Good afternoon, everyone, and welcome to PriceSmart, Inc. Earnings Release Conference Call for the third quarter of fiscal year. From our company's representatives, Ms. Sherry Bahrambeygui. There will be an opportunity to ask questions if time permits. As a reminder, this conference call is limited to one hour and is being recorded today, Tuesday, July twelfth of two thousand and twenty-two. A digital replay will be available following the conclusion of today's conference call through July nineteenth of two thousand and twenty-two by dialing 1-877-344-7529 for domestic callers, or 1-412-317-0088 for international callers, and by entering the replay access code 6291871. For opening remarks, I would like to turn the conference over to PriceSmart's Chief Financial Officer, Mr. Michael McCleary. Please proceed, sir.
Thank you, Operator, and welcome to the PriceSmart Earnings Call for the third quarter of fiscal year 2022 that ended on May 31, 2022. We will be discussing the information that we provided in our earnings press release in our Form 10-Q, which were both released yesterday afternoon, July 11, 2022. You can find these documents on our investor relations website at investors.pricesmart.com, or 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 twelfth, two thousand and twenty-two. 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 Bahrambeygui, PriceSmart's Chief Executive Officer.
Thank you, Michael. Good day, everyone, and welcome to our third quarter fiscal 2022 earnings call. Sales momentum continued during the third quarter, and we almost reached our billion-dollar mark again, but came in just shy at about $999 million, just like last quarter. This is a company that is recording sales of significant levels and is moving in the right direction. Net merchandise sales increased by 16.5% after a -2.3% currency impact, and comparable net merchandise sales increased by 12.8% after having taken into account a -2.2% impact. Membership accounts grew to 1.75 million. That's a new record, and we came in with a strong renewal rate of 88.9%.
I know the topic of interest today will be margins, although our total gross margin dollars increased 4% over the comparable prior year period, merchandise gross profit as a percent of net merchandise sales was 14.2%, a decrease of 170 basis points from the same prior earnings release. Like many other retailers, we have not been spared the impact of global supply chain disruption and abrupt shifts in consumer demand. Our hard lines and other non-foods categories are characterized by a higher penetration of imported items that tend to correlate with discretionary spending. Due to the long lead times on many of these items, commitments must be made many months in advance, if not in some cases, about a year.
Many months ago, we made strategic investments in inventory with the goal of remaining in stock and capturing higher sales. Since then, the environment changed significantly. It's been characterized by global supply chain disruption, including Asia port closures due to COVID, container shortages, higher freight and fuel costs, inflation, and sharp changes in consumer demands. This has disrupted the cadence and the flow of that inventory. Inflation has influenced consumer behavior by shifting the demand away from the more discretionary items and more towards the essential items. As a result, we've been experiencing excess inventory primarily in the area of hard lines. Now, in response, we have taken decisive action. We continue to do so, and we're working with the goal of swiftly selling through the excess inventory and quickly rebalancing our inventory mix.
As a result, we have experienced higher than normal markdown in Q3. Now, our plan is to handle this quickly and efficiently in order to be well-positioned for the holiday season and to sell through almost all of this, possibly by the end of Q4. We see this as a point in time. We've gained many new important insights as a result of this. It is our goal and our expectation that we will return to healthy historical margin structures soon. When you look at our gross margin percentage in Q3, it was primarily impacted in two significant ways.
The first is that there was a reduction of margin percentage of 100 basis points, which represents the markdown taken below cost on what we identified as excess inventory for that inventory, which sold in Q3 and for the excess inventory remaining on the books as of the end of May, which we expect will sell through the end of Q4. Many factors could impact that, things that are unforeseen at this point that could make it longer or shorter. There's another 35 basis points, which relates to the higher cost of fuel, freight, and handling. This is as a result of having to pay the spot rate on some of our freight, which we did not pass on to the member in Q3. We do not expect to see this again in the next quarter.
