Neil Rossy - President and CEO Michael Ross - CFO

Irene Nattel - RBC Capital Markets Jennifer Panes - BMO Capital Markets Kenric Tyghe - Raymond James Jim Durran - Barclays Mark Petrie - CIBC Vishal Shreedhar - National Bank Financial Derek Dley - Canaccord Genuity Anthony Bonadio - Wells Fargo Keith Howlett - Desjardins Securities Patricia Baker - Scotiabank Chris Li - Macquarie Brian Morrison - TD Securities

Good morning, and welcome to the Dollarama Conference Call for the Fiscal 2019 Second Quarter Results. Mr. Neil Rossy, President and Chief Executive Officer; and Mr. Michael Ross, Chief Financial Officer, will make a short presentation, which will be followed by a question-and-answer period, opened exclusively to investors and financial analysts. For your convenience, the press release, along with the second quarter financial statements and management’s discussion and analysis are available at dollarama.com in the Investor Relations section and on SEDAR. Before we start, I have been asked by Dollarama to read the following message regarding forward-looking statements. Dollarama’s remarks today may contain forward-looking statements about its current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements, or other future events or developments. Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believe are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results, levels of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by the forward-looking statements. As a result, Dollarama cannot guarantee that any forward-looking statements will materialize and you are cautioned not to place undue reliance on these forward-looking statements. For additional information on these assumptions and risks, please consult the cautionary statement regarding the forward-looking information contained in Dollarama’s MD&A dated September 13, 2018, available at www.sedar.com. Forward-looking statements represent management’s expectations as of September 13, 2018, and except as maybe required by law, Dollarama has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. I'd now like to turn the conference over to Mr. Neil Rossy.

Thank you, operator, and good morning, everyone. This morning we reported our financial results for the second quarter of fiscal 2019. We delivered a solid performance with continued sales growth, strong margins, tighter cost management and a 13% increase in diluted EPS over the same period last year. Top line growth of 6.9% reflects same store sales of 2.6% and the growth of our store network from 1,125 stores to 1,178 stores over the past 12 months. The Q2 SSS growth rate primarily reflects our decision to limit price increases in order to deliver an even more compelling value proposition for customers, a key factor in our long-term success. We also faced the difficult comp, given that SSS for the same quarter last year was very strong at 6.1%, driven in part by sales of products in connection with Canada's 150th anniversary celebration. That being said, we did recover the shortfall in summer seasonal sales reported in Q1. In the first six months of Fiscal '19, we opened 18 net new stores compared to 30 in the same period last year. We expect an acceleration of new store openings in the second half of this year as and are maintaining our full year target of 60 to 70 net new stores. This pattern of opening a higher number of stores in Q3 and Q4 is consistent with prior years and is really just a timing issue. Now turning to e-commerce. As previously communicated, we are gearing up to launch our Quebec only pilot for the sale of items by the case this fall. We look forward to testing our platform in our home province ahead of the national launch. Finally, regarding our distribution center expansion, construction work is well underway and we are very pleased to be moving along on time and on budget. Most importantly, existing DC operations continue to run smoothly in parallel as our store network continues to grow. Over six months into the fiscal year, we are on track to deliver strong earnings growth and a sustained long-term financial performance for the benefit of our shareholders. We will achieve this, while maintaining our compelling value proposition for consumers. I'll now turn it over to Michael for more detail on our financial and operational performance as well as guidance updates for the full year.

