Neil Rossy - President and CEO Michael Ross - Chief Financial Officer

Irene Nattel - RBC Capital Markets Mark Petrie - CIBC Jim Durran - Barclays Peter Sklar - BMO Capital Markets Vishal Shreedhar - National Bank Patricia Baker - Scotiabank Keith Howlett - Desjardins Securities Anthony Bonadio - Wells Fargo Chris Li - Macquarie

All participants, please standby. Your meeting is about to begin. Good morning. And welcome to the Dollarama Conference Call for the Fiscal 2019 Third 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 financial and analysts. For your convenience, the press release, along with the third quarter financial statements and management’s discussion and analysis are available at dollarama.com in the Investor Relations section and on SEDAR. Before we start, I have been asked by Dollarama to read the following message regarding forward-looking statements. Dollarama’s remarks today may contain forward-looking statements about its current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements, or other future events or developments. Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believe are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results, levels of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by the forward-looking statements. As a result, Dollarama cannot guarantee that any forward-looking statements will materialize and you are cautioned not to place undue reliance on these forward-looking statements. For additional information on the assumptions and risks, please consult the cautionary statements regarding the forward-looking information contained in Dollarama’s MD&A dated December 6, 2018, available at www.sedar.com. Forward-looking statements represent management’s expectations as at December 6, 2018, and except as maybe required by law, Dollarama has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. I would now like to turn the conference call over to Mr. Neil Rossy.

Thank you, Operator, and good morning, everyone. This morning we reported solid financial results for the third quarter of fiscal 2019. We delivered continued sales growth, strong margins and an 8% in diluted EPS over the same period last year. Our strong earnings and cash flows enabled us to return substantial capital to shareholders last quarter, including $288 million in share repurchases and $13 million in dividend. Our sales increased 6.6% compared to the same quarter last year, fueled by Dollarama’s two key growth drivers, same-store sales and the contribution of a greater number of stores. Same-store sells growth was a healthy 3.1%, while our store network increased by 5% over the past 12 months to 1,192 stores at quarter end. As discussed during the Q2 conference call, retailers have been more reluctant in passing on rising cost to consumer in recent quarters. During this time, we have limited our pricing changes mainly to the 25% to 30% of our product mix that we refresh on an annual basis. We also continue to monitor peer activity regarding the passing on of rising costs to consumers through price increases. As we have always said, relative value is at the heart of the Dollarama business model. So in this context, our ability to reach 3.1% of SSS growth speaks to the strength of our brand and our value proposition. At the same time, and as part of our culture of continuous improvement, we are actively looking at other opportunities to stimulate sales, both through basket size and store traffic. Through our improved tracking and analytical tools, we now have better visibility and access to an increasing amount of information. This will enable us to further improve our product offering and merchandising practices. We are firmly committed to offering consumers compelling value across our categories. This is a key element that drives customer loyalty, store traffic and sales growth over the long-term. In Q3, we opened 14 net new stores, bringing our total to 32 for the first three quarters of fiscal 2019. With the addition of 11 new stores opened since October 29th, we are at 43 as we speak. Based on year-to-date results and our store pipeline, we fully expect to reach our target of 60 to 70 net new stores for the current fiscal year, with a significant number of store openings to take place over the next two months. We are confident in the rigor of our site selection process and our ability to make our stores engaging destinations for our customers. Keep in mind that when we set our annual target we have full visibility on our store pipeline. It isn’t a question of if but of when. Having more store openings in the last quarter is not a new trend for us and is purely a matter of timing. Looking ahead, we are very pleased with our store pipeline over the next few years. In March of 2017, we raised our 10-year store target from 1,400 stores to 1,700 stores. Our conviction in this long-term target and the expected parameters remains very strong, backed by our ongoing assessment of market potential. Now turning to updates on our ongoing projects. The expansion of our Montreal area distribution center is proceeding as planned. Phase 1 comprised of the construction of the building extension is well underway and slated for completion by early 2019. This will be followed by construction work within the existing DC, ahead of the integration with the new building extension. The existing DC continues to operate at normal efficiency during this expansion work. Project completion, including the installation of fixtures and equipment, is expected to occur before the end of calendar 2019, on schedule and on budget. As a reminder, nearly 80% of our stores are located in Central and Eastern Canada. Our most recent study of the Canadian logistics market makes us confident that our centralized logistics strategy remains the most efficient and cost effective strategy for Dollarama. With increased distribution capacity in the Montreal area, we will be able to comfortably support our Canadian growth strategy. Turning to e-commerce. As previously communicated, we are gearing up to launch our Quebec-only pilot for the sale of items by the full case by the end of the year. We look forward to testing our platform ahead of a national rollout to give us insight on potential improvements. As previously stated, this site is for customers who desire to buy large quantities of the same item and are currently not well serviced by our brick-and-mortar stores. We are expecting this new service to provide additional convenience and build loyalty with our customers, though not necessarily having a material impact on revenues. While our day-to-day focus remains firmly on our Canadian growth strategy and serving our Canadian customers, we continue to assess the progress made by our partner Dollar City, an independently owned and operated value retailer in Latin America. As a reminder, in 2013 we signed an arm’s length agreement with Dollar City to share our business expertise and provide sourcing services to Dollar City essentially at cost. We will have the option to acquire a 50.1% interest in the Dollar City Group starting in 2020. Dollar City continues its aggressive growth and as of its latest quarter ended September 30, 2018, operated 150 stores, including 42 in El Salvador, 47 in Guatemala and 61 in Colombia. This is up from 107 stores as at December 31, 2017. We are pleased by the pace at which Dollar City has been able to open stores, especially in Colombia, a key market in Latin America. We continue to perform our due diligence before deciding on whether or not Dollar City represents a sustainable option for additional future growth. Overall, we are pleased with our success driving same-store sales growth this quarter. We believe that the same-store sales growth reflects the strength of our brand and our value proposition. Successful direct sourcing, operational efficiency and strong execution provide the flexibility to drive organic sales growth and profitability, which in turn provides the cash to reinvest in our business and generate shareholder returns. This strategy has focused squarely on building value for the long-term, and it has been and remains at the heart of our business model. I will now pass it over to Michael to discuss our financial results in more detail.

