PriceSmart, Inc. (PSMT) Q1 2018 Earnings Conference Call Transcript

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PriceSmart, Inc. (NASDAQ: PSMT)Q1 2018 Earnings Conference CallJan. 5, 2018, 12:00 p.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the PriceSmart, Inc.'s Earnings Release Conference Call for the First Quarter of Fiscal Year 2018, the three-month period ending on November 30th, 2017. All participants are currently in 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. To do so, please press * then 1 on your phone at any time, and you'll be placed in the queue.

As a reminder, this conference call is being recorded on Friday, January 5th, 2018. A digital replay will be available through January 12th, 2018, 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 10114245.

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

John Heffner -- Executive Vice President and Chief Financial Officer

Thank you, Austin, and welcome to our earnings call for the first quarter of fiscal year 2018. We will be discussing the information that we provided in our earnings press release and our 10-Q, both of which we released yesterday, January 4th, 2018. This morning we also released our report on December warehouse sales. You can find both press releases and the 10-Q 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 31st, 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 statement to reflect the occurrence of events or circumstances which may arise after the date of this call.

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Now I'll turn us over to Jose Luis Laparte, PriceSmart's President and Chief Executive Officer.

Jose Luis Laparte -- President and Chief Executive Officer

Good morning everyone. Happy new year, and thank you for joining us today. We finished the first quarter of our fiscal year 2018 with net warehouse sales of $745.4 million, an increase of 4.1% compared to the first quarter last year. We saw a reduction in company debt and operating profit in the quarter compared to the first quarter a year ago resulting from lower merchandise gross margins and higher operating expenses from both the addition of a new warehouse club and the ongoing investments, which we recorded in corporate G&A, associated with specific initiatives that add near-term costs but we believe will help drive additional growth and efficiencies in the future.

As reported, net income for the quarter was $22.5 million, or $0.74 per share, compared to $24.9 million, or $0.82 per share a year ago. Colombia continues to have good overall results with double-digit sales growth, improved margins, more membership accounts, and 1.2 million addition dollars, additional operating profit compared to a year ago.

Let me provide some further details on sales from this quarter. I will speak to our December sales results later in my remarks. Our 4.1 sales growth for the quarter was an improvement over recent quarters, resulting from a 4.6 increase in transactions and a 0.5 decrease in average tickets. We had positive sales growth in each of our segments.

Warehouse sales in our Central America segment grew to 3.1% to $443 million with the addition of the new warehouse club, which opened on October 5, 2017, and good merchandising. Costa Rica, a very large and important market for us returned to positive sales growth after several quarters of negative growth and exceeded plan.

Panama, our second-largest market from a sales perspective, was essentially flat with last year. We are seeing a general slow-down in the Panama economy after several years of robust growth. All other Central America countries saw sales growth, including Honduras, which has experienced some political unrest in recent weeks.

The Caribbean had a sales increase of 3.7% when compared to the first quarter of last year, a good result after recording a 0.7 increase in Q4 for fiscal year 2017 and a 0.6 the quarter before that. Trinidad, our largest market in that segment, was essentially flat, reflecting the ongoing difficult economic conditions of that country, although this, too, was an improvement from a 2.1% decline in Q4 fiscal year 2017 and an overall decline of 4.8 for last fiscal year in total. All the other countries in the Caribbean region show sales growth, with Jamaica and USVI recording double-digit growth in the quarter.

USVI, as you may be aware, got hit by two hurricanes that swept across the Caribbean in early September. This was a very difficult period for the people of Saint Thomas and our employees who live on the island. We sustained some damage to our facility, mostly cosmetic, and an interruption of business for multiple days in September, resulting in a 16.5% decline in sales for September the year before. However, the dedicated efforts of our USVI employees, many of whom were dealing with damage to their own homes, along with the help of several individuals from our other warehouse clubs, allow us to resume operation ahead of many other retailers and support our members' basic needs.

Business rebounded during October and November, resulting in 15% overall sales growth for the quarter. It is clear that we were able to capture incremental business due to the fact that other competitors in the island either lost their building, like Cost-U-Less, or were closed for many days in the quarter. These strong results continued into December as a result of PriceSmart taking a bigger share of the market, which we think will continue for the next several quarters.

Colombia, again, recorded total sales growth of 10.1% and a 13-week comp growth of 11.3%. The Chía warehouse club entered the comp calculation in November. The currency has remained relatively stable, moving in only a small band around the 3,000 pesos to the dollar level. Warehouse in the current quarter were translated back to U.S. dollars at an average rate of 2,966 compared to 2,984 a year ago.

Comparable warehouse club sales for that 13-week period ending December 4 was 2.2%. The successful opening of Santa Ana warehouse club in Costa Rica led to an unexpected transfer of sales, primarily from our Escazu warehouse club. We estimate that this transfer of sales negatively impacted the Central America comps by 150 basis points and the overall company comps by 95 basis points.