Okay. Thank you, Neil, and good morning, everyone. So our quarterly financial performance was driven by continued sales growth, strong margins and the active management of our cost structure while up against some challenging comps. Sales were up 6.9% at $869 million and same store sales grew 2.6%. Transaction size increased by 3.1%, while the number of transactions decreased by 0.5%. Gross margin was 39.7%, up 0.1% over the same quarter last year, SG&A was 13.7% of sales, a 0.2% improvement over the same quarter last year, and EBITDA was 26% of sales, up 0.3% over the same quarter last year. Diluted net earnings, reflecting their share split, rose to $0.43, representing a 13.2% year-over-year increase. We are revising our assumptions for same store sales and enhancing our guidance on gross margin G&A and EBITDA. Based on the results of the first six months, and in light of decision to hold back on price increases, we are setting our assumption for full-year same store sales at a range of 2.5% to 3.5%, down from the previous range 4% to 5%. Despite a more conservative sales forecast, we are increasing gross margin guidance by 50 basis points to a range of 38.5 to 39.5 of sales. Q2 gross margin was slightly higher than the prior year as a result of changes to the product mix and lower occupancy costs as a percentage of sales. We initially expected inflationary headwinds on goods purchased in China to have a notable impact on gross margin in the second half of this year. However, based on our visibility, on open orders the impact should be less than anticipated leaving our margins for the remainder of the year stronger than originally expected. We are also enhancing SG&A guidance to a range of 14.5% to 15% of sales or an improvement of 50 basis points. SG&A as a percentage of sales improved in Q2 due to cost control initiatives implemented towards the end of last year, resulting in savings realized in Q1 and Q2 of fiscal 2019. These help mitigate the impact of minimum wage increases, primarily in Ontario, SG&A margin also continues to benefit from in-store labor productivity initiatives, tighter control over operating expenses and scaling. Accordingly we are increasing EBITDA guidance by 100 basis points to range of 23.5% to 25% of sales. In terms of CapEx, which amounted to $26.8 million in Q2 F'19, our guidance remains unchanged for the full fiscal year and fully reflects costs associated with the expansion of our distribution capacity. Guidance of 60 to 70 net new stores openings for the year also remains unchanged. Now turning to operations. We have several ongoing initiatives to improve efficiency and further streamline our cost structure and support of long-term profitable growth. We have completed the rollout of new cash handling processes to reduce the time required to count and record cash deposit. We’re also continually optimizing in-store scheduling to improve labor allocations and simplify scheduling process for store managers. It has now been over a year since we started accepted -- accepting credit cards as a payment method across the chain. I'm pleased to confirm that credit card penetration continues to meet our expectations and to grow from quarter-to-quarter. In Q2 F'19 credit cards were used to pay for 18.4% of sales. This is compared to 12.4% of sales in Q2 F'18. Note that the expected cannibalization has been higher on transactions settled in cash and on transactions settled by debit card. Note that we will not be updating this metric on a quarterly basis. This is a one-time disclosure to put things into perspective after a full annual cycle of transaction since the introduction of this set payment method. As part of our normal course of business, we also continue to monitor and measure consumer sentiment regarding their shopping experience. The results we have seen this year suggest that our compelling value proposition remains strong, and that consumers continue to enjoy their shopping experience in our stores. Finally, a comment on capital allocation. In Q2, we repurchased 1.1 million shares at a weighted average price of $52.10 per share for a total cash consideration of $55.4 million in the first half of this fiscal year. We have deliberately slowed down share buyback light of requirements for the DC expansion. But buybacks can be expected to accelerate going into Q3 and Q4 subject to market factors outside of our control. Our NCIB was renewed in June 2018, and we remain confident that the buyback is an appropriate use of cash and an effective strategy to drive shareholder value. In summary, we delivered a strong bottom-line performance in Q2 despite lower than historical comp on the top line, and we will stay focused on delivering our key metrics for the remainder of the year as reflected by our enhanced guidance. That wraps up our formal remarks. I will now turn it over to the operator to take questions from analysts.

[Operator Instructions] First question is from Irene Nattel from RBC Capital Markets. Please go ahead.

I would like to drill down a little bit on the same-store sales number. It's not the first time you guys have face tough comps, but it feels as though something has changed a little bit in the environment. Can you talk about what are you seeing in traffic? What you're seeing in basket size? What are you seeing in basket composition? And whether from where you sit, you’re seeing any kind of change in consumer willingness to shop at Dollarama?