Thank you, Neil, and good morning, everyone. So our quarterly financial performance continues to be driven by sustained topline growth, strong margins, the active management of our cost structure and balance sheet, plus strong execution on key operating metrics. As mentioned by Neil, sales were up 6.6% at $864 million and same-store sales grew 3.1%. Same-store sales consisted of a 4% increase in average transaction size over and above a 4.5 increase in the corresponding quarter of fiscal 2018, partially offset by a 0.9% decrease in the number of transactions that was partially affected by the additional strong Halloween sales day that fell in Q3 last year, but will be reported in Q4 this year. Turning to our key operating metrics, Q3 gross margin was 38.9% of sales, compared to 40.1% in the third quarter of fiscal 2018. We continue to actively manage gross margin and pricing relative to the competitive environment in order to achieve a healthy balance between maximizing returns for shareholders and keeping our value proposition compelling with a view to stimulating long-term continued sales growth. SG&A represented 14% of sales, a 0.5% improvement over the same quarter last year. The improvement is mainly the result of continuing labor productivity initiatives, the timing of certain expenses, as well as scaling, which contributed to mitigating the impact of minimum wage increases in certain jurisdictions primarily in Ontario. EBITDA increased 3.5% to $214.6 million or 24.8% of sales, compared to 25.6% of sales, and diluted net earnings per common shares increased by 7.9% to $0.41 from $0.38. We are reaffirming the updated guidance ranges provided in Q2 press release for net new stores, gross margin, G&A and EBITDA margin. Looking at gross margin, it remains very healthy. Based on our current visibility on open orders, it’s looking like we will be in the top half of our guidance range for the year. Despite ongoing cost pressures in certain jurisdictions related to minimum wages and other factors, SG&A is trending towards the bottom half of the provided range for the full year, as a result of the positive impact of in-store productivity improvements and cost reduction initiatives. Moving to CapEx, capital expenditures, which include investments and IT infrastructures, new store in our distribution center expansion total $33 million in Q3. We have revised the range of capital expenditures for fiscal 2019 downwards based on an updated schedule of progress payments for the expansion of the distribution center. Capital cost in the amount of approximately $10 million initially expected for fiscal 2019 will be incurred in fiscal 2020 and will be included in the capital expenditure range for fiscal 2020. We do not expect this to have any impact on the commissioning date and the expanded distribution facility. Turning to operations, we continue to implement in-store initiatives to increase efficiency and improve customer experience. We have completed the rollout of new cash management processes in stores, which we expect will reduce the time required to count and record cash deposits. We are installing balers in more stores to facilitate the recycling of cardboard, and we are reducing electricity consumption through the installation of LED lights, both in-store and in our warehouses. These initiatives will continue in fiscal 2020. We are also continually optimizing in-store scheduling to improve labor allocations and simplify the scheduling process for the store managers. Finally, a quick comment on capital allocation and use of cash, in addition to maintenance CapEx, our priority for operating cash flow is growth CapEx in new stores and in business transformation initiatives that drive same-store sales and/or margin growth. Our new store pipeline is developed based on a detailed analysis of real estate opportunities and rigorous investment criteria, as well as our capacity to successfully develop and launch new stores. Discretionary cash flows after maintenance and growth CapEx is earmarked to return capital to shareholders. In Q3, we repurchased 7.1 million shares at a weighted average price of $40.56 per share for a total cash consideration of $288.1 million. We consider share repurchases to be an effective use of capital to generate shareholder returns and intend to continue pursuing our current NCIB program. We recently received approval from the TSX to increase the number of shares that may be repurchased under our NCIB program to 30.1 million common shares, representing 10% of the corporation’s public float. The other terms of the NCIB remain unchanged. Last month, we issued $500 million of senior unsecured notes bearing interest at a fixed rate of 3.55%. The notes have a fixed five-year term and were rated BBB with stable trend by DBRS. The proceeds were used to repay the $400 million 3.095% notes that matured on November 5, 2018, to repay indebtedness on the revolving credit facility and for general corporate purposes. So to reiterate what Neil said in his opening remarks, we are pleased with our performance this quarter on the topline, on bottomline and in terms of straightening our value proposition for the long-term, despite a competitive retail environment. We are committed to reaching our operational and financial objectives for the fiscal year and we are excited by the growth opportunities that lie ahead. That wraps up our formal remarks. I will now turn it over to the Operator to take questions from analysts.

