and to about 40 by the end of Q2 next fiscal year. Our decision was driven by membership interaction, partly due to the free hearing test that we provide to our members and the early determination that audiology appears to be a valuable contributor when analyzing renewal rates and the average annual purchases amongst members who utilize our services. In optical, we currently have 45 locations with optical centers and expect to have 47 open by the end of this fiscal year. This service provides up to four free eye exams with every membership. We also offer a broad range of quality lenses and frames at highly, highly competitive prices in our market. For the period ending in February, we've seen total growth in optical sales of 79% over the same period last year and year-to-date comparable growth of 15% over the same period last year. We've also opened pharmacy centers in all eight warehouse clubs in Costa Rica, and we expect to have pharmacy centers in all of our Panamanian clubs by the end of fiscal year 2023. We continue to study pharmacy for additional countries as each country varies in dynamics and regulatory requirements. So now I'd like to turn to our third driver of growth, which is our digital environment that drives engagement and sales. and our digital channels, which include Pricemark.com. Total e-com sales represented 3.5% of total merchandise sales, and delivery continues to grow as a larger proportion of online sales. Our digital capabilities are accelerating and driving growth. When comparing this second fiscal quarter versus the comparable prior year period, online sessions increased 8%, leading to an increase in digital orders, online orders, of 12%. Meanwhile, the average online order value increased 13%. Pricemart.com's sales as a percentage of net merchandise sales increased 40 basis points during the second quarter versus the comparable prior year period. Our total sign-ups, which is also an area where we're seeing benefits of the ability to engage online using digital tools with our members. Of our total sign-ups, 50% of new memberships were purchased online during the quarter, and online renewals represented 4% of our total renewals for the company. During the quarter, we had more than 9,000 email interactions, more than 65,000 chat interactions with members, which we all believe further improves our ability to engage with the customer, provide better customer service, and learn from what our members are telling us. As of February 28, 2022, approximately 42% of our members have created an online profile on Pricemark.com. We've effectively gone from about zero to almost half of our base having an online digital credential in less than two years. 14% of our total membership base has made a purchase on Pricemart.com. I'm sorry, I believe it's 15%. Michael, will you correct me on that?