Neil Rossy - President & CEO Michael Ross - CFO Larry Rossy - Executive Chairman Johanne Choiniere - COO

Irene Nattel - RBC Capital Markets Kenric Tyghe - Raymond James Mark Petrie - CIBC Jim Durran - Barclays Derek Dley - Canaccord Genuity David Hartley - Credit Suisse Brian Morrison - TD Securities Keith Howlett - Desjardins Securities Peter Sklar - BMO Capital Markets Patricia Baker - Scotiabank

Good morning and welcome to Dollarama Conference Call for the Fiscal 2017 First 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. Larry Rossy, the Executive Chairman, will also be available during the question period. For your convenience, the press release along with the first 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 the 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 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, the 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 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 June 8, 2016 available at www.sedar.com. Forward-looking statements represent management's expectations as at June 8, 2016, and except as may be recorded by law, Dollarama has no intention and undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. I would like to turn the conference call over to Mr. Neil Rossy.

Thank you, operator, and good morning, everyone. Today we reported strong financial results for the first quarter of fiscal 2017. Overall, I'm very pleased with the solid growth in sales and improved bottom line results. Sales growth reflects a 6.6% increase in same-store sales, driven by a bigger average basket and an increase in the number of transactions. Sales were also driven by the continued growth of our store network across Canada. Over the past 12 months, we opened 66 net new stores bringing our total store count to 1,038 at the end of Q1. This quarter, we opened 8 net new stores compared to 17 in Q1 last year. As we mentioned last quarter, there are many factors out of our control when it comes to the precise timing of new store openings. So there is a natural fluctuation from quarter to quarter. This slower start is by no means an indication for other quarters. You can expect the pace of store openings to increase throughout the remainder of the year, and 60 to 70 remains our target range for the full fiscal year. We are quite confident that we will reach this objective. This quarter, we also started the construction of our new 500,000 square foot warehouse in the Montreal region to support our long-term store network growth. Work is progressing on time and on budget, and we expect to be able to move into the premises before the end of 2016. Turning to merchandising and product offering. The global economic slowdown has impacted the demand for Chinese products. Increased competition among Chinese suppliers has resulted in a softening of prices, which presents buying opportunities for Dollarama. As mentioned last quarter, these conditions are helping us partially offset the adverse impact of the weakening Canadian dollar on gross margins. As disclosed last year, we are introducing $3.50 and $4 price points in the second half of fiscal 2017. These will also provide flexibility to ensure that we continue carrying an attractive and compelling product assortment, despite FX headwinds. We have not set a particular target in terms of volume at these price points, and do not expect these to have a significant impact on our overall offering in the short term. Having said that, these new price points will allow us to introduce exciting new items to our Halloween and Christmas offering later this year, which I think customers will enjoy. Overall, we are very pleased with our performance this quarter. Fiscal 2017 is off to a strong start with strong sales growth, reflecting the positive customer response to our merchandising strategies and our constant commitment to enhance the in-store shopping experience. We are also reaping the benefits of our various technology investments in the form of productivity improvements. We remain focused on making progress on key initiatives that will support profitable growth in the future. I would like to express my thanks to the dedicated employees that continually develop and execute ideas that improve Dollarama's business. Our employees make this company better and more successful every day. Now I'll pass it over to Michael to discuss our financial and operational results in more detail before the Q&A.

