Larry Rossy - CEO Michael Ross - CFO Neil Rossy - CMO

Perry Caicco - CIBC World Markets Peter Sklar - BMO Capital Markets Kenric Tyghe - Raymond James Derek Dley - Canaccord Genuity Jim Durran - Barclays Capital David Hartley - Credit Suisse Brian Morrison - TD Securities Keith Howlett - Desjardins Securities

Good morning. And welcome to the Dollarama Conference Call for the Fiscal 2016 Third Quarter Results. Today's call will be led by Mr. Larry Rossy, Chief Executive Officer. Also with Mr. Rossy on the phone today is, Mr. Michael Ross, Chief Financial Officer. Furthermore, during the question period, Mr. Neil Rossy, Chief Merchandising Officer, will also be available for questions. There will be a short presentation followed by a question-and-answer period, open exclusively to investors and financial analysts. For your convenience, the press release along with the third quarter Financial Statements and Management's Discussion and Analysis are available on the Investor Relations section of the website at dollarama.com. They are also available 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, level of activity, performance, goals or achievements, or any 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 believes 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 forward-looking statements. As a result, Dollarama cannot guarantee that any forward-looking statement will materialize and you are cautioned not to place undue reliance on these forward-looking statements. For additional information on the assumptions and risks, please consult the cautionary statement regarding forward-looking information contained in Dollarama's MD&A dated December 9, 2015, available at www.sedar.com. Forward-looking statements represent management's expectations as of December 9, 2015, 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 would now like to turn the conference call over to Mr. Rossy. Please go ahead.

Okay. Thank you, Operator, and good morning everyone. Today, we reported financial results for the third quarter of fiscal 2016. I will briefly go over the few highlights before turning it over to Michael. In the third quarter total sales increased by 13%. This increase reflects the expansion of our store network but is also driven by strong organic growth. This quarter, we achieved 6.4% increase in same-stores sales with higher average basket size and an increase in the number of transactions. Our EBITDA grew by 34.8%. It is important to note that higher gross margins played a big role in this exceptional growth. In fiscal 2016, we have been actively managing our margins to offset the impact of the weakening Canadian dollar on the cost of domestic and imported products paid for in U.S. dollars. So far in fiscal 2016, our currency hedges continue to favorably impact our margins. However, there is a significant timing element here and therefore we expect gross margin to revert back to historical levels within a range of 36% to 37% in fiscal 2017. Finally, net income for the quarter was $101.1 million, representing a 37.1% increase in year-over-year. Looking at our store network, Dollarama has now surpassed 1,000-store mark. We've opened 16 net new stores this quarter compared to 11 in Q3 of last year. This brings our total store-count to 1,005 compared to 928 in November 2, 2014. We have opened 15 net new stores since the beginning of the fiscal year. And for the full year, we still expect to open between 70 and 80 stores. As a result, the fourth quarter will be a busy one in this regard. From a merchandising point of view, Halloween sales were very strong and customers responded well to our offering. The fact that Halloween fell on a Saturday, further stimulated sales in this quarter. Our stores transitioned quickly from one season to the other. And we are now focused on the historically busy holiday season. Last year in Q4, we reported exceptional same-store sales of 8.5%, in part because we were comparing ourselves to the fiscal 2014 holiday season when we experienced unusually adverse weather conditions, as you probably all remember. In terms of the year-over-year growth percentage, this obviously sets the bar quite high for this year. With that, I will now turn the call over to Michael.