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

Thanks, and good morning, everyone.

Good morning.

Good morning. When you talked about your guidance range for the balance of the year, what if any assumptions have you made about an ability to put through more price increases and what are you seeing right now in the competitive environment around price, particularly given that we have heard some anecdotal evidence that the price environment is easing ever so slightly?

Good morning, Irene. It’s Neil. We haven’t seen the market easing, so to speak, in goods that are in our price range at $4 and less, and so in other stores that -- whatever that may be, $10 or less. We have seen some movement in higher priced goods, but in the goods that we sell and our competitors sell, the market hasn’t changed from a comp shop perspective.

So then when you stated in the guidance that you are -- that you expect to be at the upper half of the range on gross margin and lower half for SG&A, you are not assuming any incremental movement on price, is that correct?

Right. In other words it’s -- again, it’s within the range of the same-store sales 2.5 to 3.5. So, yes, so as we said in the past, we are doing some markups. We have done some, but at a much lower pace than we have done in prior years. But you are right, the gross margin when we tell you the upper range and in terms of G&A range, it’s with -- what we have been guiding to in terms of same-store sales.

That’s great. And just a couple of other questions if I may, first of all, can you tell us what the Halloween impact would have been in the quarter?

No. We don’t disclose the specific but it did have an impact for sure. We gave you the heads up in Q2 to expect that and so it does have an impact, and as we said in Q2, we suspect also that the credit card penetration, which continued to increase had some impact also.