Okay. So, Irene, its Michael. So if we look at all the facts, first of all, we’re comping against a strong quarter, number one. We mentioned also during this quarter one category we have souvenir in which you find Canada Day [indiscernible], Montreal also had the special event last year. Just for that category, the same-store sale was 31% last year. So that explains part of what's going on, and obviously part of the 6.1%. The other thing too is that we introduced $354 price points two years ago, in August. And last year's higher comp was reflected the increase associated to the penetration of the introduction of new price point. So that's where you get the biggest bang if you want from introducing higher price points. And all of this combined with the decision we took in Q2, which will most likely last throughout the year is not to do some markups. So not doing markups combined with strong tailwind from introducing higher price points from strong quarter last year, has the impact that we're talking about. And so, why did we not do the markups? So let me just backup to a second. Why we didn't do it? The, first of all, you all know that we refresh every year, 25% to 30% of our goods. And through that process, all of this is happening with the current economic situation in mind. So the margins are set accordingly. These are new products. And so that one part of why we’re able to sustain some healthy margins from this. The other part is that -- saying that we have no inflation, but also looking at market conditions. So we told you in Q4 and Q1 that since the minimum wage headwind was announced that we weren't really seeing that being passed on to the consumer by competition, anyways in our product lines. So we still didn't see that in Q2, and have decided to protect our compelling value not to transfer these costs out to the consumer, in the way of not doing markups. So these are not markdowns. They’re simply not doing markups like we do every year for a certain number of items. So that is what we have decided to do. Now what we also did during the quarter knowing that all of this would be discussed, obviously, but we do that every year is asked [indiscernible] to do a survey across Canada in terms of reassuring us that the model is still working that people come to Dollarama because of the compellingness of the offering. And that was reconfirmed, clearly in the report. So that -- so there’s nothing from a business model point of view or structurally that is impacted, which is confirmed to this survey. And the other thing in terms of traffic, you mentioned traffic -- traffic is hard to measure specifically. So this is not scientific as we’ve told you in the past. This is our guess of -- our best guess as to what's going on. We think here there are two factors that impacted traffic in this quarter. Part of it relates to Canada Day last year, the other one too, a plastic penetration. So I mentioned in the script that credit card penetration went up from 12% last year to 18% this year. Debit penetration was 44% last year and 435 this year. So debit penetration did not decrease that much. It went down just 1% from 44% to 43%. And credit card went up from 12% to 18%, 6%, so for a net of 5%. Now it's an increase in plastic, a 5% year-over-year. Debit card in the past would only increase by 2% or 3% year-over-year. So this is double the normal penetration increase that we’ve seen. And we suspect, again this is not scientific that -- part of that has had an impact. We continue to do more in depth work to understand traffic as we've always done. And, but that's what we are coming up with for the moment.

That's very helpful. Just one follow-up question if I might. Certainly, what we heard from other retailers in the first half of the year? So around the Q1 earnings release period was -- yes, no-no, we’re okay, no inflation, it’s okay. On the Q2 round of call, as we started hear more noise from other retailers around, yes, we need inflation, we need inflation. I mean the costs are just rising above and beyond minimum wage and other areas. If we were -- if we assume, for argument sake, that other retailers start to raise prices in Q3 or Q4. How quickly can Dollarama react?

Very quickly, as we've always. I mean, we do Dollarama does that day in, day out. So …

It’s a daily evaluation.

Thank you. The following question is from Peter Sklar from BMO Capital Markets. Please go ahead.

Hi, it's Jennifer Panes filling in for Peter. So my first question, on the products that are priced at $3.50 and $4, what stage are you in introducing those into the stores? Like others still new products being introduced, where you at in that process?

We’re always introducing new products into every price point. And the $3.50 and $4 price points are now at the same maturity level as our other price points.

And then on the categories performance this quarter, so obviously, the seasonal category involving Canada Day was weaker compared to last year. Are there any other categories that over or under-indexed in the quarter?

Yes, well, it varies. I mean, we don’t disclose with this one if we take -- if we’re disclosing to explain the bigger outlier. But with all the categories, it moved constantly. And that's why we refresh 25% to 30% of our goods. And as Neil just said, we review the buyers on a daily basis. We get sales report. We've got -- and so we have access to the market quite rapidly. But to specifically answer your question, there were no other outliers in the categories, the rest of the categories that were significant.

Thank you. The following question is from Kenric Tyghe from Raymond James. Please go ahead.

I would like to follow-up on the value proposition discussion. I mean, your value proposition is, and gap relative to your competitors is both compelling and wide. Could you sort of speak to though what it is you're seeing that is necessitating or justifying your investing in price, and perhaps in what categories or what price points that's necessary just given how wide that gap has long been or is deceived to be? I mean, something would appeared to have changed or you seeing some changes that are supporting these decisions in the investments you’re making in that proposition?

Yes, we won’t. Obviously, we can’t go into detail for competitive reasons. So, but, I mean, I would say it touches all categories. It's just something that where it's a balance, and we've mentioned this in the past. We've seen the gross margin grow and grow and grow. And so you just have to make sure you are -- you remain compelling in terms of offering. And historically, as I've said and demonstrated is we've had some heavy headwinds. I talk about six or so years ago in China, then energy costs the year before, after that the FX where we have 30% inflation on half our purchases. And in those periods, clearly, we were in the same level playing field as our competition. And I felt that these costs, at the end of the day, were being transferred to the consumer. And so this time around, like we said we didn't feel that that was going on and so we're reacting to that. And we've always said we're not the price setters. We’re the price followers, in other words, we look at where the market goes, and we adapt to that.

