PriceSmart Inc

NASDAQ:PSMT

Earnings Call Transcript 2021-Q4

[Operator]

Good day, everyone, and welcome to PriceSmart Incorporated Earnings Release Conference Call for the Fourth Quarter of Fiscal Year 2021 which ended on August 31, 2021. After remarks from our company’s representatives, Sherry Bahrambeygui, Chief Executive Officer; and Michael McCleary, Chief Financial Officer, you will be given an opportunity to ask questions as time permits.

As a reminder, this conference call is limited to one hour and is being recorded today, Friday, October 22, 2021. A digital replay will be available following the conclusion of today’s call through October 29, 2021, by dialing 1-877-344-7529 for domestic callers, or 1-412-317-0088 for international callers, and by entering replay access code 10159925.

For opening remarks, I would like to turn the call over to PriceSmart’s Chief Financial Officer, Michael McCleary. Please proceed, sir.

[Michael McCleary, CFO]

Thank you. And welcome to the PriceSmart earnings call for the fourth quarter of fiscal year 2021. We will be discussing the information that we provided in our earnings press release and our 10-K which were both released yesterday afternoon October 21, 2021. You can find these documents on our Investor Relations website at investors.pricesmart.com, or you can also sign up for e-mail 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, will, may, should, estimate, and similar expressions.

All forward -looking statements are based on current expectations and assumptions as of today, October 2, 2021. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the risk 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. Bahrambeygui, I think.

[Sherry Bahrambeygui, CEO]

Thank you, Michael. Good day, everyone. Thank you for joining us and for your interest in Pricesmart. Fiscal 2021 was quite the year. Our team of more than 10,000 dedicated employees really excelled by working together as one team to innovate and respond to the fluid circumstances that we continue to experience throughout the 13 markets in which we operate. Driven by this commitment and hard work, we're pleased to report strong results for our fourth quarter of the fiscal year and we continue to see growth in sales and membership as we begin the first quarter of the new fiscal year.

Despite ongoing COVID-related restrictions in some form that has affected most all of our clubs, for the fourth quarter of fiscal 2021, net merchandise sales grew 12.7% and comparable net merchandise sales grew 10.3% compared to the same quarter last year. Our membership has grown to an all-time high and our 12-month trailing renewal rate is the highest it's ever been since we began recording it 14 years ago.

These fourth quarter results were achieved through improved operational efficiencies, new digital capabilities, optionality for our inventory flow, our e-commerce platform, pricesmart.com, data analytics, incremental member benefits and services, alternative sourcing of goods in response to global supply chain disruptions, expansion of our private label program, and most importantly, the resilience of our dedicated team that has become quite adaptive, adjusting to rapidly changing dynamics brought on by the pandemic and its varying impact on our market.

We continue to evolve into a more data-driven organization. Our membership model in and of itself differentiates us from other retailers and provides a competitive advantage because it provides a wealth of data that allows us to better serve the needs of our members. Knowledge is power, and we are gaining valuable insights through the new analytics that allow us to use membership data effectively to improve member satisfaction and ultimately contribute to higher membership renewal rates.

We also believe that the early and comprehensive measures we've taken to protect and prioritize the well-being and safety of our employees and members has further strengthened our standing in our markets. Additionally, we believe that our adherence to the fundamentals of our business with fixed types of merchandising, which I've discussed on prior calls, has also contributed to positive results.

For example, even when comparing our performance to the prepandemic period in FY 2019, warehouse productivity has increased, and in inventory management, we've reduced markdowns, salvage, throwaway and demerged. These key metrics have improved relative to the comparable time in 2019, despite the challenges we continue to experience as a result of the pandemic. We believe our value proposition is really resonating with our members.

I'm excited to report that our total number of membership accounts reached an all-time high of 1.6 million accounts as of August 31, 2021, even after we experienced the COVID-related dip at the end of fiscal 2020. That's a 7.2% increase when compared to the comparable prior year period. Our trailing 12-month renewal rate was 89.6% for the period ended August 31, 2021, up from 80.5% for the period ending August 31, 2020, and up from 85.7% for the period ending August 31, 2019. This 12-month renewal rate of 89.6% is the highest since we've been publicly reporting this data and has increased 200 basis points from the end of the third quarter of fiscal 2021. This shows our business model is a real winner in our market.

