Pricesmart, Executive Insights: Target Gross Margins, Membership Fees

On Tuesday, Pricesmart, Inc. (NASDAQ:PSMT) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Target Gross Margins

David King – Roth Capital: Maybe just kicking it off a bit here, understanding that your long-term strategy to pass along efficiency benefits, et cetera and generally lower prices and higher volumes, with that in mind, can you talk a bit about your target gross margins? I know gross margins dropped in the quarter and sounds like some of that was from the implication cost in the Colombia, but I’m just trying to think about that in the context of the lower end of historical levels and how should we think about that versus the long term targets essential for further improvement in the coming quarters?

John M. Heffner – EVP and CFO: I think you correctly stated our model, that to continue to reduce prices, and they are in our business model as we can leverage our operating expenses below gross margin to pass that back in lower prices, which resulted in lower gross margin. So I think on a go-forward basis, our intentions to continue to lower prices get the expense leverage or operating expenses as we grow sales, and we would probably see lower margin percent going forward. I don’t think I have a specific target in mind. We tend to focus more on operating margin, and so gross margin could come down as we get that leverage in operating expenses.

David King – Roth Capital: Maybe then switching a little bit then for the operating margin, so on the SG&A side, you talked about that, you talked about the factors that drove the increase this quarter, but it generally seems to bounce around a lot as we move over the course of the year, pretty material impact on earnings. Is there a target there that you manage to and how should we think about that as far as how it changes seasonally, if at all?

John M. Heffner – EVP and CFO: I think the bigger impact to earnings in the current quarter were a thing that happened below operating income, and that operating income itself I think operating income was at 5.1% operating margin, was 5.2% a year ago and I think we took that charge here in the quarter which other than that, we would have actually seen I think an increase in our operating margin percent, but I think it’s sort of in the range where we expect to be and where we are right now, I think our margin might have been a little higher in Q2. We have the holiday seasons and significantly more sales (indiscernible).

David King – Roth Capital: Then, another question just on your – typically just prices to maintain a certain margin that you talked about given what we’ve seen in terms of maybe recent dollar appreciation, but then also in the context of declining oil prices, shipping costs, et cetera, how do you feel about the need to raise price at this point and did we see any of that in the quarter at all?

Jose Luis Laparte – CEO and President: Not at all. Actually, we – any business that we keep finding, we just keep lowering prices. We haven’t had any specific actions on the contrary where we keep reacting as aggressive as possible on reducing our prices. Any benefit we can take, we just take it down to lower our merchandise price.

Membership Fees

David Strasser – Janney Montgomery Scott: First question is, as you raise the membership fee, how should we be thinking of the flow-through of that through the P&L? Will some of that be reinvested back at the pricing? Will a lot of that flow through back — straight through to the bottom line?

Jose Luis Laparte – CEO and President: Yes. David. Definitely, the principal of raising the membership fees, obviously we did though the fundamental parts of our business model and we apply all that to margin as a way of reducing prices. This was a $5 increase, and as I mentioned in my script we will channel back in to lowering prices for our members. So, there is any other concept, but just after eight years of not moving anything in our membership, we felt it was the right thing to do, but again we keep lowering our prices in an effort to keep showing our members a value for that $35 membership.

David Strasser – Janney Montgomery Scott: So, I should assume that most of that will be reinvested back into pricing?

Jose Luis Laparte – CEO and President: Correct, that’s how it would be.

David Strasser – Janney Montgomery Scott: When you’re looking at member – when you’re looking at membership and new members, how do you count membership numbers for clubs not opened yet? It looks like fan members has gone down little bit, are you – I’m just trying to understand the numerator and denominator there?

John M. Heffner – EVP and CFO: We don’t – while we are selling memberships right now for our new club in Cali, we wouldn’t count those members until we open the club.

Jose Luis Laparte – CEO and President: Yeah, right now — even though we started two weeks ago, those are not counted in our total count of membership accounts.

David Strasser – Janney Montgomery Scott: So then spend for members has actually gone a little bit negative. I mean, it’s a little bit lower, any reason why that’s happening?

John M. Heffner – EVP and CFO: I am not sure what you’re looking at.

Jose Luis Laparte – CEO and President: We don’t have that sale perception, it’s partially consistent. It is not growing at a high rate. We haven’t seen that outstanding – average outstanding for members really suffering at all. They are actually doing more transactions that we have a growth in transactions, but we haven’t seen any decrease in membership spending at all.

David Strasser – Janney Montgomery Scott: I guess the last topic looking at Colombia, trying to understand, and you may have talked about this a little bit, I’m just trying to understand the bigger picture, how the expense structure there and how much leverage is there as you get into clubs two and three on the existing infrastructure in Colombia and as you kind of go through the P&L and you kind of try and back out what the strong avails are, assuming similar type gross margin, you’re still seeing some deleverage there. So, I imagine a lot of that has to be about infrastructure in the Company that’s been built out, and when do you think that becomes a leveraging from a deleveraging on that infrastructure?

Jose Luis Laparte – CEO and President: Well, Definitely from an operating perspective, the infrastructure we have in place in Colombia is equivalent to what we will have on countries with three or four quarters now. Obviously depending on a number of factors including in the growth of sales, in the new clubs once they open, the pace of finding new clubs and the cost of those new clubs, we will see a different profitability level within Colombia, but I guess, we definitely have the infrastructure in place for our future growth, for adding more clubs and we’re going to start seeing some good leverage as we opened a second one in this fall and a third one early in 2013.

David Strasser – Janney Montgomery Scott: But there’s no reason that Colombia should be a less profitable business other than the rest of the business if anything with the volumes– it could be more?

Jose Luis Laparte – CEO and President: No, there’s not any reason at all. As we see Colombia is being behaving different from the other markets. The indication with the performance of the first one is as good a performer as the other economies.