Good afternoon, everyone, and welcome to PriceSmart, Inc.'s Earnings Release Conference Call for the First Quarter of Fiscal Year 2023, which ended on November 30, 2022. After remarks from our company's representatives, Robert Price, Chairman, and Michael McCleary, Chief Financial Officer, you'll be given an opportunity to ask questions as time permits. As a reminder, this conference call is limited to one hour and it's being recorded today, Tuesday, January 10, 2023. A digital replay will be available following the conclusion of today's conference call through January 17, 2023 by dialing 1-877-344-7529 for domestic callers, or 1-412-317-0088 for international callers and by entering the replay access code 6032359. For opening remarks, I would like to turn the call over to PriceSmart's Chief Financial Officer, Michael McCleary. Please proceed, sir.
Thank you, operator, welcome to the PriceSmart earnings call for the first quarter of fiscal year 2023 that ended on November 30th, 2022. We will be discussing the information that we provided in our earnings press release and our Form 10-Q, which were both released yesterday afternoon, January 9th, 2023. You can find these documents on our investor relations website at investors.pricesmart.com, where you can also sign up for email alerts. As a reminder, all statements made on this conference call, other than statements of historical fact, are forward-looking statements concerning the company's anticipated plans, revenues, and related matters. Forward-looking statements include, but are not limited to, statements containing the words expect, believe, plan, will, may, should, estimate, and some other expressions. All forward-looking statements are based on current expectations and assumptions as of today, January 10th, 2023.
These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the risks detailed in the company's most recent annual report on Form 10-K, the quarterly report filed on Form 10-Q yesterday, and other filings with the SEC, which are accessible on the SEC's website at www.sec.gov. These risks may be updated from time to time. The company undertakes no obligations to update forward-looking statements made during this call. I will turn the call over to Robert Price, PriceSmart's Chairman of the Board.
Thank you, Michael. Hello, everyone, and welcome to our first quarter of fiscal 2023 earnings call. On behalf of myself and our board of directors, I would like to express our appreciation to Sherry S. Bahrambeygui for her leadership during the past four years. Sherry's performance as CEO during some of the most challenging years in the history of PriceSmart has been marked by record revenues and profits, as well as membership growth, club growth, and the launch of online shopping. Our company is poised to build on Sherry's accomplishments. Sherry will remain on PriceSmart's board of directors, where she will continue to make important contributions to PriceSmart's future success. I am excited about re-engaging more directly in our company's day-to-day business affairs. I have a very personal passion for PriceSmart. Our business takes place in countries that have significant economic and political challenges.
Since our company's beginning in 1996, we have been committed to operating our business at the highest standards related to our buildings and equipment, our merchandise, and most importantly, to providing an outstanding working environment for our over 10,000 PriceSmart employees, serving our members in the 12 countries and 1 U.S. territory in which we do business. U.S. PriceSmart stockholders can be proud of the investment you have made in our company. Now, I will turn the call back over to Michael.
Thank you, Robert, and welcome again, everyone, to this call. We had another outstanding first quarter with both total revenues and net merchandise sales exceeding $1 billion. Net merchandise sales increased by 8.6% after a -2.3% currency impact, and comparable net merchandise sales increased by 5% after taking into account a -2.1% currency impact. By segment in Central America, where we had 27 clubs at quarter end, net merchandise sales increased 10.1% with an 8% increase in comparable net merchandise sales. All of our markets in Central America had positive comparable net merchandise sales growth. In the Caribbean region, where we had 14 clubs at quarter end, total net merchandise sales increased 12.9% and comparable net merchandise sales increased 6.6%.
All of our markets in this segment also had positive net merchandise sales growth. In Colombia, where we had 9 clubs open at quarter end, net merchandise sales decreased 8.3% and comparable net merchandise sales decreased 13.1%. The decrease in Colombia during the current quarter was primarily due to the significant foreign currency devaluation that impacted net merchandise sales by 20.5% and comparable net merchandise sales by 19.6%. The comparable net merchandise sales decrease in Colombia contributed approximately 160 basis points of negative impact to total comparable net merchandise sales for the quarter.
In terms of merchandise categories, when comparing our first quarter sales to the same period in the prior year, our foods category grew approximately 6%, our non-food category grew 1%, and our other business category grew 10%, primarily from our food service and bakery departments. Membership accounts grew 3.9% versus the prior year to 1.76 million accounts. We continued with strong 12-month renewal rates of 87.9%. Our membership income was a record $15.9 million, an increase of 7.5% over the same prior year period. We believe that these membership numbers demonstrate that our members remain pleased with the value they are receiving and appreciate the PriceSmart shopping experience.