In terms of merchandise categories, we saw good results in the fresh and the softlines area with departments like gourmet deli and fashion apparel showing double-digit growth. In hardlines, tires, batteries, automobile, and hardwood show also solid comp growth. Seasonal candy had double-digit growth showing the acceptance of our seasonal programs in that category. Some challenges, slight decreases were seen in areas like juices, snacks, electronics, small appliances, and equal. Warehouse margins in that period were generally in line with the prior three quarters, but down 61 basis points from Q1 a year ago, a somewhat unusually high-margin quarter. The decrease of 51 basis points is driven by a decrease of 31 basis points in Central America and 26 basis points in the Caribbean, and some additional costs in our U.S. distribution operations compared to a year ago.

Colombia's margin increased 62 basis points. The reduction in margins at the segment level is primarily related to aggressive pricing targeting our Central America and Korea markets to drive sales along with some reduction in end-cap promotional funds compared to last year. In markets like USVI, we had restrictions to change prices in islands due to a government regulation to maintain prices for all consumers in the island. That applied even for categories like produce or fresh, where price changes happen often.

On membership, we had a good result this quarter. We finished the quarter with more than 1,543,000 accounts, up 3% from a year ago, and membership income was up by 5.7%. The 12-month renewal rate at the end of November was 85%. Excluding Colombia, the renewal rate was 87%. We are encouraged by the steadily improving trends in the renewal rate for Colombia. We finished with a renewal rate of 78% compared to 68% for the same quarter a year ago.

As I mentioned in the last earnings call, we launched our Platinum Membership card in two additional markets, Panama and Dominican Republic, both of them during this first quarter, and so far we're seeing a good acceptance of this program and seeing upgrades of existing members to this new level of membership ahead of our expectations.

Let me say a few words about the initiative that I spoke on our last call. As mentioned, the Board has authorized $3 to $5 million of funds during this fiscal year, specifically focused toward future growth and success of the company. The innovation area, as we call it, is working on different initiatives to better serve our members in the online space and create a similar seamless omni-channel experience for our members. There will be additional investments for those efforts in the upcoming quarters.

In addition, we continue with our efforts in the selection of a new global enterprise resource planning system, ERP, which will also require additional investments when the decision is made on the right tools to help us with our long-term initiative. During the quarter, these efforts resulted in expenses of approximately $735,000.

Let me highlight a few other items associated with the quarter before I address our December sales results, which were released this morning. Despite unfortunate events in the month of September with the storms that affected the Caribbean region, other than USVI, all our other locations came out OK from that, including our Miami DC, which only suffered some minor damage. We saw some interruptions of flow of merchandise a few weeks after the storms, but again, we're happy to report that we didn't experience any other significant damages. As we continue our plans on expansions of buildings in some of our countries, we're making progress in Pradera location in the city of Guatemala and also in our Kingston location in Jamaica. Both of those expansions will be completed during Q3 of this fiscal year, and although we had some challenges with the parking lots during expansion, we are still seeing good results out of those clubs.

Our construction in the city of Santo Domingo in the Dominican Republic is moving as planned, and our San Isidro location should be open during spring 2018. Although we don't have anything official to announce today, we continue to push forward on sites for additional clubs in a few of our markets. The timelines for permits and approvals, as always, are taking longer than we would like, but we feel optimistic about the projects that we have in the pipeline for future warehouse club openings.

As I always do during the month of December, I had a chance to visit four different countries on a trip that I plan every year with senior members of our Buying and Operations Team. This is to assess our readiness for the holiday season and to then define together opportunities to continually improve our sales and member service. I always come back excited after seeing how hard our teams are working on serving our members, which resulted in a good month of December.

Let me now spend a few minutes covering a difficult situation in Honduras. During December, we saw significant unrest in that country, as a result of the presidential elections that occurred during the last days of November. There initially was uncertainty regarding the outcome of the elections followed by a disputed result. Street protests that turned violent in many cases were the by-product. These protests resulted in road closures and government-mandated curfew hours, which limited the hours of operation of our clubs over a number of days early in the month and created hardships for our employees and our members. In addition, the shipping of merchandise from the ports and the delivery of local merchandise to our clubs was curtailed as roadblocks made the transportation of goods too dangerous due to the [inaudible]. Towards the middle of December, we saw a calming of tensions and a return to some political semblance of normalcy, which we hope will remain although there is still political uncertainty which will fuel further unrest.

Now, December sales. As announced earlier this morning, total sales for the month of December were $344.2 million, an increase of 4.9% from a year ago. All of our warehouse clubs, including Honduras once things settled down, performed well during this important month, and I wish to recognize not only buying club personnel who make good things happen on a daily basis but also the efforts of our merchandising and distribution teams who skillfully work to ensure we have sufficient levels of exciting merchandise and make the holiday season a success for our members and our company.