Our membership model is a key differentiator from our competitors and an important aspect. Our investments in technology and new talent that provide valuable data analytics, which by the way, are expense, are helping us unlock greater value from our membership data. This provides us with the opportunity to provide better customer service and more quickly gain better insight into trends and preferences. It also enhances predictability, which is of great benefit to any business, especially in a rapidly evolving environment, whether it be the pandemic, global supply chain disruption, cultural shifts or consumer behavior in the age of e-commerce.

Early indications are showing that so far, members who engage with us online and in club, members who we consider to be true omnichannel members tend to spend more with us than those who only engage with us in clubs. Additionally, to-date, we're seeing that pricemart.com transactions generally yield a higher spend per transaction than our average in-club transactions.

During Q4, pricemart.com, which allows our members to purchase online for curbside pickup or delivery through Click & Go, that represented 3.5% of our net merchandise sales. Click & Go is currently available in all 47 of our clubs. Our delivery service is growing as a larger proportion of our pricemart.com sales. Our experience with Click & Go has demonstrated the demand for the service and the data generate generated by pricemart.com, and online channels is another way technology has enabled us to enhance the value of the membership. We believe pricemart.com is providing us a platform for significant sustainable growth for our business and a valuable incremental benefit to our members.

We're also pleased to see members using pricemart.com to sign up and renew their membership. Online members signups and renewals, which we refer to as digital membership, provides several advantages to us, including the opportunity for auto renewal and auto payments, which helps to sustain our renewal rates. Digital memberships also provide a more direct way of communicating with members and learning about their preferences. Our focus on converting our members to digital sign ups and renewals have helped us increase digital sign up from 6% of all new sign ups in fiscal 2020 to 16% in fiscal 2021.

Another encouraging sign that our membership model resonates with members is the growth of our Platinum program which offers annual rebates to members in exchange for a higher annual membership fee of approximately $75 compared to approximately $35 for a Diamond membership. Analytics and new communication channels with digital members have helped us better demonstrate the value of this program to our members.

Platinum accounts in total have grown by 28% since the end of fiscal year 2020 and by 73% since the end of fiscal year 2019. Platinum accounts now represent 7% of our total member account base as of the end of fiscal year 2021. The advantage of Platinum members is they tend to show more loyalty and predictability as they renew their membership at higher rates and have higher average spend than our Diamond members. We finished rolling out the Platinum program to all of our markets during this past fiscal year 2021.

Our commitment to the development of technology and analytics is reflected throughout the company, including the leadership team. Accordingly, I'm very pleased to announce that effective September 1, 2021, Nicolas Maslowski was promoted to a newly created position for the company, Executive Vice President of Member Experience and Strategic Analytics. Prior to his promotion, Mr. Maslowski served as Senior Vice President of PriceSmart Member Experience.

Since joining PriceSmart, he's expanded the capabilities of our leadership team, made great strides in helping us better understand members, and he, along with his team, have devised strategies to grow sales by extracting valuable insights. In addition, Mr. Maslowski and his team have shown how the infusion of user-friendly data and report positively impact business decision making throughout the company.

Now, let's turn to sales by segment. During the fourth quarter, we delivered significant sales growth in Central America versus the same period last year. All markets within this segment produced positive sales growth for both the quarter and the full fiscal year. Central America posted 18.9% sales growth in the fourth quarter compared to the prior year period.

In Guatemala, we are looking forward to opening our fifth club next week, and that club is known as Aranda. During the quarter, despite the strong performance of five clubs in the Dominican Republic, we saw a decrease in net merchandise sales in our Caribbean region. This was primarily driven by Trinidad, where we have four clubs and where they have been experienced a – experiencing a high level of COVID infections and related restrictions.

In the second half of the fiscal year 2021, the government of Trinidad responded with strict lockdowns and significant restrictions that resulted in complete closures for a few weeks, followed by a reduction of our club capacity and our sales being limited to only groceries and essential goods. This, coupled with our decision earlier in the year to limit US imports to Trinidad because of the ongoing challenges converting currency, led to a significant decline in net merchandise sales in Trinidad for the quarter.

Colombia delivered an impressive 21.7% sales growth for the quarter despite a negative FX impact. And next month, we will be opening Bucaramanga, our ninth club in this market.