While we generally factor in all transportation and handling costs when calculating merchandising selling price, this last quarter saw a disproportional amount of these costs that we didn't pass on to our members. The most significant was the swings on spot rates for non-contracted freight rates coming out of Asia. There were other factors, including significant increases in U.S. transportation costs and third-party storage costs and handling expenses, which were required as a direct result of having this excess inventory. There were also some factors that contributed to margin compression that were unrelated to inventory, such as a reduction of our COVID accrual, not having the same need to accrue as much of about 17 basis points as compared to last year.
We also took steps to increase compensation of our U.S. distribution center employees, given the competitive environment. On an ongoing basis, due to the ongoing supply chain complexities, we do expect our inventory levels to continue to run a bit higher than historical levels. We're really focused on reducing our days on hand of inventory directionally toward more historical levels over the next several quarters. Order of magnitude, on the margin percentage compression that we expect beyond that which you're seeing in the third quarter, we estimate that going forward, as it relates to excess inventory, we expect the margin percentage compression to continue somewhere in the range of 25-50 basis points through approximately Q4. We share this with you because we see this as a point in time.
We see this as a situation that obviously we weren't happy about, but we addressed as soon as it came to our attention, what we were dealing with, and we've been aggressive or proactive in making sure that we do everything we can to sell through these items without delay and get back to our core business with our standard inventory balance and inventory mix, and with our more customary margin structures. In order to give you some sense of why we believe the margin compression will be substantially less than what you're seeing in Q3, we're sharing with you what is our current best assessment of the range we're likely to see in Q4 of margin compression. Now turning to the results of our third quarter.
Our total membership base grew to a record 1.75 million accounts, representing growth of 6.6% versus last year. Our twelve-month membership renewal rate was 88.9%, and our membership income was a record $15.4 million, an increase of 7.8% over the same period last year. Now we can look a little forward into Q4 for the month ending on June 30, 2022. Total net merchandise sales was $321.4 million, an increase of 15.5% over the same period in the prior year. Comparable merchandise sales for the four-week period ended June 26, 2022, increased over 11.8% compared to the comparable period last year.
Currency fluctuations continued to negatively impact net merchandise and comparable net merchandise sales by 2.5% and 2.8% respectively in the fourth quarter so far in June. Trinidad also had significant club closures and a prohibition on the sale of non-essential merchandise. In the prior year, the impact of the increase in Trinidad sales this June versus June 2021 is favorable by 2.3% and 3% on net merchandise and comparable net merchandise sales, respectively. We're very pleased with the continued strong sales growth and believe that provides a solid foundation as we head into the last quarter of this fiscal year. Now I'd like to turn to our growth drivers as we've described on calls before.
First, being in real estate, expanding our geographic footprint, whether it was clubs or distribution centers. Second, continually enhancing the value of the membership itself. Third, driving incremental sales through PriceSmart.com as well as the technological capabilities that we're creating and investing in, with our technology and talent investments. With this, we'll start with real estate. We celebrated our 50th club milestone with the opening of our Portmore club in April, and that was our second club in Jamaica. I was there, and the support and reception that we received in Jamaica was pretty impressive. We are a big presence in that market, and we're very, very well respected, and we had just by virtue of the dignitaries that attended the event and the opening. It was clear that they do see us as providing tremendous value in that market.
Hopefully, that translates into how closely they'll be working with us in the future. Portmore was very well attended, and total new signups were 25% higher than what we had originally expected in the first month of the opening. Our net merchandise sales beat our forecast by over 12%. Now this club was really important to us because Kingston, which has been the only club in that market for a long period of time, has been generating sales and activities that are our members too. Lines were getting long. It was very difficult to efficiently get in and out of that club, and it was important for us to enhance the experience of the members.
We opened Portmore with the expectation of shifting some of those sales over and enhancing the overall experience for our members in Jamaica. What we found so far is, yes, sales have shifted somewhat, but not nearly as much as we expected. Portmore has really been doing well in its own right. We're very excited about the results in that market so far, what we're seeing so far and optimistic about the future. Our real estate team has been busy. We've added two clubs. We've added two additional clubs into the construction pipeline.
