PRICESMART. July 8, :00 am CT

Transcription

1 Page 1 PRICESMART July 8, :00 am CT Operator: Good day and welcome to PriceSmart Inc s Earnings Release Conference Call for the third quarter of fiscal year 2016, the three-month period ending on May 31, All participants are currently in a listen-only mode. 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 getting an opportunity to ask questions as time permits. To do so, please press 1 on your phone at any time and you will be placed into a queue. As a reminder, this conference call is being recorded on Friday, July 8, A digital replay of this call will be available through July 31, 2016 by dialing 1 (888) for domestic callers or for international callers. The passcode is I would now like to turn the conference over to John Heffner. Please go ahead sir. John Heffner: Thank you and welcome to our earnings call for the third quarter of fiscal year We will be discussing the information that we ve provided in our earnings press release which we released yesterday July 7, 2016 along with our 10Q. The earnings release also included information about our net warehouse and comp sales for June.

2 Page 2 You can find both the press release and the 10Q filing on our website, 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 risk and uncertainties that could cause actual result to differ materially including the risks detailed in the company s annual report on Form 10K for the fiscal year ended August 31, 2015, filed with the Securities and Exchange Commission on October 29, 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. Jose Luis Laparte: Good morning everyone and thank you for joining us today. I will begin my remarks focused on our third quarter results and will follow that with some comments about June sales which was also included in our press release. And then some additional comments about our significant activities happening in PriceSmart. For the third quarter of fiscal year 2016, we reported net income of $16.8 million or 55 cents per share. This compares to $21.2 million or 70 cents per share for the third quarter of fiscal year a reduction of 15 cents per share.

3 Page 3 That reduction in earnings from the year-ago period is related to -- number one -- a larger year on year loss in Colombia of $1.5 million equivalent to five cents per share. And number two, less net income generated from our non-colombia operations in the period compared to the third quarter of last year on a 57 basis points reduction in gross margin as a percentage of net warehouse sales and a 1.4% sales growth. Starting with Colombia, we have been experiencing for the past few quarters the strong dollar versus the Colombian peso continues to have a measurably negative effect on our business. The average exchange rate during the most recent quarter was 3,035 pesos to the dollar. For the same period a year ago, that rate was 2,503 pesos, a difference of 21.3%. These impacts I reported in US dollars results of our business in Colombia when consolidated into (our global financial). It also costs us the price of imported products to increase with a corresponding reduction in the demand for those products in the market. Reported US dollars sales for Colombia declined 20.7% in the current quarter compared to a year ago. When measuring pesos, the sales decline was less -- at -3.8% -- but still an overall reduction. While it has been our goal to have positive local currency warehouse sales growth in Colombia, we did not achieve that in that quarter largely due to the sales decline for imported products. Sales of merchandise that we imported into the market declined 16.5% while sales of locally acquired merchandise increased 13.2%. As I have mentioned on our prior calls, we have been actively working to broaden our offering of high quality local resource merchandise, some of which -- like towels and detergents and others - - we have been importing.

4 Page 4 While these merchandise shift contributed to the reduction in imported sales, it is clear that the higher prices of US dollars cost-based imported items are impacting consumer demand for those items. We have been very aggressive with our margins in an attempt to spur demand and provide value to our members despite the currency challenges. These lower margins -- they are 154 basis points below the same period last year and 458 basis points below the same period two years ago when the exchange rate was approximately 1,958 pesos to the dollar. Coupled with the impacted level of sales volume in the current environment, continues to drive an operating loss in our Colombia sector. Excluding the Colombia segment, net income for the third quarter was $18.9 million or 62 cents per share. Last year, it was 72 cents per share -- a net difference of 10 cents per share. Lower warehouse margins as a percentage of sales coupled with -.4 comp sales for the 13-week period were the primary drivers of lower overall profits compared to a year ago for the non-colombia segment. We did not see a strong spring seasonal sales -- a key driver of our overall sales in our third quarter. Net warehouse sales excluding Colombia grew 4.4% but that included two additional warehouse clubs. Our index stocks were in good shape and as I travelled to the club sites I saw some exciting merchandise at a good value. There was generally soft demand in a number of larger markets that have been routinely doing quite well. Among them, Panama and Costa Rica and Dominican Republic. Trinidad is experiencing a very difficult economic environment tied to its dependence on oil and gas exports as a source of foreign currency with GDP reported and registering negative growth.