The comparable warehouse club sales for the four weeks ending 12/31/2017, for the 39 clubs opened at least 13 1/2 months was 6.4%. It is important to highlight that this four-week period had an extra day of sales compared to last year's four-week period due to the timing of New Year's Day, which fell into our December comp period last year but will be in our January comp period this year. All of our warehouse clubs are closed on New Year's Day. We estimated that this provided an additional 240 basis points to our comps in the month. We will see the turnaround effect of all this when we report our January comps.

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

John Heffner -- Executive Vice President and Chief Financial Officer

Thank you, Jose Luis. Let me cover a few additional items, including our initial assessment of the impact of the recently enacted U.S. tax reform legislation and what that will have on our financials going forward as we understand it.

Selling general and administrative expenses in total increased $6.4 million or 7.7% to 11.6% of net warehouse sales from 11.2% a year ago. Warehouse club operations expenses of $69.5 million increased 6.2% and included the new warehouse club in Costa Rica as well as extraordinary operating costs associated with the post-hurricane efforts in USVI. While Colombia operating costs decreased as a percent of sales, expenses increased $544,000 to support that growing business.

As Jose Luis mentioned, we report expenses associated with our future focus investments in general and administrative expenses which contributed to growth in that area from a year ago. Foreign exchange transactions and revaluation of monetary assets and liabilities resulted in a $278,000 currency gain in the quarter compared to a $928,000 loss in Q1 last year. We are beginning to see some positive sales trends in Trinidad, although the illiquidity conditions and lack of availability of tradable currencies, which we have spoken about over the past year, remain. Unlike last year, we did not limit shipment to Trinidad to any great degree and had good sales results in December. However, we continue to be mindful of the situation and are carefully managing our exposure to the negative impact of any sudden devaluation of the TT$0. That exposure at the end of November was $12.1 million.

The effective tax rate for the period was 31% compared the 31.5% a year ago. The improvement was largely related to Colombia due to improved operating performance and the reversal valuation allowances on intercompany transactions between Colombia and the U.S. From a balance sheet perspective, the Company ended the quarter with cash and equivalents of $129.2 million, a decrease of $33.2 million during the quarter. Operating activities, including the buildup of inventory for the holiday season and the related trade accounts payable added $29.9 million. Inventories grew $61.5 million offset by merchandise-related accounts payable of $21.4 million for a net cash use of $40.1 million.

We invested $19.7 million in various capital projects including the construction activity associated with the Santa Ana, Costa Rica club and the Santo Domingo, Dominican Republic club and the work we are doing to expand our Pradera warehouse club in Guatemala and our Kingston, Jamaica club, among other projects.

Finally, we had a net cash use of $5.3 million in financing activities, and a positive plus $2 million effect of exchange rate on our cash balances.

Let me now speak about U.S. tax reform legislation. We've been analyzing the impact of the U.S. tax reform legislation. We have more work to do in conjunction with our external tax advisors to fully understand the various elements to ensure we are in compliance. However, I wanted to provide some basic information as we best understand it.

First, the reduction of the U.S. corporate tax rate. As you all know, the U.S. corporate tax rate will decrease from 35% to 21% starting in January 2018. There are two elements of this for us. There's a one-time impact. We will likely take a one-time, non-cash expense currently estimated to be approximately $1 million to be booked in the second quarter of fiscal year 2018 to reduce the value of certain deferred tax assets which we had been carrying at 35%, which are now valued at 21%. There's also an ongoing impact. On an ongoing basis, this rate reduction is expected to have a favorable impact on the company's overall effective tax rate. However, substantially all of the company's revenues are from foreign sources, much of which attracts foreign withholding taxes.

In the past, the company has generally been able to recover all of these foreign tax credits, or FTCs, generated by these withholdings, against our U.S. taxes payable at the 35% rate. The Company currently estimates that foreign tax credits will be higher than 21% of our U.S. taxable income, resulting in the need to expense some of the FTCs. Therefore, the company expects the benefit from the reduction of tax rates, but not to the full extent of the rate reduction, as excess foreign tax credits will have to be expensed.

We currently estimate that the net impact of the reduction in rates less the unused and expense FTCs will result in an effective tax rate in the U.S. of somewhere between 25 and 30%, an overall improvement of approximately 1 to 2% in our consolidated effective tax rate. There's also a one-time tax on accumulated foreign profits. This one-time tax on accumulated foreign profits will result in a tax expense being recorded for the full amount of that tax in our second quarter of fiscal year 2018, while the cash payment will be spread evenly over eight years. The calculation of the this tax is quite complex, and the measurement dates and requirements subject to further IRS guidance. We are working diligently with our tax advisors to refine this calculation in accordance with the regulations as they are released.

We currently estimate the charge to tax expense in our fiscal second quarter to be between $10 and $20 million dollars for this item. However, from a tax perspective, the company expects to be able to offset some of this charge by FTCs accumulated prior to January 1st, 2018. We currently estimate we will have approximately $5 million of FTCs, which will reduce the cash payment we will be required to make over the eight-year period.