Okay. Thank you. And then just one other if I may. Neil, in your opening remarks, you mentioned that you now have access to more data, which is giving you some insights around traffic and around basket. Could you share with us some of those insights that you are getting and maybe things that you didn’t realize that you were doing or could do differently to help both basket and traffic.

Well, if I told you that, Irene, I’d be telling everyone the same information that we hold dear to our heart. So I can only share with you the fact that, as we have worked on our data gathering over the last few years through our POS rollouts. The quality and cleanliness, let’s say, of our numbers is getting better and better. And therefore, the visibility we have and the amount of number crunching we can do to give us better guidance is getting better quarter by quarter, and so, I think, we have gotten to a point where I feel better about the tools available to us than I ever have.

Okay. That’s great. Thanks, Neil.

Thank you.

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

Hey. Good morning. You commented, I think, Michael, at the end of your comments that your approach to pricing was straightening your value proposition for the long-term. You have also reiterated your confidence in how consumers perceive value. But, clearly, 2018 has been a year where you have been a bit more conservative on pricing. So I am wondering if you can just sort of reconcile all of that. And is it simply a matter of seeing competitors move prices up that would make you more inclined to resume sort of historical inflation or are there other factors, like traffic as an example that also play into that decision.

I think the primary reason is competition, since our bread and butter is relative value. Certainly, traffic is something that we keep an eye on. But, generally, better or best relative value drives traffic and so one generally comes with the other.

And are there other considerations just relative to like the price points you are at and that kind of thing?

For the moment, we are comfortable with our price points and don’t have any plans to add price points, obviously the ability to do so is always there, and since we have built out the systems to handle multi-pricing, it’s a non-issue for the execution. But for now, we feel that there’s still a runway ahead of us at the current price points and we are more committed than ever to highlight what I feel is a misconception potentially on how we are -- it’s been said that we are no longer a dollar store, but in reality we still have a ton of less than $1, $1 and $1.25 items. And so, we are going to make an effort in the next year or so to highlight in our stores the SKUs at $1.25 and less, because we feel as we have from day one of our business, that having that option in every department and category is an incredibly important thing, because there are and will always be a percentage of our customers that rely on the lowest end of our retail pricing, as well as those who have the luxury to enjoy the higher end.

Okay. I appreciate that. And I guess, is that -- just following up, is that highlighting of those items, is that simply sort of a merchandising exercise or is that reflective of maybe more of the items in the store at those price points versus the higher price points?

I think the answer is a two-phase answer. We are going to start with the highlighting and then depending on the results of the highlighting, we may take further action.

Okay. Thanks. And then, sorry, just one other one. The accelerated gross margin decline sort of in Q3 and it sort of implies maybe price investments accelerated in the quarter a little bit. Is that a fair assessment or is the greater decline versus the first half simply a matter of more inflation in your costing in Q3? And then, I guess, just trying to understand how we might think about gross margin in 2020, at least first half versus second half, because the performance does seem quite different in fiscal ‘19?

Yeah. So, well, first of all, as we -- we have guided you through to, I mean, to the top range of our gross margin for this year gives you a sense of where we are at for this year. The decline is mainly, as we have said in the past, because we are not doing as many markups as prior years, a markup is a direct margin pick up. And as we have done less and less of that and so that transpired into Q3 and will transpire into Q4, we will continue into Q4. But the end result on the yearly basis is the guidance we gave you. For next year, we will see, we will give you as we stated the last quarter. We will give you some in March, next March, our outlook on next year, and at that time, we will have a better visibility on F20.

Okay. Appreciate all the comments. Thank you.

Thank you.

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

Good morning. Just back to the transaction trend, what additional insights would you say you have this quarter versus what you shared with us last quarter that would help you grapple with what’s going on, on the opposite transaction volume on a comp store basis?

I mean, it’s a difference, you are talking about the impact on the transaction, what the difference between this quarter and the last quarter?

