Dollarama Inc.

Good morning, and welcome to the Dollarama Fiscal 2022 Third 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 December 8th, 2021, available on CDAR. Forward-looking statements represent management's expectations as at December 8th, 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. Dollarama delivered a solid performance across key metrics in the third quarter of fiscal 2022 and in the context of the ongoing pandemic. We are pleased with our comparable store sales growth both year-over-year and on a two-year average basis. Last year, we had exceptionally strong sales with SSS growth of 7.1%. This was notably driven by pandemic-fueled demand for Halloween products and a pull forward of Christmas sales, also recorded over and above a 5.3% SSS growth the prior year. Positive SSS this quarter was also particularly welcomed immediately following a disrupted second quarter. As you will recall, Last quarter, we were significantly impacted by a ban on the sale of non-essential goods in Ontario, in effect from April 8 to June 11, coinciding with peak spring seasonal sales. The third quarter represents somewhat of a return to a more normalized situation from a pandemic perspective. There were fewer restrictions in place and no restrictions on the sale of goods or on specific retail channels. We also delivered strong EPS growth and an industry leading gross margin. This is despite the various headwinds which continue impacting the retail sector, namely supply chain pressures and cost inflation. In this context, and given two consecutive years of strong comps in fiscal 2021 and fiscal 2020, we feel good about our Q3 performance in fiscal 2022, and we believe we are very well positioned for Q4, which is historically our most significant sales quarter. There is no doubt that when not restricted, Canadians rely on Dollarama as a destination for value and convenience, whether for everyday or seasonal goods. This was true before the pandemic and has only been reinforced since. We regularly survey our customers to ensure that our offering and concepts resonate with them. We've pursued that work through the pandemic and what we consistently hear is that a broad range of Canadian families and consumers appreciate the breadth and depth of our offer and the value we provide for their hard-earned money. Our customers also appreciate the proximity and convenience we provide in a time-pressed world. These results reinforce our conviction in the relevance of our brand and strong value proposition to Canadians. As we all learn how to navigate the ups and downs of COVID, we are also pleased to see a gradual reversal in traffic trends with a continued uptick quarter over quarter in the number of customers visiting our stores. Our direct sourcing expertise, flexible merchandise mix, and multi-price point strategy are not only what make Dollarama a sought-after shopping destination, they are important levers as we manage through the headwinds that the retail industry is currently facing. Looking at the global supply chain, including disruptions in container shipping, our position is consistent with last quarter. For fiscal 2022, our teams have done an excellent job mitigating supply chain pressures both from an operational and cost perspective. Despite the disruptions and delays in the system, our nimble and proactive approach has ensured that we entered the fourth quarter in a solid inventory position with well-stocked stores ahead of the important holiday season. Keep in mind that we are importers as much as we are retailers. This, coupled with the non-perishable nature of our merchandise mix, does provide us with some added flexibility to mitigate current supply chain challenges. On the retail front, we opened 16 net new stores during the third quarter. This brings our year-to-date count of new store openings to 41 and our total store count in Canada to 1,397. We do expect a particularly busy fourth quarter on the real estate front, as has been the case in the last few years. We are in track to hit our target of between 60 and 70 net new stores in fiscal 2022, which means we've got 20 plus stores slated for opening in Q4. Finally, looking at our investments in Dollar City, our 50.1% pickup of their net earnings was $7.3 million compared to $4.3 million in the same period last year. This increase reflects the disciplined execution of their growth strategy, continued strong consumer response, and their ability to navigate the impact of the pandemic in their countries of operation. New store openings continue in all four countries of operation, with a focus on Colombia and now Peru, which is still in its very early stages. During their third quarter ended September 30th, 2021, Dollar City opened 18 net new stores, bringing their total store count to 312. Year to date, I am proud of what the Dollarama team has accomplished and our adaptability in what continues to be a complex environment. I am also pleased to see that quarter to date, our holiday assortment has been well received by our customers. We are proud of the unique role we play in the Canadian retail landscape. We will continue to be proactive in managing supply chain and cost inflation headwinds to ensure our customers get the value they expect while shopping our conveniently located stores. I'll now hand it over to JP to discuss our results in more detail.