And then just a quick follow-up. With respect to your updated gross margin guidance, at face value, it looks as simple as the product mix benefit is offsetting the price investment. Is that a fair characterization? Or are there other inputs in your back half of the year margin expansion story or other inputs that are perhaps coming off that we should be thinking about as well. I just want to correctly characterize to understand the increased gross margin guidance given the pricing investments you've mentioned and low input cost inflation that you were expecting et cetera, et cetera?

Right. So in terms of gross margin, as of today, we've got pretty good visibility over the rest of the year with open orders. We -- the buyers, Neil, have the pulse on suppliers. We also have the -- in terms of tariff where we told you that that had no significant impact on us to-date. And so the -- again, we’ve had anticipated a bit more inflation from China for the second half the year, which is we now feel won't happen. And occupancy costs, as we open up new stores and continue filling the market, again, there's nothing -- that wasn't a surprise though. We -- occupancy cost continues. It's just confirming that it continues to be low inflationary, and in fact better in terms of percentage of sales. So there’s -- it’s having more visibility on what's going on around us that allow us to move that margin, which is still lower. I mean last year, let's not forget, we finished at 39.8%, and the range now is -- the top range is at 39.5%. So we still expect to be a bit lower than last year, but better than what we had initially anticipated.

Thank you. The next question is from Jim Durran from Barclays. Please go ahead.

So as you look at the back half of this year and into next year, and you’ve kind of reset the bar on some of the assumptions to guidance, like what element of your plans do you feel the most uncertain about?

Nothing there -- I mean, there’s -- aside from what we told you, its business as usual. I don't know if I can -- it’s truly continuing to do what we’ve always done. Now we’re looking at competition, looking at the market and reacting to it. And this time around, as we said and we were telling you in Q4, we didn’t see that minimum wage being pushed to the consumer, except for the restaurants. But in terms of retail, we didn’t see that. So that means you absorb it. We -- I’d say, looking good in terms of absorbing from a G&A perspective, for example, where we told you first of all that we still have benefits from the annualization of Q3 initiatives, and began -- which began last year, which kicked in. But also we got better savings and we had anticipated in Q2, which will transpire in Q3 and Q4, which are non-labor related other store expenses that have kicked in higher than we anticipated, and we’re going to benefit from that. So that’s what allows us to move that G&A range down a bit. So that's the good news. And but on the pipeline, we still have to be mindful of that compelling value proposition. We cannot -- it's always a delicate balance. We've always managed it that way and we continue to doing it. And this, for the rest of the year, simply means that we don't markup as much as we did historically. And that's it.

Okay. So if I just sort of paraphrase and sum up what I think I’ve taken away from the conversation on comp store sales and pricing plans for the back half of the year, is that it sounds like it’s more of a proactive move to avoid running into a meaningful problem down the road as opposed to reacting to concerns because the consumer study you did didn't really express any significant concern. Theirs is some reasonable explanations of chunks of the business that would've naturally been down year-over-year either whether in Q1, Canada Day, et cetera in Q2. And so you're really trying to make sure you don't run into resistance by the consumer as opposed to reacting to problems with the consumer?

Yes, I think you pretty well summed it. Just in relative to competition, we've heard that Miniso could be an impact to us or Dollar Tree. And just to be clear, again, there's nothing special going on in either case. So that's certainly, just to be even clearer with you.

And then the last question just again apologies for focusing on the comp store sales number, but its real focus right now. Last quarter the commentary I believe was that the weakness in the comp of 2.6 was largely poor weather and lack of support to seasonal demand. And non-seasonal products were comping and consistent with the previous 4% to 5% comp store sales growth range. Can you make the same claim still on products that would fall out of the extraordinary in this quarter?

Well, I think that by not marking up it touches minimum -- a lot of categories, so it will touch whether it's a seasonal all year or in Q2, Q3 and Q4, and each have their own -- Q4 being Christmas, Q3 being out Halloween. And just by the way mentioning Halloween, do expect hollowing it's not -- it doesn’t impact the rest of the year. But if you compare Q3 to Q4, Halloween, this next quarter in Q3, will be one day short and it's an important day short. So will gain it back in Q4, but just so everyone knows that the week before -- everyday the week before Halloween is an important day. So there is one more day that’s going to be deferred to Q4.