Again, let me reiterate: this is all new information, and our current understanding may not be 100% correct, and/or the final rate may be different than what we are currently working with, but we think we have a pretty good handle on the basic elements. With that, we'd be happy to take your questions. Austin?

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. To ask a question, you may press * then 1 on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. Again, that's * and then the number 1 if you'd like to ask a question.

Our first question comes from Ronald Bookbinder with IFS Securities. Please go ahead.

Ronald Bookbinder -- IFS Securities -- Analyst

Good morning. The comps over the past several months seem to be picking up momentum, ending with December up that 6.4% or even 4% on the adjusted basis. So, no matter how you look at December, it's still the best comp you've had in years. What macro events do you think is driving this? Is it the improving U.S. economy? Is it improving oil prices? Is it both? What are your macro thoughts on your regions?

Jose Luis Laparte -- President and Chief Executive Officer

Okay, Ron, a couple of comments on that regarding because we already have been noticing the same thing. I feel there are a lot of variables, I guess, where we have seen improvement. First of all, I think, obviously, in the last couple of years we keep working on, I guess, improving our merchandising efforts, improving our merchandising excitement, and trying to figure out how to keep our members back in the clubs and buying merchandise, so I have to definitely credit some of those results to that effort.

On the other hand, I think what you mention—or I mean there are a couple of countries where we have in the last couple of years some challenges, Trinidad being one where we saw a very soft economy. We saw a little bit of that in Costa Rica in the last year, year and a half. Costa Rica was pretty soft, so little by little some of these countries are recovering, and definitely we are taking advantage of that.

In addition, I think obviously Colombia is playing a good role in helping push, compared to last fiscal year where Colombia didn't actually pull us down, this year is pulling us up in the general results. So, when we look at how we ended the quarter at 2.2 and with the results in December, we definitely didn't have any, only with the exception of Q3 in fiscal year 2017 that we had that 2.2% increase, the rest of the quarters last year were 0, 2.1, and 1.9%. So, I think we're following a good trend, and hopefully other things will continue in terms of the economy's being help, I guess helping us, with the exception of Honduras where we have a little bit of uncertainty right now what's gonna happen. We think that the rest of the country will probably have a good performance during the calendar year.

Ronald Bookbinder -- IFS Securities -- Analyst

Okay, so if we back out that Costa Rican news story impact on comps, was there any country or territory this past quarter that was negative or was everything flat to up?

Jose Luis Laparte -- President and Chief Executive Officer

Everything was flat to up. We had that—actually yeah. Everything was flat. Panama, I think I mentioned in my report, had flat growth for the quarter. Other than that, all the other countries actually resulted on a positive. Panama and Trinidad were the only two flat, but we didn't have any country with a decrease on sales versus last year for the quarter. They were all positive.

Ronald Bookbinder -- IFS Securities -- Analyst

On merchandise price cuts, is that just part of your ongoing strategy that you've been using for the past couple decades to drive volume, or was that to clear merchandise?

Jose Luis Laparte -- President and Chief Executive Officer

No, it is definitely one of our continuous efforts to keep just driving the volume. We'd rather see it on the sales line versus increasing our margin, and I don't recall anything particular with markdowns. Like any other year, we definitely will have some that we will do in this Q2 especially between December and January to clear some seasonal merchandise, but for the most part, we don't expect anything drastic on those markdowns. Again, it's more we're trying to push that top line, Ronald.

Ronald Bookbinder -- IFS Securities -- Analyst

Okay, and just lastly, and then I'll jump back in queue, Trinidad. Trinidad seems to really be improving faster than you guys can convert out of the TTs. With the improvement in oil prices, is there any talk of the government loosening the constraints on currency conversion into dollars?

Jose Luis Laparte -- President and Chief Executive Officer

As far as we know or we've heard, we haven't had that kind of signal from the government. I think they will bear still concern on the amount of, on obviously the lack of U.S. dollars in that market, and they're actually pushing hard on exports and other initiatives to try to get more dollars in that country. So, it's gonna probably be another rough year in terms of getting those dollars in our hands, and in the meantime as you are saying, yeah, things are improving little by little on the sales, and the economy in general seems to have a better flow right now with oil and everything going on in that country. I think we're still a little worried that it will still be hard to get our hands on the dollars, Ronald.

Ronald Bookbinder -- IFS Securities -- Analyst

Okay, thank you. I'll get back into queue.

Jose Luis Laparte -- President and Chief Executive Officer

Sure. Thank you, Ronald.

Operator

Again, if you'd like to ask a question, please press * and then 1. The next question is from Thomas Vester with LGM Investments. Please go ahead.