Yesterday, we announced that in the spring of 2023, we expect to open a smaller format warehouse club located in the city of San Miguel, approximately 100 miles east of the capital city, San Salvador in El Salvador. This will be our third club in El Salvador. As we fine-tune these, what we call these smaller club formats, we're continually finding ways to extract more sales potential with less capital expense and less square footage overall for our building. I'm excited to see in the most recent iteration we have, we've been able to increase pallet count, increase the proportion of sales floor within the same envelope. The small format, when we reference it, I just wanna make sure you know it's not a fixed concept.
It's one where we're basically saying, can we do more within the real estate footprint that we need in order to have a successful club in a specific market, whether it's urban or it's secondary? Efforts continue to make that more and more effective, whether by virtue of the features we put in that specific club or choose not to put, or through the enhancement of its capacity to put through merchandise and inventory because of additional support from the distribution center. Now we are also proceeding with the construction of a smaller format warehouse club in the affluent El Poblado area of Medellín, Colombia. We expect to open this warehouse club, which will be our second club in Medellín and the company's tenth warehouse club in Colombia in the summer of 2023.
Once these two new clubs are open, we'll be operating 52 warehouse clubs, and we're actively exploring other options as well. Another part of our real estate strategy focuses on the important role of our distribution facilities to optimize efficiencies and reduce risk, to take some of the functions and storage that we would normally rely on or historically rely on coming from the club and shifting it out to a distribution location where that distribution location could support multiple clubs and allow us to increase our efficiency. We're currently analyzing new locations for local distribution centers in several areas that would serve our Central American, Caribbean, and Colombia markets. We're also reviewing potential sites in the Northern Triangle countries for regional distribution center.
This would give us a near-term option to create alternative routes for imports from Asia for distribution to our markets and represents further investment and job creation in these important markets. Our sustainable packaging plant in Trinidad is another exciting project that we're involved with. It will start, or we're planning for it to start about the end of August. It covers many of the company's really important objectives. One, it allows for more near sourcing. It brings products by producing products closer to our markets, and it supports that. It is a form of vertical integration because we would be eliminating intermediaries when with regard to the purchase of packaging and labeling or the services.
With regards for B2B business, sustainable packaging, in addition to complementing our product offering, we believe we may have a really good market with our business members. It's an item. The packaging is an item that would serve under our private label and have the benefits of what we shared with you about our private label. It's one that we could sell, just not only use for ourselves, but sell to our members. In terms of ESG, the items that are envisioned to be produced in this packaging facility will be either compostable or will use recyclable input. That really does support our efforts to improve our performance in a manner that is environmentally responsible.
With regard to the liquidity issues and challenges that we've had in Trinidad, this is an opportunity to allow us to generate more US dollars to support our Trinidad operations by exporting these items to our other markets. It's a built-in way for us to convert TTs to US dollars. This is something that, although we've made great strides on reducing the balance, and Michael McCleary can share more about that with you later, but it's a way to do it naturally and not have to seek exchange to US dollars outside of the ordinary course of business. With regard to membership benefits, which is our second driver, I wanna share with you a little bit about what we're doing there.
During the first nine months of fiscal 2022, our private label sales represented 24.2% of our total merchandise sales. That's up 250 basis points from 21.7% in fiscal year 2021. We've talked about the benefits of private label being a unique differentiator from our competitors that people cannot purchase without the membership. We usually have an opportunity to offer the same or better quality merchandise at a lower price than the leading brands. That provides greater benefits to the members. Hang on a second. Unfortunately, my computer just shut down. Michael McCleary, do you wanna take over your section, and then we can come back to the balance of this?
Okay, I will do that. Thanks, Sherry. Good morning or afternoon to everyone, and thanks for joining us today to talk about our third quarter results. Total revenues and net merchandise sales came in at $1.03 billion and $999 million for the quarter respectively. Increases of 15.1% and 16.5% over the comparable prior year period, respectively. We ended this quarter with 50 warehouse clubs compared to 47 warehouse clubs at the end of the third quarter of fiscal 2021. Our comparable net merchandise sales growth for our fiscal third quarter was 12.8% for the 13 weeks ended May 29, 2022.
