Dollarama Inc.

Good morning, and welcome to the Dollarama 4th Quarter and Fiscal 2022 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 SIDAR, 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 such that management beliefs 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, level 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 assumptions and risks, please consult the cautionary statement regarding forward-looking information contained in Dollarama's MDNA dated March 30, 2022, available on SIDAR. Forward-looking statements represent management's expectations of that March 30, 2022 and 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 strong operational and financial performance in fiscal 2022. We achieved this while navigating the ebb and flow of the pandemic's impacts on retailers and consumers, the fourth quarter being no exception. This remarkable performance speaks to the resilience of our business model, the adaptability and flexibility of our people and our operations, and the relevance of our compelling value proposition. Same store sales for the full year grew 1.7%. This is despite the restrictions impacting sales at various times throughout the year. Among those, the nine-week ban on the sale of non-essential items in Ontario last spring was by far the most significant. It came at a critical time for our spring sales and impacted 40% of our network. For the full year, SSS consisted of a nearly 4% increase in store traffic and a 2% decrease in average transaction size. This is a reversal from the first pandemic year, when consumers were buying more with each trip, but visiting less frequently. A return to positive traffic is a very welcome trend for the business as we enter fiscal 2023. This once again speaks to Dollarama's relevance in the shopping habits of Canadian consumers. Looking at our bottom line, In fiscal 2022, our team did an excellent job mitigating dynamic global supply chain and other inflationary pressures, and that work is ongoing. Sourcing is one of our key strengths and something we manage tightly, both from a cost and flow of goods perspective. Our procurement and logistics teams have been working relentlessly to ensure that stores are well-stocked, especially from a seasonal perspective. We delivered on that throughout the two years of pandemic, including this past Christmas. As we plan our fiscal 2023 sales cycle, we continue to manage our inventory carefully. We are prioritizing goods where needed, working closely with our partners throughout the supply chain, and ordering stock even earlier than we have historically. To date, I'm satisfied with our performance in tackling these industry-wide challenges. We are also more focused than ever on maintaining our brand promise and preserving our year-round competitiveness across our product assortments. This is in line with our price follower strategy. Our pricing strategy also enables us to manage some of the margin pressures, including through the regular refresh of our assortment and by leveraging our multiple price points. With regards to the introduction of additional price points up to $5, This has long been the natural next step in our multi-price point strategy. It is also fundamental to our business model since its introduction in 2009. Our strategy when it comes to new price points has always been and remains to proceed carefully and gradually. The objective at all times is to both maintain and enhance our ability to offer compelling value for each item and the best relative value on the market. Over six years since we last added higher price points, we feel that fiscal 2023 is the right time to proceed with the introduction of items up to $5. That process is now underway. It will be a gradual ramp up starting mid-year and becoming more noticeable through the second half of the year. In the near term, This brings additional flexibility to manage cost pressures in a heightened inflationary environment. Over the medium term, it enables us to deepen our broad and compelling product assortment, and at $5, we also remain firmly aligned with our unique and compelling value retail concepts. Turning now to our growing Canadian footprint. With the opening of 24 net new stores in the last quarter of the fiscal year, We've met our annual target coming in at 65, consistent with the prior year. This brings our year-end count across Canada to 1,421 stores. Going into fiscal 2023, we have a solid real estate pipeline with site opportunities across the country. Another notable development on the real estate front in fiscal 2022 is the execution of a long-term lease for a seventh warehouse located in Laval, Quebec. The 500,000 square foot built to suit facility is currently under construction and is expected to be operational by the end of fiscal 2023. This will enable us to increase our warehousing capacity near our existing logistics operations in support of our target 2,000 stores by 2031. For its part, Dollar City had another solid year as reflected in the acceleration of its store opening cadence and its strong earnings contribution to our fiscal 2022. In 2020, their net new store openings were slowed down by the pandemic, coming in at 36. But Dollar City made up lost ground in 2021 with the opening of 86 net new stores. This brings their total store count to 350 at calendar year end. Entry into Peru is still in its early stages with nine stores, but proceeding well and as planned. There is no doubt that Dollar City and its value proposition continue to be well received in all countries of operation and gaining more traction as store density increases. In 2022, Dollar City will ramp up investments in the optimization of its logistics network while continuing to scale its Peru operations. Real estate activity levels are also expected to remain healthy with Dollar City recognized as a solid tenant and with quality real estate sites available. Looking ahead for Dollarama, in what is expected to remain a challenging environment, we are well positioned to continue along the path of profitable growth while staying true to our purpose. We are uniquely positioned to provide Canadians from all walks of life with compelling value on every dollar they spend with convenient access from coast to coast. We will achieve this by maintaining our value proposition and using the levers at our disposal to mitigate, where possible, the various inflationary pressures our industry will continue to face throughout fiscal 2023. I would like to take this opportunity to sincerely thank all of our employees for their incredible dedication and solution-oriented mindset and their entrepreneurial spirit. I also wish to thank our customers for their support and continued loyalty. I'll now hand it over to JP to discuss our results in more detail.