We remain diligent with inventory management, utilizing strategic markdowns to reduce slow-moving and excess inventory in the first quarter, primarily related to home furnishings and apparel. Total gross margin for the first quarter of fiscal year 2023 as a percentage of net merchandise sales increased 20 basis points to 16.2% versus 16% in the first quarter of fiscal year 2022. In total dollars, total gross margin increased $15.5 million or approximately 10.3% versus the same quarter of the prior fiscal year. Total revenue margins increased 20 basis points to 17.6% of total revenue when compared to the same period last year, primarily due to the increase in merchandise gross margins. The team has done a great job of being proactive about selling through overstocked categories.
Our focus has been on getting back to our core business that has a more standard inventory balance and customary margin structure. We believe that good sell-through results in Q1, including for our Smart Week and World Cup events, are reducing the risk of additional markdowns in Q2. We have transitioned out of Christmas items and are now preparing for spring with water sports, camping, and exercise programs that started landing in December and will bring fresh new merchandise to the clubs. Supply chain disruptions were relatively tempered during this quarter, with our overall supply chain logistics network remaining relatively stable and reliable. Shutdowns in China lessened during the first quarter, but we remain cautious due to the recent COVID outbreaks there.
We saw relief on shipping costs during the quarter on our transpacific freight rates, which averaged approximately $6,400 per container during Q1, down from $11,500 last quarter. Rates approached $4,000 per container at the end of November. Additionally, transit days for inbound containers loaded with our merchandise from Asia decreased to 51 days on average for the first quarter of fiscal 2023 from 61 in the fourth quarter of last year. Unfortunately, inflation continues to be a macroeconomic factor that has a significant impact on the cost of our merchandise, driven in part by rising commodity input costs, labor, and higher packaging costs. Although we do our best to mitigate cost increases, inflation has resulted in increases in our merchandise selling prices.
For the first quarter of fiscal 2023, the average sales price per item increased 10.3% compared to the same period of the prior year. During the same comparative period, we've seen the items per basket decrease 4.4%. However, transactions grew 3% this quarter versus a year ago. SG&A expenses decreased during the quarter by 40 basis points as a percentage of total revenue, primarily due to the sale of Aeropost and the devaluation of the Colombian peso. Operating income for the quarter increased 20.7% from the same period last year to $55.5 million. Other expense of $4.6 million was driven by $3.2 million of foreign currency losses due to revaluation of monetary assets and liabilities in several of our markets.
In addition, we had transaction costs of $1.1 million associated with converting Trinidad dollars into available tradable currencies. Our effective tax rate for the first quarter of fiscal 2023 came in lower than last year at 33.3% versus 34.1% a year ago. On a go-forward basis, we estimate an annualized effective tax rate of 32%-33%. We are very proud of our results in this quarter, as our net income and earnings per share were a record for the company. Net income for the first quarter of fiscal 2023 was $32.9 million, or $1.05 per diluted share, compared to $30.5 million or $0.98 per diluted share in the comparable prior year period, which included a $0.05 gain from the sale of Aeropost.
Moving on to the strength of our balance sheet, we ended the quarter with cash equivalents, and restricted cash totaling $281.7 million. From a cash flow perspective, net cash provided by operating activities totaled $30.5 million for the 3 months ended November 30, 2022, and net cash used in operating activities totaled $13.3 million for the same prior year period. Shifts in working capital generated from changes in our merchandise inventory and accounts payable positions for the 3 months ended September 30, 2022 contributed $29 million of cash flow compared to the same period the prior year.
This positive change was supplemented by another positive change of $11.3 million in various assets and liabilities, primarily driven by less prepaid VAT and duties as the buildup of inventory was significantly less in the current period comparatively. Net cash used in investing activities increased by $9.4 million for the 3 months ended November 30th, 2022, compared to the prior year, primarily as a result of a net decrease in proceeds from settlements of short-term investments. Net cash provided by financing activities during the quarter increased by $13.5 million, primarily due to the $16.7 million increase in long-term debt proceeds, partially offset by net repayments of $4.3 million of short-term borrowings compared to the same three-month period a year ago. Turning now to our growth drivers.