Foreign currency fluctuations had a negative impact on net merchandise sales and comparable net merchandise sales growth of 2.3% and 2.2% for approximately $19.1 million and $18.6 million, respectively. By segment, in Central America, where we had 27 clubs at quarter end, net merchandise sales increased 12.7% with a 9.7% increase in comparable net merchandise sales. Foreign currency fluctuations had a negative impact on both net merchandise and comparable net merchandise sales growth in Central America of approximately 2.8% during the quarter. All of our markets in Central America had positive comparable net merchandise sales growth except for Guatemala, which had a small negative comp due to sales transfers from other clubs following the opening of our new Aranda club.
In the Caribbean region, where we had 14 clubs at the quarter end, all of our markets had positive comparable net merchandise sales growth, with total net merchandise sales increasing 21.4% and comparable net merchandise sales increasing 17.4%. Trinidad and Tobago net merchandise sales increased 22.8% for the quarter and contributed 1.9% of the total net merchandise sales growth of 16.5%. The significant improvement versus the prior period was due to COVID-19 closures last year, combined with our decisions to increase imported inventory levels in the current period to meet current demand, which has helped to increase sales as our ability to source additional US dollars has improved.
In Colombia, where we had 9 clubs open at quarter end, net merchandise sales increased 25% and comparable net merchandise sales increased 18.1%. These significant growth levels were achieved despite the impact that the devaluation of the Colombian peso had on merchandise and comparable net merchandise sales growth in Colombia of approximately 7% and 6.8% respectively during the quarter. In terms of merchandise, we saw our food category grow approximately 10% compared to the same quarter in the prior year. Our cleaning, beverages, and oils and condiments departments led the way with 11%, 33%, and 23% growth respectively. Our fresh category grew 14% compared to the same quarter in the prior year, led by our poultry, seafood, and meat departments with 18%, 15%, and 11% growth respectively.
Our non-foods category, where we took significant markdowns in several areas such as sporting goods, garden and patio, and TVs, grew 18% compared to the same quarter in the prior year. Improved conditions in Trinidad and Tobago also boosted sales growth for our non-foods categories as these categories have generally performed quite well in this market. Finally, our other business category rebounded with 16% growth, primarily from our food service and bakery departments and growth in our optical services and sales. Turning to margins. Total gross margins on net merchandise sales were 14.2% for the quarter versus 15.9% for the same period last year.
As Sherry described, this decrease was from a variety of factors, including pricing actions taken to reduce inventory levels of seasonal and high cube merchandise, primarily in our non-foods categories, increased freight and handling costs, and a reduction in the premium we applied to our sales prices to offset our COVID-related operating costs. Total revenue margins decreased 220 basis points to 15.6% of total revenues when compared to the same period last year. This revenue margin decrease is primarily attributable to the 170 basis point decline in gross margins and a decrease of 40 basis points due to the sale of Aeropost during the first quarter.
SG&A expenses decreased during the quarter by 130 basis points as a percentage of total revenue, primarily due to the sale of Aeropost, which lowered warehouse club and other operating expenses and general and administrative by 50 points each for a total of 100 basis points. Operating income for the quarter decreased 6.3% from the same period last year to $36.1 million. Other expense of $2.4 million was primarily driven by $2 million in transaction costs associated with converting Trinidad dollars into available tradable currencies. Our effective tax rate for the third quarter of fiscal 2022 came in higher than last year at 33.7% versus 30.9% a year ago, with our year-to-date rate coming in at 32.8%.
This increase in the quarter was primarily related to comparatively unfavorable changes in uncertain tax positions and valuation allowances on our foreign tax credits. On a go-forward basis, we continue to estimate an annualized effective tax rate of 33% to 34%. Net income for the third quarter of fiscal 2022 was $19.3 million or $0.62 per diluted share, compared to $22.5 million or $0.73 per diluted share in the comparable prior year period. Moving on to the balance sheet. We ended the quarter with cash equivalents and restricted cash totaling $222.7 million.
