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Page 1: PSMT 10-27-17 Officers John Heffner;PriceSmart, Inc.;EVP ...€¦ · Ronald Bookbinder;IFS Securities;Analyst Rodrigo Echagaray;Scotiabank;Analyst John Braatz;Kansas City Capital;Analyst

PSMT_10-27-17

PriceSmart, Inc. Fourth quarter fiscal year 2017 financial results

Officers

John Heffner;PriceSmart, Inc.;EVP and CFO

Jose Luis Laparte;PriceSmart, Inc.;President and CEO

Analysts

Ronald Bookbinder;IFS Securities;Analyst

Rodrigo Echagaray;Scotiabank;Analyst

John Braatz;Kansas City Capital;Analyst

Patricio Danziger;RWC;Analyst

Presentation

Operator: Good day, and welcome to PriceSmart, Inc.'s earnings release conference call for the

fourth quarter of fiscal year 2017, the three-month period ending on August 31, 2017.

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

given an opportunity to ask questions as time permits. (Operator Instructions)

As a reminder, this conference call is being recorded on Friday, October 27, 2017. A digital

replay will be available through November 3, 2017, following the conclusion of the call by

dialing 877-344-7529 for domestic callers or 412-317-0088 for international callers and entering

replay access code 10112016.

I would now like to turn the conference over to John Heffner. Please go ahead, sir.

John Heffner: Thank you, Austin, and welcome to our earnings call for the fourth quarter and

full year of fiscal year 2017. We will be discussing the information that we provided in our

earnings press release and our 10-K, both of which we released yesterday, October 26, 2017.

You can find our press release and the 10-K filing on our website, www.pricesmart.com.

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 risks and uncertainties that could cause actual results to differ

materially, including the risks detailed in the Company's annual report on Form 10-K for the

fiscal year ended August 31, 2017, filed with the Securities and Exchange Commission on

October 26, 2017. 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 will this this over to Jose Luis Laparte, PriceSmart's President and Chief Executive

Officer.

Page 2: PSMT 10-27-17 Officers John Heffner;PriceSmart, Inc.;EVP ...€¦ · Ronald Bookbinder;IFS Securities;Analyst Rodrigo Echagaray;Scotiabank;Analyst John Braatz;Kansas City Capital;Analyst

Jose Luis Laparte: Good morning, and thank you for joining our earnings call for the fourth

quarter and the full year -- and the full fiscal year 2017.

The Company reported sales for the quarter of $711 million, a growth of 3.6% from Q4 of last

year, and net income of $19.8 million, for an earnings per share in the current quarter of $0.64.

This compares to $0.74 per share a year ago, when we indicated that the beneficial impact of

certain tax-related items reduced our effort tax rate and favorably contributed approximately

$0.06 per diluted share to our results in that comparable quarter. For the full fiscal year,

warehouse sales were $2.91 billion, a growth of 3.2%, with earnings per share of $2.98,

compared to $2.92 in fiscal year 2016.

We saw a reduction of operating profit in the quarter in both our Central America and Caribbean

segments compared to a year ago, largely related to lower sales in our largest markets in each of

those segments -- Costa Rica in Central America and Trinidad in the Caribbean. On the other

hand, Colombia continued to outperform with sales growth of nearly 21% and operating profit

improvement of $2.7 million, from a loss last year of $1.2 million in Q4 to an operating profit this

year of $1.54 million.

The fourth quarter also had higher expenses, which were recorded in corporate G&A, associated

with the specific initiatives that we are focused on to drive growth and efficiency in the future but

have near-term costs. I will address some of those initiatives in my later remarks.

Let me begin with warehouse sales. The 3.6% growth in total sales for the quarter was all driven

by a higher number of transactions. The average ticket was flat -- essentially flat from a year ago.

In Colombia, we saw strong sales of 20.7% compared to the same quarter last year, including the

sales of the Chia location, which opened on September 1, 2016.

If we look at comparable clubs, the growth will be 4.4% with the effect of cannibalized sales,

particularly in our Salitre Bogata club. Fortunately, the exchange rate has been pretty stable in

that market for the last few months, making the comparison in US dollars and Colombian pesos

very similar.