5 Page 5 In February, the government greatly expanded the number of products which now are subject to VAT effectively raising prices for consumers on more than 1,200 items by adding a 12.5% VAT. Things like juices, sodas, snacks, and even electronics like laptops and computers. As a result, we saw a negative sales grow in a market that experienced comp growth of approximately 8% and 3% in the first two quarters of this fiscal year. On a positive note, Honduras, Guatemala, Jamaica, El Salvador, and Aruba posted good sales performance. Margins, excluding Colombia of 14.3% of sales were 57 basis points lower than last year and below where we have targeted them for the period. We did not perform well in a number of areas and I see opportunities to improve. Merchandise markdowns were higher than a year ago resulting from weaker sales than we had anticipated. Also we can improve in the end cap and vendor support area which contributes positively to margin. Coupled with this, a reduction of our sales of imported merchandise largely related to Colombia resulting in higher opportunities to regional costs to our logistic network which contributed to lower margins in the quarter. With the low level of sales growth in the quarter, we were not able to leverage our operating expenses which included two additional warehouse clubs, further eroding our non-colombia (EBIT) margin, resulting in an (EBIT) margin as a percent of sales of 4.7 versus 5.6% last year. While economic conditions in certain non-colombia countries provided headwind, our comp shops look good and our merchandise inventory is clean as we head into the final quarter of fiscal year I view many of the issues in the third quarter as related more to areas where we can work to improve our internal operations and not caused by external market forces such as a significant competitive prices of pricing - competitive or pricing pressures.

6 Page 6 Membership income for the consolidated company increased 2.6% -- a membership account growth of 3.3%. We finished the quarter with 1,470,000 accounts and a 12-month renewal rate of 80%. Excluding Colombia, the 12-month renewal rate was 87% -- consistent with the past few quarters. The overall 12-month renewal rate is still affected by the large number of non-renewals we experienced in Q2 in Colombia due to the anniversary of the opening of three warehouse clubs in the fall of We have some improvement of our monthly renewal rates in Colombia and we re working to further improve them to a level that we experience in other markets. There are various factors which can impact renewal rates -- some of which can be unique to Colombia. But it is clear that not all of our Colombia members are recognizing the values we offer. This is something we need to work on. However, during Q3, we saw an ongoing stream of new member sign-ups with Barranquilla, Bogotá, and Medellín continuing to lead our clubs in that metric. With regards to expansions, we are making great progress with our construction of our new warehouse club in Chía, a municipality in the northern suburb of Bogotá. That club is nearly complete and our membership sign-up office is open and adding new members in anticipation of our opening in early September. We are nearly finished with expansion of our club in Barranquilla, adding approximately 8,000 square feet to the club and a parking deck to better accommodate the needs of our members. In El Salvador, we are doing something similar to Barranquilla -- expanding the warehouse club and adding a parking deck to our Santa Elena club in that city. This work has recently started and we expect completion by early November in time for the Christmas holiday shopping season.

7 Page 7 We have several additional locations on the review to determine what we could do to expand them either in their current property footprint or by acquiring adjacent land when available. We will announce individual projects of this nature as we move forward. There are a number of things that we re doing with our US distribution operations as well. As announced a few months ago, we entered into an agreement to acquire a building in Miami into which we will move much of our current distribution center. That construction has started and we expect it to be completed in the spring of next year Our cold DC will remain in the current building even after we move other elements of the operation to the new site to accommodate the growing volume of our fresh business who are currently expanding the cold DC by about 30,000 square feet to approximately 100,000 square feet. These are exciting times for our distribution and logistics operation which is a key component of our success in this business. These actions will help improve the flow of goods to our countries and improve our cost efficiency. In Colombia, our goal remains to grow that business and yield results similar to what we have seen in other markets. It will not happen overnight but the foundation for success is there. Colombia has the highest numbers of members per club of any of our countries -- including our most successful countries like Costa Rica -- and the highest rate of new member sign-ups. However, it also has the lowest spended per active member and the lowest renewal rate. Our comp shop tells us that we re providing good value on the merchandise we offer. Our challenge is to increase the average visit and spending for those people who are already our members. By doing that we will increase the value of our members are receiving from their membership (appraisement), improve our renewal rates, and increase our sales volume. This will also provide us an opportunity to improve our margins over time as higher sales volume will allow us to buy better and drive further internal cost efficiencies.

8 Page 8 With respect to our non-colombia market, our plan is to better manage our margins and find operating cost leverage -- even in an environment of single-digit sales growth. My last comment is related to June sales which we also reported yesterday. We finished with a total growth of 1.8% and a comparable growth for the four weeks ended June 26, 2017 of a - 1.9%. Excluding Colombia, total sales growth for the month was 4.4% and the four-week comp was -.1%. ((Inaudible)) the first month of our fourth and last quarter I will have to - I would like to add some extra comments. Some markets had a good performance -- Guatemala, Honduras, Aruba, Jamaica. Others like Trinidad and Costa Rica were still a little soft or negative in growth. For the remaining of this fiscal year, we have clean and good inventories that will help us achieve our margin goals. The merchandise plan and the preparation we have for the summer months are in place and we believe we are in a good position to maximize our sales and execute the plan. All in all, as I said in my opening remarks, this was a challenging quarter for us. We had some difficult external factors definitely impacting our performance, but more importantly we have some things that we can improve upon to yield a better overall result. This is our focus going forward. Thanks again for joining us today. After John s remarks, we will take care of your questions. John Heffner: Thank you Jose Luis. Let me briefly touch on a few additional items with respect to our financial results for the third quarter. Consolidated warehouse operation expenses grew 3.3% from the year earlier period. The expenses in this quarter included two - the expenses associated with two additional warehouse clubs in the cost space. The translation of the Colombian peso to the US dollar, however, had a positive overall effect.