From a cash flow perspective, for the nine months ended May 31, 2022, cash provided by operating activities decreased $15.7 million compared to the prior year, which was primarily a result of non-working capital changes on the balance sheet of $22.3 million. These changes were primarily due to prepaid expenses and income taxes, which increased due to higher sales line and the VAT paid. Cash flows from operations was our inventory position, which increased to $461 million as of May 31, 2022 versus three hundred and as Sherry purchasing patterns, supply chain disruptions, inflation and the addition of three new clubs. We've taken various actions in Q3, and we're taking further actions in Q4 to continue reducing our inventory days on hand.
Net cash used in investing activities decreased by $32.6 million for the nine months ended May 31, 2022 compared to the prior year, primarily due to the decrease in balances of certificates of deposit compared to the same period a year ago, due to the significant improvement or a decrease in our balance of Trinidad dollars on hand versus the prior year. With respect to Trinidad, our balance of Trinidad dollar-denominated cash equivalents, and short and long-term investments measured in U.S. dollars improved this year, decreasing $24.1 million from our fiscal year 2021 ending balance of $52.9 million to approximately $28.8 million.
A $100.3 million change from cash used in to cash provided by financing activities for the nine months ended May 31, 2022 is primarily the result of obtaining additional Trinidad related financing in the current year, along with lower net repayments of short-term debt compared to the same nine-month period a year ago when we were repaying short-term facilities accessed at the early stages of the COVID-19 pandemic. In closing, although our results for the quarter were hampered by significant markdowns and freight and handling costs, we believe that the fundamentals of our business remain strong, with continued sales growth and continued renewal rates. The entire PriceSmart team has navigated significant challenges we face while staying true to our legacy and working to build a future for members and within our communities. That wraps up my section.
Sherry, are you ready to finish up yours, or should we move on to Q&A? Sherry, are you there? Okay. Sherry, we still don't hear you.
All right. Thank you for stepping in, Michael. I think we're now ready to go. With regard to membership benefits is, you know, where we left off, and I shared with you a little bit about private label. We are continuing with our well-being services and are seeing very positive results on the, especially the, optical and the audiology. We currently have 47 locations with optical centers and expect to have 49 open by the end of the year. This service provides four free eye exams with every membership, and we've performed over 88,000 eye exams during the first nine months of the fiscal year, including close to 1,000 exams and eyeglasses for local school children. We're very excited about having this service available not only for our members, but to also support our local communities.
With regard to the pharmacy centers in all eight of our warehouse clubs in Costa Rica, we expect to have pharmacy centers in all seven of our Panamanian clubs by the end of fiscal year 2023, and we continue to analyze opening pharmacies in additional countries. They may take different forms based on the regulatory structure, but that is something we're studying at this time. Our third driver of growth is driving incremental sales using pricesmart.com and enhancing efficiencies and opportunities for sales using digital capabilities. What we have right now is our total e-com sales directly represent 3.6% of total merchandise sales.
When we compare this fiscal third quarter versus the comparable prior year period, online sessions increased 10%, and that led to an increase of online orders of 7%. Meanwhile, the average online order value increased 14%. We're seeing some really encouraging signs with regard to how our members are responding to their online experience with us and PriceSmart.com generally. The digital capabilities have also been a great benefit for new member enrollment. Now let's put this in context because of our operating income, approximately 1/3 or slightly above 1/3 is represented by membership income, and the other 2/3 of net operating income is represented by the profits on our sales and services, sales of goods and services.
When we can move the needle on increasing membership value such that it warrants increasing membership fees or we get more reliability in the collection of those fees, that should have a significant impact on our operating income. Right now, what we're able to do, which we didn't before, is sign up our members online. 14% of new memberships that were purchased online during the last quarter, and online renewals represented 4% of our total renewals. As of May 31, 2022, approximately 46.6% of our members have created an online profile with pricesmart.com. That. If you step back, we've basically gone from zero to almost half of our base having an online digital credential in less than two years.