Thank you, Neil, and good morning, everyone. Like Neil, I'm very pleased with our financial performance in the third quarter of fiscal 2022. Total sales grew 5.5% on the strength of new store openings and from the contribution of same-store sales. Of note, there were no closed stores this quarter because of COVID-19 restrictions. For the first nine months of fiscal 2022, our sales are up 6.3%. FameStore sales increased by 0.8% compared to 7.1% in Q3 of last year. On a two-year average basis, SSS growth averaged at 3.9% per year, which brings us in line with our pre-pandemic SSS results. SSS in Q3 consisted of a 2.8% decrease in average transaction size and a 3.7% increase in the number of transactions. This is the second consecutive quarter in which we're seeing a reversal in those trends. As pandemic restrictions ease, customer traffic is picking up, and we view this as a very positive indication, which speaks to the relevance of our business model. EBITDA came in at 347 million, a 11.2% increase over last year. This reflects positive sales growth, strong margins, and lower year-over-year COVID costs. Net earnings were 183.4 million. EPS was at 61 cents per share, representing 17.3% growth year-over-year. This reflects good sales, solid margin performance, lower COVID related expenses and a strong equity pickup from our investment in Dollar City. Our gross margin came in at 44.4% of sales compared to 44% last year. Gross margin was higher year over year primarily due to a higher proportion of sales of high margin seasonal products, namely Halloween. For the first nine months of fiscal 2022, gross margin was up 20 beeps year over year. We continue to expect gross margin to be generally flat for the full fiscal year. In Q4, our product mix should be less favorable from a margin perspective as traffic trends become more in line with pre-pandemic quarters. Think higher sales of lower margin items. Looking at rising container shipping and raw material costs, As previously mentioned, we expect to continue to see these trends in fiscal 2023. We have levers at our disposal to help mitigate cost inflation impacts on our gross margin. Our response to inflationary trends will continue to be in line with our usual approach, which is aimed at maintaining our relative value. So far this year, we've seen some of these costs being passed on as those pressures are industry-wide. And through refresh and markups, we've adjusted our pricing strategy. In addition, next year, the stronger Canadian dollar is expected to be a tailwind. Turning to SG&A, it represented 14.2% of sales compared to 15.1% last year. SG&A this quarter includes $1.1 million in direct COVID costs compared to $10.9 million last year. As a result of fewer pandemic-related restrictions in place, labor hours attributed to managing customer traffic and in-store capacity limits have been reduced. Our health and safety measures and cleaning protocols, which will remain in place for the foreseeable future, have been absorbed in day-to-day operations. Excluding these costs, SG&A represented 14.1% of sales which is the same as the prior year. For the first nine months of fiscal 2022, SG&A, excluding direct COVID costs, was up 20 beeps year over year, and we're on track to remain generally flat for the full fiscal year. Looking at the labor market more generally, we've seen a tightening in labor availability across the country, but no material impact on average wages at this point. A total of 5.3 million shares were repurchased in the quarter under our NCIB for 295 million, and that 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 final quarter of the year. Since the beginning of fiscal 2022, we've repurchased 13.1 million shares for a total value of $741 million, representing 4.2% of our shares outstanding at the start of the fiscal year. We expect our buyback strategy to continue contributing to our earnings growth next year as the impact of our buyback program annualizes. Finally, yesterday, the board also approved the quarterly dividend of 5.03 cents per share. Turning now to the remainder of the year, we feel good about our performance year to date including the first five weeks of the fourth quarter. From an SSS perspective, fourth quarter to date, we're pacing at a two-year average of approximately 4% per year. We're pleased with where we are as of today, but keep in mind that our most crucial sales period is still in front of us, and many factors outside of our control could have an impact. Barring the factors outside of our control, including the future path of the pandemic, additional measures that may be taken in response to the latest variant and inclement weather, we're very confident in the relevance of our brand and our strong value proposition as we move towards a more normalized situation. With that, we want to sincerely thank our employees for their continued dedication and wish everyone safe and happy holidays. Thank you, and I'll turn it over to the operator for the Q&A.

Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speaker phone, please lift your handset before making your selection. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2. Please press star 1 at this time. If you have a question, there will be a brief pause by the participants register. Thank you for your patience. The first question is from Irene Nuttall of RBC Capital Markets. Please go ahead. Your line is now open.

Thanks and good morning, everyone. A couple of questions around supply chain to begin. So I think by now you've probably renegotiated, you've undoubtedly renegotiated your shipping contracts for next year. If you could talk about how we should be thinking about that and how you're thinking about sort of, I guess, your all-in cost structure for next year.