Starting with real estate, as we have previously discussed, we currently have two warehouse clubs under construction. In the spring, we expect to open our third club in El Salvador. In the summer, we expect to open our second club in Medellín, which will be our tenth warehouse club in Colombia. Once these two new clubs are open, we'll be operating 52 warehouse clubs, and we are actively exploring additional locations as well. Both of these clubs are applying our smaller club format, and as we fine-tune these smaller club formats, we are finding operating efficiencies that we believe will allow us to increase our square footage productivity. We believe that one of the quickest and most effective ways to increase sales and profitability is to increase the size of our warehouse clubs and the number of parking spaces in our high volume locations.
For instance, we are currently preparing to remodel and expand one of our clubs in San Salvador, El Salvador. As we've mentioned previously, our real estate strategy also focuses on the important role of our distribution facilities to optimize efficiencies and reduce supply chain risk. We continue to actively seek new distribution center options in several of our larger markets to facilitate the frequency and flow of merchandise, maximize selling space in the clubs, and create alternatives for e-com order fulfillment. Turning now to membership value. One of the things that continues to excite members is the treasure hunt in our stores. Our team of buyers curates items from around the world, seeking out great values on fantastic merchandise. This treasure hunt opportunity drives traffic to our clubs and generates incremental sales opportunities.
An area that we believe provides exceptional value to our members is our private label products under the Member's Selection banner. During the first quarter of fiscal year 2023, our private label sales represented 25.9% of our total merchandise sales. That's up 230 basis points from 23.6% in the comparable prior year period of fiscal year 2022. Another area of membership value is our wellness offering, which includes optical, audiology, and pharmacy. We currently have 47 locations with optical centers, and expect to have 51 open by the end of the fiscal year. Our optical program provides for 4 free exams for every membership, and we performed over 33,000 eye exams during the quarter. Optical is also an important social responsibility contributor to our local communities.
Through our partnership with Price Philanthropies' Aprender y Crecer program, we have provided approximately 13,000 screenings, 3,500 exams, and 3,100 eyeglasses to local schoolchildren since the program's inception, and we are very excited about having this service available to support our local communities. We currently have pharmacy centers in all 8 of our warehouse clubs in Costa Rica and have now opened pharmacies in 2 warehouse clubs in Panama. With respect to audiology centers, at the end of November 2022, 14, and we expect all in fiscal 2023. Driver is our e-commerce channel. During the first quarter, total e-com sales represented 3.9% of total merchandise sales. Total orders increased 8.1%, and the average transaction value increased 11.6% versus the prior year period.
We continue to see encouraging signs with regard to how our members are responding to their online experience with us and pricesmart.com in general. As of November 30, 2022, approximately 55.1% of our members have created an online profile with pricesmart.com. We believe that there are significant growth opportunities in our digital channel. 13.6% of our total membership base has made a purchase on pricesmart.com. The average purchase on pricesmart.com in Q1 was 37.8% higher than the average ticket for in-club purchases. We will continue to invest in this part of the business in an effort to provide an enhanced omnichannel experience to our members. It is also encouraging that 8.7% of our membership accounts are enrolled in our auto-renewal options.
This membership option allows for a component of our income to become more reliable, which is obviously something that is of great benefit in a climate where we're facing a lot of unpredictable variables that impact our sales. Turning to ESG. The company's actions and practices aim to responsibly use natural resources and focus on environmental impact and social well-being. On the last call, we told you we were planning to open 30 recycling centers this year. I have opened more collection centers in Guatemala in December and plan to be fully rolled out in that market this month, as well as opening one in El Salvador. To put our impact into perspective, our initial pilot site in our San Pedro Sula club in Honduras averages on a monthly basis about 15,000 pounds of recyclable material.
Additionally, we continue to work with Global FoodBanking Network, where the company donates unsellable but safe to consume merchandise to participating food banks. We currently have programs in place in Guatemala and Costa Rica that are fully operational, with the intention to begin in El Salvador, Panama, and Nicaragua over the next few quarters. To further the philanthropic mission in PriceSmart communities, PriceSmart and the Price Philanthropies Foundation have established the PriceSmart Foundation to serve as the philanthropic partner of our company. The core principles of the PriceSmart Foundation are promoting youth career development and education, supporting economic development in under-resourced communities, and funding initiatives that strengthen environmental and community resilience. The foundation is a separate and independent legal entity from both PriceSmart, Inc. and the Price Philanthropies Foundation and has its own board of directors.