Thank you, Neil. And good morning, everyone. So Dollarama reported a 36% increase in diluted earnings per share in the first quarter. Our strong financial performance was driven by continued improvements across all key financial and operating metrics. Total sales were up 13.2% to $641 million. Same-store sales increased by 6.6%, over and above the 6.9% increase and the SSS reported in Q1 last year. There was a 2.8% increase in the number of transactions, which reflects more store traffic compared to prior year. Transaction size increased by 3.7%, reflecting consumer demand for our higher price point items and our store count grew 6.8% over the past 12 months, with an opening of 66 net new stores. As mentioned by Neil, we are maintaining our outlook at 60 to 70 net new stores for the year. We have always met and sometimes exceeded our objectives for net new store openings and we are focused and confident in achieving this year's target. Gross margin for the quarter was 37% compared to 36% last year. Higher margins are primarily attributable to higher product margins, but also to lower logistics costs as a percentage of sales and the positive impact of same-store sales growth. We are maintaining our guidance for fiscal 2017 in the range of 37% to 38%. G&A for the quarter represented 16.1% of sales compared to 17.3% last year. This improvement reflects the positive impact of store labor productivity initiatives, and the positive scaling impact in higher sales. For fiscal 2017, we are improving our outlook on G&A for the 16% to 16.5% range previously disclosed in March to 15.5% to 16%. Our revised outlook on G&A reflects the positive impact of previously completed in-store productivity initiatives on our cost structure. As a direct result of the improved outlook for G&A as a percentage of sales, our outlook for EBITDA margin for fiscal '17 has also been increased to a range of 21% to 22.5% which is up 50 bps over previous guidance. Capital expenditures increased from $20 million in Q1 F '16 to $49.2 million in Q1 F '17. This $29.2 million increase is mainly attributable to the purchase of land and the construction of the new warehouse. Our guidance on CapEx for this year remains unchanged. In Q1 F '17, we also repurchased 1.5 million shares for $139 million at a weighted average price of $90.32 per share. We continue to generate excess free cash flows well above our investment needs. Our healthy balance sheet and strong cash flows support Board's decision today to renew the normal course issuer bid. The 2016, '17 NCIB will allow us to purchase for cancellation up to 5% of issued and outstanding shares as at June 7, 2016 or up to almost 6 million shares during the 12 month prior period from June 17, 2016 to June 16, 2017. Looking now at some in-store initiatives, we've invested heavily in store IT and fresh structural over the past few years, including new point-of-sale terminals and Wi-Fi technology. Now we're leveraging this platform to roll out three year mobile road map focus on optimizing store operations even further. So far we have successfully piloted several mobile tools. Including, for example, the use of mobile [cashes] [ph] in some locations and we are developing and implementing various applications to support store management and employees in their day-to-day work. For example, by automating certain manual tasks and optimizing inventory levels. All of these initiatives from the back store to the front of the stores are aimed at enhancing our efficiency and providing better customer service. Finally, the credit card pilot. In February 2016, we started accepting credit cards on a trial basis in our stores located in British Columbia only. We also recently temporarily activated certain functionalities at our point-of-sales terminals in Alberta to be able to accept as payment method one time emergency preloaded credit cards being distributed through Albertans displaced by the fire in Fort McMurray. The pilot is still in its early stage, and we will provide an update in due time. With that, I will now turn the call over to the operator to open the floor to questions.

Thank you, Mr. Ross. [Operator Instructions] Our first question is from Irene Nattel with RBC Capital Markets. Please go ahead.

Thanks and good morning, everyone. Just on the $3.50 and $4 price points, you've been very clear about the fact that you don't expect much of an impact in F '17. But in your opening comments, you called out Halloween and Christmas. So is it fair to say that as we look forward over the balance of the year, we may see a little bit, let's say over the summer months, back to school, but really we should start to see more of the items in the store for Halloween and Christmas?

Yes.

I'm comment, Halloween and Christmas flyer, we have bought very little at the $3.50 and $4 price points. I think it's a matter of getting used to, Irene, it’s Larry, getting used to those price points as buyers - they are going to be, I don't know, maybe 5 or 10 items out of 1,500 items in Christmas maximum. So it's just a smidgen of a test of those price points, not knowing, of course, how those price points will be acted upon by the public. So I don't think you're going to get very much a kick out of those price points this year. Michael, do you want to add something to that?

No, I think that's very accurate. So from the $3.50, $4, this year will be mute. Things should start kicking in next year.

Okay. So it really sounds as though there is only going to be a few items this year and more next year. But just coming back to your commentary, Larry. I'm wondering whether it's been more challenging for the buyers at $3.50 and $4 or is it just a matter of being cautious as is the Dollarama way?

