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.