9 Page 9 Net warehouse sales grew 1.4% and as a result, warehouse operations expense increased 17 basis points as a percent of sales. The expenses associated with the company s general and administrative activities increased 30 basis points as a percent of sales in compared to the year earlier period largely related to costs associated with our Buying and Information Technology Departments as well as the ongoing recognition of higher deferred compensation expense for stock awards granted in the first fiscal quarter of this year. Foreign exchange transactions and re-valuation of monetary assets and liabilities resulted in a net $222,000 currency loss in the quarter compared to $311,000 lost last year. We have seen some recent increased volatility and de-valuations in exchange rates in several countries other than Colombia. Countries like Honduras, Trinidad, Dominican Republic, and most recently, Costa Rica. The effective tax rate over the period was 35.2% compared to 33.7% last year at this time largely due to the higher loss we recognize in Colombia. The company ended the quarter with a cash position of $202.6 million, an increase of $45.5 million since the beginning of the fiscal year. Net cash generated from operations was $112 million with improved working capital contributing $13 million. Investing activities during the first nine months of $51.9 million included the completion of the warehouse club in Managua which we opened in November and the construction activity for the Chía, Colombia club which is nearing completion. In addition, there was spending for maintenance cap ex and some larger expansion projects like Barranquilla. From a financing perspective, the only item of significance is a semi-annual dividend which we paid in February which used $10.6 million. With that, Jose Luis and I would be happy to take your questions. (Amy), do I turn things over to you at this point?

10 Page 10 Operator: Yes sir. Thank you and as a reminder, if you would like to ask a question, please signal by pressing Star 1 on your telephone keypad. If you re using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press Star 1 to ask a question. We ll pause for a moment to allow everyone an opportunity to signal for questions. Our first question is from Dave King with Roth Capital Partners. Please go ahead sir. Dave King: Thanks. Morning guys. John Heffner: Good morning. Dave King: I guess -- first off -- in terms of the warehouse club margin decline in the quarter. Can you talk about the components there? Obviously, Colombia was down I think 154 basis points or so. But you also then had inventory markdowns, you know, higher per unit distribution costs, you know, are you able to quantify the reduced end cap activity at all? And then, you know, of the 154 decline in Colombia, did those things weigh there as well? I would assume some of them did. So, you know, some more color there I think would be helpful. Jose Luis Laparte: Yes, Dave. I can tell you that definitely a big component was warehouse markups that we had. Obviously, we were expecting a stronger spring sales and those didn t happen. I know we have to get rid of some inventory -- part in Colombia definitely. And the rest obviously in other countries where we found some soft nets. So I will say that the biggest component was definitely the markdowns, our performance. We went a little bit more aggressive on our general projections and that definitely affected. I wouldn t

11 Page 11 say that the other component of end cap of ((inaudible)) was as important. I will probably put more weight definitely to the fact that we did have important markdowns and that s a correction that I think we made already for all the inventory. I think we have clean inventories as I mentioned as few minutes ago entering into the last quarter of this year. And we shouldn t see that affecting us going forward. I think we are in a good position now and definitely will create some good value for the members out there but that respective impact that it had in our sales or our profits actually for this third quarter. Dave King: Okay. That s good color then. So and then if I then think about that I think when we talked last quarter on Colombia, you know, the thought was I think at that point, you know, Colombia warehouse margins were down like 130 something basis points. And then obviously that decline accelerated a bit this period. I guess -- and then Jose Luis you commented today that you re expecting to kind of hit your goals. I guess, how should we be thinking about, you know, warehouse club gross margins going forward, you know, given last quarter I think that you said that you would expect that the, you know, that degradation might abate. Is that the new assumption from here assuming that the inventories are cleaner? I guess just, you know, some context I think would be helpful. Jose Luis Laparte: Yes. Definitely we will have a good improvement. Even with Colombia assuming the currency helps us as it s been pretty much consistently at an average of 3,000 pesos. I think we will be able to sustain a lot of our margins and obviously without the need of increasing prices, no? During Q3 we have definitely more activity and price changes especially in Colombia also because currency was still moving. And it didn t help.