Well, Irene, we have to deal with the FX negative exchange rate. So I think our biggest challenge was to take items that we enjoyed and that sold well at $2 last year, tweak them, give them a little bit more value and say we can sell them at $3.50 and $4. I think that's the greatest - that's where the $3.50 and $4 price points are coming from for this year. It's to absorb some of the negative foreign exchange rates, Canadian dollars and to still be able to - because we couldn't sell those items at $3 next year and absorb 40%, even if you save 4% or 5% in our [China] [ph] prices. So I think those price ranges are being filled in by items we have; we’ve tried to tweak a bit and to make them look different and to be able to say that we can now sell them at $3.50 and $4. I think those are the items that we're talking about.

And in addition to those items, some of the categories have lent themselves to having items that were not affordable at the $3 price point or the $2.50 price point. And so there are some new $3.50 and $4 items as well, of course.

Understood. That's very helpful color. Thank you. Just switching gears for a moment, wondering if you could just talk a little bit about demand trends, what you're seeing across Canada, whether there's any shift in consumer spending patterns positively or negatively on a regional basis?

We haven't seen any shift regionally whatsoever.

Outstanding. And then just finally, if I may, on the new store openings, understood that you're very comfortable with the 60 to 70 this year, wondering about the maturation process of the stores that you opened last year. Are you seeing any slowing whatsoever in the payback period at this point in time?

There's no - no, absolutely not. There is no slowing down in the payback period of the new store openings. The cost to open up a store is still $400,000, the same cost it was at the IPO 6 years ago. And the sales [term] [ph] is $2.7 million, and so they - and you've seen the numbers this morning and the last quarter. So it's - the payback is still very much in the 2 year zone.

That's great. Thank you very much.

You're very welcome.

You're welcome.

Thank you. Our next question is from Kenric Tyghe with Raymond James. Please go ahead.

Thank you and good morning. If I could just touch on your inventory velocity, I'm trying to - I wonder if you could shed some color on whether there's been a change in how customers are shopping in each category or the type of goods perhaps they're buying in each category and your opinion as to what the read-through is from those changes if any?

Okay. So this is Michael, Kenric. So you've seen the inventory levels on a per store basis improving over last year, but there is a bit of noise last year. If you recall because of the - we were pre buying because of the duty increase in January 2015. So we have pre bought, and that's left a bit of inventory in Q1, higher than usual. And so that explains - that's the bit of noise we had last year. And but overall, inventory management continues to improve. The in-stock position, we got better tools, more information. Johanne, as I've told you in the past, at the store level is doing a great job in store in terms of execution. So all of that has been helping our working capital situation.

Great, thank you. And then just a quick two-part question on debit card and debit card penetration. I see that's picked up again in the quarter. Is that debit card use pretty balanced across the country or is there any change in terms of how customers are using their debit card even realizing it's essentially a proxy for cash anyway, but curious. And then could you just remind us, are your new point of sale is it all cap enabled and is it a quick switch for credit card enablement for cap as well?

Yes. Okay. So first, debit card consistent coast-to-coast and penetration has increased. So it's in all provinces and it's very consistent. So there is nothing new from that perspective. And all our pin pads and devices and systems are credit card enabled. So it's just a matter of turning on a switch and tap and go.

Great. Thanks very much. I'll leave it there.

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

Morning, Mark.

Good morning. So you guys had previously talked about FX being an increasing pressure in Q1, and I guess through fiscal '17. At the same time, gross margin was up pretty materially again. You talked about prices softening in China somewhat. But the guidance is unchanged. I'm just wondering if you could talk about your outlook on the gross margin through the balance of the year.

Yes. So the outlook remains at 37, 38. We've got more visibility than we had from Q3. And although, you're right, there is some softening, last year we had softening coming more from the transport side. And so things balance out. And for the time being - and we expect competition to continue intensifying as it has always been. So we are just monitoring that and for the time being 37 to 38 is our comfort zone.

Okay. And in terms of some of the physical changes you guys have made in store in terms of layout and fixturing, what kind of impact has that had on the stores where that's in place? And what's the pace of rollout to get that into all the stores across the network?

Yes. You're talking about the implementation the…

Yes, the different layout on cash.

The layout.

Yes, yes.

I think all we've changed there is the method of cashing out.

Right.

John, do you want to talk to that? Instead of having what you have seen for the last 20 years, this new type of cash setup, you've gone more to a…

Linear.