In terms of merchandise, we saw our non-foods category comprised of both hardlines category comprised of both hardlines and softlines, continue its impressive run with 16.3% sales growth compared to the same quarter in the prior year. Our merchandising team has done a great job of anticipating demand and working with our global suppliers to procure high demand inventory that has been difficult for our competitors to secure. As a result, our softline category grew approximately 40%, casual apparel grew 41% and basic apparel grew 48% versus the same quarter last year.

We're seeing the shift in consumer behavior from the stockpiling and surge demand for essentials in the second half of fiscal year 2020 to an increased demand for discretionary items that is continuing into this fiscal year. Our hardline category experienced approximately 7% comparable sales growth compared to the prior year quarter. Virtually all categories in that segment enjoyed growth but the leaders were garden patio, which grew 42%, sporting goods which grew 29% and small appliance sales grew 19%.

Due to the COVID stock up in the prior period as expected, we experienced comp declines year-over-year in our canned food, grain and grocery categories, which were largely offset by a rebound in other categories such as soda and beverages, pet supplies and oils and condiments.

Overall, our food category remained steady and had a nearly 6% gain in the quarter. Our fresh category grew nearly 11% this quarter versus Q4 of last year with poultry growing 26%, meats were up 23% and gourmet foods were up 12%. We're seeing growth in our high quality fresh products sourced through our Direct Farm program. Our Direct Farm program to remind you reduces costs and improves the quality of our fresh produce offerings while also supporting local farmers and industry in our market.

Our new produce distribution centers allow us to provide farm to table produce more cost effectively, allowing us to pass on a better value than if we were to purchase from distributors. We currently have to produce distribution centers in operation located in Panama and Costa Rica. We expect our third produce distribution center in the Dominican Republic to be fully operational by the end of the current quarter.

We intend to continue to expand this program with additional produce distribution centers and more of our markets going forward. We especially like this program because it is a win, win, win for our business, our members and our local communities. It also furthers our mission to be a socially responsible business.

A significant component of our merchandising strategy and another way we build brand loyalty and differentiate ourselves from our competitors is through our private label products. Our private label products only earned a private label if we believe the product is that the same or better quality as the leading brand and can be offered for a better price? We've increased our selection in all major areas versus the prior year.

Our private label sales as a proportion of our total net merchandise sales for the 12 months ended August 31, 2021 was 22%. This is going to be an important part of our merchandising strategy as we move forward. Beyond the obvious benefits of quality, value, and price private label gives us greater opportunity to nearshore the sourcing and manufacturing on select items. Gives us the opportunity to invest in local markets that helps potentially reduce the risk of supply chain disruption and it helps identify potential opportunities for vertical integration.

Our other business category yielded 41% comparable net sales growth led by our food courts which grew by 46% and bakery which grew 31% for the quarter versus the prior year. We achieved these growth levels despite the fact that Trinidad food courts were closed most of the quarter and we're restricted to takeout for the rest of the corner. Additionally, a few other markets also have some club closure dates that negatively impacted sales in this category.

Turning to supply chain and inventory. Just like many other businesses across the globe, we experienced several challenges during the quarter including container shortages, port delays and truck and driver shortages. These disruptions and shortages are impacting the timing of deliveries and leading to higher freight, transportation and labor costs. Despite all of these issues, we worked hard to hold down or mitigate the price increases passed on to the members while maintaining sufficient inventory.

Our expanded network of distribution centers and additional real-time data on a number of fronts has facilitated alternative routes of shipments, increased throughput and provided flexibility all of which helped us keep good in stocks and generate the sales for this quarter. We've also made strategic investments in inventory and worked with our local vendors to source alternative products to reduce potential future out of stocks on high demand items that have been impacted by these disruptions or that have been affected by electronic parts shortages.

In the last several months, we've also experienced inflation because of significant increases in the prices of commodities that are input to our vendors’ product. Despite these issues, our team has done a great job of holding, delaying or mitigating cost increases in their continued efforts to provide the best value to our members. However, supply chain disruptions and overall inflationary impact of sourcing and shipping merchandise are causing pressure on our ability to consistently source merchandise and will likely further impact our cost and the price of merchandise. We are closely monitoring our inventory and supply levels to continue to provide the best possible value in this inflationary environment while mitigating against the risk of decline in demand.