Yeah. Any additional insights you may have determined as you have watched the last few months unfold in terms of trying to understand what is happening there, like how much of it is just strong prior year versus the credit card impact you have noted, but as there other things that you feel may be contributing to the transaction growth comp being more challenged than it has been in the past?

Well, yeah, we are -- again and we -- Halloween and credit card is definitely an element, and other aspects, as Neil mentioned, that we -- these are things we look at study. We don’t necessarily communicate publicly for obvious reasons. But at least you have got an idea of some of the elements that would have impacted transactions this quarter.

And from a competitor standpoint, aside from Dollar Tree, which is an obvious competitor in your space, like who else would be in a competitive set as you would define it that you pay close attention to?

Well, everybody is a competitor in some form or fashion, as you know. But I would say that, Dollar Tree and Wal-Mart are two retailers that we are the most apt to make sure that we are competitive and have great relative value against, since both of those retailers also live by the value motto. We obviously compete in different categories against all retailers. When we are selling our hardware, we compete against the hardware stores. When we sell our health and beauty, we compete against the pharmacies. When we sell our -- the bit of dry goods we sell, we compete against grocery. But they represent a much smaller percentage of our business. As a whole, our closest competitors are the Dollar stores both independent and national Dollar stores and Wal-Mart.

Okay. And then, last question. Just so, we are hearing that Canadian grocers across the Board talk about grocery type merchandise inflation occurring and sequentially increasing. So it sounds like they are leading the market to believe that their four-wall comp inflation is sort of in the 1% range and is picking up to a slightly higher level as we move into Q4 and presumably into 2019. Like how much of an impact can that have on your consumables business broadly defined or is that -- is there disconnect there in terms of how we would view your consumables products versus theirs?

Well, again, grocery and candy, chips, chocolate, all of those categories for us are just part of the mix. There’s an additional pickup. There’s certainly not what’s driving people to our stores and we have made an effort over the years not to be in that business principally. That being said, as a percentage of the goods we sell and even within the category itself within our stores, we see no changes in the goods we sell in those departments from the perspective of pressures that you are referring to.

Okay. Thanks, Neil. I appreciate it.

No problem.

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

Back on the gross margin, so assuming that you held the line on price, like theoretically your gross margin should be flat not down 100 basis points -- not down 100 plus basis points all else being equal, so what are pressures on COGS, was it things like per transportation costs, contractual rate increases, is that how we should think about it?

No. Well, one -- okay. So for the components and that hasn’t changed from what we said in the past. Occupancy more or less stable, there is an increase in transportation costs, energy costs, you have the inflation there. We do have initiatives, by the way, on logistics this year and next year. And also depending on the seasonality it has an impact on the cost structure and on whether or not you do markups or markdowns. So it’s the merchandise itself and it’s the other factors, I mentioned to you.

So does that mean you took some markdowns during the quarter? Is that what you are saying, Michael?

No. We didn’t take any markups.

Okay. And…

And there’s the refresh of goods also, yeah.

Okay. My next question, I want to address transaction count, which I think you could use as a measure of traffic. Your transaction count has been down three quarters in a row, this quarter almost down 100 basis points. On the other hand, based on your commentary, you are very confident about achieving the 1,700 stores and usually traffic, like negative traffic count is an indication that store footprint is maturing. So I am just wondering if you can reconcile the two?

No. Well, I mean, the -- you are assuming what that I don’t understand. The -- we are not saying that we are at declining in same-store sales, right. So even up at 2.5 to 3.5 same-store sales, you can sustain very easily the growth in store base that we have right now. As we have told you our cohorts, most recent cohorts have been trading -- trailing, I mean, with very strong paybacks and so you don’t need 4% to 5% same-store sales to justify the 1,700 stores that we were talking about. And so they are still with the growth that we envision any the potential to maintain that.

Okay. And the lastly, I just have a question, in the press release in the outlook section. You have one of the like the bullet points under the guidance, where you talk about your assumptions. And one of the assumptions is the third one, lower than expected impact of inflation on product margins for goods imported from China. Could you explain what that is all about and directionally what it means?