12 Page 12 I think as we continue with this quarter, there s no reason why we shouldn t accomplish our margin goals and hopefully we don t have to raise anymore prices, no? Especially in the Colombia market I think the currency is getting more stable and that hopefully will help obviously how we price our imports. In the meantime, we re continuing our process which also helps margin. Let me I guess talk a little bit about local items that definitely - that ((inaudible)) of some items that we have had during the past year obviously helps lowering prices of merchandise and getting members obviously good values that eventually will help in our sales and margin (costs), no? It s a combination of things that -- sales of imports we need them to recover faster so that we can see increase in our merchandise sales and imported items. As I mentioned, we had a decrease of 16% and then local merchandise have an increase of 13%. We want to continue with that increase on local merchandise but hopefully with the currency more stable, we will also see an increase on US goods as members probably get used to those new currency rates. Dave King: Okay. Actually that brings up sort of another question along those lines. As you think about having more goods, you know, locally sourced, you know, what s the overall sort of margin tradeoff or how should we think about that in terms of, you know, I mean -- obviously it sounds like that would be good in terms of, you know, import costs not weighing as much in terms of having to re-price. But then obviously you have the lower cost per or -- excuse me -- the higher cost per unit on the distribution wing. Is there a good way to sort of think about those two drivers, you know, offsetting drivers? I mean, is it generally still positive I would assume to have more locally sourced goods?

13 Page 13 Jose Luis Laparte: Yes. The locally sourced goods -- I ll give you a good example of something that -- it s kind of a clear example of items that make sense to convert to local. We recently changed some of our towels were being brought from outside Colombia. We found a vendor that is actually doing the same towels to our specs in Colombia. But we were able to lower the price of those towels, so we re definitely offering a better value to the member. The quality -- as good as the quality we were bringing from the program that we were bringing outside Colombia -- but obviously we have the opportunity to get more sales because we lowered the price of that and definitely even without sacrificing margin because in the past what we have been doing is with a lot of these ((inaudible)) we have been lowering the margins in an effort to push the sales and obviously help the currency challenges in that country. So the combination -- doing this right and little by little we have been successful in converting some of the items. I m giving you a real story of something we have seen with items that as soon as we convert them to local we lower the price because we have a better value with obviously keep our specs because we don t want to sacrifice our specs on any item that we sell in the clubs. We re not going after lowering prices by reducing quality. We re staying with the same quality or staying with our club concept. A lot of these items happen to be actually under our private brand. So by doing all those things, Dave, we try to keep increasing our sales and improving our margins because we have the opportunity to still offer a good value to our members at a lower price, no? That kind of things that are going on in terms of that combination of local versus US and how we kind of handle the margins and sales that we re trying to drive. Dave King: Okay. That s good color.

14 Page 14 Then switching gears a bit on memberships, it looks like the growth decelerated further this quarter but you talked about continued new member sign-ups in Colombia. You know, has the growth rate there been, you know, what s the growth rate there been doing? And then it seems like the - you said I think, and I think it was in the queue as well that you had improving renewal rates in Colombia. Is that then mean that the renewal rates subsided a bit in some of the other markets? I guess just some of the drivers around memberships renewals and growth would be helpful. John Heffner: Membership in total in Colombia actually has stayed pretty even during the quarter. The new members that we signed up, Dave, in the quarter sort of offset some of the renewals we did not get in the period. So we were somewhat flat with our membership in Colombia. The growth that we got in total for the company really came in the non-colombia areas. We have seen some improvement in the membership renewal rate. It s ticked up a little bit in the last couple of months but it s still nowhere we re happy with or where we think it should be relative to the high 80s we re seeing in the other countries. Dave King: Okay. That s great color. Jose Luis Laparte: And I will only add something that Dave. I will say that for -- particularly for Colombia - - obviously it s a good sign that we have new member sign-ups but definitely as I mentioned in my comments, our next important activities to make sure that we keep retaining those members that we are signing up and we are doing that through the values. And we definitely recognize that we have to do a better job of showing the values.

15 Page 15 We know the values are there but we have to do a special effort in Colombia making sure that all our members appreciate those values. The opening of Chía hopefully will also help because we re looking at some members especially in the Bogotá market that are in the north of the city. That distance of the traffic makes it harder for them to shop and we want to make sure that those members hopefully have a warehouse that hopefully will be a little closer and we should see some renewals particularly in that market which is our biggest base out of Bogotá - out of Colombia, the Bogotá market. So there are a lot of things going on at the same time that we see as a good indication that we hope to see improvements in our renewals rates little by little in each quarter. Dave King: Okay. Great. Fantastic. And good luck with the rest of the year. Jose Luis Laparte: Thank you Dave. Operator: Thank you. Our next question is from Ronald Bookbinder of Coker Palmer. Please go ahead sir. Ronald Bookbinder: Hi. Good morning. Thank you for taking my question. John Heffner: Hi Ron. Ronald Bookbinder: Hi. What was the traffic versus ticket, sort of the breakout of the comp? John Heffner: I had it right here. For the quarter? Ronald Bookbinder: Yes.