Thank you, Larry, and good morning, everyone. As Larry mentioned, total sales increased during the quarter by 13% to $664.5 million from $588 million in the prior year. The increase in sales was fueled by the opening of 77 net new stores over the past 12 months and a same-store sales increase year-over-year of 6.4%. Same-store sales growth consisted of a 5.4% increase in base basket size, which reflects consumer demand for the higher price point items and a 0.9% increase in number of transactions driven by higher traffic. In this quarter, 59.7% of our sales were from products priced higher than $1.25 compared to 54.1% in the corresponding quarter last year. Effective this quarter, we will be reporting this metric using the $1.25 [ph] price point as a reference instead of the $1 price point. We believe this will provide a better appreciation for the fact that there are still many items offered in our stores at very affordable price points at or below $1.25. With the majority of units sold in our stores being at the $1.25 price point or below, we believe this is a better reflection of the extreme value end of our price point range and so better point of comparison when looking at the penetration of higher price points. And the third quarter, our gross margin was 40% of sales compared to 36.8% of sales in Q3 last year. As we explained in September, our higher than expected gross margin for the quarter and year-to-date has been driven by higher product margin in anticipation of an increase in our average forward contract rate. In other words, we made select changes to our product offering and price mix, while we were still hedged at favorable rates in anticipation of next year's currency headwind, when those hedges are scheduled to roll out. The higher gross margin is also attributable to a lower transportation cost, as a percentage of sales as a result of operational improvements, as well as rate and fuel surcharge reductions. Margin is also benefiting from the positive scaling impact of stronger than anticipated sales. Based on third quarter results, we have adjusted our fiscal 2016 gross margin target range, upward from the range of 37% to 38% disclosed in September 2015, concurrently with our Q2 results to a range of 38% to 39% for the full year. We believe that while comparable store sales growth for the first nine months of fiscal 2016 is exceptionally strong, the trend for fiscal 2017 should revert back to historical results, which are more in range of 4% to 5% combined, total. Gross margin should also come back down within the range of 36% to 37%. As we have done in the past, we will continue to actively manage the gross margin by reinvesting in our value proposition by refreshing up to 25% to 30% of our product offering on a yearly basis. Longer term, the goal is to maintain a margin that will sustain reasonable profitability while ensuring that our customers are getting value to stimulate sales. Our Q3 SG&A was 16.7% of sales compared to 17.% last year. This progression is a result of our in-store labor productivity improvements and the positive scaling effect of higher sales on fixed cost. Overall, we expect an improvement in the SG&A margin for the full fiscal year 2016 and continue to target a margin between 16.5% to 17% for fiscal 2016. For fiscal 2017, the targeted range will be between 16% and 16.5%. With higher sales and margins and lower G&A costs, EBITDA in Q3 grew 34.8% to a $154.8 million or 23.3% of sale. Q3 net earnings increased to $100.1 million or $0.78 per diluted share compared to $73 million or $0.55 per diluted shares in third quarter last year. Cash flows from operation increased to $114.4 million in Q3 from $62.8 million for the same period last year. This increase is due to the higher earnings. We spent $21.2 million on CapEx in Q3 compared to $18.5 million last year. For fiscal 2016, we expect to incur total CapEx in the range of $95 million to $100 million, depending on the number of new stores that open in Q4. At this point, we are forecasting CapEx of $100 million to $110 million for fiscal 2017. As in fiscal 2016, these will mostly be related to new stores, fixtures, equipment, as well as information technology project. Getting into our capital structure now, on October 2015, we entered into an amending agreement with our lenders and extended the term of our credit agreement by one year from December 2019 to December 2020. We have received additional commitments of $125 million, which is over and above the $250 million credit already available under the revolving facility for a period of approximately 20 months to June 2017, pursuant to the accordion feature of the credit agreement. This period coincides with the maturity date of the floating rate notes. We are planning to use this extra capacity on the revolver to further optimize Dollarama's capital structure between now and June 2017 including through the purchase of shares under our share buyback program. In Q3, we repurchased the total of 2.1 million at an average weighted cost of $88.83 per share for a total cash consideration of $188.2 million for cancellation under our 2015 and 2016 share buyback program. Today, we received approval from the TSX to amend the 2015-2016 NCIB to increase the maximum number of shares that maybe repurchased from approximately 4.5 million common shares or 3.5% of the common shares issued and outstanding as of the close of the markets on June 9, 2015 to approximately at 6.4 million common shares or 5% of the common shares issued and outstanding on the reference date. The other terms of the NCIB program remain unchanged. Now from an operational perspective, we have made significant investment in stores over the past few years and we are seeing again the results and the steady improvement of our SG&A margin. This year, we completed the roll out of Wi-Fi in all our stores. The introduction of Wi-Fi lays the foundation for the use of mobile technology in our stores. And some of these mobile driven projects are currently being piloted in select stores. These initiatives are intended to reduce non-value added tasks at the store level, automate our manual tasks, optimize inventory levels in the store and reduce wait time at the checkout. We expect to start seeing the benefits of this new operational efficiency towards the end of fiscal 2017. Debit card penetration continues to increase year-over-year, as 46.6% of sales were paid with debit cards compared to 43.8% in the corresponding period of previous fiscal year. In November 2015, we activated tap-and-go [ph] in all of our stores, so that consumers can benefit from the flexibility of contact list technology for purchases. It also saves time at checkout which can only have positive impact on waiting times and lineups at the cash. Regarding the payment methods, we will start accepting credit cards on a trial basis in our 80 plus stores in British Columbia, beginning in early 2016. We have been evaluating credit cards as a payment method since before our IPO, and we believe the timing is right to run another pilot at this time. Since the last time we ran a pilot, which was back in 2010, things have changed quite a bit. Customers are increasingly using non-cash payment options, especially younger customers while most exclusively use plastic as a payment method. In addition, we operate more stores and our average basket size is higher. Conducting the pilot in British Columbia allows us to test a good sized sample of stores that are representative of the average basket size and mix of payment methods across the chain. No time line has been set as to the length of the pilot. As an example, the last time we did a pilot of this nature in 2010, a decision was made after 12-month period. The pilot will tell us if customers are receptive and if there is meaningful incremental improvements in our sales. In summary, we are doing a thorough credit card pilot, only in British Columbia, only starting next year. Finally, as a natural evolution of Dollarama’s growth strategy, we will be gradually introducing $3.50 and $4 price points in the second half of fiscal 2017. We are maintaining by design, our product mix focusing on increasing the sales in the key categories that have made us a unique value destination, namely seasonal and general merchandising product. Selectively introducing $3.50 and $4 will enable us to enhance our customer shopping experience. We have not set a particular target to reach a critical mass of items at these price points, and we do not expect them to have a significant impact on our overall offering in fiscal 2017. In closing, we are obviously very pleased with the financial and operating performance of the Company this quarter and the continued progress being made on our key initiatives. So, this ends our formal remarks, and we can now take questions. Operator, I'll turn the call over to you.