Okay. Sorry I'll ask one more question, if you don’t mind, just on the debt leverage ceiling, right? In terms of your ability to use the buyback, I assume, you don’t really expect on the full year basis much of a change to your free cash flow outlook given the trade-offs of the guidance change. At what ceiling do you feel you need to pay attention to on your debt leverage?

So we’re allowed up to 3x, but our comfort zone is 2.7x, 2.75x, adjusted to debt to EBITDAR. And as we said with this -- aside from the CapEx on the DC and the construction, it's full steam ahead with share buyback in an opportunistic way though.

Thank you. The next question is from Mark Petrie from CIBC. Please go ahead.

I want to ask about the pace of store openings. As you noted slower start to the year, you did maintain the guidance for this year. But wondering about sort of further beyond that, obviously, the store potential that you put out there gives you room to remain at that pace for a while. But to the slower same store sales assumption change you're thinking about how aggressively you want to push new stores out there.

No, it does not. It does not. And that I would also add that if the pace at which we've been opening stores this year is slower than last year. As mentioned often that just relates to the specific timing of real estate. And if stores are pushed closer to the end of the year, it could be that there is an overlap between a few more stores at the end of this year or a few more stores in the beginning of next year, and the end, it will keep our pace of 60 to 70.

And then just with regards to Neil, I guess, your comment about sort of feeling like the $3.50 or $4 items are sort of at maturity in terms of the penetration within the assortment. We have seen a deceleration, I guess, over time of the percentage of -- or the -- in the increase in the percentage of goods sold above $1.25. What’s the current appetite or outlook for pushing to price points above $4?

It's an excellent question. At the moment there is no appetite to push for price points above $4. There's also nothing stopping us from changing our minds at any point. But for the moment, we have no intention to do that. We remain committed to the idea that selling items at $1 and $1.25 remains a really important part of our business. And we could easily have made all of our lowest price point items in our store, $1.25, like some of the other retailers in Canada. But we feel that we still can offer tremendous value at $1. And there's no reason to simply paint all of our items with one brush. So we sell hundreds and hundreds of SKUs at $1. And we feel that those items are equally important as our higher price point items are to continue to offer great value at whatever specific item or category we’re competing in the market with. So that just gives us another tool to remain even more competitive when putting, for example, items of $1 against items of $1.25 in the market. So we’re committed to all of our price points finding new SKUs within all of those price points. But for the moment there's no appetite to increase to another price point.

And then just with regards to the same store sales expectations for the back half of the year, the guidance range sort of implies a continuation from here or an acceleration. And so I guess I'm just curious, what do you expect would be the catalyst to accelerate momentum from here? Is it simply a lack of sort of the nonrecurring issues whether in Q1 or the tough seasonal comp in Q2? Or are there other factors to consider?

Well, yes, that -- for Q3, like I mentioned there's that Halloween Day, but otherwise, no, I think, it's not that -- we don't -- it’s normal conditions that we expect.

Thank you. The following question is from Vishal Sreedhar from National Bank. Please go ahead.

On the Canada 150, just to be clear, that isn’t a lingering issue like the souvenir category in the next quarter was back to normal. Is that correct?

Yes.

Okay. And in the past, I think, and you can correct me if I am wrong. I think, management used to say or at least imply that 4 to 5 was kind of an internal aspiration, and granted there’re some issues this year, which may bring it lower than that. Should we anticipate over time? And I am not asking for specific guidance here, but over time that 4 to 5 to be maintained? Or is that new guidance range you gave us something we should contemplate for the longer-term?

Yes, well, one just for specifically, right now, it's too early to say for next year, we still have two quarters. But as we've said, we will be disappointed if we cannot generate 4% to 5% same-store sale, but 4% to 5% same-store sale is an aggressive -- I've always said that it's a very dynamic target to reach. And so, but to say, can we continue that for next year? We will -- I mean, right now it's too early to say.

So given that -- internally the team would be disappointed if they couldn’t hit that aspiration of 4% to 5%. And this year, things -- inflation isn't coming in as you anticipated. Is it fair to say that management is looking at new initiatives maybe to help sales without pricing? I know you said price -- taking a price points not an issue, but Dollarama does do things differently than other retailers, and you don't engage in promotions to the extent that others do, you don't use the data analytics to the extent that others do, other things that you can look at or is that not on the radar?

No, while we look at a lot of things, absolutely, obviously these are nothing we would want to disclose, but obviously we're always motivated to generate as much as possible. And we constantly -- as we do for executing on operations and the rest look to stimulate growth as much as possible. But beyond that, those things we keep to ourselves.