PriceSmart has budgeted to provide partial funding that includes in-kind donations of staff time and cash grants to nongovernmental organizations that supports its mission and to support the foundation itself. Our commitment to sustainability and social causes remain strong, and we're committed to fostering a safe, healthy environment for our employees, members, vendors, communities, and the world around us that we consider to be part of PriceSmart's family. Looking forward into Q2, we are happy to report strong holiday sales with our comparable net merchandise sales for the 4 weeks ended January first 2023, up 10.4%, which includes a negative currency impact of 0.7%. We also want to highlight that as disclosed in our 10-Q filed yesterday, we expect to take a charge in Q2 due to the CEO transition, which will reduce EPS by approximately $0.23.
In closing, I would like to reiterate that we are determined to focus on the fundamentals that have characterized the club business since its inception in 1976, including by ensuring we have the right merchandise at the right price, in the right quantity, in the right condition, in the right place, and at the right time. PriceSmart has a unique business model in the markets where we serve that is embraced by our members and continues to grow. We have a highly committed and talented team at PriceSmart, and I want to thank all of our employees for their continued hard work and dedication to PriceSmart. With that, I will now turn the call over to the operator to take your questions. Operator, you may now start taking our callers' questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. 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. Our first question will come from Jon Braatz with Kansas City Capital. You may now go ahead.
Good morning, Robert, Michael.
Morning, John.
Mike, I got a question for you. Let's going back, going to back to Colombia. Obviously it's a very difficult situation. You know, membership was down sequentially, comps were weak. In the Form 10-Q, you mentioned that you're considering some different strategies over the near- term to confront these issues. One of them was, you know, you might hold pricing steady, and it could impact the gross margin. I guess two questions. Number one, have you adopted any new pricing strategies yet in Colombia? You know, if so, how far might you go in terms of holding prices and having it a little bit of a negative impact on the gross margins?
Jon, this is Robert, and let me begin. I just wanna greet everybody on the call, including, of course, our employees at PriceSmart, who I wanna thank for all the good work they do. We're taking a very serious look at how we wanna deal with the sales situation in Colombia. We've got a big investment there. We've probably put more money into Colombia maybe than any other country we're in in terms of real estate. I think now is the time for us to try to build that market. Even though the economy there is weak, and of course, we also suffer because a lot of our strength is in imports, and imports are particularly affected by the currency change. I think we can't be passive.
This is a long road in terms of how we think about Colombia and the future in that country. I don't know the exact numbers, but I would expect that there could be some effect on margins. We also hope that our suppliers are going to support us in terms of more aggressive pricing, particularly on imports, so that we can begin to build sales volume at this time. I don't think it's gonna be a major thing in terms of margin impact, but I think we're gonna be more aggressive about how we build sales in Colombia.
Okay. Have you implemented anything yet, or are you still in the process of thinking about this?
We haven't implemented anything yet, but we're doing more than thinking.
Yeah.
We're really actually making plans and working with John Hildebrandt, our new President, and Ana Luisa, who is our Chief Merchant, to try to develop a strategy that. We'll do it incrementally. We're gonna test things out and make sure that what we do really impacts. The other thing to keep in mind is we have a second location opening in Medellín.
Mm-hmm.
We want that location to open well. What we'd like to do is begin to implement some more aggressive merchandising strategies in advance of that opening.
Okay. Okay. You know, secondly, you've you mentioned that your December comps were up 10.4%, which is a little bit ahead of what they most recently have been over the last quarter and so on. Did you see a similar improvement in the comps in Colombia in December?
Mike, do you wanna answer that?
I don't have, I don't have the Colombia.
I would answer. I can answer that.
Okay.
I would say in local currency.
Yes.
yes. In translated dollars, no.
Yeah. Okay. Okay. That's fair. Okay. All right, that's all I have right now. Thank you.
Thanks, Jon.
Well, thank you for not having more questions. That's good.
Our next question will come from Héctor Maya with Scotiabank. You may now go ahead.
Hi. Thank you. Thank you very much for the opportunity and also for your time. I wanted to know about the progress of the CEO position, how long-term will it be? How much time do you think it could take? Really how difficult would it be to find an appropriate candidate to fill in? If it's more likely that this person might be an outsider to the company or from within.
Hi, Héctor. We're having a lot of trouble hearing you. It's coming a little garbled. I understood your question relating, being related to the CEO transition and, I think how long, we expect the interim position to last and what the strategy is for replacement. Is it something along those lines?
Yes. Yes. Thank you. If you believe it's going to be more likely an outsider to the company or from within?
Yeah. Okay. You know, this is a very, very important question and very important matter for the company. Our approach is gonna be to discuss this with the board and take our time to be sure we come up with a good answer. Because the board needs to be involved, and this is a key responsibility of the board, is the leadership of this company. The resolution of this has to be done in a way that's really gonna be good because it's a very challenging issue to make transition in CEO. We're gonna take our time. We're gonna make sure we do it right, but it will be a board responsibility.