Thank you. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Perry Caicco from CIBC World Markets. Please go ahead.

Yes, thank you. In the outlook, the store opening range is 60 to 70; it’s a little lower than I think what you are targeting for this year. What are some of the dynamics that are causing you to keep that number a little more modest?

Because I am modest, Perry, Larry. How are you?

Good.

Good. It's hard to me to be bullish on anything actually, particularly store number. So, I put down what I feel we can attain and modestly attain, if I can use that word again. And, I guess I feel that the runway is becoming tighter at the 10,000 square-foot module that we presently have. It may or may not -- I am always surprising myself on that particular issue. So, this may continue to be surprising to me and delightful in many ways. So, at the end of the day, I feel I’m being modest. What did we have for next year?

60 to 70.

That is modest. So, let's take it like that. Let's leave it like that for now. Because I just don’t know -- certainly, I can say for next year that seems modest the years to follow. Since I don’t have a good handle on that, I’m being conservative.

Okay. And then in considering your outlook for the SG&A margins, what factors are you concerned about managing on the expense side for next year? Is it minimum wage or are there other issues that might hold back a little more leverage on the SG&A?

No. We are very comfortable in managing, first of all, the gross margin, as we have always done. The key factor here for next year is clearly the currency. So, it's -- we are rolling out, getting closer to and closer to the spot rates that we’ve seen recently. So, it's just that. The other factors, there is no material movement.

