Dollarama Inc.

Good morning and welcome to the Dollarama Fiscal 2022 Second 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, 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 September 9, 2021, available on CDAR. Forward-looking statements represent management's expectations as at September 9, 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.

Thank you, operator, and good morning, everyone. We've been navigating the ups and downs of the pandemic environment for over 18 months now, and no two quarters have been alike. For Dollarama, the second quarter of fiscal 2022 was defined by the ban of non-essential goods in Ontario. It impacted the tail end of our first quarter and remained in place for nearly half of the second quarter. While other restrictions across Canada also affected our sales, the Ontario ban's impact was significant for several reasons. Firstly, it impacted 40% of our network as we have nearly 550 stores in Ontario. It coincided with our peak spring season sales and stretched to almost mid-June. Keep in mind that much of the spring seasonal assortment offered at that time is sold in a short window as it relates to activities completed in the spring, such as planting your garden or decorating your backyard. Third, it specifically targeted in-store shopping at discount and big box retailers. Some of the products we couldn't sell during that extended period were available for purchase in other retail environments, such as exterior garden centers, pharmacies, and grocery stores. All of these factors limited our ability to recoup sales once the ban was lifted. The good news is that it was a temporary measure lifted on June 11th. For the remainder of the second quarter ended August 1st, SSS growth rebounded to mid-single digits. That's both year over year and on a two-year average basis, reflecting the underlying strength of the business. We increased total sales for the quarter year over year, and we delivered positive EPS growth while opening 13 net new stores. This speaks to our solid fundamentals, disciplined execution, and compelling value proposition. Despite the distortion effect on sales of the various restrictions in place during the quarter, we saw a shift in consumer shopping patterns with an uptick in store traffic. On the real estate front, we've opened 25 net new stores to date in fiscal 2022 and remain on track to meet our 60 to 70 net new store target for the year. More stores are expected to be opened in the second half of the year, as has historically been the case for some time now. Turning to Dollar City, we saw a notable increase in our 50.1% equity pickup of their net earnings, from $2.5 million last year to $4.1 million this quarter. We are pleased with the execution of Dollar City's growth plan. New store openings continue in our four LATAM countries of operation, with a focus on Colombia and now Peru. During the second quarter ended June 30, 2021, Dollar City opened 15 net new stores. Looking at the global supply chain environment, container shipping has experienced significant disruption. For fiscal 2022, our teams have worked hard to mitigate supply chain pressures, both from an operational and cost management perspective. Container shipping costs continue to be on the rise, and our rates are mostly contracted through the fiscal year end. Pressure on container shipping costs continue to build, and as a result, will be felt more in fiscal 2023 as we renew contracts and renegotiate rates. Clearly, the pandemic has thrown everyone a lot of curveballs. As a team, we've demonstrated our ability to adapt to changing market conditions, the resilience of our business model, and the essential role we play in the retail ecosystem. We are proud to continue serving Canadians from all walks of life as the economy reopens. I'll now hand it over to JP to discuss our results in more detail.