Thomas Vester -- LGM Investments -- Chief Investment Officer

Hi Jose Luis, and hi, John, and congratulations on December. Can you talk a little bit about, Jose Luis, in terms of your operating leverage, I mean, you have seen a sort of the question just asked indicated an uptick in your revenue growth, you also mentioned that in your opening statement and in the same, those sales. When do you expect that to start converting into a pickup in your operating margin up to the more historic level of around 500 to 550 basis points? If you can give any indication of that or point to anything to observe or anything like that, that would be very helpful.

Then on the Miami area distribution, do you still carry the full rent of the old facility and can remind us how much that is and when you expect that to be sublet? Then you made the comment on your sites and most appreciated that's difficult, and is there any updates on if you have increased your search in new markets on top of the countries you're already in or if that's still focusing on mainly new sites in I guess Colombia and some of the other more successful markets you're in?

Jose Luis Laparte -- President and Chief Executive Officer

Okay. I'll try to remember all your questions, Thomas. Happy new year, first of all. I guess on the first one, I think if I understood the question, I think between Q2 will probably see a slight recovery on our margins, and that way we used to pretty much getting much more leverage. Definitely this is the year of investment in a lot of initiatives. So, it will probably be more on Q3 or Q4 where we will get more of that leverage. I think I believe we are doing the right investments in different areas, and again as I mentioned the online channel it's gonna be definitely on ERP. It is some volume where we also did some important investments to add some people and to add some resources to get the better results in sales. So, we believe that all the things are the right things to do and hopefully will get us back in the way we would like to see the results and not only including the top line but at the same time getting the leverage we need on our expenses. Hopefully that will happen.

In terms of the Miami distribution center, I believe, John, we are still carrying some --

John Heffner -- Executive Vice President and Chief Financial Officer

Yeah, we've sublet some -- Thomas, we've sublet some space, however, we do have some underutilized space I think in the quarter it was about $300,000 of space that we're carrying, and so that's sort of the operating amount I think in a quarterly basis of underutilized space that we've got at this point.

Jose Luis Laparte -- President and Chief Executive Officer

So, hopefully, we'll [inaudible]. As we start the new year, we're looking forward to trying to get that space completely subleased so we can stop that expense. Then, on opening new clubs, we're obviously busy busy working on getting the approvals. I think hopefully that by our next call we will be able to announce more sites and more things going on in that respect. We definitely have a lot of efforts going on in every -- you mentioned Colombia. We have efforts going on in that country in particular. We have efforts in a lot of different countries, not only Colombia, so we're not stopping that. We really believe there is good opportunity in those markets, especially, again, Colombia where we're having double-digit growth and we're seeing good results and good acceptance of our concepts. We wanna go back and keep adding warehouse clubs in that country and at the same time other countries in the region. We definitely haven't stopped our efforts, and we're working as hard as ever on trying to get more clubs open and keep adding to the pipeline.

Thomas Vester -- LGM Investments -- Chief Investment Officer

That's much appreciated, and are you, in terms of the efforts you're doing with the investments you mentioned to enhance revenues, are you testing anything also in terms of any add-ons in clubs, because I mean, clearly one of the, I guess, the key difference still to PriceSmart from the established U.S. clubs is probably a bigger offering around the club in terms of other add-ons, optical offering, et cetera. Is there anything you're testing or is it that is not in the pipeline?

Jose Luis Laparte -- President and Chief Executive Officer

No, it is, actually. I mentioned it on my last call. I did in fact put it again on my script this time that we have optical, actually, we launched it at the opening of our Santa Ana club in Costa Rica. We then added another one in Escazu, and we're now expanding that to all our clubs in Costa Rica. That's one of our first intentions of adding some add-on services to our clubs. We also have an initiative on travel that we're recently gonna be launching on travel. We did a small kiosk on café, we started with a test in Colombia in Salitre club in Bogota city, and we're looking at expanding that one to two more locations. So, there are some different initiatives that I referred to in my last earnings call. They're still small offices in the scheme of things, but definitely are getting our members that we're trying to become more of our membership, part of their membership life. There are different efforts in that respect, Thomas.

Thomas Vester -- LGM Investments -- Chief Investment Officer

That's great. Sorry I was not on your last call, so apologies.

Jose Luis Laparte -- President and Chief Executive Officer

I'm glad you brought it up.

Thomas Vester -- LGM Investments -- Chief Investment Officer

I heard from the last caller you're retiring, John, so I'm not sure when it is, but best wishes for that and congratulations when the day comes.

John Heffner -- Executive Vice President and Chief Financial Officer

Good. Thank you, Thomas.

Jose Luis Laparte -- President and Chief Executive Officer

Thank you, Thomas.

Operator

The next question is a follow-up from Ronald Bookbinder with IFS Securities. Please go ahead.

Ronald Bookbinder -- IFS Securities -- Analyst

Thank you. On your online strategy, will the online be focused on the larger, more mature markets like Costa Rica and Panama first where you've been building out regional DCs to support it, and then from there would you build out to sort of ancillary countries?