I was actually thinking a little more about the cost side of the business, the SG&A side of the business, Michael?

You are talking about the SG&A?

Yes.

So, no, G&A, it's a normal headwind from wage increases and continued savings from our productivity initiative. So that’s why we are comfortable with the range that we stated. In other words, an improvement over this year.

Okay. And just a last question. The additional higher price points, do they allow you to get into some new categories or new items that you otherwise been shut out off?

Larry here. Certainly not new categories. New items, well, I said that we’d have a better, more clarity after we came back from our China trip in October. And we came back without much more clarity because when we tackle the weak Canadian dollar and factor everything in, we didn’t come back with too much in that -- from that perspective. So, I don’t expect there to be that many items in those price points at all. There will be some, but whether they will blow the roof apart with those items, in other words whether we think the exceptional value. First of all, the buyers have got to get used to buying goods at those price points, factoring the exchange rate and then saying hey, is that great value or not. And that didn’t happen very often during our October trip, as I checked with all of the buyers. So, I don’t expect that to have a significant -- not next year anyways, maybe in the future, I don’t know, as we become more familiar with those price points and we handle the Canadian FX problems. Apparently we’re expected to have poor -- the Canadian dollar’s supposed to get even poorer than it is today. So, all that factors into the values that we can offer at $3.50 and $4 and hope that in the relative -- and from a relative point of view that they are good value. But we as buyers -- and not only we as buyers, our customers also have to be able to absorb these two new price points. So, it's going to be a very slow rollout, really slow in my opinion. And I don’t expect it to have any major impact on very much.

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

I noticed you gave on the call some initial guidance for same-store sales growth. I believe you said 4% to 5%, which would be a deceleration from current level. So, I'm just wondering what's underlying that. Does that reflect some of the comments that Larry just made on the higher -- the new higher price points you are introducing or are there other factors that play or you’re just not thinking…

No. Simply, Peter, it's right now for their first nine months were at 7.1 SSS, which is quite high for a nine-month period. So, I think it's just reasonable to expect that we’re going to be comping against a very strong year. And that to expect another 6% to 7% next year would be very exceptional. So, it's simply bringing it back into a reasonable range.

Okay. And Michael, on another matter. Can you be more definitive on the timing of when these favorably priced foreign exchanges hedges roll off and when you really begin to reset in the context of current exchange rates?

Yes. I think as I gave a bit of color last quarter, this year, Q3 and Q4 would continue to see some favorable impacts. But beginning of next year, Q1, you will start seeing some impact and then continuing through the year.

Okay. And finally, I just wanted to ask you and Larry, you want to work back to that 36%, 37% gross margin in terms of the value proposition. I just wanted to ask what's -- like what's the magic in the 36%, 37%; I mean why not 30%, why not 40%? Where does that number come from?

Can you imagine if we told you 30%? Having said that, I don’t think there is a magic. I think basically we are not -- it's not a set amount. We’re just trying to be realistic and say that what's just happened is not realistic and what's more realistic is what historically we've been doing between 36% and 37%. If you came to me and said we’re going to go for 40%, he probably loses job. So, he didn’t have the nerve to do that. And if he came at 30%, well, you guys would be all over us. So, we’re basically using the 36%, 37% as the historical numbers that we feel comfortable with. And it maybe hopefully better than that. It's very hard to manage when the foreign exchange is having its ups and downs at this rate. This is quite exceptional.

And historically, we’re able to maintain some good sales growth level, same-store sales but the 36%, 37%, we just don’t want to exaggerate. And we’re -- the buyers obviously comp [ph] shop a lot at those levels. So, as we said, 36% to 37% remains our comfort level.