Now looking at real estate, we're excited about our plans to open our 48th club in [indiscernible] Guatemala next week, which will be our fifth club in Guatemala. We're also – we also expect to open a new smaller format warehouse club in Bucaramanga, Colombia, next month, which will be our ninth club in Colombia. Our technology and omni-channel capabilities enhance the value of our smaller format club concept by allowing us to extend our reach and presence in regional or secondary city locations and represent a significant opportunity for growth for the company. Following Bucaramanga, the next planned opening will be in Portmore, Jamaica, which is currently scheduled to open in spring of 2022 this fiscal year.

We have expanded our real estate team and have an active pipeline of additional potential club locations that we're working on in many of our markets, which we will announce as the level of certainty around the timing of each project solidified. We will evaluate locations, prices, and investments required for these additional club in the context of the opportunities we now see to capture sales through the combination of our brick-and-mortar clubs, our pricemart.com platform, enhanced delivery capabilities and potentially less costly, strategically located fulfillment and delivery hubs which we are setting now.

Our member wellness initiatives remain a key focus of our growth strategy. As of August 31, 2021, we have 38 in-club optical centers in nine of our markets. We plan to expand the service to almost all clubs by the end of fiscal 2022. As of the end of fiscal 2021, we had opened pharmacies in three of our clubs in Costa Rica and we expect to open pharmacy in the remaining five Costa Rica clubs during the current quarter, followed by other countries that we are planning for pharmacies as well.

We recently opened our first two eye optic audiology service centers in Guatemala under our well member wellness Umbrella and we’ll be opening our new club in Aranda with audiology and optical services included. We plan a full rollout of audiology to all clubs in Guatemala during this quarter. Initial indications, initial indications from our audiology department are that our members are enjoying dramatic savings relative to the lowest priced competitors in addition to improving their quality of life.

In recognition of all the hard work, determination, flexibility and commitment to the company during this pandemic, we paid all of our non-management employees a special appreciation bonus, which in some markets has a component that incentivizes our employees to get vaccinated. The total impact of the fourth quarter was approximately $1.9 million.

Pricesmart people-first culture is embodied at every level of the organization and it is humbling to see the tireless efforts made by our employees to support the members, co-workers and our communities and ensure business continuation throughout all of these significant challenges that have been brought on by the COVID pandemic.

Bring you current, following the fourth quarter, we sold the legacy Aeropost casillero and marketplace operations. The talent, technology and processes we gained from the acquired Aeropost in 2018 served as a springboard to launch our e-commerce platform pricesmart.com, accelerated online sales by pickup and delivery and generated online members sign up renewals and payments and enhances our ability to better connect and serve our members. We've retained the requisite valuable talent and the technology that is directly applicable to PriceSmart’s plans for the future growth of our omnichannel business, data analytics and information technology capabilities.

We meanwhile recouped a portion of our original investment in Aeropost while dispensing of parts of the business that we believe are not core to PriceSmart’s growth plans. Examples of the talent we've retained include our recently created EVP position as chief technology officer and EVP position of member experience and strategic analytics. These key leadership roles have been filled by former Aeropost officers and continue to be supported by members of their team. We believe the transaction itself will not have a material impact on our results of operations in fiscal year 2022 but will consolidate our efforts, sharpen our focus and will help accelerate our innovation going forward by freeing up resources that were previously shared with the Aeropost legacy businesses.

We finished the fiscal year with a strong fourth quarter, especially as we saw membership's rebound and foot traffic to our clubs increased in most markets. When looking to the future including the longer term, we've embarked on a multi-year growth plan which includes building the internal infrastructure needed to support faster growth. These initiatives will be buoyed by further investing in talent and technology much of which is expense.

We plan to grow by expanding our brick-and-mortar footprint in conjunction with our e-commerce platform, supporting both of these sales platforms with a diversified and expanded logistics and distribution system. We intend to continue our increased focus on our private label product offering and identify additional opportunities for vertical integration. We will evaluate every element of our growth plan through the lens of the member, and we will drive this growth by continually increasing the value proposition we represent to our members and by growing our member base.

To wrap it up, we're grateful for the trust that our members have placed in us to help improve their lives and businesses, especially during these trying times. And I'm especially proud of our more than 10,000 employees across 13 countries. It has taken everyone's collective effort, from frontline workers to remote and offsite workers, from club and country managers to corporate executives, and our supportive board of directors. Thanks to each and every one of you. Together, we're turning trials into triumph. Our team is energized and motive – motivated to grow, and we believe that the investments that we are making to lay the foundation and infrastructure for near and medium term growth will help us gain market share.

