Dollarama Inc.

Good morning, and welcome to the Dollarama Fourth Quarter and Fiscal 2021 Results Conference Call. Neil Rossi, President and CEO, and J.P. Towner, CFO, will make a short presentation, which will be followed by a question-and-answer period, open exclusively to financial analysts. The press release, financial statements, and management's discussion and analysis are available at Dollarama.com in the Investor Relations section, as well as on CDAR. 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 believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results, levels of activity performance, achievements, future events, or developments to differ materially from those expressed or implied by 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 March 31, 2021, available on CDAR. Forward-looking statements represent management's expectations as at March 31, 2021, and accept as may be required 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 now like to turn the conference call over to Neil Rossi.

Thank you, Operator, and good morning, everyone. We've just completed a truly unprecedented year. There is no question that Dollarama, like so many businesses, was put to the test. Through the strength and dedication of our team, the resilience of our business model, and the relevance of our brand to Canadians from all walks of life, I believe we have emerged stronger. At the outset of the pandemic, our team responded quickly and efficiently to implement a vast array of new operating procedures that protect customers and staff, so that we can continue providing Canadians with convenient access to affordable everyday essentials. From head office to our warehouses, from our distribution center to our stores, coast to coast, every team member contributed to our ability to adapt and evolve in a rapidly changing environment. The same can be said of our Dollar City team in Latin America. Early in the pandemic, Dollar City, just like Dollarama, was recognized as an essential business. The team on the ground acted quickly to support employees and adapt to strict and evolving measures put in place by the governments of Colombia, Guatemala, and El Salvador. By their performance, Dollar City demonstrated both their agility in a time of crisis and their growing relevance to Latin American consumers looking for convenience and value. This bodes well for our long-term growth plans in Latin America, including the expansion of Dollar City's footprint into Peru. where our market entry is imminent. As President and CEO, I am truly proud of our entire team for the solid financial and operational performance we achieved in fiscal 2021 ended January 31st. Despite the roller coaster of events over the last 12 months, our annual sales increased 6.3% and same store sales were up 3.2%. We delivered solid EBITDA and gross margin both in terms of absolute dollars and as a percentage of sales. This reflects Dollarama's attractive positioning as a destination both for essential goods and seasonal items. These results were achieved despite operating restrictions throughout the fiscal year and during our fourth quarter, which is historically our peak sales period of the year. For fiscal 2021, we invested $84 million in COVID-related measures, primarily impacting SG&A. Labor hours in stores were increased to allow the execution of daily cleaning and sanitization protocols, and we rewarded our staff both in stores and in RDC and warehousing facilities on a number of occasions. This included a four-month wage increase for store and logistics employees, and the equivalent for agency workers as well as a one-time gratitude bonus for store employees. Over and above COVID related costs, we increased our logistics seasonal bonuses in fiscal 2021 and permanently increased base hourly wages for all workers in our logistics operations. Despite these incremental costs, we reported solid net earnings and earnings per share. As restrictions are gradually lifted, our team is squarely focused on safely and profitably growing our sales and our footprint across Canada in select Latin American markets. We were pleased to announce this morning that we are increasing our long-term growth target in Canada to 2,000 stores by 2031. This is up from our previous target of 1,700 stores by 2027. Our hard earned position as a weekly shopping destination for millions of Canadian families has been reconfirmed and strengthened by the pandemic. Our stores continue to deliver an exceptional payback period and perform consistently from coast to coast, whether they are older stores or more recently opened locations. And despite the pandemic, we opened 65 net new stores in fiscal 2021, consistent with prior years. Based on our experience, our historical performance, and what we see going forward, we feel very confident in raising our long-term store target at this time. We expect to achieve our growth objective by maintaining our current rate of annual net new store openings. Before I turn it over to JP, I would like to formally welcome him to the team. He joined us a few weeks ago, but I can assure you he has hit the ground running, and we couldn't be more pleased to have him on board. As you know, Michael has stayed on in an advisory capacity to ensure a smooth transition for JP, and we thank him for delaying his well-deserved retirement. We appreciate being able to count on Michael for a little longer, including on the call this morning, and as a mentor to many at Dollarama. JP, over to you.