It is exciting to see our business results in this market now that the currency has stabilized, even

with the recent increases a few months ago in their VAT, which went from 16% to 19% in certain

products. We have also seen good results in margin and membership, which I will address

further.

For the Central America region, we finished the quarter with total sales growth of 2.1%, driven

by growth in most of our markets, like Panama, Guatemala, Honduras, El Salvador and

Nicaragua. Costa Rica experienced a decrease in sales of minus 1.1% for the quarter, to some

degree affected by currency, since in local currency it will be a 3.3% positive growth. Obviously,

this is somewhat significant, however, in that Costa Rica is our largest market in terms of sales.

The Caribbean had a slightly favorable comp of 0.7% for the 13-week period. We continue to see

difficulty -- difficult economic conditions in Trinidad, which had a negative 13-week comp of 1.9

-- minus 1.9%, and Barbados, which came down minus 4%. The Dominican Republic and USVI

recorded good sales growth, but Jamaica led the pack with sales growth right at double digits for

the quarter.

Page 3: PSMT 10-27-17 Officers John Heffner;PriceSmart, Inc.;EVP ...€¦ · Ronald Bookbinder;IFS Securities;Analyst Rodrigo Echagaray;Scotiabank;Analyst John Braatz;Kansas City Capital;Analyst

Overall, comp growth for the 13-week period ending September 3, 2017, finished at 1.9%. For

the full fiscal year, our 52-week comp sales were 1.5% in total, with Central America up 1.4%,

the Caribbean down minus 1.2%, and Colombia up 10.2%.

We finished the fiscal year with over 1,000,542 membership accounts, representing a 3.5%

increase to our base from a year ago. Membership income for the quarter was $12.2 million, a

5.3% increase. The higher growth in membership compared to account growth is largely due to

the membership fee increase we introduced in Colombia in the month of February.

Our 12-month membership renewal rate for the end of the quarter and year was 85%, compared

to 80% a year ago. Most of the growth is reflected by the improving renewal strength in

Colombia. The 12-month renewal rate in Colombia has improved from 58% a year ago to 78%.

In addition, we continue to attract new members to our clubs in Colombia.

Given the relative currency stability of the past 18, 24 months, I continue to be upbeat about our

opportunity in Colombia for fiscal year 2018 and beyond. Our Chia club near the city of Bogata,

which opened a year ago, is showing good growth in membership and transactions. At the Salitre

Bogata, club, after a year of suffering the effect of cannibalization, is back on the growth trend,

finishing the month of September with double-digit sales growth. Our club in Medellin, our

second-highest volume club in Colombia, comped nearly 27% last fiscal year and 16% in this

past month of September.

We continue our efforts to identify possible locations for new warehouse clubs in Colombia and

have a few targeted site opportunities, in addition to exploring other ways we can serve that

market.

The combination of good sales and membership growth, somewhat higher but still aggressive

margins on -- somewhat higher but still aggressive margins on exciting merchandise, and good

operating standards in our Colombian clubs have resulted in a much improved business result.

Operating income in Colombia for the full year was $4.9 million, versus an operating loss a year

ago of $5.4 million.

Let me say a few words about merchandise in general. Company-wide, the top categories for the

quarter where we saw double-digit sales growth included gourmet deli, tires, and fashion apparel.

We have been very active in growing our road shows as a new initiative, with good results. We

saw single-digit growth in candy, pet, soda, deli, seafood, automobile, and hardware. Overall, our

(inaudible) departments and fresh area led the way in growth with a total comp growth of 13%

and 2.5%, respectively, for the quarter.

I would like now to provide some updates on different areas of the Company and different

activities going on as we start the new fiscal year 2018. As we started the year in September, we

had the challenges of the hurricane events that affected the region where we operate in the

Caribbean and South Florida.

In particular, USVI got affected more than other locations with a one-two punch from Irma and

then Maria. We were closed for a total of nine days during the month of September and had to

curtail operating hours on a number of other days to comply with local curfews. We were

fortunate that our building handled the storm well in USVI and only received minor damage,

including losing all our light posts in the parking lot and some cosmetic damage to signage on the

outside of our building. We were able to run on generator power for a few weeks and even

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managed to connect wirelessly to our bank to handle credit card transactions in the days

immediately following the first storm.