I want to thank you all for your time today, and I'll now turn the call over to Michael.

[Michael McCleary, CFO]

Thank you, Sherry. Good morning or afternoon to everyone, and thanks for joining us today. Total revenues in net merchandise sales for the quarter were $909.6 million and $871.2 million, respectively, representing increases of 12.2% and 12.7% over the comparable prior-year period, respectively. Including the club we opened in Bogotá, Colombia in December 2020, we ended this quarter with 47 warehouse clubs, compared to 46 warehouse clubs at the end of the fourth quarter of fiscal 2020.

Our comparable net merchandise sales growth was 10.3% for the 13 weeks ended August 29, 2021. Foreign currency fluctuations had a negative impact on both merchandise sales and comparable net merchandise sales of approximately $10 million or a 130 basis points and $9 million or a 110 basis points, respectively.

By segment, in Central America where we had 26 clubs at year end – quarter end, excuse me. Net merchandise sales decreased 18.9% with an 18.7% increase in comparable net merchandise sales. Most markets in this segment had double digit comparable net merchandise sales growth with only Costa Rica coming in strong but in single digits.

In the Caribbean region, where we had 13 clubs at quarter end. Total net merchandise sales declined 1.8% and comparable net merchandise sales declined 2.2%. The Dominican Republic continued its stellar sales performance during the COVID-19 pandemic with double digit sales growth. However, this gain was more than offset by weakness in Trinidad where we have four clubs.

In Trinidad, comparable net merchandise sales declined 21.3% in the fourth quarter due to COVID related restrictions and our continued reductions of US inventory shipments to that market in response to the US dollar and liquidity situation. Of note, for most of the fourth quarter, we were unable to sell non-essential merchandise in Trinidad, thus we further reduced our shipments of US inventory during that period. However, in mid-August, this prohibition was rescinded and we were allowed to resume sales of these items. Therefore, we began increasing our merchandise shipments to Trinidad at the end of fiscal 2021.

In Colombia, where we had eight clubs opened during the quarter, net merchandise sales increased 21.7% and comparable net merchandise sales increased 3%. The comparable net merchandise sales increase contributed 30 basis points of positive impact to total comparable merchandise sales for the quarter. Colombia is benefiting from a comparable improved COVID-19 situation from a year ago and from the opening of the eight club in this market in December of 2020.

The impact of currency on total and comparable net merchandise sales in Colombia was negative 2.6% and 2.3%, respectively for the quarter. Currency fluctuations are a constant challenge in Colombia and we continue to take actions to try to mitigate the impact of any future devaluations such as the sourcing of locally produced goods and actively managing our sales prices and foreign currency exposure.

Turning to gross margins; total gross margin on net merchandise sales came in at 15.9%, an 80 basis point improvement over the same quarter last year. The 80 basis point increase was primarily driven by approximately 60 basis points due to certain pricing actions we took to offset by foreign currency exchange costs and COVID-related operating costs and the remaining 20 basis points is primarily due to the effect of margins returning on our other business categories such as food services and optical compared to the prior year period.

Total revenue margins increased to 17.7% of total revenues, an increase of 50 basis points versus the same period last year. This is the result of a higher gross margins of 80 basis points that I mentioned previously, partially offset by lower revenue margins from our casillero and marketplace business in the quarter of 20 basis points and 10 basis points lower of other revenue and income.

Selling, general and administrative expenses for the quarter were 14.1% of total revenues, an increase of 40 basis points versus the same period last year. In total, SG&A expenses increased $18 million compared to the prior year. Warehouse club and other operations expense contributed 30 basis points of the increase, primarily due to our new club in Colombia, which is not yet reached normalized sales levels. General administrative expenses contributed the other 10 basis points of the increase, primarily due to investments to support our account and technology development. Operating income was $32.5 million in the fourth quarter of fiscal 2021 compared to $29 million in the prior year or 3.6% of total revenue in both periods.

