Dollarama Inc.

Dollarama Inc.

CAD134.3
-1.8 (-1.32%)
Toronto Stock Exchange
CAD, CA
Discount Stores

Dollarama Inc. (DOL.TO) Q2 2018 Earnings Call Transcript

Published at 2017-09-07 14:14:29
Executives
Neil Rossy - President and CEO Michael Ross - CFO
Analysts
Irene Nattel - RBC Capital Markets, LLC Jennifer Panes - BMO Capital Markets Tal Woolley - Eight Capital Derek Dley - Canaccord Genuity Jim Durran - Barclays Keith Howlett - Desjardins Securities
Operator
Good morning, and welcome to the Dollarama Conference Call for the Fiscal 2018 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 open 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 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 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. And 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 7, 2017 available at www.sedar.com. Forward-looking statements represent management’s expectations as of September 7, 2017, 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.
Neil Rossy
Thank you, operator and good morning everyone. Today we are reporting our financial results for the second quarter of fiscal 2018. Our results reflect a strong operational and financial performance with higher sales and improved gross margin, a tightly managed overhead structure and growth in net earnings. Sales growth was stimulated by store network expansion as well as a healthy increase in same-store sales. Our operations in real estate teams opened 17 net new stores during the quarter. Over the past 12 months we’ve added 74 net new stores bringing our total store count to 1125 at quarter end. We continue to seek opportunities to open stores in underserved markets across Canada, in locations where we can achieve our targeted return on investment. We are on track to hit our objective of opening between 60 and 70 net new stores by the end of fiscal 2018. Same-store sales in Q2 increased 6.1% over and above SSS growth of 5.7% recorded last year. Our customers responded well to our product offering during the quarter despite a slower and colder start to the summer season in some of our largest markets. The sustained growth in same-store sales demonstrates that consumers continue to appreciate the compelling value we offer through our broad range of products at low fixed price points. Since the beginning of the second quarter, credit card acceptance has been part of the Dollarama shopping experience, providing even more payment method flexibility to our customers. We are confident that our customers appreciate this additional convenience. Our focus remains on meeting and exceeding customer needs by offering the broad assortment of everyday merchandise and seasonal items at the compelling value that they have come to expect from us. Now over to you Michael.
Michael Ross
Great. Thank you, Neil, and good morning everyone. So Dollarama reported a 24% increase in net earnings and a 31% increase in diluted earnings per share in Q2. This financial performance was driven by improvements across all key metrics. So total sales were up 11.5% to $812.5 million, same-store sales increased by 6.1% over and above the 5.7% increase reported last year in Q2, transaction size increased by 5.9% reflecting consumer demand for our higher price point items. The number of transaction was up by 0.2% and our store count grew 7% over the past 12 months with the opening of 74 net new stores. Gross margin and SG&A as a percentage of sales also improved over last year. We expect our gross margin to benefit from the stronger-than-expected product margins and the sales mix as well as a lower logistics and occupancy cost as a percentage of sales, and are therefore increasing our guidance to F '18 this year to a range of 38.0% to 39.0%. That's an increase of 50 basis points. We’re also increasing our EBITDA guidance for F '18 by 50 basis points to a range of 22.5% to 24%. G&A guidance remains unchanged at 15% to 15.5% of sales. Our CapEx envelope for this year has been increased by $10 million to a range of $100 million to $110 million. The reason is simply an acceleration of certain projects that were originally scheduled next year giving -- given our strong results and the headwinds expected next year. We mentioned last quarter that we are currently evaluating our options to increase our distribution capacity. Our work in the -- in this regard continues as planned, so this is not a factor in the revised CapEx guidance for F '18. CapEx in Q2 was $29.4 million. This was $7.5 million lower than in the prior year which included CapEx related to the construction of the new Montréal warehouse completed last winter. In Q2, we continue to the development of various productivity initiatives including further optimization of labor scheduling and other cost-reduction initiative. These included the introduction of additional balers and stores to recycle cardboard and reduce waste management costs, and of LED lighting in new and renovated stores as mentioned last quarter. We’re also proactively implementing various loss prevention initiatives as well as enhancements to in-store mobile applications. These initiatives will carry on for the rest of the year. We also continue to identify additional initiatives to further improve our efficiency and streamline our cost structure in support of our profitable growth. We are also currently assessing mitigation measures in response to the future minimum wage increase anticipated to take effect in 2018 in Ontario where we currently operate about 40% of our stores. We do expect that there will be an increase in administrative store operating costs. As we have said before, what's important for us is that we operate on a level of playing field with other retailers. Now to conclude, we continue to actively repurchase shares per our NCIB program, which was renewed in June 2017. In Q2, we repurchased 1.304 million shares at a weighted average share price of $122.86 per share for a total cash consideration of $160.2 million. We believe that buying back shares is an appropriate use of cash and effective strategy to drive shareholder value. That concludes our formal remarks. I will now turn it over to the operator for questions from analysts.