12.5% of our total membership has made a purchase on pricesmart.com, and the average online purchase on pricesmart.com in 2023 was 31.5% higher than the average ticket in-club purchase. Our omni-channel members, those who shop both online and in-club, made approximately three more orders than in-club-only members during the third quarter, and orders for this category of member grew 14%, with the average spend for this group growing 25% compared to the prior year fiscal third quarter. Now, we recognize that these omni-channel members historically tend to be higher spending members anyway, so we take that into account when looking at this.
Even when we compare that set of members against themselves, we're seeing growth. Now also encouraging is that 8% of our total membership base, that 1.75 million membership accounts, is enrolled in our auto renewal option. We do have credit cards on file with many of those online auto renewal members. We're being challenged on everything today, so I'm getting political scam calls on my phone while we're doing this conference call. The increase in online auto renewals with credit cards effectively takes a portion of our operating income and puts it in a much more reliable, predictable state. Because that income can be measured, and it can be extrapolated out for a period of time, at least a year.
The odds of that income being repeated for the following year is higher when you have them set up for auto renewal and you have their credit card. That allows for a component of our income to become more reliable and more predictable, which is obviously something that is of great benefit in a climate where we're dealing with a lot of change and a lot of unpredictable variables that impact our sales. The goal is for us to continue to increase that so that we can project out in a more reliable manner and also enhance the capture of and reduce any leakage of the renewal of the membership fee. Now, with regard to ESG and our commitment to sustainability, that remains strong.
Despite headwinds on the horizon concerning inflation, the global economy, and persistent effects of the pandemic, we're committed to fostering a healthy environment for our employees. Members, vendors, communities, and the world around us are part of what we consider to be part of PriceSmart's family. The company's actions and practices aim to responsibly use natural resources and focus on environmental impact and social well-being. For example, we've opened a recycling center in our San Pedro Sula club in Honduras and had encouraging results and plan to have two more in Honduras by the end of the fiscal year. Now, these are centers where members of the community can bring their own recycling and actually, in some cases, get paid for the materials.
Lastly, on the subject of ESG, PriceSmart continues to invest in its relationships, both with the U.S. administration and the governments of the markets that we operate in. We were a participant in the Summit of the Americas last month. Had the opportunity to moderate a panel with three of the presidents in three of our markets. We are engaging with them to make sure that we're strengthening our relationships, that there's good communication and access, and so that we can have a better sight line to what is going on in our markets and also make sure that those markets recognize us at the highest levels in terms of the value that we bring to those countries and those communities. I just wanna say thank you to our teams.
Especially, I wanna call out buying and finance, who really shifted their focus to addressing our inventory issues so that we could address it very quickly and proactively. We also have to recognize that logistics and operations also have been real troopers in managing the inventory in a way that we can sell it through quickly and hopefully get back to what is our normal cadence of inventory flow by the end of the fourth quarter. It takes a team. I wanna thank you all, and thank you for your patience with the computer glitches. I hope you have a good day.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Rodrigo Echagaray with Scotiabank. Please go ahead
Thank you. Hi, Sherry and Michael. A couple of questions from my side. I wanna clarify if I understood correctly, you said the non-food categories grew in the teens in the quarter. Did I misunderstand.
I think he's-
Yes, I said 18%. Yes, we grew 18%. Klaus, am I wrong? Sorry, I got some technical difficulties of my own. Yeah, sorry. Yes, it went up 18%.
Got it. I guess what I'm curious to understand is the markdowns in the context of same store sales in the double digits, also within non-food categories. I guess when I look at you know, what happened you know, in Q1 or in this the first half of the year at some of the retailers in the U.S. that face some similar challenges on you know, excess inventory, there was a much sharper slowdown on the top line, which does not appear to be there at least not in Q3 for you guys. How should we read that? Is that an expectation that you know, Q4 is going to be extremely challenging?
Rodrigo, are you referring to with regard to generating top line sales?
Right. I'm trying to understand the markdowns in the context of a healthy top line, and within that, you know, strong sales on the non-food categories, which it sounds like that's where you have the excess inventory.
Right. You're perhaps trying to distinguish between the healthy sales growth and sales growth that may be just the result of markdowns below cost. Is that?
I guess, yeah. Is that the best way to understand the dynamics in Q3 in the markdowns?