Jose Luis Laparte -- President and Chief Executive Officer

We are working on that the strategy, but you're kind of describing it, Ron, and that's exactly what we're looking at doing obviously we think Costa Rica, Panama, Colombia, some of the bigger markets obviously to start. Then as we learn those markets, we will be able to expand into the other islands I guess or smaller markets. That's a little bit what we're trying to put together in our strategy, and hopefully we will be launching something in the next, probably toward the end of the year so we can explain more in detail what we're doing, but that's a little bit there for what we're looking at doing.

Ronald Bookbinder -- IFS Securities -- Analyst

Okay, and John, on your retirement, is there any update as to timing? We're all gonna miss you. How many more quarters are we going to have with you on board? How's the transition going?

John Heffner -- Executive Vice President and Chief Financial Officer

Well, I should probably let Jose Luis speak to process that he's intimately involved in at this point in terms of the recruiting effort and the sourcing of some good candidates.

Jose Luis Laparte -- President and Chief Executive Officer

Yeah, we're actually working, Ronald, on that transition, and we don't have anything to announce yet, but we're thinking that probably during the month of January we'll finish that decision of that transition and the new CFO and also will work with John on the exact date and try to have a smooth transition. Not so bad. Hopefully won't be later than the end of January when we'll come up with a name and find someone for that new role.

Ronald Bookbinder -- IFS Securities -- Analyst

Okay. Well, John, we all wish you the best as you move into retirement, but I'm sure we'll be talking more in the future.

John Heffner -- Executive Vice President and Chief Financial Officer

Okay, and it's not happening in the next two weeks, so there's still more time here.

Ronald Bookbinder -- IFS Securities -- Analyst

Alrighty.

Operator

Our next question is from Jon Braatz with Kansas City Capital. Please go ahead.

Jon Braatz -- Kansas City Capital Associates -- CFA

Good morning, Jose, John.

Jose Luis Laparte -- President and Chief Executive Officer

Good morning, Jon.

Jon Braatz -- Kansas City Capital Associates -- CFA

Online competition. Are you facing any online competition or any significant online competition at this moment in your markets?

Jose Luis Laparte -- President and Chief Executive Officer

It varies by market, Jon, but we are obviously -- I will say first of all, in some of our markets, or pretty much in every market, we face the competition of all the U.S. online retailers. You name it, either Amazon, Target, Walmart, all of those are in some way competing in our countries because members can actually purchase some goods and use postal service, and there are different ways that members in Costa Rica, we know members in Costa Rica and the Caribbean, in Panama and different countries, use these postal services and get goods mostly from Amazon probably and any other retailer that they want. They pay their duties when they have to, and they get them and pick them up in their countries. So, that's one competition that we know we have that exists over there.

In addition, there are some countries more developed, I would say probably Colombia is the one that is most developed with [inaudible] retailers that have been working on that, and also, they have more offering. In the other countries, there is some online competition, more I would say on the grocery shopping. There are a lot of apps and a lot of retailers that are getting into that grocery shopping mode and they basically buy, you can buy the groceries and get them delivered either in two or three hours. It is becoming very popular, similar to what is happening in the U.S. with some supermarkets and using Instacart or other applications like that. So, that is happening, but we don't see a lot of online shopping yet, I guess, from other retailers. I will say Colombia is the one that's had the most, although we see little by little an increase in every country, and everybody trying to get some efforts or putting together some plans to get in that space. That's why we're working on the same token.

Jon Braatz -- Kansas City Capital Associates -- CFA

Okay. Do you envision PriceSmart having grocery shopping apps and delivery capabilities?

Jose Luis Laparte -- President and Chief Executive Officer

We are discussing that, but not necessarily we're not sure that's gonna be our focus right away, the grocery shopping. We do have, eventually we may have that ability, but I don't think we're gonna get in that space yet. We know that some apps are using us for sure in Panama, in Colombia, there are a couple of very popular apps that actually use PriceSmart, and we see that drivers shopping in our clubs and delivering merchandise to their customers. So, it's kind of a virtual warehouse member, warehouse business, a virtual business member. I guess in the past, we used to have supermarkets shopping from us and reselling merchandise in other places. Now it's just, I guess, these apps that basically shop and deliver to some of our members or customers. So, it is happening. I'm not sure we're gonna get into that space of that complicated delivery in two hours or in next-day delivery, some of that. Maybe not, but we're still studying how we approach that, Jon.

Jon Braatz -- Kansas City Capital Associates -- CFA

Okay, and then, Jose, could you refresh my memory again as to how much you'll be spending this year on the online development, and will there then be incrementally additional expenses in the following year? Can you give me a little sense on the spending program?