We certainly didn't see any normal operation during the month given the challenges that the

country experienced with lack of fuels, difficulties to move around the island caused by road

damage, and inconsistent or nonexistent communication, but I am happy to say that we were able

to open quickly and provide much-needed supplies to our members while many other retailers

were closed.

It is a testament of the commitment of our employees who reported to work despite difficult

conditions and-or damage to their own homes. I would like to recognize and to thank all our

employees in that location for their efforts in serving our members' needs during the difficult

times we have had -- we had there. We provided some extra relief to our employees to help them

get back on their feet.

That particular club finished the month of September with a decrease on sales of 16.5, and during

October, we have seen a more stabilized level of business. It may still take a few months to see

the real impact of the storm to the other businesses in the island, including hotels and other

tourism industries that have -- that drive the economy in USVI.

Other locations in the region, like Dominican Republic and Barbados, had to close for business

for a couple of days, also due to the storms, but we're happy to report that there was not any

damage to our warehouses in those locations.

In Miami, we were also lucky, and our new distribution center only received some minor damage,

but nothing of consequence considering what happened in other cities and facilities in the

Caribbean and South Florida areas. While there has been some minor interruption of

merchandise flow, we were generally able to maintain our shipments and recover once the storms

passed. I would like to express my best wishes to our members, employees and all those affected

by the storms throughout the Caribbean and Southeastern US.

Despite those unfortunate events, we started the new fiscal year with a good performance,

reflected by a 2.8% comparable growth for the four-week period that ended October 1, 2017. In

October, we opened our seventh warehouse club in Costa Rica, in the area of Santa Ana, an area

west of San Jose. Again we were affected by weather, on our opening day, with torrential rains

and flooding around the city. Nevertheless, we had a successful opening, and good sales have

continued.

This new location will certainly impact our other clubs in the city, especially our Escazu location,

which will probably experience about a 20% to 25% cannibalization. However, we believe that it

will allow Escazu, our highest-volume club in Costa Rica and the second-highest in the

Company, to grow again given the traffic and congestion in that area associated with the

popularity of our club.

Other clubs in Costa Rica may also suffer some cannibalization to a smaller degree, but as a

Company, we're happy to consolidate our presence in such an important market for us. If our

projections are correct about the transfer of sales from Escazu, our reported comps over the next

12 months will be impacted by 75 to 100 basis points.

We are also excited about a number of initiatives and strategies that we have been working on,

some of which were launching as we begin the new fiscal year. We have one dedicated to

Page 5: PSMT 10-27-17 Officers John Heffner;PriceSmart, Inc.;EVP ...€¦ · Ronald Bookbinder;IFS Securities;Analyst Rodrigo Echagaray;Scotiabank;Analyst John Braatz;Kansas City Capital;Analyst

increasing the value of our membership and bring more innovation to our warehouse clubs so that

our members can view our membership as a bigger part of their life.

With that said, we are introducing a few new programs and initiatives in our clubs to keep

creating excitement and improve our average purchase within our clubs. Let me speak to a few of

those.

We opened our first optical center with our new Santa Ana location in the beginning October -- at

the beginning of October. This week, we opened our second location in the Escazu club.

Members are able to get either lenses or frames in that new optical center. So far, with just a few

weeks of experience, we are pleased to see the response from our members on this new offering.

We are able to offer good savings and great value compared to other alternatives in the market.

As soon as we get more results, we will be able to make an assessment on how to grow this

initiative, but so far, we're happy with the initial results.

We have also been working on more gourmet foods -- for example, a sushi road show, which

started at the Santa Ana opening, offering our members a high-quality, exciting product that

received great response. In our Salitre Bogata club, we opened our first PriceSmart coffee kiosk,

where we offer our own private-label member selection coffee and some baked goods in a setting

not unlike you will see in the US. The kiosk sits just outside the entrance to our club. While this

is also a new test, it is showing good results and positive feedback from our members, and we

may look to do more of these.