Thanks, Irene. It's JP. So from a cost perspective, next year, we've, as you know, I mean, the shipping contracts are mostly renegotiated in the fall, but they're staggered throughout the year. So we've renegotiated most of them. It's no secret, as we've discussed in the past, that next year we'll see higher freight costs and inflationary pressures will likely continue as we've discussed on prior calls. But our strategy will remain consistent with the past, which is that we're a price follower, we're not a price setter. The priority will be to maintain our Brent promise and to have the best relative value. As you know, and we've seen it in Q3, we have the levers at our disposal to manage margins, to refresh and markups. The Canadian to USD FX hedge will be a tailwind for next year. And so, in short, our priority will be to maintain our Brent Promise or relative value when we have the lever at our disposal to adjust depending on how the competitive set moves next year. I hope this helps.

That's great. Yeah. No, absolutely. Thank you. And then just on availability of product, I think on the last call, Neil said that Christmas had been in for a while. But could you just talk through where you are right now in terms of sort of the shipping cadence, what the next key dates are, and the degree to which the disruptions in B.C. may or may not have an impact on Q4?

So I'll answer the BC piece, and then JP will answer the balance. In BC, other than the effect of flooding on specific stores, the overall BC sales have not been impacted in any material way. And then as far as our handling of logistics going forward, JP will give you more coverage.

Look, if we go back to the Q2 conference call, because I think it's a good starting point to answer your question. Remember, at that point, we're dealing with a global container shortage, and we've successfully managed that global pressure through, number one, our warehousing and distribution strategy, and number two, our critical mass is one of the largest importers in Canada. So that allowed us to have a good in-stock position ahead of Halloween and supported the strong Halloween performance as we're seeing today in our Q3 results. And so it also allowed us then to have a good in-stock position ahead of the holiday season and a few shop any of our stores today, holiday and stock position is in a good situation. Then if we move to the BC flood specifically, I think the same thought process applies, which is of course it's disruptive, it's highly imperfect, and we'd much rather manage without it, but our teams are using the same strategies that we used in Q2 and in Q3 that I just described to manage the situation and make sure that we're ready for our Q1 sales as the holiday season evolves and Q4 evolves. So really right now it's getting ready from a shipping perspective for Q1 and that's underway based on the strategies that I just described.

That's great. And then just one final question, because you'd be disappointed if I didn't ask it. All of this discussion around inflation, how does that play into your current thoughts around higher price points or the possibility of higher price points?

Well, there's a number of strategies on the table to address the inflation question. One of those strategies is adding new price points. But for the moment, we have nothing to announce on adding new price points.

Thank you, Neil.

Thank you.

Thank you. The next question is from Mark Petrie of CIBC. Please go ahead. Your line is now open.

Yeah, good morning. It would be helpful just to hear your views with regards to the competitive environment and the relative sort of pricing issues being passed through that you're seeing today. Is that accelerating? Has it been stable for the last few months? What are you seeing?

It's an incredibly iterative situation, Mark. Obviously, the retailers in the country are all adjusting as required, and every item has a different story. different raw material cost effects on different items. The larger the cube of the item, the higher the effect of the challenging freight rates. Really, it's a very, very fluid situation. As the market adapts to the new reality of different costs, obviously retailers cannot absorb all of it, and eventually it gets passed on to the customer. And so what we have as our focus is what we have always had, and that is remaining the best relative value in the market. That is our bread and butter, so to speak. And so that's what each of the buyers has been tasked to do, is to ensure that whatever we're selling, we are that best relative value in the market.

Yeah, okay, understood. And, you know, obviously a healthy gross margin result this quarter. You called out the seasonal mix, but you were also lapping a period last year where seasonal mix was also a tailwind. So could you just give any color with regard to how much of the boost from last year or the improvement from last year was that seasonal mix versus other factors like, you know, core product margins or FX?

No, it's really on the mix market. We had a good Halloween last year and we had a better Halloween this year. And so the mix played in our favor. And to your question earlier, I mean, we've seen so far inflation being passed on and we've been able to, through our refresh, to adjust accordingly. But it's mostly a mixed discussion here.

Okay. And then I guess just to follow up on that, as we look into Q4, you know, you reiterated your view for flat gross margin for the year. Obviously, last year, Q4 was a particularly strong result on gross margin, again, driven by seasonal. But just given what you saw with Halloween, what gives you caution to about the seasonal mix heading into Q4?