Jose Luis Laparte -- President and Chief Executive Officer

Yes. We are looking at maybe $3 to $5 million, and we haven't figured out how much in the next upcoming year, but definitely we will continue investing until we figure out how to get a lot of space and trade out on the channel experience. So, we're looking at that as an investment for the future, Jon, and as our countries are getting more into this online concept, we definitely believe it is the right thing to do. But yeah, this year is $3 to $5 million in this fiscal year 2018.

Jon Braatz -- Kansas City Capital Associates -- CFA

How much do you spend in the first quarter?

John Heffner -- Executive Vice President and Chief Financial Officer

$733,000 -- $735 I think.

Jose Luis Laparte -- President and Chief Executive Officer

$735,000 is what I describe. There is some money there from, I guess, our ERP efforts, but mostly it's online initiatives or the innovations initiatives.

Jon Braatz -- Kansas City Capital Associates -- CFA

Yep. Okay. Thank you very much.

Jose Luis Laparte -- President and Chief Executive Officer

Thank you, Jon.

Operator

The next question is a follow-up from Thomas Vester with LGM Investments. Please go ahead.

Jose Luis Laparte -- President and Chief Executive Officer

You're back for more.

Thomas Vester -- LGM Investments -- Chief Investment Officer

Yeah, sorry for that. I just had a few more. You mentioned the ERP a couple of times. Can you just talk a little bit about it? I mean, it's something that has, especially in what can I say more emerging jurisdictions caused a big number of companies' problems when they change ERP systems into your logistics, it's everything to your operation. So, just talk a little bit about the implementation there if you can, and if it's too early, it's fine. Then I just had a question on the Colombian membership fee. You raised it, but it's still below the 35 U.S. dollar equivalent target, correct? And if I am correct, what is the outlook for bringing it up to par? Because it seems like you were pretty successful bringing it up when you raised it and didn't see an impact on memberships.

Then I guess the last question would just be on the cost side. I mean, clearly, it's much appreciated, you spent where you should be spending also to develop these new lines, so it's the only channel and the ERP, et cetera, and sometimes clearly you need to invest to harvest in the future. Do you see any opportunity on the cost side that you're not capturing yet, or is that just on a daily basis to squeeze efficiency where you can so there's no projects in the pipeline that could help bring back in or free up dollars to reinvest into prices for members or improve margin?

Jose Luis Laparte -- President and Chief Executive Officer

Okay, well let me go out of order to answer your questions. I'm gonna start with the middle question, and John will refer to ERP, the efforts on the ERP, but I'm gonna first take the one on membership. We went from 65,000 to 75,000 pesos a year ago. I believe we did that in March 2017. So, yeah, we do realize we're still at a lower level from the $35.00 mark [inaudible] we have in the other countries. It is due to the exchange rate. I don't think right now, Thomas, we're considering raising it again this year. We definitely don't want to send a message to our members that this is an increase that we do every year. I think we will probably wait until next calendar year before we even do something on the membership.

Even though we do realize it is as still low, we have to keep in mind that for the local Colombian consumer, they make Colombian pesos, so if we keep raising it, it will probably be a little bit out of control in terms of -- it will probably be a little expensive on pesos. When we're thinking dollars, it doesn't matter if you think if you make dollars and you get it that way, but when you're thinking Colombian pesos, it will be hard to afford -- I don't think it will be the right thing to do to raise it again. So, we are prepared to live right now with a lower, I believe that our exchange rate right now will be about $22.00, $23.00 depending on the exchange rate, but I think we're better off staying like that and honestly getting more members, and eventually we'll get back to that price.

In terms of cost, if I understood your question, there are different efforts where we're trying to keep lowering our prices. Obviously, the Miami, the new Miami DC and initiatives we're doing there are important. We just started actually last December, we started a new initiative where we're packaging where we call it business development and we're packaging a couple of items on our own with the intention of lowering our prices. So, we got a couple of multi items that in the past we were buying in a pack that wasn't necessarily the appropriate package, so we're now doing the packaging ourselves and saving obviously some money for our members and reducing that price. So, that's one way we're looking at always increasing the top line and making sure we get some of those costs down.

In addition, in the next quarter we'll give a more accurate date, but we're gonna open our next Costa Rica regional distribution center, which also is looking at doing some of those things and reducing costs. We're gonna take some of our direct shipments from the U.S. or from Asia directly to Costa Rica trying to save money on freight, potentially duties, and again trying to reduce our prices. We're also opening very soon in a couple of months we will be opening a produce distribution center in Panama, and that will do exactly the same thing. Instead of buying through distributors or buying directly from the producers, the growers, and reducing our prices, we did a study and will probably reduce prices 20 to 25%. Another effort, again, to reduce obviously cost and probably increase our prices and being more price leader, more of a price leader in those categories.

The same thing will happen in Costa Rica. We're a little behind in terms of the building we're looking at doing, but we're definitely pursuing that same effort in our big market. So, those are some of the things that hopefully will give you some color of the different initiatives we have to increase our, to reduce our prices and reduce our work cost.