Well, I mean, certainly one could look and say sales were impacted by the fact that merchandise was marked down significantly. There are a number of different factors. One is, our top line sales has been consistently growing. Just to give you some context, approximately 17% of our sales in Q3 were for non-food. Of that, about 2/3 of it was in hard lines, and approximately 1/3 was in soft lines. It was only with respect to a portion of the hard lines that we had this excess inventory. I think, Michael, have you quantified that as of the end of May, the amount of excess inventory or what we deemed to be excess in the hard lines? Is that
We've increased our days on hand targets because of all the supply chain complexities, but when you carve that out, we're estimating that we're probably about $20 million to $30 million higher than we would like to be in general as of the end of Q3, for between hard lines and soft lines. But I think, you know, to your question about markdowns and does that signal a slowdown, I mean, Sherry did share the June comps, right? 11.8%. You do have an indicator of the direction of sales that sales are headed, at least for the first month of the quarter.
I think Sherry's also emphasized that we've really been trying to clear out this problem, and that doesn't necessarily mean that there's gonna be a slowdown. We're just trying to work through some of the backlog we have of overlapping programs and most importantly, just cleaning things up so that when the red and green starts hitting at the beginning of the fiscal year, that we have space for it and we're out of this stuff that's kind of accumulated. I don't think we're directly linking markdowns to a slowdown in growth at this point. I mean, obviously at some point, the higher ticket items, you know, have some inflation impact. You know, we're especially focused on those.
The current quarter, we're working on a furniture program, which has some higher ticket items and, you know, we have to keep an eye on those, but we're not directly projecting a slowdown at this point.
Now, to fill that in a bit, Rodrigo, if your question is with regard to the excess inventory, I reiterate what Michael's saying, we don't see the excess inventory as being a cause for a slowdown. There are other factors our business is facing. I mean, we can't really predict other than, you know, FX is providing major headwinds. Colombia's FX, Costa Rica's FX, whether or not that results in a slowdown remains to be seen. I mean, we have been operating with significant FX headwinds more so than historically, I think, for a couple of years now, and we've managed to continue to grow sales.
Clearly we have to continue doing what we do best, and we know we're in tough markets with currencies that fluctuate, and at least more recently over the past few years, don't fluctuate in our favor very often. We're still delivering sales growth and healthy comps, and that is through all the multitude of decisions we make along the way in order to achieve those sales. I couldn't answer to you whether or not there will be a slowdown because, again, there are so many factors that are beyond our control. All I can tell you is that we're very conscious of them, and we're trying to make the right business decision every day to be able to keep the members happy, keep the memberships renewing, grow the membership, make those sales.
Got it. I guess maybe a better way to ask that same question is would it be fair to say that the expectations were much higher for certain hard lines in terms of top line for Q3, and that's where the excess inventory came from, just on the expectations front rather than weakness on the top line in terms of you know consumers already adapting.
To the extent we were not clear about it, there's no doubt. I mean, when we were making these. Remember, these hard lines usually have long lead times. Decisions regarding consumer preferences and what we anticipate the market will demand are made nine months, six months, nine months, 12 months in advance of the time that the consumer will actually be in a position to transact. In an environment where things are shifting pretty significantly back and forth, we did take a point of view.
Mm-hmm.
We took a point of view that we are going to make a strategic investment in more inventory with the expectation that we would be able to capture higher sales and be able to sell, you know, these items. After that is really when a number of these other factors came together and sort of created a perfect storm, even though some of it was ongoing, but we saw the Asia port closures increasing more extensively. What would happen is we'd have merchandise there ready to go. It was seasonal. No one was there to put it on the ship to send it to us. But then we'd have the next season coming up on the heels of the prior season's merchandise.
By the time the first season got to the clubs, it almost ran out of time in the schedule. We'd have two rotational seasons backed up. That's the kind of challenge that we didn't, you know, we couldn't predict. It was caused, again, by the supply chain disruption, the unexpected closures, the unavailability of containers. That's what we were faced with at a time when we basically took a point of view that we wanna have the in-stocks.