Yeah, well, last year in Q4, if we step back, we had the, well, first of all, severe capacity limits across the country and the non-essential restrictions in Quebec that kicked in and mostly impacted January. And so think of January as a lower margin month And so this year we'll have, if there's barring any unforeseen circumstances, we'll have stronger sales in January just as a result of not being restricted, and we'll have stronger sales of lower margin items because January is a lower margin month. So the mix in Q4 will normalize, whereas Last year, it was driven by mix on the back of the restrictions.

Understood. Appreciate all the comments, as always, and all the best heading into holiday. Thank you. And to you.

Thank you. The next question is from Richard of National Bank. Please go ahead. Your line is now open. Richard from National Bank, your line is open. Please proceed with your question.

Hi. Thanks for taking my questions. Hi, Vishal. Hi. With respect to Dollar City contribution, we're seeing an acceleration there in terms of the contribution, at least looking at the last few quarters in terms of year-to-year growth. Wondering if this is a COVID anomaly year over year or if there's any specific issues or items that you'd like to call out on that Dollar City business that's leading to these results.

In terms of Dollar City, I think we've seen a good store growth. Consumer reception to our offering and our value proposition has been good in our countries of operations. I don't think it's a COVID-related dynamic. It's really the brand that's been gaining traction and a value proposition that's just well-received, combined with a very healthy store growth on a lower store count than our Canadian operations. So as a percentage, it has a more meaningful impact. But That's what it is, essentially.

And how would the margins of Dollar City compare to Dollarama? Obviously, as the business grows, we would anticipate some favorable operating leverage, but give us the delta on, let's say, EBITDA margin versus the Canadian business.

Yeah. Look, as you know, in terms of we don't go into specifics in terms of margin, but relatively speaking, of course, Dollarama being a more mature and a larger operation has economies of scales in its logistics, its transport, that Dollar City could gain over time. But it's a business that, is performing well, and in terms of margin, there is economies of scales to be gained in the future, but I can't go into more specific than that.

Okay. And just changing topics here, with respect to the media reports on the latest variant of COVID-19 associated concerns. Are you seeing any changes in consumer behavior recently in your source?

Not to date.

Okay. And maybe a last one here on SG&A. Obviously, a lot of moving parts, and the market is reacting very quickly. But with respect to Dollarama's ability to control the controllables, are there any major efficiency projects that we should be thinking about for fiscal 23 to control these various pressures?

Well, we always have efficiency productivity initiatives that we roll out, and some of them annualize, some of them are new. We keep refreshing LEDs in stores. We keep upgrading... HVACs, we're working on a new time management system. So there are many initiatives that we keep rolling out every year, and next year some of those initiatives will continue to be rolled out across our stores and drive efficiency and productivity as we have in the past.

Okay, thanks for the comments. Much appreciated.

Thanks, Ashok.

Thank you. The next question is from Brian Morrison of TD Securities. Please go ahead. Your line is now open. Brian Morrison of TD Securities, your line is now open. Please proceed with your question.

Thanks very much. Sorry about that. I was on mute. I want to go back to Dollar City if I can for a moment. you are seeing this acceleration in earnings. You did put a $4 price point in Columbia back in November 2020. I'm wondering if you plan on expanding that to the rest of the network. And then with respect to the store growth, I think you have 48 stores year-to-date here. That's well above your pace and your long-term outlook of 40. I'm wondering if this is an aberration or if you're seeing greater opportunities than you earlier thought.

It's a little of both. The... The question of store count is really a question of identifying opportunities. And as the leader of that business identifies opportunities in his country, our partners, they will be as aggressive as they can if those opportunities present themselves. And so for the time period in question, the opportunities obviously presented themselves and they took advantage of that opportunity. of that situation. If it does present itself in a systematic way, then we will update you with guidance to that effect.

And on the price point question, the $4 price points have already been rolled out in Salvador and Guatemala as well.

Okay. Sorry, when was that done?

It was October, yeah, October.

Okay, excellent. And then can you just clarify for me, I'm not sure I heard it correctly, JP, just the 4% comment on the two-year stack to date, is that saying that 4% relative to December 8th last year, and that's before accounting for the Quebec restrictions, which made things kind of fall off in the month of January?