Thank you, Neil, and good morning, everyone. I'm excited to join a very dynamic team and for the journey ahead. As part of my responsibilities, I look forward to meeting analysts and investors in person as soon as conditions allow. My goal is to maintain the high level of transparency and availability that have been the trademarks of Dollarama's investor relations practice. I've been getting to know my colleagues during the past few weeks, and I would like to thank the team for their welcome and support. I'm grateful for Michael's counsel and fortunate to share in these great results for my first conference call with him by my side. So let's dive right in, beginning with a review of the fourth quarter. Dalram achieved solid financial results despite many new and stricter government-imposed measures in response to the second wave of the pandemic. We began the fiscal 2021 fourth quarter with very strong momentum, posting 7% same-store sales growth for the first five weeks of the quarter, covering the months of November and the first week of December. Seasonal merchandise performed extremely well, taking off earlier in the quarter than historically. But within a matter of days and following the announcement of additional restrictions across Canada, this momentum was abruptly interrupted. It is important to understand that these new restrictions coincided with not just our peak sales quarter of the year, but with the peak sales month December. Lockdowns and stricter in store capacity limits were imposed in several provinces including Alberta, Ontario and Quebec in early December. New restrictions included a ban on the sale of non-essential items in Quebec where we have approximately 30% of our stores. Even though the ban started on December 26th, its impact on store traffic began to be felt quickly following its announcement in mid-December. As a result of these measures, same-store sales for the quarter declined by 0.2%, while total sales increased 3.6% and exceeded $1.1 billion, driven by the increase in the total number of stores compared to the same period last year. Average transaction size increased by 27% while the number of transactions or store traffic decreased by 21.4%. We are pleased to inform you that sales momentum picked up as soon as the stricter measures were lifted in the second week in the fiscal 2022 first quarter that is still underway. Gross margin was strong at 45.5% of sales primarily driven by the performance of higher margin seasonal items. SG&A was 16.9% of sales and included $23.8 million of COVID-19 costs, representing 215 basis point impact. This reflects additional in-store hours and the December 2020 gratitude bonus for store employees. EBITDA was 326.9 million, or 29.6% of sales. Net earnings were 173.9 million, and diluted EPS was 56 cents. Earnings were negatively impacted by lower SSS and COVID-19 costs, but positively impacted by higher margins, lower financing costs, and a higher equity pickup of Dollar City net earnings. Looking now at full year results, sales increased by 6.3% to over $4 billion. SSS was up 3.2% over and above the 4.3% growth recorded in fiscal 2020. SSS growth for the year consisted of a 29.1% increase in average transaction size, and a 20.1% decrease in the number of transactions. Throughout the pandemic, consumer shopping patterns evolved in line with public health restrictions, which generally resulted in fewer trips but higher spending per store visit. SSS growth was driven by increased demand for seasonal items, as well as various essential goods categories, including household and cleaning, health and hygiene, and food. SSS for both the quarter and the year exclude temporarily closed store. As you will recall, a number of stores were closed during the first and second quarters as a direct result of government measures, mainly the closure of malls, primarily in Quebec. No stores were closed due to the pandemic in the third quarter. During the fourth quarter, and more specifically in January, Dollarama temporarily closed a limited number of stores, mostly in Quebec and in enclosed shopping malls where the majority of other businesses were closed at the time and where another Dollarama location in close proximity was open. These stores have since reopened. Gross margin for the year was strong at 43.8% of sales and up 20 basis points due to higher sales of higher margin products. A small portion of COVID-19 costs are included in gross margin, namely for measures implemented throughout our operations, including in the logistics chains. SG&A was 16.2% of sales, which includes the bulk of our direct COVID-19 costs, or $81.1 million. This represents 200 basis point impact. EBITDA was 28.1% of sales. Net earnings were up 0.1% to $564.3 million. And EPS increased by 1.7%. to 181 per share, reflecting slightly improved earnings and the accretive effect of our share buyback program. Turning to Latin America, our equity pickup of Dollar City earnings in fiscal 2021 came in at 19.7 million. Despite disruptions to new store opening plans through the first half of 2020 due to the pandemic, Dollar City opened 36 net new stores, bringing their total store count to 264 at December 31, 2020. Dollar City's