John Heffner -- Executive Vice President and Chief Financial Officer

So, let me, Tom, let me jump in on the ERP activity. We've been operating with the legacy system for quite some time now that we need to move forward to a new system for a number of reasons. One is it's costing us a lot to maintain that which we have. In fact, we're even finding it hard to hire people in our IT group who can support the languages behind the system we're operating right now. We're going through a pretty rigorous evaluation of at this point three different options. We haven't made a selection yet, but there's a dedicated team that has been focused on working with the three more significant vendors in this space. We expect in the next two months or so to be able to make a selection and understand the implementation process and the return and the support that's required to make that happen. So, we're actively involved in it but not at the point of having made a selection, but it's clear we need to move forward given where we are right now, and it needs to be something that can support these new initiatives that we're talking about going forward.

Jose Luis Laparte -- President and Chief Executive Officer

To your point, Thomas, we are definitely aware of the challenge that is implementation and we're also talking to other retailers and other clients or customers from the software companies to learn a little bit how much how we can plan implementation without hurting our supply chain, without hurting obviously deliveries, without hurting our replenishment. A lot of things that when you hear stories out there from ERP implementations, there are a lot of things happening, so we're trying to learn from the mistakes that other ones have made.

Thomas Vester -- LGM Investments -- Chief Investment Officer

Great. Thanks a lot for your time and the call.

Jose Luis Laparte -- President and Chief Executive Officer

Thank you so much.

Operator

The next question is from Charlie Carter with Ceredex. Please go ahead.

Charlie Carter -- Ceredex Value Advisors -- Analyst

Yes, just wanted to clarify the tax reform implications. John, you had said it was likely going forward corporate income tax would be somewhere between 25 and 30%. Just want to confirm that you'd said something about a reduction in the consolidated rate of 1 to 2 percentage points. I was a little bit thrown off by kinda what the go-forward income tax might look like. I understand that you're still working through the policy change, but just wanted to clarify what you were saying.

John Heffner -- Executive Vice President and Chief Financial Officer

Sure, Charlie. Keep in mind that of our total tax expense of the company, only about 20 to 25% of it is associated with the U.S. The majority of the taxes we pay are in the countries in which we operate, and they didn't undergo any U.S. tax reform, so they have their own tax regimes such that we will see a benefit in our U.S. taxes, the tax we pay here, although not to the full extent of the 21%. It will be more in that when they said 25 to 30%. When you put that into the equation of all the taxes that we pay against the pre-tax income that we recognize across all of our jurisdictions, it'll have about a 1 or 2% impact on our consolidated results. So, if we're at 31% this past quarter, we would expect once it worked through that we'd probably be at the 20 to 30% consolidated tax rate.

Charlie Carter -- Ceredex Value Advisors -- Analyst

Understood. Would your strategy for repatriating cash, would that change with the tax policy, just given there'd be more of an incentive to bring it back versus to maybe reinvest?

John Heffner -- Executive Vice President and Chief Financial Officer

Well, there's a couple things that I would say there. One is that in most of the countries we operate in, any dividends that we would pay back to the U.S. parent, which is the structure we have in place, would result in a withholding tax in these countries of anywhere between 10 and 20% in most cases. So, it may not fundamentally change. While it would it improve what the tax situation here is in the U.S., theirs are taxes that we may not be able to recover in that. So, it's still under review and understanding, but I think what's more behind our whether we repatriate cash back to the U.S. is we have our investments and our operations are really outside the U.S., and we use that cash for opening new clubs and expansions and growing our business in those markets, which is where we generate that cash.

Charlie Carter -- Ceredex Value Advisors -- Analyst

And the dividends funded by your U.S. earnings, in other words?

John Heffner -- Executive Vice President and Chief Financial Officer

That's correct. Dividends are provided, are funded by the U.S., and we have mechanisms to bring cash back in the normal course to meet our dividends based upon whatever the Board believes are the right dividends for the Company.

Charlie Carter -- Ceredex Value Advisors -- Analyst

Okay. Thanks very much.

Operator

This concludes our question and answer session. I would like to turn the conference back over to John Heffner for any closing remarks.

John Heffner -- Executive Vice President and Chief Financial Officer

Well, thank you, Austin. I don't have any specific closing remarks. We'll end our call and thank you for your participation today. Thank you.

Jose Luis Laparte -- President and Chief Executive Officer

Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. You will now disconnect.

Duration: 55 minutes

Call participants:

Jose Luis Laparte -- President and Chief Executive Officer

John Heffner -- Executive Vice President and Chief Financial Officer

Ronald Bookbinder -- IFS Securities -- Analyst

Thomas Vester -- LGM Investments -- Chief Investment Officer

Jon Braatz -- Kansas City Capital Associates -- CFA

Charlie Carter -- Ceredex Value Advisors -- Analyst

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