Yes. Straight line cash.

Straight-line cash and trying to enhance or trying to make it more tempting for the customers on their way out to pick up some incidental items as they walk through this linear setup. The stores itself - the stores themselves are not - we're not touching the cash counters. There is no reason to do that, but we had about 100, 120 stores with older cash counters. But if we made the change to our newer cash counters, you wouldn't, especially we're talking about - not the cash counters, gondolas, the gondolas, you wouldn't even know that we were changing them. But we're changing them because the new ones are easier to work with from a labor point of view. We are able to change the height of the shelving easier with the newer ones, and we have about 80 to go. But again, you wouldn't even see that, you wouldn't notice that, because that's so invisible. So we are only changing the area of the - cashing out area. What we're trying to do as the inventories are better controlled is remove these - what I have always said to be horrible looking top shelves full of merchandise. We call those risers. We're trying to remove - and that's how I can tell that our inventories are going down because more and more stores are removing those risers which make the store a lot more aesthetically pleasing. Since day one, I've been criticized for having these brown Chinese boxes, well whether they're Chinese or Canadian, they are brown as all the cardboard boxes are, or most are, and they deface the look of our stores. So as inventories are better controlled, we are removing those top shelves as fast as we can. Maybe we've done that - what percent would you say we've done that, Johanne? Removed risers, 30% to 40% of the stores?

We've just started the process, so we - the goal is by the end of September wherever it's possible in any of the stores to have to return the shelving, so that we'll use those fixtures for new stores opening. Obviously because of the sometimes of the size of the store or the volume of the store, it won't be possible to take them all. And we've asked the stores to keep in mind that for seasonal coming up, Halloween and Christmas. They have to make sure that they don't return everything because this is a high volume season. But overall, I would say, so far, we probably have 20% to 25% of our channel that's done, and the goal is to end everything by end of September.

So I think we've answered your question a little bit more pedantically than you probably wanted, but you got our best answer.

I very much appreciate that. Thank you.

And I would just like to add, Mark, that the question you asked we'll be calling it - here internally, we call it store optimization. So what the process is, is if the store has very old fixture, like Larry mentioned, I roll it. We go in and we change the fixture because the fixtures are way more productive at store level, that's step number one. Our second step is to analyze our size of each department, and then we change the traffic flow and the layout according to the specifics of the stores. And then we, by the same token we change the cash configuration. So most of the stores that we've changed have been straight line cash. When the store adds more than six cashes, we divide that line and we go for and for what we call facing cashes, four cashes facing each other. Like at store 508, Saint-Eustache. We did 176 projects last year, and so far after the beginning of this year, we had 32 completed. So I would say that we have roughly over 225 stores that have the new cash configuration.

Okay. That's really helpful. Thanks a lot.

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

Good morning. I just wanted to go back to the transaction growth in the quarter. I mean, it was quite strong. Are you seeing anything either specific to a region or across the board that would suggest that you're gaining more customer penetration and that that's driving significant transaction growth? You mentioned traffic was up or should we view the 2.8% as more of just the moon is aligned and more in the 1%, 1.5% is more of a reliance reference point?

It's not region specific. It's pretty much even across the line, Jim.

And so do you think that more stores is just attracting more customers in terms of ease of access?

No.

It's anecdotal from here on in. It's a gut feeling. You're asking us, we don't have that measured out or quantified.

I'd trust your gut, Larry.

Well, okay, you're one of them.

The specific reason is hard to say. We don't measure that.

And just for clarification on a couple things. Number one, the items of that $3.50 and $4, so you mentioned there will be very few new items. Am I wrong in understanding though that there would - because you're taking prices up on some items with some value-add tweaks, will there be a number of what I would consider mostly existing items or modified existing items of any substance in the store when we get to the Halloween and Christmas timeframe?

As opposed to brand new items. I think there would be…

Yes.

Again, I haven't measured this. But I think there would be more of that yield [ph] than brand new items.