Another member-centric initiative was launched in Panama during the month of September, our

Platinum membership program. Panama is now the second market which offers a Platinum card,

which has been in place for a number of years in our Costa Rica market. The initial acceptance of

the program has been very good in this market, and sign-ups and upgrades are running ahead of

our expectations.

As a reminder, this program provides our members the opportunity to get a 2% reward cash back

for all the purchases they make at PriceSmart. The cost of the Platinum membership is $75,

which compares with $35 for the regular membership. In our experience in Costa Rica, we

actually saw higher sales -- higher spend with the Platinum members a year after they joined the

program. Renewal rates on Platinum members is about 94%, and those members represent over

24% of our sales in Costa Rica. In addition, we will be launching the Platinum program next

month in the Dominican Republic.

Last, but not least, we're also looking at some plans to enhance our co-branded credit card

program in an effort to keep growing the number of members that have our card, which reduces

our costs while providing an increasing level of reward, convenience and value to our members.

In terms of expansion, our future club in the Dominican Republic, in the area of San Isidro, is

under construction, for a grand opening in spring 2018, and we're in the middle of the expansion

of two of our warehouses, one in Pradera, Guatemala, and the other one in Kingston, Jamaica.

Both of those clubs will have not only additional sales floor space, but also more parking to

improve the members' shopping experience.

Before we move to John's comments, I would like to cover one additional topic, which I also

mentioned in our last earnings call. As a Company, we realize the importance of the online

activity occurring in the United States, and we realize that is an important trend in meeting future

Page 6: PSMT 10-27-17 Officers John Heffner;PriceSmart, Inc.;EVP ...€¦ · Ronald Bookbinder;IFS Securities;Analyst Rodrigo Echagaray;Scotiabank;Analyst John Braatz;Kansas City Capital;Analyst

consumer needs. We at PriceSmart are developing a strategy plan and investing in technologies

to better satisfy our business and retail members.

While we advance our development and strategies in this area, we have decided to stop what we

call our international catalog business. We learned a lot in trying to make that business work, but

we felt we needed to refocus our efforts in developing technologies that will better serve our

members and contribute to a future growth path.

We currently have a new group of people working on what we call the innovation team. Their

main goal is to integrate the best of our traditional brick-and-mortar warehouse clubs with the

new trends of online shopping and create the right omni-channel experience for our members.

We also created an innovation committee of the Board that oversees the efforts of this innovation

team. The Board has designed $3 million to $5 million of technology-related spending for this

fiscal year, 2018, and we believe that the returns of these efforts will be important to create a

seamless omni-channel experience for our members.

We began these efforts and spending in early Q4 with the associated expenses for these and other

initiatives that are focused on the long-term success of the Company in this changing retail

environment, and that is recognizing our general and administrative expenses in the quarter. It is

our intent to continue to make these investments, fund these investments and seek innovation

solutions as to how we can best serve our members and markets in the future.

Thanks again for joining us today. After John's remarks, we will take your questions.

John Heffner: Thank you, Jose Luis. Let me cover a few additional items. Total gross margins

in the period included the effect of the current period lease costs for space in the vacated Miami

distribution center that has not been sublet. The impact in the quarter was approximately

$450,000, or about six basis points of margin, which included a termination fee for 65,000 square

feet of space, which we returned to the landlord. We now have about 140,000 square feet

remaining of the original 260,000 square feet, with a monthly carrying expense of about $90,000.

Overall for the fourth quarter, net warehouse club margins declined 17 basis points from a year

ago, although they were higher by 61 basis points from the prior quarter, Q3. Colombia margins

were again higher than the year-earlier period, by 154 basis points, while Central America and

Caribbean margins were lower by 36 basis points and 13 basis points, respectively.

As Jose Luis mentioned, a number of the investments that we have associated with future

initiatives resulted in higher spending in general and administrative expenses in Q4 compared to a

year ago. We would expect to operate at somewhat above this -- at or above this level of G&A

spending throughout fiscal year 2018 as we develop the technologies and capabilities we believe

are essential for our future.