Net interest expense decreased $1.2 million for the fourth quarter, primarily due to a short-term borrowing to – sorry, primarily due to lower short-term borrowing compared to the prior year period when we drew down on short-term lines of credit as part of our efforts to secure adequate cash to cover our contingencies arising from COVID-19-related risks. We repaid all these borrowings by the end of the third quarter of fiscal 2021.

Other expenses of $1.5 million were primarily related to the cost to convert Trinidad dollars into other tradable currencies. However, these costs were partially offset by unrealized currency gains related to our US dollar denominated cash position in Jamaica designated to fund the construction of our new partner club due to a devaluation during the period of the Jamaican dollar against the US dollar. In the prior year, we recorded a net gain in this line of $1 million, primarily due to the devaluation of the Jamaican dollar and the Costa Rican colón against the US dollar in that period, resulting in a negative year-on-year pre-tax FX impact on earnings of $2.5 million.

Our effective tax rate for the fourth quarter of fiscal 2021 came in higher than last year at 35.5% versus 28.2% a year ago, primarily related to recognition timing for the loss of benefit of foreign tax credits, which are no longer deemed recoverable. It is important to remember that last year's Q4 effective tax rate was lower than normal due to much stronger pretax results than those expected as of the end of our third quarter last year. Our full year effective tax rates were fairly consistent between years coming in at 33.3% in fiscal 2021 versus 32.5% in the prior year. On a go forward basis, we continue to escalate an annualized effective tax rate of 33% to 34%. Net income for the fourth quarter of fiscal 2021 was $19.5 million or $0.53 per diluted share compared to $20.1 million or $0.65 per diluted share in some terrible prior year period.

Now, I would like to cover just a few brief highlights related to the full fiscal year and our strong balance sheet. In fiscal 2021, total revenues increased by 8.7%, net merchandise sales increased by 8.6% and comparable net merchandise sales increased by 5.8%. FX fluctuations adversely impacted net merchandise sales and comparable net merchandise sales by 2.4% percent and 2.3%, respectively. Net income for fiscal year 2021 grew to $98 million or $3.18 per share compared to $78.1 million or $2.55 per share in fiscal year 2020.

Moving on to the balance sheet, we ended the quarter with cash, cash equivalents and restricted cash totaling $215.5 million. While cash flow provided by operating activities decreased $132.1 million versus the prior year period, this decrease was primarily the result of the vastly different inventory financing strategies throughout the different stages of the pandemic between these two years.

In the prior year period, we made a conscious decision to pull back on merchandise levels in non-food areas whereas in the current period we increased our position in these items to meet increased demand and to compensate for supply chain challenges. Additionally, at the beginning of the pandemic, we negotiated temporary extensions of vendor terms to assist in cash management activity. These temporary extensions have now lapsed. However, we have been able to secure permanent extended terms with a substantial portion of our vendors especially for long lead time items.

Net cash used in investing activities decreased by $14.5 million compared to the prior year, primarily due to a decrease in net proceeds from short and long term certificates of deposit related to management of our cash balances in Trinidad, partially offset by an increase in construction expenditures year-over-year.

With respect to Trinidad, as of the end of our fiscal fourth quarter, our Trinidad subsidiary had committed dollar denominated cash, cash equivalents, and short and long term investments measured in US dollars of approximately $52.9 million, a decrease of $23.8 million from the end of our fiscal third quarter. This decrease is largely due to the fact that our ability to source US dollars remained relatively constant during the quarter, but our use of US dollars was dramatically decreased due to the COVID related closures and limitations on sales which had further decreased our imports.

Following the full re-opening of the clubs in the fourth quarter, we began a measured process of increasing our imports. We currently expect the operational sources and uses of US dollars in Trinidad to be equalized on a go forward basis. $170.7 million change from cash provided by cash used in financing activities is primarily the result of a net decrease in proceeds from long term debt and net repayments of short term borrowing. We continue to be vigilant about our cash position and are ready to adapt to sudden changes and circumstances.

In the prior year period, we executed long term loans primarily to finance the purchase of land and construction of several of our warehouse clubs, and increased our short term borrowings as part of our cash management strategy in the early stages of the pandemic. However, as I mentioned previously, in Q3 we finished repaying all of our short term borrowings. While some uncertainty and risks remain in our markets, we can feel confident in our operations and our ability to generate and access sufficient cash for our needs while also continuing to invest in the future.