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

Thank you and good morning. Michael, just with respect to your CapEx guide at the mid-point, fewer stores, higher CapEx guide. Is there some inflation in terms of new store build cost or was that all the heavy IT related commentary that you highlighted? And then, if it is the IT related side of it, could you perhaps give some indication on sort of where the focus areas are for you in terms of that elevated spend next year?

Okay. So, you are good, Kenric. So, that number of stores -- by the way, it's just a bit lower. There is always the timing of new store openings and so on. But essentially, in terms of store openings, just to reassure everyone, the economics are still the same i.e. to open up a store it’s still $400,000 or around that and $230,000 of inventory and two-year payback. So that hasn’t changed. And yes, if the mix of the new transformation projects -- maintenance is more less stable again. And so, it's the transformation projects and that’s where it varies.

And just on those projects, any additional color you could provide around those at this point?

Not really.

Okay. Fair enough. One final one. Just on the gross margin expansion in quarter, you highlighted the impact of transportation costs, et cetera. Are you able to better handicap how much of the gross margin expansion was transportation and the like, or are you not inclined to share that with us?

No, but as I mentioned on the last quarter, it's the -- you are talking about the majority of the impact, and gross margin was FX adjustment related, there’s transportation cost second and scaling third.

Great, thanks very much. I’ll leave it there.

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

Hi, guys. Can you just comment on the new price points; the margin contribution on those price points; is it similar to the 36% to 37% target you guys have?

Yes. Initially, like we said in the past, usually when you introduce them, the percentage margin is a bit lower; you don’t get the benefit of the quantities and so on. But over time, we try to improve on that margin. The dollar contribution is higher but the percentage is not, it’s usually a bit lower.

Okay, understood. And have you guys witnessed any impact from the slowdown in Western Canada and even in Alberta, Saskatchewan?

No, still not. No real change at all. Every province is moving in sync with the chain as the prior year.

Okay. And then just finally, can you give us any update at all on the Dollar City? How many stores are you guys at down there now? And even as anecdotally, I mean have you seen sales increase materially since you took over the procurement?

Yes. So, I won't disclose how many stores we’re at because it’s not material and we want to respect our confidentiality agreement, but also say the results seem promising but again not material at this time.

Okay, thank you very much.

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

Good morning. I'm just wondering, are you seeing any resistance to your higher prices? I mean obviously your consumer has had to face much higher price points than they are used to. Is there any sense of a pushback from them?

I don’t see or feel that I look at our penetration of higher price points, it's steadily increasing and has always been steadily increasing.

If numbers count, I guess we have to say no to your question.

And partly following on Kenric's question, but with respect to the buyback, so, am I wrong in assuming that you've increased the current NCIB because of being so far ahead on your free cash flow forecast that you felt you had excess capacity utilized this year? And then the follow on to that, what would your thinking for a renewal in June of 2016?

Yes. Well, I don’t know for June 2016 but right now we’re following it -- our buyback program closely obviously, we've been active, as you've noticed. And we’re still a very much a growing company and it is continuing to do very well. And we just expect the opportunity to buy back more before next June. So that's why we increased it this quarter.

Any change to your thinking about your net debt to EBITDA target, like is it still three times, generally speaking?

Yes. It's in that range. It was increased through 3.25 recently by DBRS. The capacity to maintain our current rating. So, DBRS recently increased it. And always using eight as a factor to capitalize operating leases, when we’re talking about 3 and 3.25. Otherwise if you use 6 as a factor, it's 2.75 times. But we would keep ourselves some wiggle room. And obviously we do also some share buybacks on an opportunistic basis, as much as possible obviously.

Okay. And my last question, just back to the new store growth outlook. Larry, I kind of lost track of where we were at on trying to do smaller stores. I know at one time it was kind of a focus, and I think you were not wowed by the results. If we're seeing 10,000 square-foot box opportunities potentially get quite tight, does that reinvigorate your interest in the smaller stores and trying to make those work?