Compared to Q4 of last year, we had less interest income due to lower cash balances on deposits

and higher interest expense, largely as a result of the debt associated with the acquisition of the

Miami distribution center in Q2.

Foreign exchange transactions and the revaluation of monetary assets and liabilities resulted in a

$394,000 currency gain in the quarter, compared to $119,000 gain in Q4 last year. We continue

to face liquidity issues in Trinidad, but have been able to effectively meet the demand for our

imported products with shipments without a significant increase in our exposure to the TT dollar.

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Our team in Trinidad and our Corporate Treasury team have been able to source sufficient

tradeable currency to maintain adequate flow of imports into the market. We remain vigilant,

however, to any changes in the market, which may cause us to take action to more tightly manage

our flow of US products to Trinidad.

The effective tax rate for the period was 33.9%. As expected, the effective tax rate has increased

to a more normalized level after several quarters of a lower rate due to the benefit we saw for

several quarters attributable to inter-Company transactions between PriceSmart, Inc., the US

entity, and PriceSmart Colombia related to our ongoing market development efforts in Colombia,

with last year's Q4 being exceptionally low at 30.4%. As you may recall, we highlighted this

reduction last year as having a beneficial impact of $0.06 per diluted share in our Q4 fiscal year

2016 results.

From a balance sheet perspective, the Company ended the year with cash of $162.4 million, a

decrease of $29.7 million during the quarter. Operating activities in the quarter added $36.6

million. We invested $35.7 million in various capital projects, including the construction activity

associated with the Santa Ana, Costa Rica, warehouse club and the acquisition of land in Santo

Domingo, Dominican Republic, and the initial construction of what will be our 41st warehouse

club. The work we are doing to expand our Pradera warehouse club in Guatemala used about

$2.5 million in the period.

Finally, we used $30 million in financing activities, primarily reducing debt and making our

August 31 dividend payment of $10.6 million.

Now, before we take your questions, I have one more item of a personal nature. I recently

informed Jose Luis and the Board of my intention to retire from the Company. I committed to

work closely with them over the next several months to effect a smooth and seamless transition. I

am leaving at a good time for me and for the Company. PriceSmart is in a very strong position in

the markets where we operate. It is also a time when the Company has some very exciting plans

for the future, including the wider use of technology to better serve our current and future

members.

This is a great opportunity for someone to be part of that innovation and transformation over the

next few years, which was a longer period than what my personal plans allowed. The Company

has retained a firm to conduct a search and to evaluate candidates, both internally and externally.

We expect that the overall transition process will extend through the first quarter of the calendar

year 2018, and until the time is right to formally pass the baton, I will remain fully engaged in my

current role, one that I have enjoyed immensely for the past 14 years.

Jose Luis Laparte: John, let me add that I am very appreciative of John's many contributions to

the growth and success of PriceSmart. He and I joined the Company at about the same time and

have worked together closely over the years. I will miss John's counsel and leadership, but I fully

respect his decision, and I'm happy for him as he makes plans to move on to his next life stage.

It is important that we have an uneventful transition as we continue to grow the Company and

execute on our many plans and initiatives. John will continue to play an important role in that

process over the coming months. Thank you, John.

With that, we will be happy to take your questions. Operator:

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Questions and Answers

Operator: Thank you. We will now begin the question-and-answer session. (Operator

Instructions). Ronald Bookbinder, IFS Securities.

Ronald Bookbinder: So on the cannibalization in Costa Rica, you mentioned a 75- to 100-basis-

point impact. Is that on the Company-wide comp, or is that just on the Costa Rican comp?

Jose Luis Laparte: That's on the total Company comp, on the wide -- Company-wide.

John Heffner: Yes.

Ronald Bookbinder: Okay. And on the slowing in Costa Rica, you grew on a local currency

basis, but is there anything else going on there, any competitors, or how is traffic versus ticket?

How should we think about Costa Rica?

Jose Luis Laparte: Yes, let me tell you, Ron, I think for the most part, I don't think there is any

increase or any difference in competition in that particular market. It's pretty much the same. I

think we have been competing for the last few years with the same guys, and we haven't even --

we haven't really noticed a big increase in competition in that specific market. In terms of our --

the economy seems to be a little soft, no question, and obviously the impact of a slight exchange

rate that the -- or a slight devaluation shows better results in local currency.