In closing, we are very pleased about the results of the current quarter and fiscal year. The investments we have made and are making in talent, data and technology and other capabilities combined with our commitment to the fixed rate have been the foundation to our past and recent success. We are looking forward to our growth opportunities for years to come and to your support and engagement in our journey.

I will now turn the call over to the operator to take your questions. Operator, you may now start taking our callers’ questions.

[Operator]

We will now begin the question-and-answer session [Operator Instructions] Our first question today comes from Jon Braatz with Kansas City Capital.

[Jon Braatz, Kansas City Capital]

Sherry, Mike could you walk through the impact of the Aeropost disposition for me? The legacy business was sort of I guess doing maybe $40 million, $45 million in revenues at about a 60% gross margin. And obviously with the disposition you lose that, I guess you lose most of that gross, gross profit but where's the offset? Because you had mentioned that it was sort of going to have a neutral impact on the business. What cost you are going to go away with the disposition of AP?

[Sherry Bahrambeygui, CEO]

Yeah. So, hi, John. Yeah, so definitely there will be a loss of revenue but there also be a decrease in costs. We have some other operations expenses in our cost of goods sold area to support that activity and then we also have G&A expenses for that activity. So, overall, I think we said that we're not expecting a material impact, but there will be a net – probably a net decrease in overall costs in general.

[Jon Braatz, Kansas City Capital]

Okay. So…

[Sherry Bahrambeygui, CEO]

Although not material.

[Jon Braatz, Kansas City Capital]

Okay. So – and will there be any – with the sale, will there be any gain or loss on the sale?

[Sherry Bahrambeygui, CEO]

Yeah. We haven't disclosed that, but as Sherry said, we recovered a significant part of our – a part of our initial investment and actually remember the basic reasoning rationale behind the original investment was for – to acquire the accounting technology to support our omni-channel business, which is what we're basically keeping.

So, the values of both the initial acquisition were largely allocated for that. So, as we said, we're not expecting a material impact…

[Jon Braatz, Kansas City Capital]

Okay.

[Sherry Bahrambeygui, CEO]

…either way between both the recurring, revenue, and expense net; and also, the transaction software, although obviously, we’ll disclose more about that in our Q1 earnings.

[Jon Braatz, Kansas City Capital]

Right. Right. Okay. And then I'm sure you – you're talking about, like everybody else in the supply chain challenges, higher freight costs and all this other stuff that everybody else is seeing. As you look into 2022, obviously, it looks like some of these things are going to continue. Do you think it's going to worsen a little bit? You're going to see some additional pressure on your margins from the inflationary costs in the supply chain challenges compared to what we've seen most recently?

[Sherry Bahrambeygui, CEO]

Well, as everybody else is noting, the inflationary costs and the disruption to inventory flow as a result of the supply chain challenges and container shortages is leading to higher costs. But we are, planning ahead and we've been very engaged with identifying alternative routes for us to be able to flow the merchandise at the lowest possible cost. And this is where our investments in regional distribution centers is – comes in very handy. A lot of our long lead items can be shipped directly into Costa Rica and bypass Miami. We also are mitigating some of this by identifying products that can be nearshored as I mentioned earlier and source locally that reduces the risk of the disruption and also some of the higher cost of transportation.

So, we're in the same boat as everybody else as they say. But I do feel that we are in a position to be able to mitigate much of this. But certainly as costs increase because of transportation, freight and other supply chain issues, that that will be ultimately has to be reflective in the pricing. But again, we're not alone on this. We just feel that we've got a good infrastructure to be able to mitigate the impact and remain a cost effective and as efficient as possible.

[Jon Braatz, Kansas City Capital]

Sherry, Are there any specific inventory or merchandise items that when you look at it you're short and obviously you'd like to have more. But is there anything in particular that you're short in stock?

[Sherry Bahrambeygui, CEO]

At this very moment?

[Jon Braatz, Kansas City Capital]

Yes.

[Sherry Bahrambeygui, CEO]

No. At this time, there are some very in-demand items that are hard to get a hold of. And they are more of the discretionary items, the special items that…

[Jon Braatz, Kansas City Capital]

Yeah.

[Sherry Bahrambeygui, CEO]

…that have longer lead times. And there – we've noticed in some areas and that’s why, as Michael mentioned, we’ve taken positions on certain categories and certain items that we predict are going to be in demand. And there will be a shortage, for example, or scarcity in our markets for some of those items. And we've taken positions on some of those things to be able to have – to be in stocks available to generate the sales and also serve the members.