16 Page 16 John Heffner: ((Inaudible)). The traffic for the quarter was up 4.4% and the average ticket was down about 2, almost 3%. Ronald Bookbinder: Okay. So you re still sort of gaining market share when it comes to traffic. And it really just is the impact of the currency that s driving the lower ticket prices as prices increase on the imported goods, correct? John Heffner: Yes. That s in -- yes. That s in totally and honestly the, you know, currency impacts that Colombia is some portion of that. But we ve seen some de-valuations in the quarter in some other areas. DR, Trinidad, you know, but our transactions overall are up. And in essentially most of our markets if not all of them. It s down in Colombia -- our transactions our down. But that sort of tracks with the sales being a little bit down. Ronald Bookbinder: And the markdowns. You entered the quarter with inventory down 7.5%. So you entered with pretty tight inventories. Can you tell us what specifically or what general category most of these markdowns came in? Jose Luis Laparte: The biggest component was coming out of hardline. Definitely that was the area where we have higher markdowns applied during the third quarter. More on the ((inaudible)). Ronald Bookbinder: That s primarily the US imported goods? Jose Luis Laparte: Yes. Definitely. Probably I will say 95% of that component is US goods. Definitely. John Heffner: Which are the things you plan further in advance, right?

17 Page 17 Jose Luis Laparte: That s correct. Yes. That we definitely go back and - but maybe a year ago in some cases, so I think we have a more cautious plan right now with the purchases. And again we feel good about the level of inventory that we have in the warehouse clubs right now. Ronald Bookbinder: What sort of comp do you guys need to leverage SG&A? Is it about a 2% comp? John Heffner: I don t know if I -- I think our approach is always try to figure out how we can leverage SG&A and I think certainly over a period of time -- I mean, time period certainly has an impact on that. Our ability to leverage in a very short window is somewhat limited over a longer window, it is - we have a greater ability to do that. I can tell you the focus throughout our operations is to focus on leverage and doing things better both to our distribution operations and the way that we buy and obviously within the four walls of a warehouse club, that s where operations puts a lot of their efforts. I don t have an exact number but I think still it is somewhat, you know, time-based a little bit as to where, how we can leverage those expenses over time. But I think over time we should be able to leverage expenses essentially under any scenario given enough time. Ronald Bookbinder: Okay. And with oil sort of stabilizing as of late in the $45 to $50 range. Do you think that could help Colombia get back to a positive comp and Trinidad also? John Heffner: I m not sure I got your question. Jose Luis Laparte: What was the reference, it was ((inaudible))? Ronald Bookbinder: Yes. With oil.

18 Page 18 Jose Luis Laparte: Oh. Oil. Okay. Oil. Okay, I couldn t follow that first. Yes. Okay. (Crosstalk) Ronald Bookbinder:...around $45 to $50 a barrel. Is that good enough -- and as long as it s stable -- that these petro currencies -- the Colombias and the Trinidads -- would that be enough to help get you back to a positive comp in those areas? Jose Luis Laparte: I will say -- obviously without trying to predict oil or currencies -- I will say that at least -- speaking first for Colombia -- I think that a lot of things have adjusted already. At least we hope that that adjustment was already digested in the market. We have seen pretty steady currency for the last few weeks. There are other indicators in the country that put the country in a good perspective going back to growth, security improving. A lot of good things happening at the same time that hopefully it will be part of that comeback to call it that way that we would like to see in the Colombia market. For Trinidad, there was an impact definitely for oil and gas prices, but I think during Q3 I will say that the one that affected those probably a little bit more was the VAT. When you start moving items that were paying 0 VAT to the 12.5%, we saw consumption in a lot of items basically being lowered. So it was something difficult to digest as I mentioned in my comments. We came from a Q1 growing 8% and Q2 growing 4% to basically negative growth in Trinidad just for that quarter. So the impact was probably more driven by the VAT increases. John Heffner: If I can just add to that. I think, you know, to your point about oil, Ron. I mean, it was really the government policy reaction to the price of oil I think that really drove more what we saw. So I

19 Page 19 think government policy by adding the VAT to increase the government flow of revenues into the government as a result of the lower oil -- how that will play out over time, I guess I don t know. You know, we have looked at places where that s happened to us before. I think a couple of years ago in Jamaica we saw a similar sort of thing where VAT was added to a number of products that didn t have VAT and some changes in that. And what we saw is it took -- oh, close to a year I think -- to sort of work through the system in terms of people adjusting to those prices. So I would expect that Trinidad could be a difficult place for a while longer. And really related to I think the government policy more than the price of oil specifically. Ronald Bookbinder: Okay. Great. That s all my questions and thank you and good luck in the new quarter. Jose Luis Laparte: Thank you Ronald. Operator: Our next question is from Jon Braatz from Kansas City Capital. Jon Braatz: Good morning John and Jose. Jose Luis Laparte: Good morning. Jon Braatz: Going back to Colombia, as we look ahead into You know, the currency could be flattish year over year and maybe even a little bit of a tailwind possibly. But I guess my question is, is it possible in that type of environment to see margins in Colombia improve year over year? Or do we need - or do we just simply need additional sales growth and volumes in Colombia?