Got it. And on the gross margin side, like I assume that when you increased your gross margin guidance back in March, that that was already on a best-guess basis reflecting softening prices out of China. Looks like from a hedging standpoint with your average hedge book in line with where the Canadian dollar is today that you're in pretty good shape there in terms of being able to minimize margin erosion. Am I wrong in sensing that maybe the margin erosion you might have expected even three months ago is going to be potentially less in the upcoming quarter and through the rest of the year?

The 37%, 38% reflects my - what I think will happen. So it's there. But the other point that is missing in the equation is the competitive landscape. And the proof is that we've been through the past year and a half a sharp increase, almost 30% increase in the inflation related to the currency. But yes, our margin improved and our sales improved. So it depends on how competition reacts around you. So we anticipate that it will intensify, and that's the other piece of the puzzle that you have to factor.

And is that competitive intensity coming out of other dollar store type competitors, or is it coming out of the bigger discount players?

From everyone, everyone, whether it's the big ones or the dollar stores out west.

Okay. That's great. Thank you.

Thank you, Jim.

Thank you. Our next question is from Derek Dley with Canaccord Genuity. Please go ahead.

Hello, guys. Just a couple questions. Can you just comment on the Wi-Fi rollout and where you guys stand with that? When you - have been implementing Wi-Fi both in the store in terms of the mobile checkouts and as well as at the DCs?

Okay. So the Wi-Fi hardware has been fully implemented in all stores. Now what we're doing is we're rolling out the mobile devices to do on handing, pack away, pallet reception, mobile cash registers, and we're in the process of doing that. And the - this, which is going on right now, there's training going on as we speak at store level. And so you won't see the benefits on the G&A that we're projecting coming from that implementation. We will be using it. You will get some certain benefits. But these are offset by the training costs that we're putting to deploy all of this, this year. The benefits from this you will see more during next year. What we're seeing in terms of improvements this year relate to prior investments that we did leveraging our POS, our continued store labor scheduling and things like that. But in terms of deploying the mobile devices and training people and having them use it. We are in the process of doing that. We should be ending - all of this should be ended by the end of the year, of course, but the benefits from this will kick in - start kicking in next year.

Okay. Thank you. And just can you provide an update on your initiative in-store network down in Latin America? I believe you're looking at a couple of new regions down there.

Well, yes. Well, the agreement covers nine countries. And so we continue to perform very well in Salvador and Guatemala. We've started our homework in other larger countries, such as Columbia. And there's a whole lot of work still to be done, comp shopping, meeting institutions, so on and so forth. And so that is going on right now, things are moving right along. And then the call option, as we told you, has been pushed back one year to allow us to do - to complete our work because we think that we have - we need that time to do the extra work. And in February 2020, that's when we'll have the call option. But otherwise, nothing has changed since the last time we spoke.

Okay. Great. Thank you very much.

Thank you. Our next question is from David Hartley with Credit Suisse. Please go ahead.

Thanks. Good morning. Just a question on some SG&A first of all. So you have your stores this year, then a year ago. How much does that drag on the growth of - or improve, help with the SG&A in the quarter?

At our scale now, there's no drag. There is no - either way there is no impact.

Okay. And when I think about growth in SG&A on a quarter-by-quarter basis, very low this quarter. Should we expect that growth to tick up materially by the back end of the year or should we expect a flattish type of growth?

I'm not sure I understand. When you talk about growth…

In the SG&A. So if you're up about 5 point, I think it was 2% this quarter, would we expect that kind of growth over the course of the year?

Yes. Well, it depends on the number of store openings and other factors. I don't have that number. But it will be more or less in line with what you see from a store-growth perspective, and the rest we'll see. It depends on the initiatives and when they kick in. And I don't have that by heart right now. But we did it in a detailed way which allowed me to revise my outlook and tell you that we'll be between 15.5% and 16%.

Yes, no I'm clear on that. So new store growth does matter for SG&A growth in the quarter?

Absolutely.

Okay. That was…

We don't know when the new stores are just going to fall on.

No, that's what - yes.

Okay, that's great. And just on the costs for the new DC, can you take us through how that's going to affect your costs going forward? And is there a point when that gets really turned on in terms of costs, whether it be on the gross margin line or the SG&A line? Could you take us through the cadence of that as we move the next year or two?