Yeah, I mean, the way to think about it, and the reason the two-year average is important is because We're trying to normalize for the noise from the pandemic restrictions last year. And as you pointed out, the non-essential restrictions in Quebec, which had a significant impact on our SSS performance in Q4 last year. But really what it means is if you take the point in time Q4 last year and you look at where we are today and average our SSS performance, we're pacing at the 4% average. And that's also how we've seen the business pace in Q3 with 0.8% and 7.1% the prior year to your average of approximately 4%.

Okay, so I guess the message here, though, is we should see that really grow as we get through the back half of this quarter because I believe that you were off to a very strong Christmas start last year, or Q4 start, pardon me, prior to those restrictions kicking in. Is that a fair comment?

I mean, the two-year average will remain, and then, of course, you'll – well, we'll see if the two-year average remains, but the business spacing at that level, and, of course, we're going to face easier comps in the second part of Q4.

Thanks very much. Good luck during the holidays. Okay. Thank you.

Thank you. The next question is from Peter Sklar of BMO Capital Markets. Please go ahead. Your line is now open.

Okay, good morning. Do you mind just elaborating on the labor situation? So everybody knows about the labor shortage. It seems particularly acute in Quebec. So are you able to attract employees? Have you had to curtail opening hours in any stores? I mean, have you had to increase wages? Could you just work your way through all that thinking?

So the labor situation is a challenge, no doubt about it, across the country, not just in Quebec. That being said, to date, we've been able to manage the situation without having to change our normal course of the way we handle that process. We've put more effort into Our HR initiatives for job fairs and other like practices to help us You know garner the attention. We need to get the employees we need but Even though it's a greater challenge than it's been in the past Joanne and team have done a phenomenal job keeping the stores staffed and and keeping our staff more importantly happy and and in-store and keeping the stores open. So it is more difficult, no question about it, but to date it's been manageable.

And from a wage perspective, Peter, we haven't seen any material increase in wages as a result of what Neil just described.

Okay. And so, Neil, just to confirm, there's been no curtailment of store hours?

No.

Okay. And then just the other question I want to ask about, There was a discussion earlier about Dollarama's long-term strategy in terms of not being a price leader or your price follower to make sure you maintain that brand messaging of compelling value. Can you talk a little bit then? How are you seeing that your competitors thus far are handling these increases in COGS inflation? I think you look at your competitive set as Walmart and drug stores and certain other dollar stores. Do you have any insights yet as to how they're behaving? Because you're going to follow along, as you indicated, on what they do.

I can't say that there's a clear picture, to be honest. It's evolving. It's still relatively new and will continue, no doubt, going forward over the next six months to 12 months. We consider everyone our competitor. So while we may focus a little more on some retailers, the truth is the entire market is the set that we compete against. And so it's the buyer's job to shop every retailer in the country and make sure that for the goods we offer, which is, of course, a tiny subset of everyone's goods and not necessarily head-to-head with any particular retailer's goods, that we are competitive on those goods. On some of our more, let's say, treasure hunt type of goods, the sensitivity to pricing is obviously less than it is on consumable goods, and that allows us to help with our margins. But as a whole, the market is evolving. It's a constant study, and I can't tell you truthfully whether there's any you know, clear message that I've gotten out of any retailer other than they're all handling different parts of their business differently, but they're all evolving and they all have no choice but to evolve to what's happening in the market today and the challenges on a cost front.

Okay, I understand. Thank you for your comments.

Thank you.

Thank you. The next question is from Chris Lee of Desjardins. Please go ahead. Your line is now open.

Well, thank you. My first question is, you know, as you continue to scale out your self-checkout kiosks and rollouts to other stores, just curious, how meaningful would that be a tool in terms of helping you mitigate some of these labor pressure for next year?

I mean, the way we think about the self-checkout strategy is really as an enhancement to customer experience. We want to make it more convenient and easier for our customers to shop at our stores and make the Dharam experience as seamless as possible. But it's not an efficiency initiative. It's a customer experience initiative. And it's been rolled out so far, Chris, in about 20% of our stores. And I'd say we've done the low-hanging fruits in terms of where we'd like to see those self-checkouts being deployed. And now as we continue to progress, we're assessing every year what are the next stores that make the most sense, but it's really on a store-by-store basis and where it makes a lot of sense based on traffic trends and shopping patterns. So that's how we look at it.

And I'm very pleased to add that it has been very well received by our customers and it's really taken as a very nice alternative when the line for our manual cashiers and cash out is busy. The systems we've built in our self-checkouts have been well received by customers and our self-checkouts accept both cash and credit and debit. So they're a full service machine and not limited to specific payment type.