20 Page 20 Jose Luis Laparte: We believe obviously that the currency will help us -- as you mentioned -- to get some of the improvements that we need in the margin. I think the conversion of local items is also helping us. I will also say that our position as we keep growing obviously with just six clubs now close to seven in a few months should also help us to be in a better position of even buying better all the local merchandise. So I think there are different components, Jon, that we see making part of that and to help us grow and definitely as if we see the currency is stabilized we should see sales improve, no? I think - I will hope it continues to be that members are getting used to the exchange rate. It took us longer than we expected. (Realities) of Colombia went through a huge de-valuation when you put it in perspective from 1,900 to the 3,000 that it is now, and we hit points of 3,400. So there was a lot of confusion in that market specifically with the currency moving all the way. So even our pricing has been difficult to keep in that market. So there are a lot of components and a lot of moving pieces Jon to get that but we believe that we can stabilize obviously those margins, no? Little by little. Jon Braatz: Okay. Jose, in your prepared comments you talked about a little bit of weakness in what two of your biggest markets, Costa Rica and Panama. What are you seeing there in terms of the economy and what may be behind that little - that weakness? Jose Luis Laparte: Yes. Well, Panama has been obviously growing tremendously in the past few years with the expansion of the canal. I think that Panama the way we ve viewed is that we re going at - I think someone made the reference once that they were going 180 miles per hour and they re now going a little bit slower.

21 Page 21 So we definitely continue to see growth, a lot of investment going on in Panama. A lot of positive things happening. But definitely they ve slowed down. We still feel pretty optimist about Panama s market. Definitely we open - we just anniversary the opening of our warehouse that did very good for us a year ago. We opened (Costa Bella) and we just anniversaried that one. That should help us in a few months with our comps that were affected actually in two of our locations over there. And know that a new location will start comping we believe positively also. So I think there are components in the Panama economy that is obviously dollarized that should be helping us going forward or at least not taking such a bad hit. So obviously we ve made a slowdown a little bit, I will have to say Jon, I don t think we will continue growing at the same pace it was growing, but I think it s still pretty strong. And Costa Rica is in a similar condition. Costa Rica went through some challenges the last quarter, but they have indications -- the currency obviously also got a little affected -- not much, I believe not as drastic. But they went back to a currency of about 550 if I recall when they were already in a 535, 540. So they had a little bit of a currency de-valuation also in Costa Rica. I don t think to the degree that it will affect spending as much. So it s probably just a matter of things adapting in that market. They keep relatively good growth in terms of I guess tourism is still a big component for them. So we are still more optimist about Costa Rica in general. And this is still an important market for us and there are good signs in those two markets I will say, Jon, also -- renewals are good, which is a good sign. We feel good about our value proposition. Those are markets where we have good competitors but we definitely feel good

22 Page 22 about the things that we bring to those two markets and there are just that the combination of those big components of our sales as a percentage, no? Jon Braatz: Okay. All right. One last question. I know it might be a little bit early, but are you taking memberships yet for Chía? Jose Luis Laparte: Yes. We started about two or three weeks ago and we already have a trailer outside our parking lot. And we re actually seeing decent traffic at that for a beginning, no? So I think it s going to get stronger as we get closer to the opening day which we believe - we are still thinking about the first week of September if not earlier. So we think it s going to be a good warehouse club and we obviously are turning that one - that one will open with obviously the new exchange rate -- whatever that is -- and hopefully the members that are - we have been hearing good comments about being in that part of the city. Not only for the Chía municipality, more importantly, to some degree, the level of people that can probably access that location from the north of Bogotá, no? ((Inaudible)). Jon Braatz: Okay. Good. Have you been able to discern whether some of the new members were members at the Bogotá club? Jose Luis Laparte: Some of the new members. We re actually capturing renewals, so yes, they were definitely members at the Bogotá club. I m sure we re going to start seeing actually many more renewing in that location. And yes, they have - our database indicates that we definitely have the members that were members. Yes, that one, or maybe even some in Barranquilla because remember some of the history for Colombia we have -- even before opening in Bogotá -- we have a good amount of members that were shopping in Barranquilla when they were visiting.

23 Page 23 Jon Braatz: Right. Jose Luis Laparte: So we see a second point in Colombia will definitely give us the ability to recapture and go back to get those members that we probably lost because of the distance on a big city, no? Jon Braatz: Okay. Thank you. Jose Luis Laparte: Thank you Jon. Operator: Our next question is from Thomas Vester of LGM. Thomas Vester: Hi Jose Luis and hi John and thanks for the talk. This Thursday we saw in the news yesterday, you had a robbery in Mausica in Trinidad. I mean, we ve never seen that before, I mean. Of course we hope that all the stuff is well and nobody were injured. It didn t indicate from the article. But can you just tell me if this is something that s happening regularly and if you re insured for it or how it is? Jose Luis Laparte: Well that definitely doesn t happen regularly at all. I mean, those incidents happen fortunately not very often at all. And we didn t have anyone injured and definitely we have insurance for that case. But it was a very unique condition. John Heffner: I think it has happened in the past. Jose Luis Laparte: It has happened. Yes.