Yes. Okay. So the cost is as I - we'd mentioned earlier it's about 20 million or 22 million land and $40 million building. And so during construction, there's no amortization that's capitalized. And we start amortizing it towards the end of the year where is the expected date that we'll start using it. And when specifically, it's not clear yet, November or December, and everything is tracking on time. And at that point, we will be amortizing the building, obviously the land has no amortization. So we'll be amortizing the building, and we haven't yet determined the exact time period, but it could range between 40 and 50 years.

Okay. And what about actual costs, though, to your SG&A and gross margin as this DC gets up and running? What do you see happening there? Are those costs going to go up initially and then fall or could you give us an idea of that and how that kicks in?

The - I just want to clarify. You say DC, Dave, but it's not a DC. It's a warehouse.

All right, warehouse.

And it's important the difference. Because the costs are very different one operation from the other. But the warehouse, so there's - the costs related to the building is all capitalized. So there's no impact on G&A, per se. Currently, we're operating through our other five warehouses, and some leased space if we need it. Otherwise, there's no material impact, if you want.

Okay. And so when that's up at running, there won't be any increased costs. You'll just be transferring costs around a bit and getting some benefits of greater scale, et cetera?

Yes.

Okay. Just on the merchandise improvements, do you really want to make too many merchandise improvements given the type of retailer that you are? How do you measure aesthetics and those kind of in-store improvements relative to your competitive set and your competitive positioning in the marketplace?

The improvements that we're doing aren't - they are not improvements of an aesthetic nature. They're purely improvements of an efficiency nature for the flow and cashing out efficiencies within the stores, or the shopability efficiency within the store. So they're really not meant to have an aesthetic perspective to them.

Okay. And the last question just on the duty increases I referenced earlier. Is there any catch up on those duty increases? Meaning that you have some impact as you move forward at all, or are those relatively minor and they've already been dealt with, if you will?

Its peanuts. There's no impact whatsoever that you would see.

Okay. That's great. Thanks a lot, guys.

Thank you, David.

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

Thank you. My first question is for Michael. Hello, good morning. Michael, you've broken out the hedging component into two trenches this quarter. I assume that's just done to illustrate that one trench is a cash flow hedge asset and one is a liability as recent disclosure is typically lumped as one?

Yes.

Okay. So assuming that's correct, I just want to clarify one of Jim's previous questions. I'm not sure I understand. So within your gross margin guidance for this year, aside from the new price point introduction, do you require any further notable upward price point adjustments or value proposition adjustments this year to achieve your gross margin guidance?

Well, yes. Well, it's all mix. We refresh 25% to 30% of our items. So through that process, you set the price according to what the items that you're buying, and we're also marking up products and so the currency is factored through that. So - and there's been that going on over the past six years. And in times of high inflationary pressures, and that's why we say as long as we're on the same level of playing field as our competitors and that we monitor their reaction more or less and we keep our relative value in sync, well, obviously, we do that, yes. So we adjust upwards, but we do that every year. So there's through one the refresh 25% to 30% of new item, and two, through marking up our items that we did not necessarily refresh that we're keeping.

Okay. Then that's helpful. That leads into my next question. And this might be for Neil. I've asked this question before. But it's a little bit more relevant now with the appreciation of the dollar. So if you look through the hedges, and I realize it's early, but I'm just wondering what your discussions amongst yourselves entail about your pricing or valuation for you value proposition approach should the Canadian dollar further appreciate. Is there the potential to see an additional benefit to the gross margin, or do you believe the right approach will be to reinvest that back into the value proposition or does it simply come down to what Michael just commented that it will be a function of the competitive environment at the time?

Historically, our philosophy has remained pretty consistent, which is, the buyers have a target margin percentage in any given department, because different departments, of course, have different average margins. And the buyers buy to those margins, and traditionally, those margins in those departments are what allow us to be competitive relative to the market. And so that concept will remain the same.

So why do you feel that 37% to 38% is the correct gross margin now? You've seen the success as you raised your prices, your gross margin has been very well received or your transactions and same-store sales growth has been very well received. Why is that the right margin when it potentially could be higher?

