Dollarama Inc.

Good morning and welcome to the Dollarama Fiscal 2022 First Quarter 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, level of activity, performance, goals or achievements, and 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 MDNA dated June 9, 2021, available on CDAR. Forward-looking statements represent management's expectations as at June 9th, 2021, and except 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. Please go ahead, sir.

Thank you, operator, and good morning, everyone. The Dollarama team continues to demonstrate its ability to adapt in order to serve Canadians safely and with purpose. We delivered another solid performance for the first quarter of fiscal 2022. We generated a double-digit increase in sales, along with strong same-store sales growth and industry-leading margins. This is despite additional COVID-19 restrictions implemented across Canada in early April. These included strict measures directly impacting select retailers in Ontario, where we have 40% of our stores. The COVID impact in the first quarter was similar to what we experienced in the fourth quarter. That is, we entered the quarter with solid momentum, in this case, right through early April, with same store sales growth in the mid-teens. Then, in the last month of the quarter, Our sales were negatively impacted by additional measures taken by provincial governments in response to the pandemic's third wave. The ban on the sale of non-essential goods in Ontario, which is the most significant of these measures, was in place for the last 23 days of the first quarter and it currently remains in place today and is set to expire on June 11th. Again, this backdrop sales nonetheless increased by 13% year-over-year. Same-store sales were up nearly 6% driven by higher sales of seasonal items, including Easter, holiday, and spring-summer products. The opposite occurred in the same period last year, with customers buying large quantities of household and cleaning products, not Easter decorations. Looking at real estate, we have started off the year with a good new-store opening rhythm. having opened 12 net new stores this quarter. This is compared to 10 in the same period last year. As a result, you can expect an uptick in the quarterly number of net new stores openings as we reach the second half of the year. Turning to Dollar City, as planned, they opened their first store in Peru last month, thereby entering a new and fourth market of growth in Latin America. Like Colombia, the product offering in Peru includes products up to $4 US price point, adjusted in the equivalent local currency. Our local management team continues to deliver a solid operational performance in all countries of operation. We're pleased with their progress and ability to execute on the business's growth strategy. On the ESG front, I am pleased with the progress we have made integrating sustainability initiatives company-wide over the last two years and during a pandemic. We published our second ESG report this morning now available on our corporate website. As a team, we are more committed than ever to managing our operations and resources responsibly and to serving our customers with purpose. Looking ahead, And despite near-term impact of COVID-19 restrictions, which remain in place, our solid momentum in the first two months of the fiscal year reflects the relevance of our unique business model and the compelling product offering to Canadian consumers from all walks of life. I would like to thank our customers for navigating the situation with us and for their continued loyalty. Our customers have been very supportive. and at times quite vocal about their desire to shop at Dollarama during the pandemic. And we appreciate that enormously. This has only further reinforced the role we play in the Canadian retail ecosystem. With that, I'll hand it over to JP to discuss our results in more detail. JP, over to you.