That's very helpful. And then maybe a question on the traffic growth during the quarter. Just wondering, was the growth very much in line with your expectation? And then the second part is, are you seeing sort of a pickup in traffic as a result of consumers, you know, to continue to look for value in this very highly inflationary environment?

Yeah, so in terms of traffic trends, look, we're pleased and we're grateful to see traffic coming back at a good clip in our stores. We saw it in the second half of Q2 and we commented on it back in September. We've seen the same thing in Q3 and so far in Q4, the same trend has continued. So, yes, we're pleased, and it's in line with our expectations. I think we're not back to pre-pandemic levels in terms of where traffic is, but we're definitely trending in the right direction and the direction that we like to see for our business. Then to the second part of your question, look, I think the – The value channel with the latest survey that we conducted is still a very healthy and relevant channel for all Canadians, and we definitely have top brand awareness in that channel specifically. So how will that play out in the future? It's hard to predict, but we like how we're positioned.

Great. And then my final question is, can you provide us an update on the progress that your buying team is making to adjust the product offering to mitigate the cost pressures for next year?

Thank you. It's a daily task that I would tell you is more like so many parts of the business for so many businesses at this particular time. That's just far more time-consuming and challenging than it's been in a very long time, simply because the factors that affect the cost of goods are changing so quickly. And thankfully, that's not just up, up, up. Sometimes it's up, up, and then down again. So it's not just... doom and gloom, but in order to make sure that it's not up, up, and then no one's paying attention, that it's going back down, it means that all the buyers need to stay on top of the cost of raw materials and the other factors that are affecting the goods that they're responsible for sourcing. So it's a very iterative process, very fluid again, and again, there's really, other than staying on top of their, you know, the sourcing of their goods more than they've ever had to do on a more consistent basis to stay on top of what the right, you know, costs are and factors affecting that cost, there's no general theme across it that I can give you or enlighten, you know, you to... just general themes that apply to all pieces of our purchasing. So really, it's very item-specific, very raw material-specific when it comes to FOB costs, very specific to things also like what part of what country any given item is made. So if an item is made in China, for example, and it's made in an area where the government's is reducing electrical consumption at any given time, well, that might affect the cost of that product for that given period. But that may stop three weeks later and affect the product in a more positive fashion from a cost perspective in really short timeframes. So there are things like that happening all around the world from the different countries we source from, including little flare-ups of COVID or what have you in different parts of the world where we source goods. And so it's a constant study of where we should source goods, which countries, which vendors, and just to stay on top of all of those elements.

Understood. Thank you very much, and all the best for the holiday season, too.

Thank you, and to you, too.

Thank you. The next question is from Karen Short of Barclays. Please go ahead. Your line is now open.

Hi, thanks very much. I just wanted to clarify on... the sales for 4Q. So in the first five weeks, you were comping at 7%, I believe, which would imply the last portion of the quarter, you were kind of down five. You're trying to say that we should be thinking about a two-year average in the 4% range for the entire quarter. Is that the right way to think about it?

That's the right way to think about it.

Okay. And then I wanted to ask, I don't know if it's a little early to focus on this, but I know there's so many puts and takes to gross margins just for 4Q alone, but wondering if you could try to frame a little bit on how we should think about puts and takes to both gross margins and SG&As as we look to next year, broad, you know, high level.

Yeah, in terms of next year being more specific, Karen, it will be discussed, of course, on the next call in more detail, I think. We all know the different tailwinds and headwinds that we'll be facing for next year. The good news is so far in Q3 and in Q4, the consumer is responding very well to our offer, and that's the fundamental of our business. Then in terms of inflation and freight, which we've discussed in the past, We have levers at our disposal to manage those and it will be a function of relative value how our competitors react and our goal will be to maintain market share, maintain our value proposition, maintain our brand promise and adjust as we see the competitive set adjust to cost pressures next year. But we have the levers at our disposal to manage those pressures depending on how the competitive set moves, like we've done so far this year. So far this year, we've seen inflation. We called it out back in March of this year. And we've been managing through those dynamics for a good chunk of fiscal 2022. And we've used the levers that that we all know about, refresh markups, and all the other ones that we've discussed in the past. So that's as far as we can go, probably, in terms of providing color on gross margin.