There's always been that range. There's always been a range, and that range has been a little lower than that for a while. A little higher for a very short period. And the answer is that it's an art, of course, not a science. And we can only work thousands of items throughout the year. And so there will always be some small variance. But corporately, philosophically, that range has always allowed us to produce consistently good relative value. And so to try to creep it towards less good relative value and hope that the relative value is still strong enough is something that we've never felt that we needed to do.

Okay. Thank you.

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

Yes. I had some questions on the store labor. I was wondering where we were on manual inventory accounts within the store, whether that's now at the equilibrium level or whether there's still more production ahead there?

No, there's still some more ahead for sure and as we roll out the mobile devices and use them now to do the on handing, it's giving us new information. So as we move it, we'll never eliminate the daily counts 100%. But certainly, we still see a bit of room. But less than what you've seen in the past.

And then just on redesigning the, sorry, not redesigning but reallocating space within the store depending upon the sales, I guess, of the store. Can you speak a bit, is that - some of that coming from your POS system that you're able to better balance…

Yes, I would say so, Keith. I would say so. And Johanne just left, she could comment better than I could but she had to leave to get a plane back to Toronto. Yes, what does she call it when you reconfigure the store?

Optimization.

Optimization. Yes. Okay. So that is a question of optimizing a store according to their sales. That information is coming from POS. Absolutely.

And is it very noticeable to the customer, or are these…

No, I wouldn't say so. If you have 4 feet or 8 feet of craft that goes from, let's say 8 feet goes to 12, I don't think the customer is going to pick that up. But if we should have 8 according to the numbers we're getting, then it's better to have 8 than 4.

Right. And then just in terms of the debit card, are you able to track the penetration of PayPass or not?

Yes. Yes, we are. But, no we won't.

Okay. And then just on rents. I still see a lot of big format space lying around. But are you seeing any diminution of rents on new space?

Diminishing. I think more, better - I'm going to say we're getting opportunities that we probably didn't have. Those spaces are to be cut up if you're talking about particularly the target spaces. It costs a lot of money to subdivide those and, yes, the landlord is, certainly it's worth doing. But I think we're getting opportunities possibly that we never had. That could be because we're becoming better performers, or it could be because other people are downsizing, or as they call it in retail today, rightsizing. And renewals, depending on the market and depending on how cheap we negotiated prices 10 years ago or 15 years ago, we are either maintaining or we're getting increases. Very seldomly do we get decreases. Don't forget when you renew, you're renewing something that's 10 years old or 15 years old, and you're not often going to get decreases on those leases. So if you maintain, I'm very happy to maintain a 10-year old lease, again, depending if you're in Vancouver or if you're in a small market elsewhere. But you're renegotiating something that is 10 to 15 years old. And to say that you're maintaining is a job well done, to get a small increase is also a job well done. So it varies. But I think what you're seeing is empty stores. If you're seeing empty stores, they're mostly the target locations which are massive and could impress anyone that's passing by. I hope I've answered your question, Keith.

Yes. That's helpful. Thanks. And just to confirm, there's no thought to go with an online offer any time soon?

I'll let those who are more familiar.

No. When we are really ready, I am sorry to announce eCommerce or online or any other project where we will let you know.

Okay. And just one last question on the relationship between cannibalization and the store traffic numbers you report. Is there any correlation, like when the traffic numbers look very strong like this quarter, does that show up in your - at your new store openings in cannibalized nearby stores as much as you thought, or there's really no correlation in the numbers?

I don't think we analyze it that way.

No. There's no correlation.

I don't think we analyze it that way, to be honest with you.

No. We have the ability, but at this time there's no correlation.

Okay. All right. Thank you.

Thank you.

Thank you. Our next question is from Peter Sklar with BMO Capital Markets. Please go ahead.

Morning, Peter.

Morning. Michael, I'm back on the gross margin percentage.

Yes.

When we do our arithmetic, if you factor out the impact of the FX hedges that you realized during the quarter on the margin, so if you take that out of the equation, it looks like to us that the gross margin is below your target rate. So I'm just wondering if you agree with that math? And if that means that assuming the Canadian dollar holds its level and you lap all these hedges, when you don't have that tailwind from the hedges, do you need to raise prices? Either through SKU renewal or higher price points in order to meet your target range for the gross margin percentage?