Our transactions are actually not trending bad at all. They are actually up, and they were up about

2% in transactions in that market, so it is more a result of a little bit less spending from the

members, in general terms. But as I mentioned, obviously, and the reflection of our seventh

opening in that market demonstrates our commitment, and things hopefully will get better in the

economy for us to keep growing our base there.

Ronald Bookbinder: Okay. And on the G&A, the increased spending as you build out the

technology, you said that it should be at or above the current levels. Are you talking about as a

percent of revenue or on an absolute dollar basis? Could you just give us a little more color as to

what that means?

John Heffner: Yes, it was driven more on an absolute dollar basis. I think our -- the G&A for

the quarter -- well, I have it right here, about $18 million or something like that, and it'll sort of

run in that or slightly above that over time. We had about $800,000 to $900,000 of that type of

technology and innovation spending in the quarter, Q4, and it'll be -- it'll probably increase a little

bit from there. We indicated $3 million to $5 million incrementally for the year, so $5 million

over four quarters would be a little more than the $800,000 in any individual quarter.

Ronald Bookbinder: Okay. And then, just lastly, you guys, your model -- as you ramp up

revenue and you leverage SG&A, you usually cut price, lowering gross margin. With this

technology spend for the next year or two, should we think that you're not going to be so

aggressive on cutting price and squeezing gross margin because we're going to see increased

G&A?

Jose Luis Laparte: No, Ron. This is Jose Luis. I definitely don't think that -- that's not our plan

at all. We want to continue being aggressive. It's the concept of our business model. It is what

makes us obviously of value for our members, and that's what makes members pay the

membership and get those renewals, so we don't want to punish, I guess to some degree, the

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members because of that. I think we have to work through this year of investment and,

obviously, do the right things for the long run, and we definitely are not looking at any changes --

dramatic changes at all in the margin results, no.

Operator: Rodrigo Echagaray with Scotiabank.

Rodrigo Echagaray: John, good luck on this new phase. We wish you the best, and thanks for

your time at the Company. My question is with regards to the gross margin impact from the

carrying cost on the DC. Can you just -- I think I might have missed that. I think you said about

$90,000 of carrying costs per month. Is that right?

John Heffner: Yes.

Jose Luis Laparte: Yes, it is correct. It is a $90,000-a-month carrying expense, Rodrigo.

Rodrigo Echagaray: Okay. And when do we lap that? When do we see that moderating?

Would that be until Q3?

John Heffner: Well, that assumes -- I mean, that $90,000 assumes we don't have any -- we don't

do anymore subleasing. So we are currently active in trying to sublease the additional space that

we have there, but if we don't do anything, it would be $90,000 a month, so with some luck, we

will see that reduce. When you say lap it, I guess we vacated that space in probably March of last

year, I think.

Jose Luis Laparte: Yes, March of 2017.

John Heffner: Yes, of 2017, so I guess we will anniversary whatever that is in March or April of

next year. Hopefully, at that point, we'll be less than $90,000 a month because we'll have been

successful in subletting more space.

Rodrigo Echagaray: Right. No, it makes sense. And then, just lastly, I guess, congratulations on

the Colombia results. I mean, I'm looking at my models here, and essentially, at least as of Q2,

every single retailer in Colombia has negative same-store sales, nominal, so the fact that you guys

are able to grow in that context means that the format is working extremely well, and I just

wonder how do you think about when you compare your numbers versus the competition.

Obviously, the currency has stabilized. Does that -- I mean, you were saying it gets you more

excited on the Colombia opportunity, but does that change your overall estimate on potential

returns in Colombia and maybe in that region, maybe Peru, given that we have a better macro?