Okay. Related to the just the performance this quarter and the last, there were discrete issues in each quarter, which may have caused results not to be what consensus expected them to be. Is there anything else, like is it the economy, is the offer or are those issues perhaps that you may be seeing a little bit kicking up there, or is it really just what you highlighted?

Yes, I think it’s more us reacting again with the market and in other words, doing what we've always done but this time around seems like from the last headwinds, we were having that the market then will react like in the past. And so, we're just doing exactly the same just monitoring that and reacting to it to keep that compelling model out there to make sure that, we over time keep those sales as high as possible and stimulate them as much as possible. So, it's not more than that and that's what we continue to do. And we will see -- and just by the way, Vishal, since you are talking about the outlook for next year, we typically get that in Q3. But two things are happening, as you all know there's IFRS 16 that's going to be kicking in next year, and so that's going to require some updating for the investment community and analyst. So, we will have some scheduled prepared and meetings done to explain all of this. But at the same time, this will be disclosed in March of next year, for next year. So we have to wait for the full year to go by. And obviously some of the outlook items like EBITDA, G&A will be impacted by that. So as opposed to giving the guidance in Q3 results or the next December, it will be given in March of next year for next year so just as a heads up.

Thank you. The following question is from Derek Dley from Canaccord Genuity. Please go ahead.

Just following up on price point discussion, I know you mentioned that the $3.50 and $4 items are now maturity. Can you give us an update on what percentage of your items are priced at those levels?

No, we Darek -- sorry, it's Michael. We don't disclose the specifics, we only disclose above 1.5.

Yes. Okay, I better try there. Just in terms of the same-store sales trends and through the quarter, it sounds like, I think from your last call as well. May was relatively strong as you manage to recoup some of the weather related seasonal items that you didn’t sell in April. And it sounds like to me June -- maybe the end of June may have been weak just given the Canada Day impact. Is that the right way to look at you kind of saw stronger May a weaker June and then reacceleration in July?

Yes, I mean those facts are accurate. So summer, even at the last call, we had quite a bit of pick up. We have recuperated a lot of the summer that continued on and the souvenir or category or Canada they absolutely have an impact. And then it's throughout or the rest of Q2, some markups that were initially planned were not done and obviously those will transpire through Q3 and Q4.

Okay. And then just lastly, we’re about seven quarters away from the call option on Dollar City and I get you -- you guys would say, it was about 1% of sales during the quarter. Can you give us any other incremental disclosure where you're at on that? What remains some of the key metrics you're looking to evaluate and just kind of an update on how far long that initiative is?

Okay, so, in terms of dollars, first of all the call option date is -- begins February 2020, so that’s the official call date where it begins. Secondly, Dollar City to-date like we’ve said in the past is going very well, may be that the -- I can update you on the store count, we’re at 137 stores today or our partners; Columbia 51 stores, Guatemala 44 and San Salvador 42, otherwise things are going very well over there. The business is good, but we still have critical phases the due diligence process to go through and so there is still important steps to -- that we need to go through.

Thank you. The next question is from Edward Kelly from Wells Fargo. Please go ahead.

Hi, guys this is Anthony Bonadio. Thanks for taking our question. Just quickly on SG&A, you guys are clearly doing a pretty impressive job of offsetting the wage increases and you’re cycling already solid cost leverage last year. Can you just give us some more color on specific leverage you’re pulling here in terms of cost control? And how you expect it to play on the back half of the year? And just secondly, if there’re any other initiatives in the pipeline that we should be thinking about?

Yes, so, the -- as I was mentioning earlier, so we -- there’s always different initiatives going on. But -- so we’ve had one that we had began earlier last year and have increased our CapEx in fact related to that that’s kicking in well this year in Q1 and Q2, but we’ve also had other initiatives that are non-labor -- non-labor related are more other expense, store expense type that we don't want to disclose the specifics of but have given us better savings then we had anticipated, and these will definitely transpire through the year. And so that that was good news to us and we continue to work at different levels at the store trying to find ways to -- as I mentioned a bit earlier to bring more efficiency in terms of operations, but also on the logistics side, working on initiatives there to be more efficient. So -- and hopefully these are -- generate strong enough savings to offset normal inflationary pressures that we see year-over-year.

And just as a follow-up on store productivity. Can you quickly just talk about what you’re seeing here? It looks like it picked up a little bit kind of back to more normalized levels this quarter. Is there anything we should be thinking about there as model this?