long-term growth objective of 600 stores by 2029 in its three current countries of operation remains unchanged. Now back in Canada... Following a careful evaluation of the market potential for Dollarama, management believes that the corporation can profitably grow its Canadian store network to approximately 2,000 stores over the next 10 years or by 2031. With an average new store capital payback of approximately two years, which is consistent with our current and historical payback period. Factors taken into consideration in our evaluation, among others, included census and household income data, the current competitive retail landscape, rates of per capita store penetration, historical performance of comparable and new stores, and our current real estate pipelines. Looking at our capital allocation strategy, in fiscal 2021 and in the context of the pandemic, we adopted a conservative approach and did not repurchase any shares in the first three quarters of the year to preserve liquidity. In the fourth quarter, we repurchased 1.6 million shares for a total cash consideration of 87 million at a weighted average price of 53.67 cents per share, leaving ample room in our current NCIB expiring in early July. Our adjusted net debt to EBITDA ratio at fiscal year end was 2.68 times, 29 basis points lower compared to fiscal 2020 year end. As for the quarterly dividend, the Board maintained it at the beginning of fiscal 2021, and announced a 6.8% increase in December 2020. This morning, we are coming back to our regular Q4 dividend increase, and we are announcing another increase of 7%, bringing the quarterly dividend to 5 cents per common share, 5.03 cents per common share, to be precise. Looking at our debt structure, as a reminder, we closed a new seven-year bond financing for $300 million in the third quarter of fiscal 2021 to take advantage of favorable market conditions. This was ahead of the maturity of $300 million of floating rate notes repaid this past February. We continue to actively manage our solid capital structure, and we have a healthy balance sheet. The business continues to consistently generate excess free cash flow, and as a result, bearing factors outside of our control due to COVID-19, we intend to actively resume share repurchases in fiscal 2022, and we expect our adjusted net debt to EBITDA ratio to creep back up and to return to our target range of between 2.75 to 3 times, which we are very comfortable with. Turning now to the outlook. Due to continued uncertainty related to COVID-19, we have not provided guidance ranges for gross margin, SG&A as a percentage of sales, or EBITDA margin for fiscal 2022 at this time. As demonstrated by the events of the fourth quarter, the pandemic scores can change very quickly making its impact on some of our key metrics more difficult to predict and to quantify. But we can provide you with some color based on the first quarter underway, our experience through the first year of the pandemic, and what we do have visibility on. Given our ability to open 65 new stores last year despite the pandemic, we are confident that we will once again meet our 60 to 70 net new store openings range for fiscal 2022. Looking at same-store sales, as mentioned, we had same-store sales of 7% after the first five weeks of the fourth quarter, but ended the quarter at negative 0.2% as a result of suddenly imposed stricter COVID-19 measures, especially in Quebec. As some of these measures were lifted in early February, our Q4 momentum returned in full force, coupled with an additional SSS catch-up from the prior quarter. Two months into the first quarter, same-store sales are in the low to mid-teens. Bearing any COVID-related factors outside of our control, such as what occurred in Q4, we expect a solid performance in terms of SSS for the first quarter. But keep in mind that we will be lapping tougher comps in Q2 and Q3 of fiscal 22. Looking at gross margin as a percentage of sales, gross margin in fiscal 2021 was very strong. And based on results to date and visibility on open orders, we are also expecting a notable improvement in gross margin in the first quarter compared to the same period last year. We expect the gross margin improvement in Q1 to be in the same ballpark as what we saw year over year in Q4 fiscal 2021. This reflects the positive impact of changes in the sales mix. However, it is important to note that assuming raw material prices and inbound shipping costs remain at current levels or continue to increase, this will temper our gross margin performance through the second half of the year. Looking at SG&A as a percentage of sales excluding COVID-19 direct costs, we should be generally in line with the prior year although the first quarter should benefit from additional scaling on higher sales. Finally, our CapEx envelope is between 160 to 170 million, which is in line with fiscal 2021, and will go towards new store openings, regular maintenance, and some transformational CapEx. We will update you on our assumptions and hope to be able to provide more specific guidance across all key metrics concurrently with the results of our Q1 results in June. With that, I will now turn the call back over to Neil.