Jose Luis Laparte: Yes, I would say, Rodrigo, that definitely we're also excited, as I mentioned,

with the results of Colombia. I think it took us -- the devaluation was very difficult for --

especially for a new player like us to absorb, especially given our high content of imports. I think

we passed that. It was a very challenging year, fiscal year 2016. I think now things are stable

with the currency, and we -- as you mentioned, the business model, the format is well-accepted in

the country. It seems that it's no different from -- not only from the PriceSmart countries, but

other countries where club business operates, and I think that's good. It's good to see that.

I think also that other retailers learn how to play with us. We are going to continue being

aggressive, as I mentioned, in trying to find more locations, especially in the big cities. Bogata

and Medellin area cities where we believe there is good opportunity. It doesn't change -- I think

at this point we're not necessarily changing our strategy. We have always believed since the

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beginning that we wanted to keep growing in that particular market and especially in those big

cities.

And in relation to other countries, we definitely do recognize that there might be an opportunity.

We don't have anything official. We have just been studying a few of the potential countries

where this concept can be accepted, but nothing at this point that we can be talking about. It is

basically just business as usual at this point, but we're happy with the results in -- Colombia was

challenging, as you mentioned, for a lot of retailers, and we were able to come up with a good

performance for fiscal year 2017.

Rodrigo Echagaray: Thanks. Then just lastly on dividends. I mean, you obviously generate a

lot of cash and have a solid balance sheet. Any thoughts on that in terms of maybe when you

announced next year's dividend, or any thoughts on how you're looking at your balance sheet?

You had a big spending last fiscal year with the distribution center that you will not have next

year, so it would seem like the cash may accumulate faster at the current pace of growth in terms

of openings.

Jose Luis Laparte: Yes, I will say, Rodrigo, that at this point we don't foresee anything.

Obviously, it will be discussed at the next Board meeting coming up in January when we do the

first -- the review of the first quarter and our shareholders' meeting, but nothing at this point that

we have been discussing on dividends.

John Heffner: Yes, if I can add to that, Rodrigo, as we've mentioned before, we don't have a firm

dividend policy as a Company, and it is considered by the Board in the January meeting each

year. Historically, that's when we have made our dividend declaration, and I would see no

difference this year as well.

Operator: John Braatz, Kansas City Capital.

John Braatz: John, best of luck in retirement. We'll miss you.

John Heffner: Thank you.

John Braatz: Jose, returning to Colombia, did I hear you correctly, say that Colombian comps

were about 4.6% or 5%, something like that, in the quarter?

Jose Luis Laparte: For the quarter, including the cannibalization that Salitre had, we ended with

a 4.4% comp in Colombia for that quarter. And for the year, we were up in comp 10%. 4.4% for

the quarter, and 10% for the year.

John Braatz: Okay. That looked like a deceleration from the prior quarters. Was there anything

specific in Colombia that might account for that?

Jose Luis Laparte: No, I think it's just the behaviors that were catching up with the years.

Obviously, at the beginning of the year, we had -- back in 2016, we had more of the impact of the

devaluation, so that's what caused the main difference on the numbers being a little higher.

Obviously, we knew that at some point they were going to get more normalized. We actually had

a good start in the month of September with some clubs, like Salitre, that is again in double digits

now with the effect of the Chia cannibalization gone, and even Medellin growing double digits in

September.

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So we're going to see, I think, John, a good combination of still probably close to the -- we would

like to continue having close to double-digit comps in that market, assuming that currency helps

us, which seems to be right now pretty much equal to what it was last year.

John Heffner: I would add one more thing, if I could, John. Chia will not be in our externally-

reported comps until November.

Jose Luis Laparte: Oh, yes. Yes.

John Braatz: Until November.

John Heffner: Yes. While we've anniversaried the opening the way we track that, it'll be -- in

November will be the first month that this cannibalization will not be there.

Jose Luis Laparte: Yes, in external reports, correct.

John Braatz: Right. Right. John, have you been able to, for tax purposes in Colombia, use your

tax loss carry-forwards yet?

John Heffner: To some degree we have, but not all of them. So, yes, we've been able to use

those a bit over the last year.

John Braatz: Okay. To the degree that you could fully use them, would that have a meaningful

impact on your overall tax rate?

John Heffner: I don't think it'll have a meaningful impact. It'll certainly help it, but, no, it will

not have a meaningful impact.