Yes. So, initially we had anticipated higher margins. We revised our gross margin up. From the beginning of the year, if you recall, our margin range was 38 to 39, and we were expecting more inflation from China. We were expecting more impact on tariffs. Those did not materialize as much as we have thought and so we had revised our range upwards, and that’s the reason behind it.

So you are saying that has a -- that had a positive impact on margin.

Yes.

Okay. Okay. Thank.

That’s why we increased our margin range.

Okay. Thank you, Michael.

All right.

Thank you. Our next question is from Vishal Shreedhar with National Bank. Please go ahead.

Hi. Thanks for taking my questions. Just wondering why management proceeds there to be or is observing limited inflation in the market into goods, which -- with which they can goods where itself competes in. Is it because your competitors are looking at Dol’s growth and Dol’s margin are saying they can compete more effectively there, is it the consumer health is limiting abilities to price increase in the market, different challenges thing different things. So, just trying to reconcile what your view is?

If I understood correctly, the question is why we think the market is so competitive in our range of pricing. Is that what the question was?

That’s right, Neil.

Okay. Well, I guess, where we used to fly under the radar, quite honestly. Having 1,200 stores comes with its pluses and its minuses. And one of the facts is that, we are everywhere, and therefore, all the other retailers are as aware or more aware than they have ever been of our presence and that’s normal. And so between that and the fact that other retailers are vying for the same customer in food, whether that’s our business or not, it drives traffic into other retailers. It creates, let’s say, a market of competitiveness and focus that over the years, I think, has just gotten more and more aggressive for the same dollars. And at the end of the day, the Canadian consumer, I think, is the one that benefits from it. But the retailers have a harder and harder time trying to maintain their market position. And at $5 and less, a lot of goods and units, transactions transpire at that level, and therefore, it just is a very competitive market more now than ever.

Okay. That’s helpful. In the past, management has indicated that their performance across Canada is generally fairly consistent. Is that still an observation that you have?

Absolutely. Yeah. Our performance is stable across the country coast-to-coast.

Okay. Wonderful. And just on a bit of, maybe a tough one for you to answer. But as management looks at long-term margin power of this company, call it on a rate basis. I don’t know if that’s the way you look at it. When you look at it, is management’s primary goal here to maintain that relative value versus its competitors and the products that it competes in or does management also consider that margin rates as it looks for the long-term, but how do we think about the way you guys will orient as the competition kind of intensifies or potentially intensifies in your products?

We will always be guided by relative value and if that relative value in the market shifts, and we must shift with it, then the margin percentage will be what the margin percentage is, that we can afford to provide our shareholder, while remaining the best relative value in the market, because that is that is what we sell. We sell, new product, refresh, a bit of a treasure hunt, as many of the basics as one can get for the price range that we sell. But at the end of the day the reason people come to Dollarama and our primary goal is to provide the best relative value to the consumer.

Okay. And with respect to the buyback, a pretty large buyback indication, how active does management intend to be and what are the parameters around, if it will be active or not?

So we continue to be, well, as you have seen very active, all within our playground, if you want, maintaining leverage below 3 times around our comfort zone 2.75 times adjusted debt-to-EBITDA, with earnings yield now has increased are -- and still higher than our after-tax cost of debt. So we are going -- we are continuing to buyback.

Thanks.

Thank you.

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

Yeah. Thank you very much. I want to go back to your opening remarks, Neil, about the other -- getting at other opportunities to drive sales traffic in basket and then you mentioned that you are getting better and better with data quarter-by-quarter, and so you have better tools available. So I am just curious about whether or not you have begun to deploy these tools or is that something that we will see you deploy in a greater manner over the course of the next year or so?

Yeah. The latter of your two comments. We are in the midst of the first phase of our execution with what we feel is, let’s just say, better tools than we have had in the past and we do think that it will make a big difference from a decision making perspective. And what the results of that will be, I can’t speak to you yet, but I am confident that these tools will be very helpful for the buying, and the replenishment and logistics to do their jobs better.

And would I be -- would that -- would it be fair for me to say that this is really a new set of tools and a new way of looking at the business, so something that you have not done in the past?