Operator
Thank you, sir. [Operator Instructions] Our first question is from Irene Nattel from RBC Capital Markets. Please go ahead.
Irene Nattel
Thanks and good morning, gentlemen.
Neil Rossy
Good morning.
Irene Nattel
Looking at the same-store sales numbers, basket growth obviously very strong. Can you talk about category performance, if you saw some weakness in seasonal and also what impact credit cards may have had on the size of the basket growth?
Neil Rossy
Okay. So -- okay. So, category, so there is, I mean, seasonal -- the season went extremely well. It started off slowly and we attribute that to weather conditions initially, but we caught up quite nicely. And so at the end of the day our seasonal sales were in line, even I'd say that better than expectations. The credit card impact was enough to offset the cost and the penetration was pretty much in line with our expectations. So, so far so good on the credit card.
Irene Nattel
That’s great. Thank you. And just one more question on basket before I just have a question on SG&A. But as we look ahead to -- we will soon be coming up to Thanksgiving, Halloween, Christmas, can you talk a little bit about the price point mix within the store. Was there -- we are seeing a little bit of price point creep in a number of units of higher price points for those season?
Neil Rossy
Well, the holiday season buyer happens to think that the values in our holiday season are even more impressive and more available for them as buyers to convey that value in the higher price points in our holiday seasons than they are in our everyday goods. So you're right. In general, the $3.54, let's say offering in holiday seasons is slightly higher than it is in the everyday assortments, and that’s simply because we can convey such terrific value or pass on such terrific value to our customers.
Irene Nattel
Because you have the best buyers around. And then just one more question, if I may. SG&A dollars were really well-controlled this quarter and yet you kind of left your SG&A guidance unchanged. Is there anything that we should be thinking about in terms of pick up in the back half of the year?
Michael Ross
Yes. So there is a bit of timing in that. And as we mentioned, you have the minimum wage increase kicking in January in Ontario. So it's a mix of all of this.
Irene Nattel
That’s great. Thank you, Michael.
Michael Ross
Yes.
Operator
Thank you. The following question is from Peter Sklar from BMO Capital Markets. Please go ahead.
Jennifer Panes
Hi. This is Jennifer filling in for Peter.
Neil Rossy
Hi, Jennifer.
Jennifer Panes
Hi. I was just wondering, so with the stronger Canadian dollar, historically you’ve kind of passed that on to the consumers and improved the value proposition for them. I was wondering if you’re planning on doing that again or if you’re planning on sort of taking that in gross margin, given that you increased your gross margin guidance?
Michael Ross
Okay. So let me just and I appreciate you given me the opportunity to clarify that. So as we said in the past, we first of all, hedge out typically up to a year, nine months to a year out and so -- and the purpose being that the buyers need to have visibility on the cost of the currency. And they use that and reverse engineer into the price point, taking into account an acceptable margin. So, if it goes down, that's one of the factors that they account for and bring it back. And when they reverse engineer and determine what that price point will be having factored the currency, that's where the compellingness or the balance between the return and the compellingness is determined and that's been the case for 27 years, that's how they've always worked. So nothing different. So it goes down, find where -- it go -- it's not just going down for Dollarama, I mean, when I say go down the cost is going down, the dollar is improving, but it's also the same for our competitors. So now that's that. So, in other words, you can't assume that it's going to be all given back or how back, that's not how we look at it. We take it into account and reverse engineer into the price point.
Jennifer Panes
Okay. Thanks. And then just switching gears a bit. So on your transaction account, I know a lot of Canadian retailers have been reporting negative traffic trends. So I just wondering if you could comment on the positive traffic in the quarter, and what why you’re sort of seeing that positive trend?
Neil Rossy
Well, we don’t -- yes, well -- so I’m not comparing to the other retailers, but in our case we kind of give you the heads up that historically Dollarama has generated between 0% and 1% of sales. You’ve seen negative traffic that was announced well in advance of the results that you had in Q1 and Q4. That was because in prior years we had very, very strong traffic results. So it's more of a ebb and flow situation. Now -- so that just continues to be the case. Now as we said in the past, we survey our customers every year, at least once a year and the most recent survey said that customers, the reason they shop at Dollarama still because of that value proposition. So the model hasn’t changed or our approach hasn't changed. We’re happy to see positive traffic and that's it. Compared to the others I can't tell.
Jennifer Panes
Okay. Thank you.