I am sorry I missed that.

On new store productivity, it looks like it picked up a little bit this quarter kind of more in line with normalized historical levels. Is there anything we should be thinking about there?

No, there’s timing, there’s -- it’s hard to follow, specifically from one quarter-to-quarter, but generally like I said, it’s a bit more the initiative that we started this year is benefiting us more than we had anticipated and again, that will transpire in Q3, Q4.

Thank you. The next question is from Keith Howlett from Desjardins Securities. Please go ahead.

I was just wondering if you could just give some color around what you call price increases. Does this mean items that you might have moved from a $1.25 to a $1.50 you left at $1.25? Or what are we speaking about when we talk about price increases?

No that exactly at, but at all price point. So I would have been one example, $1.50 to $2, $2 to $2.50, $2.50 to $3, $3.50 to $4. Any of those as what we would've been referring too.

And you typically have a sort of a program each year or is it more situational what those increases are each year?

They are a reflection of market competitiveness. So, they move iteratively on a daily basis throughout the year. So, you have more in the past then you have this year.

So mid quarter you might adjust the prices up of things on the shelf that were up $1.25 to a $1.50?

If our competitiveness remains at the levels we want and the market changes their pricing to a higher price point then that's a possibility.

Yes, it can be decided very quickly, Keith.

I see.

And then implement quickly, yes.

And then in terms of the fact that there's less inflation in China and therefore, you're going to have a better gross margin then you anticipated. On that front you don't want to pass that part of the benefit to the consumer or don’t feel you need to?

Again it's an item by item discussion Keith, and as long as the buyer feels the relative value of any given item that they are buying compared to the market is good enough, then they won’t change the price. If they feel that the value is not as good as they want, they'll. They have the ability to lower their price, raise their price or keep their retail. And so, it's really an item-by-item study, as it always has been for during our whole history. And that's how we try to remain competitive across the entire store.

And then just in terms of the performance across the network, looking at regions is it pretty. Does it remain pretty uniform across region as it did in prior quarters?

Yes.

And then just in terms of the cohorts of stores, is there any change in the performance of the sort of the cohorts of one year ago or two years ago or maybe 10 years ago? Those stores are less productive entire or is any change in sort of performance longitudinally of when the store opened?

No, we haven't seen, typically, the older course and we monitored constantly are pretty much in line, all performed well, so it's not like one cohort doesn’t compare to others. So it's pretty stable from year-to-year, then your cohorts obviously we look as we said in the past. If you look at two years ago or a year ago, they were averaging first year almost 2 million a year or 2.1 and then 2 points for the second year. Obviously, the course starting this year with 2.6 FSS in Q1 and Q2 will be slower, but the prior year cohorts have not are doing all well, very well.

Thank you. And this question is from Patricia Baker from Scotiabank. Please go ahead.

Michael, I have two questions for you. You do the 25% to 30% refresh of the goods every single year. Can you talk in the past, is there on average of that 25% to 30%? What proportion of them would receive a price increase?

The 25% to 30% is not a price increase. 25% to 30%, there are new items and they take into effect that current market condition and their comp shop like before they introduced them they check to see how compelling they are. So, obviously, these you do every year and you control the margins. So you -- this year we had very good margins with them, now the other 70% that you didn't refresh, well those they’re still there. Now, how can you adjust the compellingness of that given market conditions and that's what we said, we said okay well, let’s just make sure that we’re -- remain compelling and you look at the movements in the market and you decide not to increase these. We've never disclosed the percentage of markups we did per year, but I can assure you that compared to last year and the year before that, we've done much less this year.

Okay I guess I mean I understand the whole compelling and what you’ve decided to do this year. You’ve made that very clear. But I guess what I was getting at, those 25% to 30%, yes, they are new items, but they’re replacing something that was there. And are they -- do they typically come in at a higher price point or it’s all over the map?

Well, it depends, it’s not like -- but because the -- it’s in all price points, and it’s -- the penetration has been going up. So if you look at the gist of it it's at a higher price point average if you will.

And then secondly you referenced the -- you’ve done a new ledger, ledger report reinforcing the fact that you’ve got that compelling value in the past. You’ve shared with us what proceed -- what the consumers perception of the price point is, can you share that with -- any of that data with us today?

We haven’t this -- though we haven't disclosed it, but essentially it’s the same approach that you’ve seen, it’s looking at the different price points and what the -- and the calculations too are a bit different this year. So, it wouldn’t necessarily be the same, but we will see whether or not we want to disclose that. But I assure you that the conclusion is that they are still compelling at every price point.