I don’t think I was negative to it. I said that as long as we have opportunity to keep finding 10,000 square-foot boxes, 10,000 or 10,000 to 15,000 even; that would be our preference. I think it's harder to manage smaller store surfaces. I mean whether they are -- they don’t have to go all the way down to 5. 5 is almost a different business, but they can go to 9,000 to 8,000 to 7,000, even to 6,000, but that's getting pretty hard to manage. And so, we have better management tools. So, as time goes on, we can be more selective and possibly better manage 6,000, 7,000, 5,000; 5,000, 6,000, 7,000, 8,000-foot stores. But ideally, it would be nice to continue to find boxes and opportunities at 10,000 to 15,000 feet, if we can. And now, when the time comes that we can't and we have these better management tools, we will take a look at it. But we have opened 7,000 footers of late, 7,000 to 8,000 footers. And they usually have basements in them. So that gives us a little bit of a help. And what we save on those 2,000 to 3,000 feet, we usually put into labor because you are receiving into basements and then transporting merchandise on a daily basis up and down. To open a 5,000 footer with no basement is almost a different business and we’ll look at them, and those opportunities when we have to but it's the same manager, it's the same labor. And I don’t think we’re far from being exhausted at the 10,000 to 15,000-foot box. I believe we still have a ways to go. But I'm certainly not negative to looking at it, not at all.

How are you finding rent? Is there pressure on rent?

No. I think I would say stable, particularly west where things are little rougher. But in renewals, we renew many leases at the same as we have. When you are saying the same, that's a 10-year lease with a bump usually after five years within that 10-year. So, we’re usually being able to keep our rents I would say pretty constant giving you are going to have some of the increases, you are going to have some things and you are going to have a few decreases so generally speaking I think it's -- they are pretty similarly so it’s no major like I've said a few years ago that it was I don’t think that's exists any longer at the moment things change quickly but they don’t you ask me the question today so today I would say not.

Thank you. The following question will is from David Hartley from Credit Suisse. Please go ahead.

Just wondering about your guidance range is there conditions there you mentioned you called out the currency and you expect the Canadian dollar to be weaker perhaps I guess in your budgets going forward I mean what are the conditions that would take your margins than the ranges that you have provided other than currency do you see opportunity there or you are being kind of modest or conservative in your outlook?

Dave. We've shown clearly over the past two years that can manage the margin and we've explain and you see what happens when there is a sharp increase in the margin and that was the effect of that. Now we are managing it back to our comfort zone and so we will adjust to whatever the currency does and we've demonstrated that again and what we’re I guess telling you is that our comfort zone is not at the current level, it's -- so we want to keep that compelling that out there and reinvest into the product so we are bringing down the margin to 36% to 37%.

Yes and I can add that I don’t think that there is opportunity to grow above well at 35%, 38%, 39% because I don’t think we can give the compelling value which is the motive there, the key motivation to our existence here the compelling values that we've been giving if we just try to push the margins higher I think we should be happy at what they are I've always said that I've always used the word vulgar actually but I'll take it back just for our safety it is out there in the public now but I would be very happy I think when we went public we are in the 34% to 35% area and at that time I was very happy and with those results today we are while exceptionally let's say we are 37%, 38%, 39% let's for it get the 40% for a moment so I have to be satisfied with that and I think everybody should be were still giving great value and that is number one our assessors has reflect that so to strive for more mark up I don’t think would be the right thing to do.

What about on the SG&A as a percentage of sales the ranges you've given I think to the lot of folks out there at the bottom end or lower than that in their projections is there conditions there that would take the number below that?

No Dave while no I mean the numbers we gave you are the numbers that we are comfortable with so.

Are there conditions?

No.

It could happen but I think in your view...

The likelihood I mean the best likely hood is between 16.5 and 17 for the year.