Thank you. On that note, I also wanted to know long-term strategic needs for the business could be changing with this movement and consider the implications, considering the implications of the appointment of David Price as Executive Vice President and Chief of Staff.
Sorry, I caught something about David Price and EVP, I didn't catch the rest of it. I can't. Sorry. We're having a lot of trouble.
Yeah. Sorry. Is there long-term strategic views for the business that could be changing considering the appointment of David Price as Executive Vice President and Chief of Staff?
The question is, would there be changes in the business because of appointment of David Price? Is that your question?
Sorry, I don't know if you can let me try something different here.
I'm having a lot of trouble. Let me tell you one thing about David Price.
He's the son of you? Sorry.
He's my son, you know. He tells me on a regular basis that I'm too old to understand technology, so he's gonna educate me in technology. That's, that's one thing that I expect from these young people, that they're going to be able to provide much more relevant and knowledgeable information on technology than an old-timer like myself.
All right, thank you. I don't know if I heard the answer correctly because I'm having issues here, for me. I'll try again. Thank you. The last question would be an operational question. If you could give us more color on the other expenses categories, mainly on how FX impact drove decline, including what expansion has been built a little. Thank you.
Wait, Héctor, this is. I'm very sorry, but we're just having. I heard operational expenses and.
Would it be better in Spanish? You wanna try in Spanish?
No, I think it's the communication line.
Okay. All right.
I think it's more about the communication line. It's just coming across really garbled. Try one more time, Héctor, please.
Oh, sorry. About the expenses categories, mainly on the FX impact, the core decline. We saw that there was expansion with the historical levels, so wanted to know if you could give us more details on that.
I heard something about FX and something about expenses. Is that the question about the level of FX expenses, below operational income? Is that it?
Yes. That's the one.
Oh, okay. Yeah, good question. The, the primary component, the, the biggest component of that, of the, of the FX line continues to be the Trinidad FX premium that we've been talking about for probably three years now, as being a significant component. The other components actually relate to an unusual circumstance we had this quarter versus other quarters, where we had actually the big appreciation in Costa Rica actually worked against us. You may recall we've had some similar circumstances in the past, where we have a large dollar value, dollar balance outstanding, which over time is the Costa Rican colon devalues, you would expect that to add more value to us. In, particularly in this quarter, we had a significant 8% devaluation.
That hurt us in Costa Rica. At the same time, we had the known depreciation in Colombia, which, where we had a liability position. We do protect all of our long-term financing is protected through swaps and local currency loans, but our working capital, you know, tends to be, fluctuate between dollars and local currency. We had just kind of a perfect storm there of the Trinidad premium, Colombia devaluation, also devaluation in Dominican Republic, and then the counterintuitive appreciation in Costa Rica kind of all worked against us during the quarter.
Yeah. Thank you. Thank you very much. I'll try to catch up later with due to the line complications. Thank you.
Okay. Thank you, Héctor.
We will now take a follow-up from Jon Braatz with Kansas City Capital. You may now go ahead.
Michael, you did a pretty good job on the expense line, the Operating Expenses. One of the things you've said in the past is you're gonna continue to invest in technology and so on. Did that spending moderate at all in the quarter relative to some prior quarters?
No, I wouldn't say it moderated. I mean, you know, obviously, I mean, we've talked about this before. When sales are going up, then as a percentage of sales.
Yeah.
It doesn't, it doesn't distort things as much as when, you know, sales are growing a little bit slower. No, I wouldn't, definitely not say that we've moderated, our.
Okay. To the extent that, you know, revenues grow, you know, let's say mid-single digit, you think those expenses, that expense, technology expense might grow at a lower rate?
I'd say TBD, Jon. I mean, we've got a lot, you know, Robert alluded to it earlier, we've got a lot to do.
Mm-hmm.
In the digital area, and we've got commitments, you know, to continue along that path. You know, that's a constant thing for evaluation within management and within the board as to the track and the pace.
Yeah.
A lot of things to do, we'll just, you know, doing our best to balance that out. You know, sometimes you can get a imbalance as far as the sales growth versus our.
Sure.
Expected goal of continuing down that path.
Okay. All right. All right. Thanks a bunch.
Yeah. Thanks, Jon.
This concludes our question and answer session. I would like to turn the conference back over to Michael McCleary for any closing remarks.
Okay. Thank you all for joining us today, and we look forward to talking to you next quarter. Take care. Bye-bye.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.