And from time to time, there are just the essentials that do all of a sudden experience a surge in local markets when the COVID rates go up. So it's a very fluid situation. But we're very focused on anticipating those needs and demands, and quickly trying to solve for making sure that we've got the products available as best we can.

[Jon Braatz, Kansas City Capital]

Okay. Thank you very much, Sherry.

[Sherry Bahrambeygui, CEO]

You're welcome.

[Operator]

Our next question comes from Rodrigo Echagaray with Scotiabank.

[Rodrigo Echagaray, Scotiabank]

Thanks. Hi, Sherry and Michael. Just a question on margins in Trinidad. There's been a positive impact from the price increases and all that has been happening there. Any sense of what to expect on the margins front as we hopefully see some normalization in Trinidad? Thank you.

[Michael McCleary, CFO]

Yeah. At this point, Rodrigo, we're continuing with our pricing. I mean we did see a kind of good news, bad news situation there in Q4. Obviously, we would have preferred the clubs to be open the whole quarter. But since they weren't, we – and the dollar liquidity kept flowing. We were able to actually decrease our dollar [ph] balance. But we're still seeing largely that we're not able to source the amount of dollars that we would like to source and need to source and there are costs associated with the sourcing we're able to do.

So, at this point, we're not intending to pull back on that. It's always something we're monitoring including our competitive umbrella and doing the best we can serve the members. But, at this point, we're not planning on going back. Obviously, as I've said, I think pretty much in every call, that's not something that we would expect to hold permanently to the extent that this situation normalizes in the market. But, at this point, we don't have any plans to pull back.

[Sherry Bahrambeygui, CEO]

Rodrigo, it is something that we're monitoring on an ongoing basis and we're not being passive about it. We are – there are other ways that we are pursuing to be able to source dollars, whether it may be through lines that are made available through efforts to develop manufacturing in the country. And we're very closely engaged to seize on any opportunity we can to be able to convert those TDs to US dollars. So, as the situation improves, obviously, the priority would be to reduce that extra margin because our goal ultimately is to provide the best value to the member, but also make sure that to the extent there's an extra expense associated with converting the TDs to US dollars that we're recapturing that.

[Rodrigo Echagaray, Scotiabank]

Got it. And on your earlier remarks, Sherry, you touched on the growth of the real estate team. I was just wondering if you could share more color on that. Like, where are they based? Are you restructuring? How you think about your team in the region? Any changes that you can highlight on some of these initiatives?

[Sherry Bahrambeygui, CEO]

Well, in order to accelerate our process with regard to our strategic plan for growth, we have increased staffing in that area and also support for analysis of real estate investments. And it's yielded for us a stronger pipeline at this point in time. Nothing I could specifically point to in terms of when and which are going to be the ones that prove out to be the right investments for us. But there's definitely more going on right now in terms of our due diligence and activity in evaluating opportunities for additional clubs.

And you couple that with also the fact that we now have some history with our pricesmart.com,, the receptiveness of our members, the growth of delivery, the desire for more delivery, the growing proportion of our pricesmart.com activities. And there’s some important takeaways for us from that that allow us to look at real estate in a manner that is more flexible than it has been in the past because with these additional capabilities. For example, we may not need the same amount of land. We may be able to build smaller formats.

We may be able to support clubs in a different way when it comes to dot-com or support the sale of pricesmart.com differently in terms of fulfilment. These are all things that we're looking at as a result of recent learnings that we have from the investments that we've made in technology and talent. And it's just opening doors for us to consider alternatives and see opportunities that I think are – there's more that we're looking at now in the pipeline than in recent history.

[Rodrigo Echagaray, Scotiabank]

That makes a lot of sense and it's great to hear. Thanks for the color.

[Sherry Bahrambeygui, CEO]

Thank you.

[Operator]

This concludes our question-and-answer session. I'd like to turn the call back over to Sherry Bahrambeygui for any closing remarks.

[Sherry Bahrambeygui, CEO]

I just want to thank everyone for your time and interest in Pricesmart. We really appreciate your support and are looking forward to the future. Our team is very excited about everything we have in the works and we're grateful for your interest. Take care and have a good Friday.