24 Page 24 John Heffner: But it s rare. Jose Luis Laparte: But it s very rare. John Heffner: We have a number of procedures associated with how we do closings and things like that. That s why we take obviously very a lot of care associated with it, but this was an interesting one that I think is under investigation. Jose Luis Laparte: Yes. Thomas Vester: Okay. Good. Well it s good to know that everyone is well. Maybe just coming back to Colombia, I mean, when looking at Exito and Cencosud where we have the published figures only for Q1. I mean, they really pose significantly better things for sales in local currency. I mean, pretty high single digits, 7, 8%. We don t have the Q2 yet obviously. Maybe there s some base (technicals) that was slightly depressed especially as ((inaudible)) alluded to that in the more high-end format that they felt that you took something away from them in Bogotá with the opening. But they are, I mean we understand a lot of the problems. But I guess that s one of the things that probably would raise some concerns that they are comping at better rates in local currency. Then again we don t know the Q2. But is that something you re feeling especially someone like Exito has been explaining at least once that they are trying to look at your offering and simply just be aggressive in some of the things that you bring in and bring in at and aim for better prices to really to fight on your turf.

25 Page 25 Jose Luis Laparte: Yes. I will say from us -- because, yes, I actually have been waiting for Q2 results from Mexico in particular because I noticed the Q2 results and they have definite single digit growth. One disadvantage we have is the component of important merchandise hasn t been growing yet for us. And obviously as much as we re seeing growth in the locally-sourced merchandise as reported I think, what, 13% what I reported on local growth? We still have a decrease on the imported merchandise that is not the -- we are not getting the sales increase that we need in that part of our merchandise. So that is not helping. We really need to get - that s our next goal for sure to get local currency growth with the combination of local and imported merchandise. And obviously our component of imports being much higher than either Cencosud or Exito puts us in a much more challenging condition to get that growth. But yes, we keep an eye on those figures and I can tell you that our number one goal right now for Colombia is to get that local currency because we can t control the US currency or the currency exchange so the only thing we can control ((inaudible)) is get the members to in local merchandise and everybody thinking in pesos and get those sales in local currency to be positive. That s our goal for definitely for Q4 and we re keeping an eye on that number every single day Thomas. Thomas Vester: Okay. Good to know. But then also Jose Luis, I mean you re on the way with a seventh club and I mean, it is a big -- it is a very, very big -- what can I say -- strategic move for you to go into Colombia and you have invested a lot of capital and a lot of time.

26 Page 26 I mean, we clearly appreciate that the timing was just very unlucky and nobody could have forecasted that at least we couldn t and you couldn t. But, I mean, there must be a part of you that asks a little bit if this was the right move and if it s the right plan to continue to ramp up in Colombia or stay at those seven clubs and then give it a couple of years. I mean, can you just share a little bit that the mood and your thinking and also the mood in the board room? Because it is clearly -- it is hard to separate these factors. But clearly it would be problematic for PriceSmart long-term is to (prove) that for some reason the club concept won t work in Colombia. Jose Luis Laparte: Yes. No. I will say that the -- how do I start. First of all, I will say that it is a concern definitely. The timing couldn t be, I mean, worse -- definitely with all the things going on in Colombia in terms of the currency and all the you name it, oil or whatever causes the currency to move obviously the timing didn t help a concept like ours. I think in terms of proving our concept, there are good indications on the end of the day we -- in some of these particular clubs or cities -- where members have appreciated our concept where -- I mean we keep talking to members. We use a lot - every time we travel, every time we find someone that is from Colombia, we hear very positive comments about our concept, what we bring to the table. Obviously everybody is concerned even the way we ve raised prices -- although they understand -- members understand why prices went up. I think we have a - we get the currency to be stable, I think we definitely have a very good chance to move the needle in terms of the spending with the members. Keep educating them -- we have to put into consideration also that this is a new market where a lot of these members are learning how to shop in the clubs, pack sizes, you name it, no?