Okay, and just to clarify one thing, I mean, it seemed like that the last call, you know, the competitive landscape was very rational and somewhat benign, and it I don't know if you were trying to maybe signal that that was a little bit less so the case in this quarter or not, and I ask that in the context of specifically labor offsetting Ontario wage increases. How orderly do you think the ability would be to offset that, and is there any change in how you're seeing the competitive landscape?

I mean, in terms of the, if your question is specific to Ontario minimum wage, I mean, first of all, we need to step back and look at that minimum wage increase as very different than the last major Ontario minimum wage increase, which was more than 15%, almost 20% increase. This time we're talking about 4% to 5% minimum wage increase, which is in line with the inflation we're seeing in the market. So it's not something that we'll have to actively offset next year. Of course, we have efficiency and productivity initiatives we will continue to work on to manage that. But it's not a major headwind as we're headed into fiscal 23.

And it's the same headwind that every retailer in Ontario has to deal with. That's our competition.

So no change in the competitive landscape sequentially, though.

It's been fairly stable since Q2.

Okay. Thank you very much. Happy holidays.

Thanks, Karen. Thank you.

Thank you. The final question will be from Edward Kelly of Wells Fargo. Please go ahead. Your line is now open.

Yeah, hi. Good morning. I wanted to first just kind of follow up on Q4 and the outlook for the comp. You know, so you're run rating at about a 4% average now, but your holiday compare, you know, if you go back over sort of like a multi-year period is actually kind of easy if we're sort of like doing stacks versus 19 because that, you know, that 19 comp had some calendar shift in it, which I think was 180 basis points back then. So I guess my point around this is, as we think about the outlook from here, is 4% really the best way to look at it? Because on a sort of three-year basis, it seems like it could be a little bit better than that.

I mean, 4% is where we've been pacing at in Q3 and Q4 so far. How will the holiday season unfold? We still have very important weeks ahead of us that will tell us the final answer. But the pace of our business so far has been on a two-year average of 4%. And holiday sales last year were good. And so when we look and we think about our Q4 performance, The further we can go in terms of providing color is how we're doing as of now, and it's really 4% to your average, which has been consistent since, let's call it the reopening of Ontario in the second half of Q2. So that's really where we're seeing the business pace at this point at this point.

Okay, and then I wanted to ask you about on the supply chain side, actually on consumables. We are hearing in the U.S. some dollar store players are having some issues on sourcing on the consumable side. I'm just curious if you're seeing any of that and if that is somehow weighing on comp at all.

It's more challenging, no question about it. I would say it's more challenging for a good part of consumers all manufactured goods at this point in time and I think part of that discussion in many cases although they don't provide color is simply that they're more expensive and so at a certain point they're saying that those goods aren't available to them but they mostly mean that they can't afford those goods anymore because that you know the manufacturers of the world have not in general, stop making the goods they make. They're just more challenged by the cost factors that affect them, like the cost factors that affect everyone, namely raw materials, labor, logistics, et cetera. So, all in all, I would tell you it's more challenging to source all those goods, but the goods are still available as a rule.

Okay. And then just one last one for you. I just want to actually go back to the question that Karen really just asked and maybe a different way. If we think about what is known today from a cost perspective, how competitors are reacting, what your potential offsets are as we look at gross margin into next year, I'm kind of curious as to whether you could help us with how wide is the range of potential outcomes? You're running now right above 2019 levels from a gross margin perspective. Is there risk that that could be lower? I don't know if there's any way that you could help us with that at all, but I thought I'd give it a shot.

So, look, in terms of the different cost headwinds and the tailwinds and the levers, I think that's as far as we can go at this point because I'll tell you, Ed, the key input that we don't know is how the competitive set will evolve next year. And that's something that we're watching skew by skew every day and we're adjusting our strategies accordingly. And we can't predict how it's going to evolve. And the fact that we're a price follower and not a price setter makes the discussion that we're trying to have a little bit hard to have at this point because we don't know how things are going to unfold next year, and it's something that we're watching on a daily basis. But we know the headwinds on freight and inflation, and we know the levers on pricing, on FX, that we've been using in the past and that we've used so far this year. So those levers are at our disposal, and it will really be a function of maintaining our relative value, doing what's best for our brand and for our customers over the medium to long term. And we have the levers at our disposal to manage those headwinds. That's as far as we can go at this point.

Okay, understood. Thank you. Good luck, guys. Okay, thanks so much.

Thank you. This will conclude today's conference call. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.