Yes, absolutely, because all the information given in the financial statements is one side. The information everyone is missing is at what price the buyers put the items at. And so - and that's also influenced by competition. So that's the piece that you're missing. So my guidance, I stand behind it, we stand behind it with all that in mind. Unfortunately, if you don't, you're missing part of the color.

Right.

And I haven't heard the word arithmetic in a long time. Well done, Peter.

Thank you. And then I just have one other question on the 1,400 store count. My understanding is you arrived that number because that's the total number of stores that you've assessed or the total number of sites that you've assessed are available to you in Canada that meet your return hurdles, which I believe are $2.5 million of revenue potential and 2 to 3 year payback. And I'm just wondering if there has been any further thought amongst management about going beyond the 1,400 and accepting a lower return?

No. There's no - it's still that number that is out there and we have no other information on that.

Yes. But I don't like to say that that's - your capped at 1,400. Is that…

No. We're not capped. What he's saying is that the idea we said 900, we revised it to 1,200 and now we've revised it to 1,400. Is that still the number or are we announcing - ready to announce something else?

No. And when we say 1,400 or 1,200 or 900, we haven't got the locations in mind. Again, it's a question of availability, and a question of studying the market and saying can the - markets change. And whereas ten years ago I thought let's take a city, any city, Saint Étienne [ph] in Quebec. That Saint Étienne can only absorb on Dollarama store, and now we're up to three. They change in the sense that we change, the markets change, and usually they change because populations go up. They change because populations go down. So it's hard to put a number. And I don't like you using those numbers, whether they be 900, 1,200 or 1,400. But 1,400 right now is our best estimate. Is it capped in stone, no. Do we know where we're going for those 1,400, no. So let's make that clear.

Okay. Thank you.

You're welcome.

Thank you. Our next question is from Patricia Baker with Scotiabank. Please go ahead.

Thank you very much. I want to come back to the store optimization program that Joanne was talking about, because it feels to me like that's going to be featured quite prominently over the course of the next few years in how the results going to play out. And to use Larry's term, I probably have two very pedantic questions. The first one, when Joanne was talking about the fact that you're analyzing each department and then changing the traffic flow and layout, I just want to make sure that that's almost like a customization thing, you're doing that on a store-by-store basis. So what you might decide for store A might be slightly different than you decide for store B or store C.

That is correct. It's on a store-by-store basis, and it's something we've been doing for 20 plus years. There's a new push at the moment to do a refresh. So stores are constantly tweaking to adjust the sizes of certain departments to play better to the current mix. But at the moment, there's a big push to refresh the layout of many of our stores, and it's a continuous thing in retail for us like everybody else.

Absolutely, Neil. But you now have better information with which to make those decisions, right? So you're actually doing it more optimally than maybe you were able to do it five or seven years ago. Is that right?

You are correct. However, we don't planogram. And so…

No, absolutely. I understand.

We're just different from everybody else that way. So you're not going to get that efficiency per hook or per shelf space like you'd discuss having at other retailers which, of course, comes at a very high cost. So, you're right, understanding the data of any of our given items will help us reset better. But when we do reset, the size of the departments isn't changing that much. What's changing mostly is where we're deciding to flow things.

No, it makes perfect sense and I've actually seen it myself. Where it's changed, I can see that it looks like it's putting more stuff in baskets. And then, secondly, just talking about the linear checkout, and I'm just curious here, if a by-product of having that linear checkout in addition to being maybe more efficient and then also having that impulse purchase. Is it resulting - is there any way for you to know in better customer satisfaction that they have a perception that things are flowing better for them and that it's less boring as they're waiting in line?

We've certainly had very positive feedback that the customers prefer the linear setup with regards to the impression they're left with, with how quickly the lines move.

Exactly. Okay.

And so it's been very well received.

Okay. Thank you, Neil.

And we help with that with the tap two, right…

Yes.

Speeding up the lane, volumes too. Okay.

Thank you. That was the last question for the day's conference. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.