Thank you. The next question is from Chris Li from Macquarie. Please go ahead.

Two questions here. First, the tariffs that Canada is imposing on some of the CPG products that are produced in the U.S. like confectionery and candy. Is that having meaningful impact on your business?

It is having an impact, but it is not a meaningful impact. As things change, we will keep you posted but so far it is not a meaningful impact.

And if it does become a bigger impact do you foresee opportunity to raise prices? Or is that harder because the consumer products are more capped at 2….

Again, it’s purely a question of relativity to the market.

And Michael I think you said earlier that you’re not seeing anything special from Dollar Tree Canada, why is that -- is that because they’re much smaller than Dollarama or yes I am just curious to see…

Well, one in terms of store build, they haven’t moved very much too, again it’s not the -- it’s not a pure play in the sense that they still have one price point so any of our price points above theirs, we’re not competing. And -- but they are a competitors, so it’s not that they’re not a competitor, but there is no significant change from -- in behavior of our stores near the Dollar Tree as there was in the past.

And then, Neil, I guess ecommerce by the case and I know in the past you’ve described this as a convenience play for a lot of your customers, they don’t have to go through multiple Dollarama stores. I am just curious as here you talked about the opportunity in the small and medium-size business opportunity, longer-term. Do you think this is -- there’s a lot of opportunity for you to penetrate that market? I'd just be happy to hear your on that?

The answer to your question is I have no way to evaluate that and time will tell. If that impact becomes a reality, I would say terrific but our intention is simply to service our current customer who is not being serviced properly and that it's impractical for them to acquire a large number of any given item in our stores without going to multiple stores. And so, whether it ends up helping small business or whether it ends up helping school boards or whether it ends up helping you know multitude of other things, those are all unrealized opportunities at this point in time and time will tell, but I wouldn't want to guess something I don't know any better than you just said.

And my last question just on Dollar City, and thanks for reminding us that the call option begins in Feb 2020. Does that mean directly that it can delay or you can get pass beyond that and exercise later than Feb 2020, if you choose to?

Yes.

And then I think related to that is, I probably have this wrong and I apologize. I have read somewhere I guess there is a provision where if you don’t exercise the call option, you have to provide them with a 12-month notice or something to that effect to continue to be the supply for number of years versus is that true? And secondly would that -- will you have to disclose that publicly, if you actually chose that option?

No, no, that’s not true, and I don’t know where you got that, but that certainly not true.

Thank you. The next question is from Brian Morrison from TD Securities. Please go ahead.

I presume I know the answer but I will ask it anyway. With the inflationary pressures different by region, I'm wondering if you've ever bantered about having the same number of price points, but potentially having product pricing vary in different regions? And then second part of the question, I wonder if the change what seems to be the new 2.5% to 3.5% range. I'm wondering, if the key factor here is just you need to see the movement by the competition?

So, I will answer your first question which is a very valid question. Many retailers have 5, 6, 7, 8, 9 price points across the country. Historically, Dollarama has had one. Certainly, it's an opportunity for us to remain competitive in some environments with a certain price points and remain competitive in other environments with a different price points. We have studied it and continue to study it, it's a possibility and it adds a level of complexity, of course internally not one that isn't easily surmountable, but it does complexify the situation a little. It would be something that we continue to study to see whether it does or does not make sense. And if we did try it to be clear, we would do it like we do everything else, which is we would try it on a very few product and a very limited area of the country and see how -- what the results are. And if the results are good and we can execute it well and our competitiveness does stay at a very high level then it's an opportunity for us to consider.

Sorry, go ahead Michael.

No, I was just going to answer the second part. So, yes, it always -- we -- it's always watching competition obviously.

Michael, while I have you I don’t mean to ask you accounting question in a public forum, but I'll do it anyway just with the delay and what seems to be the Q3 guide for next year. Your initial view on IFRS 16, does this have the potential to have a negative impact upon financial statements albeit just on paper?

Well, no, that’s an unfair question, Brian. No, the -- it's simply an accounting treatment, so it doesn't change anything in terms of real performance, it doesn't change anything in terms of cash flow or financial capacity or financial strength or so, it's purely an accounting change. And so, we will communicate that as I said, with the full explanation in March of the next year.

Thank you. This concludes today's question-and-answer session. So the conference call has now ended. Please disconnect your line at this time. And we thank you for your participation.