Thank you, Neil, and good morning, everyone. Let's start by drilling down on our fourth quarter results. We delivered a strong quarterly performance across all key metrics. Sales in Q4 grew 11%, reaching over $1.2 billion, and SSS grew 5.7%. Our sales were impacted by the new wave of restrictions implemented in response to COVID-19 in the critical weeks leading up to the holidays and into the month of January. Gross margin was 45.2% of sales compared to 45.5% in Q4 last year. The slightly lower margin reflects a change in the sales mix as anticipated. SG&A came in at 14.5% of sales for the quarter compared to 16.9%. While we did have $4.4 million in COVID costs, these were low compared to the $23.8 million incurred in Q4 last year. SG&A also benefited from the positive scaling impact of strong sales. Q4 COVID costs are mainly additional hours to manage restrictions implemented in the quarter, notably store capacity limits. As previously mentioned, health and safety measures and cleaning protocols have now become part of our day-to-day store operations. Earnings growth in Q4 was exceptional. EBITDA increased by over 20% and diluted EPS increased by over 30% to $0.74 a share. Our strong earnings growth reflects our excellent top line performance, active gross margin management, lower SG&A, and a higher equity pickup from Dollar City. A few comments on full year results before turning to fiscal 2023 outlook. To echo Neil, Valrama's performance in fiscal 2022 was remarkable, reflecting our strong fundamentals. I'm also pleased that we met the guidance we provided across the board. we delivered a solid performance on network and same-store sales growth in the context of a roller coaster. poster of measures implemented and lifted through successive waves of COVID variants. We maintain our industry leading gross margin year over year coming in at 43.9% of sales in fiscal 2022 in line with the guidance provided. SG&E as a percentage of sales came in at 15.1% of sales compared to 16.2% for fiscal 2021. Excluding direct COVID costs, SG&E as a percentage of sales was flat year over year, also in line with guidance provided. Looking now at fiscal 2023, there is no doubt that we continue to operate in a complex and volatile environment for consumers and businesses alike. It also remains to be seen how the future path of the pandemic will play out. Under these circumstances, providing guidance can prove challenging. but we felt it was important for investors to have some visibility on our expectation for fiscal 2023 and guidance in select metrics. We are maintaining our annual store target at 60 to 70 net new stores. Note that based on most recent store cohorts, new store performance remains in line with historical payback thresholds. We will also remain highly focused on maintaining our relative value in the market, In the first half of fiscal 2023, we should benefit from a favorable sales environment as we lap COVID-19 restrictions during the same period last year. Our SSS assumption for the full year is in the range of 4% to 5%. Turning to the bottom line, rising freight and input costs are expected to be felt more in fiscal 2023 than last year. We do have good visibility on raw material and shipping costs for the next several months, and we are confident that we have levers at our disposal to help mitigate some of the pressures on gross margin. The stronger Canadian dollar is also expected to be a tailwind. Based on this, gross margin as a percentage of sales is expected to be in the range of 42.9% to 43.9% for fiscal 2023. This guidance range reflects the gradual introduction of additional price points up to $5 throughout the year. SG&E as a percentage of sales should benefit from scaling on higher sales and labor productivity. Assuming we won't see the implementation of strict restrictions like we did in fiscal 2022 and 2021, we expect minimal to no COVID costs in fiscal 2023. So far this year, wage growth has been manageable. As such, SG&A as a percentage of sales is expected to be in the range of 13.8% to 14.3% for fiscal 2023. Our annual CAPEX budget remains in the range of $160 to $170 million. The new warehouse in Laval being leased, only minimal CAPEX associated with this project. Dorama continues to benefit from its capital light model, which drives significant free cash flow generation. When it comes to returning capital to shareholders, we will stay the course and continue to prioritize share purchases. In fiscal 2022, we repurchased more than 18 million shares under our NCIB. At fiscal year end, our adjusted net debt to EBITDA ratio was 2.77 times. we remain well within our comfort zone of between two and a half to three times and expect our active buyback strategy to continue contributing to our earnings growth in fiscal 2023. This morning, we also announced Dalrama's 11th consecutive annual dividend increase. The board approved a 10% increase to 5.53 cents per share. Turning now to the first quarter underway. From an SSS perspective, quarter to date, we're pacing at the two-year average of approximately 4%. On gross margin, keep in mind that last year's Q1 mix was exceptionally impacted by the beginning of the ban on the sale of non-essential goods in Ontario. As a result, we expect our Q1 gross margin to be in line with fiscal 2021 levels. When not restricted, Canadian shoppers recognize and appreciate the affordability value and convenience we offer. That's our brand promise, and there's no doubt that these enduring strengths will continue to resonate with consumers throughout fiscal 2023. Thank you. That concludes our formal remarks, and I'll turn it over to the operator for the Q&A. Thank you.