Dollarama Inc.

Good morning and welcome to the Dollarama Fiscal 2023 First Quarter Results Conference Call. Nirwasi, President and CEO, and JP 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 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 remark 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 their circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors can 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 8, 2022, available on CDAR. Forward-looking statements represent management's expectations as at June 8, 2022, 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 financial performance in the first quarter of fiscal 2023 with a 12.4% increase in sales, a nearly 21% increase in EBITDA, and over a 32% increase in EPS. With the lifting of COVID-19 restrictions across Canada early in the quarter, we were also pleased to see a double-digit increase in customer traffic. This contributed to driving same-store sales growth of 7.3%, over and above 5.8% SSS growth in the same quarter last year. Our excellent performance in the first quarter reaffirms the relevance of our business model and unique retail concept in Canada. It also echoes the positive consumer response to our value proposition in a high inflation environment. This is driving particularly strong demand for our broad offering of everyday essentials and consumable products, in addition to our seasonal and general merchandise. Actively managing supply chain challenges. rebuilding our warehouse and store inventory, and making sure our stores are well stocked in a timely manner are our top priorities. This has been more challenging than ever, and we are managing well all things considered. I am impressed by the flexibility, dedication, and creativity being deployed by our team to ensure that we deliver for our customers. Inventory is now up year over year, and our in-stock positions have continued to improve. Despite the inflationary environment, we continue to feel comfortable mitigating gross margin pressures with the tools at our disposal. This is based on our current visibility from an open orders perspective and our ability to move on pricing where needed, while continuing to maintain a relative value in the market. We are gradually gaining additional flexibility with the introduction of price points up to $5, but never at the expense of our value proposition. The rollout of new price points is now underway with items making their way to stores in the coming days. While this will be a gradual introduction, we are excited to be able to bring back SKUs that were appreciated by customers in the past but were discontinued because of cost increases, as well as being able to offer new compelling items. We will continue to provide a wide array of products at each price point, ranging from $1 or less and up to $5. Turning to Latin America, Dollar City continues to perform well, generating strong sales growth and a solid net new store opening cadence. Dollar City entered Peru in May of last year and continues to be happy with the performance of its fourth country of operation. With each additional year of operation and increased store densification, Dollar City continues to be recognized as the destination for compelling value on a broad range of merchandise, much like Dollarama. I am also pleased with Dollarama's progress on the ESG front. With the publication of our climate strategy and an annual ESG update this morning, we approach our sustainability commitments as a journey on which we must continuously raise the bar higher. Committing to our first GHG intensity reduction target by 2030 is a major milestone. We believe in setting measurable and achievable goals that consider our business and operations. the unique role we play in the lives of Canadian consumers, and the expectations of our stakeholders. Through all of this, we are always guided by our shared purpose, which is to provide Canadians from all walks of life with convenient and compelling value on every dollar they spend. Our ability to provide affordable everyday products resonated throughout the pandemic and continues to ring true in this high inflation environment. Over the last 30 years, Dollarama has managed through several economic cycles while pursuing its growth, and our relevance to Canadian consumers from coast to coast has only grown throughout this time. During these uncertain times, we will continue to deliver on our customer brand promise while generating sustainable and profitable growth for our stakeholders. JP, over to you.

Thank you, Neil, and good morning, everyone. In the first quarter of fiscal 2023, we delivered a strong quarterly performance across all metrics. Sales grew 12.4%, reaching $1.1 billion, and SSS grew 7.3%. This is over and above SSS growth of 5.8% in the same quarter last year. For Q1 this year, we saw a 14% increase in the number of transactions, coupled with a 6% decrease in average transaction size. This reflects a continued trend reversal from the pandemic and corroborates the fact that when not restricted, customers seeking value shop our stores in large numbers. It also reflects the strength and quality of our value proposition, especially in an inflationary environment when Canadians are seeking more value for their money. We generated strong earnings growth in Q1. EBITDA increased by 20.9% to $300 million, or 28% of sales. and diluted EPS increased by 32.4% to 49 cents. This earnings growth reflects our excellent top-line active gross margin management, a good SG&A performance, and a higher equity pickup from Baller City. Gross margin was 42.1% of sales compared to 42.3% in Q1 last year. This slightly lower margin year-over-year reflects a shift in our sales mix namely strong demand for consumables in a high inflationary environment, which tend to be lower margin products. The shift in mix was partly offset by lower logistics costs at our distribution center and our warehouses in Q1. SG&A came in at 15% of sales, which reflects lower COVID costs. We had $1.6 million in direct COVID costs this quarter, compared to $18.3 million in the same quarter last year. We do not expect to incur COVID costs in coming quarters unless restrictions are re-implemented. Our 50.1% share of Dollar City's net earnings was $8.7 million, compared to $3.4 million last year, reflecting a strong financial and operational performance. During their first quarter and in March 31st, Dollar City opened eight net new stores, bringing their total store count to 358 in their four countries of operation. On the capital deployment front, we remained active on our NCIB with the repurchase of 1.4 million common shares for cancellation. At quarter end, our adjusted net debt to EBITDA ratio was 2.74 times just slightly below our comfort zone of 2.75 to three times. The board also approved a quarterly cash dividend for holders of common shares of 5.53 cents per common share. Last quarter, we provided guidance for fiscal 2023 on select key metrics. One quarter into the year, we continue to feel comfortable with the guidance ranges provided. And as such, these remain unchanged. For the first half of the year, we expected to benefit from a favorable sales environment with the lifting of COVID-19 restrictions. And this materialized in Q1. For Q2, that has remained the case to date as we comp against a negative SSS quarter last year. This was due to the ban on the sale of non-essential goods in Ontario and impacted over 40% of our stores last year. Looking at our Q2 SSS performance to date, five weeks into the quarter, we're comping against five consecutive weeks of the ban. As such, our SSS performance to date, whether compared to last year or on a two-year average basis, is not a helpful measure to illustrate our underlying performance. To cut through the noise caused by this ban, and exceptionally this quarter, we're looking at our SSS performance on a three-year stack. Based on this metric, second quarter to date, we're currently pacing at the three-year stack of approximately 12%. On gross margin, we anticipated that supply chain and other inflationary pressures would be felt more in fiscal 2023. This assessment remains true and is factored into the full year guidance range of 42.9% to 43.9% disclosed at the end of March. As a reminder, the impact of the new price point introduction was factored into our guidance range and should be felt more next year as it is a gradual process. Looking at SG&E as a percentage of sales for the year, although wage inflation remains manageable at a consolidated level, we have observed increasing regional pressures over the past few months. As such, wage inflation in fiscal 2023 looks to be more sustained than anticipated. No changes on annual CapEx envelope, and we're also on plan on the new storefront with eight net new stores in Q1, and with a solid store pipeline ahead to get us within our 60 to 70 target for the year. Finally, we also expect to remain active on the NCIB program as part of our commitment to returning capital and generating value for our shareholders. That concludes our formal remarks. I'll turn it over to the operator for the Q&A.