Operator: (Operator Instructions). Patricio Danziger, RWC.

Patricio Danziger: I just wanted to understand a little bit more if you can elaborate on the

innovation that you mentioned that you're spending more money in innovation. I mean, what are

you doing there, and what is the cost of that?

Jose Luis Laparte: Yes, as I mentioned, Patricio, the concept -- I guess we created a committee

from the Board of Directors, and we started creating a team that we call the actual innovation

team, and the idea for that team -- and as we mentioned in the 10-K and I mentioned here on the

call, we are looking at a possible investment. We look at this as an investment, but obviously

we'll see that we are going to probably be spending, for the full year, maybe between $3 million

to $5 million, and the idea is to invest more and to learn more about what we can do in this omni-

channel and online market.

We did discontinue, as I mentioned, the efforts that we had before with the electronic

international catalog. We used to have an operation online where we were only serving

international catalog, meaning items brought from the States to the countries. We discontinued

that, and although we learned a lot, we knew it wasn't the direction we wanted to go. So we're

now looking at how we see that we can better integrate our traditional brick-and-mortar

warehouse clubs with the new trends of online shopping, so it is -- and obviously we want to

create this omni-channel experience for our members, which is where pretty much a lot of the

concepts are also going, in retail and in the States.

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So that's the effort of that innovation team, to see how we see that we can come with new ideas,

and obviously, this team is working with the regular team of operators and buying and logistics,

which are an important part for these initiatives. But that is, in general, the concept of this

innovation team -- or the plan for this innovation team going forward.

Patricio Danziger: Fantastic. And as a follow-up question to that, this is basically salary -- costs

in salaries, correct? And how much was it this quarter?

Jose Luis Laparte: There is a little bit more than salaries there, some investments, and we are

going to see more in licenses and things like that. We're looking at launching a new platform

replacing our old platform that we had before, so there will be additional spending besides

salaries for sure. So in that number, $3 million to $5 million, we have a component of different

things, not only salaries. We are going to start seeing some depreciation. We are going to start

seeing investments from different things, consulting. I mean, it's going to be different things,

Patricio, to make it the right way.

Patricio Danziger: Fantastic. And this $3 million to $5 million -- is $3 million to $5 million one

time, or is it yearly $3 million to $5 million?

John Heffner: Well, I think that's what we've sort of looked at for this year, and what the Board -

- and with the plans we brought to the Board for this fiscal year, it would not be unreasonable to

think that this would continue to some level. I don't think we would be sort of done, if you will,

with this evolving market and how to best serve our members going forward, so I wouldn't cap it

as a one-time expense. It's just certainly what we have sort of understood for how we see things

working right now.

Patricio Danziger: Sounds good. And if I can, if I may ask a second question.

Jose Luis Laparte: Sure.

Patricio Danziger: Thank you. I understand that you have 39 stores as of August 31. I mean, if

you can tell us a little bit more of how many stores you announced on openings and how many

stores you plan to open in the next months. Thank you.

Jose Luis Laparte: For the remaining of the fiscal year, for sure we have the one that is under

construction in San Isidro, Dominican Republic. That will be our number 41, because we opened

in October just a few days ago -- 20 days ago, we opened Santa Ana, Costa Rica. So we will

finish the fiscal year with 41, and definitely we are looking at -- we have plans, but nothing

official to report.

But we are trying to add more clubs in the pipeline, but there is no -- we haven't started

construction on any other products, so basically for the remaining of the fiscal year, we will only

have that one, San Isidro. As soon as we have more, Patricio, we will be releasing information on

potential projects or whenever we acquire property. We are looking for permits in different

properties around different countries, so hopefully we will be able to announce those soon.

Operator: This concludes our question-and-answer session. I would like to turn the conference

back over to John Heffner for any closing remarks.

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John Heffner: Well, thank you, Austin, for helping us out today. So this ends our call, and I

want to thank everyone on the line for participating with us today. Have a good rest of the day

and a nice weekend.

Jose Luis Laparte: Thank you.

Operator: The conference has now concluded. Thank you for attending today's presentation.

You may now disconnect.