Okay. [Multiple Speakers] And my final question just on kind of price points to the relative price points to I guess other retailers other forms of competition out there so you move into the 3.50 and 4 price point you are giving kind of the a muted expectations for the contribution certainly for next year. Can you take us beyond that into 2018 I mean we've seen in previous that you've slowly rolled out products that are of a higher price and we’re very careful about how you manage the margins and customer expectations and maintaining value and a preposition in general of value to the consumer does it get tougher here are we past the a sort of tipping point because you seem, your guidance around those products seem much more modest perhaps in tone than I think I've heard in the past from you and maybe you can answer that?

Yes. Let Neil give a little color to that question.

I think that in true Larry tradition he his continuing to be modest for sure because of the timing of those two new price points the impact on next year will be less than it will be the year after but I think that as the buyers continue to get used to the price points find great values there will be an impact a positive impact both to our customer shopping experience and to the overall basket.

And if I can ask just one more following that thanks Neil. Just with regard to the store size your offering size as you move and maybe early for this but as you move into higher price points maybe your bigger products other things just see for see a need where you have to increase your store size and all look to Dollarama a plus or something like that where you as you push forward in your evolution?

So we have someone asking us about a dollar M express and you are asking me about a Dollarama plus. [Multiple Speakers] Look it's all rent dependent if I can get 15,000 feet at what I feel are good terms we will do that will that allow us to put larger $4 articles into those stores and larger by I mean cube wise and what will that mean to this it's just pretty tougher to give you a little bit of the insight into that.

Okay. Thank you very much.

I think basically the extra space allows us to better merchandize our present assortment and it will evolve in time.

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

I've got a couple of follow up questions on the guidance, Michael with respect to the gross margin the 200 basis point increase in the target gross margin relative to say your historical norm. I'm wondering if you might be able to go into a little bit more detail as to what is attributable to price and increase relative to the hedges wearing off or what's attributable to the decline in transport cost and what's attributable to scale or at least address the pricing increase at a minimum?

Well. I'm not going to go into details of pricing increase but definitely while they are refreshing 25% to 30% of our items we take into account there the currency because of the steep increase again the -- instead of using the actual hedge rate that you will be paying the item initially you are using the higher rate which is the spot rate to determine what your price should be to long term needs your margin requirements or where the next time you will refreshed to same item so that you don’t have to market up six months later you set the price accordingly and obviously the buyers comp shop that make sure that it's will be compelling at that price so that's what has been that going on and so as you rollout from your hedges and you catch up to that spot rate when you are refreshing those same items the cost of the currency is higher and the margin shrinks back to the levels that we were used to 36% to 37% transport has been contributing also the scaling impact too but I think that with the assumptions and the outlook there the assumptions being 4% to 5% same store sales next year and the gross margin and G&A range, it's still ending up in the 20% EBITDA range is still obviously very good.

No I understand the mechanics, is it fair to say with a appreciation or depreciation of the Canadian dollar being so rapid, that the majority of that gross margin increase this year that is attributable to the pricing.

Yes.

Yes.

Okay. And then second…

In other words the buyers were duped into pricing goods at 131 in actuality. We had hedges of 110, 110, 110, 108, 112, so we priced at 130 and it worked out. It just made us make harder.

On the new store count then when you mentioned that the run rate, it could be a little bit tighter in terms of the availability of 10,000 per store, does that at all impact your forecast new store or your total store count, total I think it is 1,400?

No that’s remains and even I mean last year when we mentioned for the first time that we were setting that new objective at 1,400 which is a clearly still the case we said that for this year we have 70 to 80 and that you should use 60 store as an average giving us a six to seven year run way. So nothing has changed.

Okay. And then last question more of a curiosity than anything else, why did you decide to use BC as your pilot market for your credit cards?

Yes okay. So the reason being BC is a good size -- has a good size sample our stores it's representative of the chain in terms of basket size, mix of payment methods, so it is more or less the same as the chain and we were targeting a specific market which would help to avoid confusion at other store level. So we are using a province -- a total province which is BC. And so what we are looking for is to improve the shopping experience of our customers while stimulating more sales to offset the cost.

Would it be taken with the fact that a major competitor has a bigger presence in that region, would that have anything to do with it or no?