Operator
The next question is from Tal Woolley from Eight Capital. Please go ahead.
Tal Woolley
Hi. Good morning.
Neil Rossy
Good morning.
Michael Ross
Hi. Good morning.
Tal Woolley
Just on the minimum wage discussion, you referred other retailers talk about the response that they sort of directly addressed labor productivity, talking about things like self checkouts, labor scheduling. This is kind of step you guys have already been aggressively tackling over the last for a while. Is there more that you think you can still do on the labor productivity front as with some of those things might be?
Neil Rossy
Yes. So Tal, I mentioned a few in the script, the ones that loss prevention, ways to in-store, there was always scheduling. We’re looking presently at self checkouts, but there's no -- there is absolutely no deployment. We are studying it and one of our stores and typical to our culture we just take a lot of time to test things to make sure we understand it correctly before implementing it. And so, you know there's still room there and as I said earlier we've got in-store, we are taking $10 million that was due to be expected to be spent next year on store op initiatives and bringing that forward. And as I said, part of what allows that is the great results this year, but also the minimum wage headwinds that we have in front of us. So we're doing everything to offset that as much as possible. And then as I’ve told you in the past, we look at competition and how they will be reacting and that will determine whether we can absorb some in gross margin or not. And we told you last quarter too that in Q3 when we give you the outlook for next year, we will factor all of that into that outlook.
Tal Woolley
Okay. That’s great. And then, just maybe if you can discuss to your vendor base overseas. On your last trip, are you still being able to find, it sounds like you’re still being able to find excellent deals and can you talk maybe about the inflationary environment to in your overseas vendors as well?
Neil Rossy
Yes. The overseas environment is pretty stable with regards to the availability of vendors and the offerings presented to us. I would say the last year has been one of the most stable years in the long time, and we continue to find new and interesting items to buy and offer to our customers. So really don't [technical difficulty].
Tal Woolley
Okay. That’s great. Thank you.
Neil Rossy
All right. Thank you, Tal.
Operator
Thank you. The next question is from Derek Dley from Canaccord. Please go ahead.
Derek Dley
Yes. Hi there. Just kind of following up on that credit card discussion, is it fair to say that the initial response to the credit cards has been an average basket in line with what you seen with your debit card penetration roughly 2x higher than a cash transaction?
Michael Ross
Yes, it's a bit higher than 2x. So they the basket for credit is a bit higher, higher enough to offset the cost, the additional cost. We are seeing that is cannibalizing cash transactions and debit transactions and we will give you more color, because right now we just implemented chain wide. But let's wait till after Q4 when we disclose the Q4 results to give you a bit more color and appreciation, because then we will have Halloween and Christmas, which are two biggest season in that information and that information will then be more valuable and precise.
Derek Dley
Okay. That’s great. Looking forward to that. And just on your -- I know you guys talked about a little bit on the last conference call -- do you have any updates on the progress of your bulk buying program? Are we still on track to see that rolled out in mid 2018?
Neil Rossy
Yes. So the bulk ecom concept continues to be developed and so far it's pretty much in line with what I’ve said last time, which was within two years. So [technical difficulty] within year and a half I hope of having it tested and ruled out. And it's a work in progress and hopefully it will be incremental business to Dollarama, because the concept again is not to steal from our current stores, but to help customers who are being serviced directly by bricks-and-mortar and have the need for more quantity of the same items we sell at the same retail. And so we continue to work on that and hopefully it will be within the timeframe that was discussed.
Derek Dley
Okay, great. Thank you very much.
Neil Rossy
Okay. Thanks, Derek.
Operator
Thank you. Following question is from Jim Durran from Barclays. Please go ahead.
Jim Durran
Yes. I mean, going back to the whole credit card conversation, am I correct in understanding you won't be giving us debit card, credit card penetration numbers for this quarter?
Neil Rossy
Yes, that's exactly it.
Jim Durran
Okay, but hopefully by Q3 …?
Neil Rossy
Q4.
Jim Durran
Q4.
Neil Rossy
Q4. Yes, because I think like I said let's wait, it's premature. Let's wait till we get Q3 and Q4 results. In other words, Halloween and Christmas, and then we will have more meaningful information.
Jim Durran
Okay. On the real estate side, can you just give us some idea as to what you're finding in terms of rental opportunities and the cost of rent? I would be interested if you're open to just sort of comparing Eastern Canada versus say Alberta in terms of affordability?
Neil Rossy
Well, our real estate team is basically said [ph] that things are no change to historical availability. There is this -- they’re normal ebbs and flows between provinces at any given time, but when there's a short-term low in any given provinces economies per se, it doesn't affect the real estate cost that quickly. So it's pretty stable market across Canada and we continue to have opportunities in each province. And sometimes they come more at given province and less in others and then the -- the opposite happens at a different period of time at a different time of the year. So, overall, we continue to expand in all provinces proportionally generally to what we have historically. And the real estate market itself cost license is pretty stable.