27 Page 27 There are different things that you really - I mean when we talk about the other markets, we have been there for many, many years so the members are well-educated on how to shop at the clubs. Colombia, our focus is -- with all this - assuming all this stabilization in the market -- to get the extra item in the basket, to keep working on the members understanding our value, and in the meantime we re trying to keep our expenses as low as possible but still run a good business in Colombia. So I don t think we re disappointed that we got there. We didn t know that things were going to turn out to be that difficult with the currency in the past 17, 18 months, but I think we are still definitely optimist of turning things around and the opening of Chía is going to be strong for us -- has to be strong for us to prove obviously our - to keep proving our concept in that market, no? Thomas Vester: Yes. Okay. Good. And then just on the openings. I think I asked you on the last call as well. And now that over three months has progressed, I m pretty sure this is the longest period in the last five years where you haven t announced any new clubs being under construction -- any new sites. Am I correct in that and is it just because you re working on multiple different things and suddenly they might just come out at the same time or -- because I mean, clearly it s very important that there are more members in existing stores -- and they re spending more and that is driving (marking) some revenue. But to me another thing is to continue to increase the penetration and increase the number of clubs as well in the existing markets. Can you share anything in that compared to what you shared last time? Jose Luis Laparte: Yes. I m not sure I keep the same account that you are keeping in terms of how often we announce, but definitely now that while we haven t announced a new building, we do have things on the works that definitely will be announced until we get confirmation of sites.

28 Page 28 So there are -- in other markets different from - or I will say non-colombia markets -- we have activity on the real estate side that I hope we can come back with some good announcements soon, Thomas. We didn t (invite) this. I m just deciding not to announce anything or not to keep moving on projects, no? It just takes longer. In some countries it is just slow process for getting permitting. But we didn t definitely lower our expectations in these markets, no? In the meantime, I will say Thomas also -- as I mentioned -- we re doing some of the expansions in current buildings. We have found out - we believe that s going to be another good vehicle to keep growing. In the past when we have done them, we have seen good results. We haven t done parking decks but we have a good experience doing club expansions. We have done probably five or six in the past that have come to my mind in different markets in Panama. We expanded ((inaudible)), Brazil, we expanded the one in ((inaudible)) in Santo Domingo. We expanded the one in (Charles Summer). We expanded Barbados. So we have - we expanded Nicaragua at some point. So there is some history on expansions that help us better serve our members, help us grow our sales, and develop better member service, more parking. So there are different initiatives. The way to look at expansion would be in those two ways, no? And that s why everything we talk about in terms of growth is coming either from - it s starting from the beginning which is that (they see) these tuition centers to be able to serve the locations better. The clubs obviously that are getting expansion are getting more space, more in the fresh areas for sure. We are kind of seeing a big component of growth in our fresh areas and that will be reflected in some of these expansions as we do with the new clubs.

29 Page 29 So there are different pieces moving when it comes to expansions, Thomas, not limited only to the new buildings but also to the current buildings that the - obviously you get a lot of leverage expanding those buildings. The investments are less and still the good expectations that we have of sales growth for those. Thomas Vester: Yes. No. That s clearly appreciated. Maybe just the last thing then, can you share anything in terms of offering - I mean you ve been talking about before that you are investigating other avenues on top of the bakeries to ((inaudible)) et cetera in the clubs. Is there anything that you think makes sense or I know - would appreciate you cannot share anything concrete. But just if you see anything that you can add on to clubs that are ((inaudible)) offering that you think it should be on the (longer line). Jose Luis Laparte: We have a couple of things here or there but nothing significant right now. I mean, in terms of adding things to our clubs -- no. We re just doing the regular expansions. I m trying to think if I mentioned something in the past about that. We re definitely trying to improve our - one thing we re doing actually is delivery to some business members and even diamond members. So we re looking at different areas where we can improve our business and give the members more reasons to shop and make it easier for them to shop. So delivery would be one of the things that we re looking more seriously to adding to some of our locations when it comes to appliances and maybe business delivery. So those are kind of some of the initiatives we have. Nothing yet concrete on those, no, but they are some ideas that we are definitely looking at doing on those terms, Thomas. Thomas Vester: Okay. Great. Okay. Thank you so much for your call.

30 Page 30 Jose Luis Laparte: Thank you Thomas. Operator: Our next question is from Scotiabank, Pablo Vallejo. Pablo Vallejo: Hi. Good morning John and Jose. My first question is regarding the Colombian operation. Whenever you mentioned the example of the towel -- how you switched to locally sourced. What would be -- first of all -- what would be another category you re looking into? Or in another or in a way -- what percentage is now imported? And where do you see it in the next year or so from total merchandise? Jose Luis Laparte: Let me - you were going to say something? John Heffner: Well I was going to say in terms of the split. I think we re just under 50% now with imported. Whereas if you go back probably two years ago we were probably 60 to 65% imported. And so some of that is the shift of some of the merchandise categories. But I think a big part of it is the currency and the impact on the volume demand for imported merchandise. I ll let... Jose Luis Laparte: I will say Pablo that obviously we have a list of items that we have been converting. Colombia s a big country. Fortunately, there are a lot of sources of merchandise and when we look at our - it s kind of unique even for us in terms of the size of the country and the number of item opportunities that we have there. Towels was a good example of something I used but we have done oils, we have done some detergents, we did pet food, we did - we re looking at now doing some snacks. There are opportunities in different areas that is giving us not only the opportunity to bring local items to Colombia, we re even exporting some of those items to other countries.