No.

We didn’t think of that you just brought it up and just thought of it just now because you brought it up. And also when we threw the coin up in the air it landed on BC. So there was not much other than we felt at going to one of the extremities of the country would be easier to handle in case this pilot failed and gave us the same results. But I think we have better metrics to measure success today than we did in 2010. And I am a little bit more confident that in 2010 I was not confident that would break but I am a little more confident today that it May work.

And you are Larry and it is good opportunity to test that market as it stands today and under more favorable terms also.

Thank you. Our last question is from Keith Howlett from Desjardins Securities. Please go ahead.

Just some questions on SG&A expense rate. Can you roughly break it down between variable expense versus fixed expense?

It's still on the 85, 15% range 85 being variable, 15 fixed.

And then just in terms of the gross margin rate you tend to put many or I think you have a policy not to put too many higher price points in the consumable area. And so I am wondering if there is a natural shift of gross margin higher as you given that some of the I presume sales of general merchandise in seasonal grow faster as you shift this product mix to meet your product price points or maybe not?

Well I think at this point I could say that we have made the point in the past that we are trying to stick and we have succeeded in doing so and we -- those are full intentions on grocery items not to go over the two dollar price point. So yes your perception is correct. So on consumables mainly grocery items I'm not sure about the other consume but Neil are you trying to stick to any? No so on consumables food stuffs we are trying to stay at the $2 price point at maximum and on the rest while the rest is the rest so again unless I've answered question I don’t think I've anything else to say.

So would there be a gradual shift up or movement in gross margin given that consumable stand to be at lower gross margin category and you are not really adding higher price points or?

Well we’re losing margin trying to keep and staying at the $2 by the way on food stuffs basically those three items we don’t concentrate on that area but we’re certainly loosing gross margin by not being able to go over $2 so I don’t expect that to gross margins we’re not expanding the range but basically with the rest of the non food items we will continue to provide value where we can I guess again I'm dam not sure if I've answered the question.

And when do we say that we’re losing margin on the because of the limited price points that is until the buyer has time to adjust to the challenges of foreign exchange so eventually we are still working back toward this targeted and margin within that price range.

And then just in terms of the credit cards and debit cards do you get any information at all on a anonymous basis on debit cards like can you track some debit card number as to how much they shop or how they shop ?

No not at all. We don’t have access to any customer information.

And does that change with credit card or not really?

No it's the same system. All our systems are credit card enable tap and go everything so it's just turning on the switch very simple no everything is there and yes that's pretty simple.

And just on the technology will you be doing any pilots this holiday period on the Wi-Fi enabled alternative cash payments term lines et cetera?

Yes. There are some going on in the certain stores. The benefits from this you will start to see more next year. This year it is not material yet.

And the tapping goal is next year also or now or?

No it's already in place it has been in place for a month or so.

Okay. Well, you better get it at Scarborough Town Center, I can tell you.

No, okay.

And just on the talk about the physical space in the number of stores. Is the issue was number of stores did not really related to what landlords have available but to where you want to put a store or where competitors are located or?

Well I think it's not an issue where our competitors are located really I mean if I could have my choice I'd be next to the draw but we kind of go anywhere it's available and sometimes they will do things to make sure that we get in I mean landlords consider us more favorably then they did 15 years ago. That's a good thing doesn’t guarantee pricing but it's a good thing that they want us as opposed to not want us and again I think I've answered your question.

And then just finally on your initiative in Central and South America, are you at the point where you might locate one of the other countries within the agreement with your partner?

While we have a possibility of nine but I'm not -- as I mentioned earlier I don’t want to disclose more than I need to because of the confidentiality agreement but they are aware of the countries we've mentioned those in the past Central American countries and so we are -- and we mentioned to you that we were looking at Columbia but that's as far as we need to go.

Thank you. That is all the time we have for questions today. That concludes today's conference call. Please disconnect your lines at this time and we thank you for your participation.