Jim Durran
Okay. That’s helpful. Last question just on pricing. Historically, whenever we’ve asked about competitive pricing and who you keep a close eye on Walmart often pops up. How much time and effort do you spend keeping an eye on Amazon and do you have a sense of how your pricing compares to them on like items if there is such a thing?
Neil Rossy
We try to keep an eye on everyone to the best of our ability, but as you know it's near impossible to do that on a daily basis. I think our goal over the course of time is never to compete with any given low for one week of the year. We’re not in the on-sale business, we are not in the flyer business, we are not in the -- two, three times the year giving things away. So I think the concept we try to convey to our customers over the course of time is everyday great value that they can rely on at the price they see every time they go. And so, if we are selling in a loose-leaf at a $1.25 or $1.50, and it's a great value for 50 weeks of the year and during two weeks of the year, the other retailers decide to give it away for $0.10, while then for two weeks of the year they won't buy at our source in the rest of the year, hopefully they will, because we are just not in that high low headspace. So on a day in, day out basis, I think we have a good competitive relative value offering, and on any given day any given item somebody will be beating us and we don't like to play that game or chase that logo.
Jim Durran
And you’ve continued to see fairly rational behavior for the competitors that you do keep an eye on?
Neil Rossy
Yes. Generally speaking, retailers still have to pay their rent and their employees and everything [technical difficulty]. So, the irrationality, I guess, only comes in very short spurts on specific items where specific strategies and they all have their reasons of course. And we tend to try to just provide an everyday low price without moving our retails up-and-down and fluctuating -- worrying about any given competitor next to any given store across 1,100 plus stores, it would be [technical difficulty] practical and I don’t think it will be the right strategy.
Jim Durran
Great. Thanks, Neil.
Neil Rossy
Thank you.
Operator
Thank you. The next question is from Keith Howlett from Desjardins Securities. Please go ahead.
Keith Howlett
Yes. I just wondered if you could speak to the month-to-month sales trends? It sounds like it was an improving story as you went through the quarter?
Neil Rossy
Yes, well, the only color we’re going to give on month-to-monthly, Keith and you’re right as you suspected it is the fact as I said, it was a slow start for the summer season and -- but quickly as the only two days of summer we got came about, we recuperated eventually. So -- but and obviously it did pretty good. So the weather question is, wasn't a permanent impact, it's the timing impact for us.
Keith Howlett
And then just in terms of and you may not typically answer this question, but anyway in terms of the inventory turn rate by price point, do you find the, I guess, the price goes up does the inventory turn rate decline or is it stayed pretty steady?
Neil Rossy
It's pretty steady. Yes, very steady.
Keith Howlett
And then just a question on the real estate. It's sort of two questions. One, whether you are seeing any more direct competitive activity for the 10,000 square foot store that you seek? And secondly whether there is any thought to larger store size?
Neil Rossy
Well, our store size has crept up over the course of time simply bigger offering and sales that merit a slightly larger footprint, but there is not been a specific strategy to do so. It's been relatively stable just slight creep over the corresponding [ph] relatively stable. As far as competitors, the competitive environment again stable. There has been no new particular competition vying for the same spaces. It's always been the same players looking for those same size, 8,000 to 12,000 foot boxes and we continue to do our best to acquire them at a price that makes sense relative to our -- what we think our sales will be and it has to make sense. So the retailer has their jobs to go get locations at prices that make sense and the landlords have their jobs to get what they can and so that’s the everyday back and forth between the retailer and the landlord. We all try to find a place that makes sense for both parties.
Keith Howlett
And then just finally on a couple of components on the cost of goods sold. The freight component and your distribution center efficiency, I wondered if you could just speak to what you will look on freight costs are, and what DC efficiency outlook is?
Neil Rossy
Yes, okay. So freight is stable and warehouse and DC in terms of cost and efficiency going very well and outbound cost too. As we said, logistics costs as a percentage of sales went down, so in other words, there is part of that scaling, but part of that at is control of cost.
Michael Ross
And to add a little color also on the DC question, as we’ve mentioned in the past, our warehouse network is well-established now, and over the next two years we'll continue [technical difficulty] option to expand the amount of space that we had in our distribution center capacity to be able to handle future growth.
Keith Howlett
Thank you.
Michael Ross
Thank you.
Michael Ross
Thank you, Keith.
Operator
Thank you. This concludes the question-and-answer session of the conference call. Please disconnect your line at this time, and we thank you for your participation.