Thank you, Neil, and good morning, everyone. Let's start by taking a closer look at sales. Total sales for the first quarter of fiscal 2022 increased by 13% to 954 million, driven by an increase in the total number of stores, as well as SSS growth. Looking at same-store sales for the first nine weeks of the quarter, or the nine-week period ended April 4th, 2021, we recorded same-store sales of 15.2% compared to the corresponding period of the previous fiscal year, driven by strong seasonal sales, Easter holiday, and spring-summer products. However, various provinces across Canada subsequently imposed new or more stringent measures due to the sharp rise in COVID case counts. This included a stay-at-home order and a ban on the sale of non-essential goods across Ontario, which went into effect on April 8th 2021. This had an immediate and sustained impact on sales for the remainder of the quarter. As a result, comparable store sales growth receded to 5.8% for the full first quarter of fiscal 22. Same store sales growth consisted of a 9.3% increase in average transaction size and a 3.2% decrease in the number of transactions. The basket consolidation trend has continued, although the increase is more modest than last year. As a reminder, while only a limited number of stores were closed in Q1 fiscal 2022, as many as 104 stores were closed during the same period last year, primarily Quebec mall stores, as we're now lapping the pandemic as of the second half of the first quarter last year. This adds a bit more noise to our year-over-year comparisons for this quarter and in the coming quarters. You'll recall that at the onset of the pandemic, we experienced a huge surge in transactions in early March 2020 as customers stocked up on consumables. This was followed by a sharp decline in transactions as the first lockdown was implemented. Turning now to gross margin, we recorded a notable increase in Q1 fiscal 22, with gross margin as a percentage of sales coming in at 42.3%, up from 41.3% last year, as anticipated and discussed during our last quarterly call. This is as a result of increased sales of higher margin seasonal products. SG&A was 16.6% of sales in Q1 fiscal 2022, compared to 16.3% in Q1 last year. SG&A reflects incremental costs related to COVID-19 including hours for in-store cleaning, sanitizing measures to protect the health and safety of staff and customers. These costs amounted to $18 million in the first quarter compared to $14 million last year. In that case, all incurred in the last six weeks of the quarter. Excluding COVID-19 costs, SG&A would have been 14.7% of sales in Q1 fiscal 22 and 14.6% of sales last year. So generally flat year over year as expected. EBITDA was $248 million representing 26% of sales. Net earnings were $113 million and diluted EPS was 37 cents, a 32% increase compared to Q1 last year. Our equity pickup of Dollar City's net earnings was $3.4 million in Q1 fiscal 22 compared to $2.4 million in Q1 fiscal 21. Dollar City continues to perform well and opened 15 net new stores in its quarter and in March 31st, bringing its total store count to 279 stores. The first store in Peru is open subsequent to their quarter end, so it is not reflected in this total. Our long-term store target for Dollar City is 600 stores by 2029, and they are right on track. Keep in mind that this target excludes Peru, which is still in its very early stages. In terms of our capital allocation, the board approved a quarterly dividend of 5.03 cents per share, We also actively resumed activity under our share buyback program in the quarter. We repurchased 4.9 million shares for a total of 283 million. Our leverage ratio stood at 2.82 times adjusted net debt to EBITDA quarter end. Barring factors outside of our control due to COVID-19, it is our intention to continue share purchases under the NCIB throughout fiscal 2022. while maintaining our leverage ratio between 2.75 times and 3 times adjusted net debt to EBITDA. Before turning to our outlook, Neil mentioned the publication of our 2021 ESG report, which is based around four pillars, our people, products, supply chain, and operations. This year, we've aligned our ESG disclosure with SASB, which is the standard for our industry and areas of activities. On the people front, we provide a comprehensive overview of our talent training and retention programs, which are resulting in lower turnover and an increase in internal promotion at store level. Regarding products, we outline our achievements and commitments under a robust product quality and compliance programs. We're also reporting on our progress following the full implementation of our three-pronged approach to vendor compliance in our extended supply chain. And regarding our operations, we provide an update on the measurable initiatives underway to minimize our energy consumption and environmental footprint. We've also committed to building a roadmap to align with TCFD recommendations in the future. The objective is to further enhance climate change disclosure and have a plan to reduce or mitigate our carbon impact. We have made great strides since the publication of our last report two years ago and remain committed to continuing to integrate TSG across our business. Turning now to our outlook, the COVID-19 situation continues to make it difficult to predict the environment in which we'll be operating in the near term, given that the Ontario restrictions have yet to be removed. As such, we continue to only provide limited guidance for fiscal 2022. Looking specifically at Q2 and the near-term impacts of COVID restrictions which remain in place, stricken store capacity limits are expected to remain across Canada at least until the end of the second quarter and to continue to impact store traffic. The ban on the sale of non-essential goods in Ontario, which impacted Dollarama in the last few weeks of Q1, will be lifted on June 11, 2021. It will have been in place for the first full five weeks of our second quarter, a crucial period during which Canadians usually start planning for summer activities and stocking up on related seasonal goods. Also keep in mind that Q2, also keep in mind that in Q2 we faced tough comps with a strong performance in Q2 last year, largely driven by strong seasonal sales. But despite the significant impact the Ontario band will have on our SSS in the second quarter, and the fact that we face tough comps, our confidence in the underlying fundamentals of our business model remains. This is a temporary headwind, and I can assure you that we're all very eager to be able to once again offer our full product assortment to all of our customers from coast to coast as soon as we're permitted to do so. Looking at full-year metrics provided last quarter on net store openings and capital expenditures, the guidance on these two annual metrics remains unchanged. We did not release full-year guidance on gross margin or SG&E, but the color we provided last quarter still stands. Based on results to date and visibility on our open orders, we anticipate gross margin as a percentage of sales for the full fiscal year to be relatively flat compared to last year, with continued inflation on raw material prices and inbound shipping costs. For SG&E as a percentage of sales, we should also be generally in line with the prior year, excluding direct COVID costs. That concludes our formal remarks. I will now turn it over to the operator for questions from financial analysts. Thank you.