Yes. I think that’s a fair way to say it.

Okay. Thank you. That’s very helpful. And then, Michael, could you refresh for us what the plastic penetration was debit and credit versus cash in Q3?

Yeah. We are not -- as we said in Q2, we disclosed it after one year as promised, but after that we would stop disclosing the numbers. But it still has, obviously, it doesn’t stop from one quarter to the other, it continued to grow.

Okay. I apologize. I forgot that you weren’t going to give it.

No problem.

But it continues to grow is what I wanted to hear. Thank you.

Yes. Yeah.

Okay.

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

Yes. I had a question on the traffic numbers. I am wondering whether you are able to -- I don’t know if you will share it with us, but whether you parse out what the impact of cannibalization is on store traffic.

Yes. So, we do -- we have that information. We know, but in terms of store opening cannibalization, it doesn’t really have an impact. If you are opening the same number of stores every year, the impact of the words is the same. So there’s no real impact there.

So there’s been no change in the impact of cannibalization on the traffic…

No.

…numbers?

No.

No. And back to a question that was asked previously by a colleague, it’s also something that gives us confidence that we are far away from what was being questioned or insinuated was that do we feel comfortable with the 1,700 store number. And when the day comes that we start seeing serious cannibalization, obviously, we will question that number. But we haven’t seen any and based on all other studies at the market, and if we look at the penetration south of the border relative to pop for store, we are far, far away from where we feel we will be talking about over penetration.

And then just in terms of the impact of inflation in China. Is that something that affected Q1, Q2, Q3, Q4. It wasn’t mentioned as a factor in the gross margin in Q3. So I am just trying to make sure, was -- is the impact of the China -- the less China inflation sort of been throughout the first three quarters and also will affect the fourth?

Yeah. So in other words, we -- at the beginning of the year when we gave you the guidance, the original guidance, 38 to 39, and by the way we are guiding towards the upper range and better of that. But when we were guiding you towards that, a part of the assumptions was that we would have more inflation in China and -- for the year, which has not materialized for the whole year including Q3 and Q4, and as much as we thought and tariff also. So both those factors with the visibility we get from our open orders. That’s why we were comfortable last quarter to revise that guidance and so that remains.

And then just in terms of the SG&A expense rate, which is through nine months is below the guidance range, I had a few questions on the fourth quarter. You mentioned timing was an issue in the SG&A in Q3, so whether there’s something that carries over to Q4? And thenQ4 has the extra week and I am wondering if that has a significant impact on SG&A rate in the negative direction or what other factors lead to the guidance being above the current run rate, so to speak?

Right. So, as we mentioned to you in Q2, we had initiatives that weren’t non-labor related at the store level that we were happy to see were much came out much better than we had anticipated, and I mentioned that would transpire in Q2 and Q3. Most of it to -- I mean, Q3 and Q4. Most of it being in Q3, less in Q4, and for the rest it’s -- we are going to feel -- where we feel more the impact of a minimum wage in Q4. That’s what we are expecting and that’s how we come up to our range, but nonetheless, at the lower part of our range.

And does the extra week, is that a negative to SG&A rate or does it matter?

It’s peanuts. It’s a very small.

Okay. Thank you.

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

Hey, guys. This is actually Anthony Bonadio on for Ed. Thanks for filling us in. So just quickly on new store productivity, I know there’s lot of nuances around how this is calculated. But it looks like it that some of the lower levels we have seen since you guys went public. Can you just quickly speak to what you are seeing on this front on whether there might be any one-off factors that might be driving this?

No. It’s, for us, it’s been a lot of -- as I have said, historically, you do the implementations, you POS, Kronos, WiFi, mobile devices, cameras. And when you implement those in one year, you don’t get all the benefits in that year. As you move in time, you activate additional functionalities, you benefit from that, so it’s the total of all that. We have had more -- some newer ones this year touching on loss prevention, touching on with balers, you have had labor initiatives, cash management, so a number of those that have materialized and continue to materialize this year.