Thank you, Neil, and good morning, everyone. As we continue to lap pandemic quarters, it's important to look at our underlying performance. This includes looking at our sales performance on a two-year average basis. These metrics provide a more insightful picture of our trends and performance. Year over year, our total sales grew 1.6% on the strength of our new store openings and the contribution of non-com sales from stores that were temporarily closed last year. Same store sales decreased by 5.1%. This drop primarily reflects the impact of the Ontario ban on the sale of non-essential products in place for the first five and a half weeks of the second quarter. The timing and length of the ban resulted in significantly lower seasonal and all-year product sales in Ontario, thereby impacting total sales. And we were already comping against a very strong performance last year in Q2. If we carve out those first five and a half weeks, SSS growth for the remainder of the quarter was a positive 5.1%, and that's over and above 4.3% growth for the same period last year. If we look at the same June 11th to August 1st period, on a two-year basis, SSS growth averages 4.7%. Getting back to SSS for the full quarter, it consisted of an 8.7% decrease in average transaction size and a 3.9% increase in the number of transactions. This is the first quarter in which we're seeing a reversal in these trends and an increase in traffic. These trends are also continuing in the third quarter to date. We generated EBITDA of $293.7 million, representing a 5.7% increase over last year. This reflects positive sales growth and lower year-over-year COVID costs, offset by a slightly lower gross margin and slightly higher SG&A. We generated net earnings of $146.2 million and 4.3% EPS growth in the second quarter. Our gross margin came in at 43.4% of sales compared to 43.9% last year. This decrease is largely due to lower sales of higher margin spring and garden products impacted by the ban on the sale of non-essential items in Ontario. For the first half of fiscal 2022, gross margin is up 20 basis points year over year, and we continue to expect gross margin to be generally flattish year over year for the full fiscal period. As mentioned by Neil earlier, we expect an increase in container shipping costs to be felt more in fiscal 2023. SG&A represented 15.3% of sales compared to 16.7% last year. SG&A includes $11.7 million in direct COVID costs compared to $32.4 million last year. Last year at this time, we had temporary wage increases and we're still incurring some implementation costs related to the rollout of COVID measures. Excluding these costs, SG&A represented 14.1% of sales compared to 13.5% last year. As an essential business, we kept our stores open and staffed throughout the Ontario ban on the sale of non-essential product. But this impacted store productivity, which explains the year-over-year variance in SG&A margin excluding direct COVID costs. For the first half of fiscal 2022, SG&A excluding direct COVID costs is up 40 beeps year-over-year, and we're on track to remain generally flat for the full fiscal year as we see potential for the second half, especially during the fourth quarter. Looking at capital allocation, a total of 2.9 million shares were repurchased in the quarter under our NCIB program for a total of 163.6 million. At quarter end, our leverage ratio stood at 2.8 times adjusted net debt to EBITDA, leaving ample room to remain active on this front in the second half of the fiscal year. Since the beginning of fiscal 2022, under a previous and current NCIB program, we've repurchased 7.8 million shares for a total value of $447 million and representing 2.6% of our shares outstanding. This past July, we renewed our NCIB, allowing us to repurchase up to 7.5% of our public float between July 2021 and July 2022. Yesterday, the board approved a quarterly dividend of 5.03 cents per share. Turning now to the third quarter underway and where we are headed. Here are a few takeaways as we think about the balance of the year. What we know is that the underlying fundamentals of our business are strong. For the first half of fiscal 2022, our sales were up 6.7%. we've maintained an industry-leading gross margin and have generated 15% EPS growth. This is in the context of the pandemic and strict restrictions directly impacting value retailers. Looking at the second half of fiscal 2022 and assuming that non-essential product bands are behind us, we are particularly looking forward to our fourth quarter performance. Historically, Q4 is our highest sales period of the year. and we will be facing favorable year-over-year sales comps. As you will recall, last year we experienced a significant pull forward of Christmas sales, which boosted Q3 but negatively impacted Q4. And then our solid momentum in Q4 was interrupted by new restrictions, including a non-essential product ban in Quebec in late December, where we have about 30% of our network, resulting in a slightly negative SSS for the quarter. If we look at the third quarter underway, to date, we are holding comparable store sales compared to Q3 last year. Keep in mind that we're lapping our best quarter of the past five years. As for the rest of Q3, our performance will be dependent on the Halloween season. We'll also need to think about that on a two-year average basis. In terms of consumer shopping patterns, which we're seeing in Q3 so far, the continued increase in traffic and a readjustment of basket size. The shift in March of 2020 was very sudden, but to date the reversal we're seeing is more gradual. In this context, we're as committed as ever to serving our customers and offering compelling value and unrivaled convenience while creating long-term value for our shareholders. With that, I'll turn it over to the operator for the Q&A.