Got it.
We wanted to push for the sales. Now, as it turns out, looking back, had we known all these other things would happen as well, we probably wouldn't have taken that same point of view. Does that make sense?
No, that makes sense. Yeah. No, for sure. I think I get it. It makes sense.
I think it's important to recognize, again, we're not happy about it, but it's a point in time. It's a point in time where these different variables came together and resulted in the current situation with excess inventory. We are, as a result, addressing it directly and as quickly as we can to get back on track. We don't see it as a development that should continue on an ongoing basis or something that we have an issue with in terms of our ordinary course of business and how we do business and make decisions.
Got it. No, that makes sense. Just another question to clarify. If I understood correctly, the expectation is that, you know, roughly speaking, the impact on gross consolidated gross margins in Q4 is upwards to, you know, 50 basis points just on the excess inventory issue, if I understood correctly.
We're estimating within a range for the rest of the merchandise that has not yet been sold, and the compression on that merchandise has not already been accounted for in our Q3 numbers, which you see.
Got it.
that the residual of that would be about 25 to 50 basis points, which again, we've got to have more sales information in terms of trends, but we think we should be out by the end of Q4.
Got it. Given that, you know, we have these, you know, short term challenges, and then also, when we include the excess margin that came from Trinidad that is, I guess, normalizing or should normalize. Like when we look at the gross margins over time, what should be the reasonable gross margin expectation for the future? I know you don't give guidance, I'm not looking for guidance. I guess I'm trying to understand what's the, you know, where do you feel comfortable in terms of gross margins given those two issues that are kind of impacting the visibility on the gross margins?
You know, this is an area that comes up over and over again. I personally have wondered how someone in your position views margin percentage. Because knowing what we know about how our business operates and how it's evolved, I think we've talked about this before. Historically, you know, almost all of our sales were the result of purchasing merchandise, marking it up, getting it to the clubs and selling it. As a business, we've intentionally evolved and have developed new capabilities and have expanded ways that we think we can either create greater value or create efficiencies. As a result, we've got more than just purchasing items and then getting them to the club. The examples are our direct farm program.
We've invested our own people in identifying and teaching farmers food safety and helping identify what they need to be able to provide a reliable source of produce to a company like ours. We've invested in a produce distribution center. We've invested in teaching them food safety and handling. That is more like getting involved in actually creating or a business that then supplies us. As a result, the margin structure on that program is different, it's higher. We only will do something like that if we feel ultimately the product that comes from that is gonna be as good, if not better quality, and a better price for the member. In that circumstance, we'll still remain very competitive and maintain our typical comp umbrella.
In that circumstance, you're gonna see a higher margin percentage that's applied to that specific function.
Yep.
That example is-
No, that makes sense. Efficiencies that were not there before should be accounted for, but tough to put a number around that. I guess I do have a good perspective with these comments in that, you know, necessarily going back to the 16% range, you know, necessarily makes sense just because that used to be the gross margin, especially after these investments have been made.
In some cases, the gross margin may be higher.
Right.
You know, in certain areas of our business. For example, private label. As we're expanding private label, what we're really doing is movement further up in the supply chain. Once again, that would in some cases merit a different margin structure. The bottom line is we have to always tie it back to, are we giving the greatest value we can to the member? Do we have a healthy comp umbrella? Have we squeezed out the inefficiencies? And all eyes are on that effort, but we recognize that when we have to participate so much more than just identifying the merchandise and getting it to the club, that the shareholders must have a return on the investment that it requires from us to be able to create that opportunity and make it available.
Got it. I took a lot of your time. Thank you so much.
Our pleasure. Thank you. Congratulations, Rodrigo.
Oh, thank you. Thanks, Sherry.
That is all the time we have for today's call. I would now like to turn the call back over to management for any closing remarks.
We wanna thank our shareholders and our employees for continuing to stand strong with us as we navigate some choppy waters. Again, this was a limited time, limited scope situation in our view, and our focus remains on the medium term and long-term growth of the company and continuing to invest in that and make sure that we are doing our best for the future. Thank you for being with us today.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.