Well, that’s it for me. Thanks, guys.

All right.

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

Hi. Good morning. Just a few questions for me. First, have you given more thought about being a little bit more creative in terms of pricing, I think you mentioned maybe a while back about maybe pricing by region. And I am also thinking about is there an opportunity to introduce price point kind of in the middle range like 225 or 375 to give you more opportunity to optimize your pricing and then sales.

So, Chris, the opportunity to have more price points exists and we feel it comes at the cost of simplicity for the customer. The simpler you keep the shop the easier it is for the customer to appreciate your relative value when they are at other stores, and the more you muddy the waters and make multiple, multiple, multiple prices, the harder it is for them to remember what your relative value is. We also don’t think that adding price points between the ones we have today will really bring any fruits to bear from a buying perspective, because when you are sourcing and I will take the simplest of examples, if it’s a 10 pack of pencils at $1.25 and the price of pencils goes up and I’d have to charge $1.75 for the sake of discussion, I can reduce the pencil count to eight and make it a $1.50 or reduce it down to six and make it a $1 for the sake of discussion. So when there’s piece counts you have that flexibility to help you engineer the product to a price point. And then if you are talking about, for example, anything made out of plastic. If you have a plastic ball and it’s 300 grams and the price of plastic goes up, you have the opportunity to make the ball a little thinner as long as it’s not -- can make the bowl impractical. And that’s a way to shave some costs off when you have to keep to a certain price point. In the same sense as being able to add value or add ramage [ph] to the ball when you want to add better value and get to a price point that still makes sense. So there’s ways to engineer the products in almost all products to make sure that it fits within our price points and we have never found our price points to be a limit -- a limiting factor in the assortment that we provide our customer. As far as having different zones of the country for different reasons, the different price points, it is something that we are considering. We take it very, very seriously the conversation and we are very sensitive to the idea. But we are looking at it to see if there are some zones in the country that are far more competitive than others that are much less competitive and sometimes that has to do with the logistics cost to get goods to certain areas. Where it’s very expensive to get goods to very, very rural areas, the cost of goods everywhere else is more expensive, and where it’s much less expensive in super urban areas, you may have a much more competitive market that can be addressed or has to be addressed in a different way. So we continue to study that. But unlike traditional retailers who often have six, seven, eight, nine, 10 pricing zones, if we do it, we are likely to have two at most, which would be basically urban and rural, were some form or fashion of that idea. But for the moment, it is still at the study stage. If we decide to do it, we will test it and we will test it probably one item, then five items, then 10 items, and if it’s positively accepted as a whole, it’s a concept that we are not against, but for the moment it is theory.

Okay. That’s very helpful. And maybe just a quick one on Dollar City, the disclosure about the 51.1% -- 50.1%, I believe that’s a new disclosure. Any reason you disclose that now or you are just trying to be more helpful for the street to understand?

Yes. Trying to be more helpful. Yes, so it is the first time and it’s just trying to be more helpful for the street so that everyone have the same number.

As we get closer to that date where we have to make a decision, we will continue to provide different information that’s more and more helpful for you to do your jobs rather.

Okay. That’s helpful. Great. And Michael, just on your SG&A rate, as you look at your pipeline of all the cost reduction and productivity improvement initiatives you have for next year. Do you expect you will continue to have some SG&A leverage, I know that depends on what your -- you comp sales outlook will be next year. But even if it continues to be 2% or 3%, is that SG&A leverage is that still achievable under that scenario?

Well, I mean, like we have said, we will give you the guidance in March, and you are right, it depends on sales level also. But the thing I can tell you is this -- the company, our culture is all about continuous improvement and we do have some initiatives in the pipeline, whether it’s at a store level or logistics level. So we absolutely have some opportunities there that we are working on and savings to come. Then it depends on inflation and the other components that we will have at the time where we give you next year’s disclosure.

Okay. Great. Thanks and happy holidays.

Thank you.

Thank you very much.

Thank you. There are no further questions registered at this time. This concludes today’s conference call. Please disconnect your lines at this time and we thank you for your participation.