Dollarama Inc.

All participants, please stand by. Your meeting is about to begin. Good morning and welcome to the Dollarama Fiscal 2023 Second Quarter Results Conference Call. Neil Rossi, 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'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 forelooking statements. As a result, Dollarama cannot guarantee that any forelooking statement will materialize, and you are cautioned to not place undue reliance on these forelooking statements. For additional information on the assumptions and risk, Please consult the Cautionary Statement regarding forward-looking information contained in Dollarama's MD&A, dated September 9, 2022, available on CDAR. Forward-looking statements represent management's expectation as at September 9, 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 will now turn the conference call over to Neil Rossi.

Thank you, Operator, and good morning, everyone. Dollarama registered a strong second quarter operationally and across all key metrics, once again reinforcing the relevance of our business model and a sustained consumer response to our compelling value proposition. Canadians from all walks of life continue to adapt to the high inflation environment, and in this context, Dollarama's brand promise remains more relevant than ever. Our teams are working diligently to ensure that we are providing a convenient and consistent shopping experience and the best year-round value on the broad assortment of items we offer. I'd like to recognize the Dollarama team for their contributions and commitment. Our 18% sales growth was driven by particularly strong demands everyday essentials and a shift in sales mix we've been observing since the beginning of the year driven by the inflationary environment we also registered strong seasonal sales for both spring and summer as you will recall last year during the same quarter we faced bans in Ontario which impacted over five and a half weeks of the quarter during that time over forty percent of our total store network couldn't sell non-essential items. This occurred during the peak spring seasonal sales period, which had a negative impact on customer traffic and overall sales. On the real estate front, we opened 13 net new stores during the second quarter, bringing total net new stores for the fiscal year to date to 23. We remain on track to reach our annual target of between 60 to 70 net new stores by fiscal year end. As we strive to provide Canadians with a wide variety of merchandise at compelling value, it's essential that our stores are well-stocked ahead of key seasons. I am pleased with our progress in rebuilding our inventory to pre-pandemic levels. Our inventory is now up 40% compared to the same period last year. Our business model and the nature of the goods we sell allows us to warehouse a large proportion of our inventory an approach which served Dollarama and its customers well throughout the pandemic. We are also ordering goods earlier than historically to mitigate delays in the system. All of this work is now coming to fruition. At July 31st, a significant proportion of our inventory is represented by goods in transit. Subsequent to quarter end, these goods have been making their way through our warehouses and distribution center. Our logistics operations are processing an exceptionally high volume of goods, putting us in a solid in-stock position ahead of key holidays for the second half of the year, with Halloween just around the corner. Consumers will discover new items across our price points, as well as items we've been able to bring back as we continue to gradually introduce items up to $5 throughout the balance of the year. We remain extremely disciplined in our pricing strategy across all price points as a price follower and to preserve our year-round relative value. This is something our customers have come to expect from us. Our strong top line performance throughout the first half of the year reflects the effectiveness of our brand promise and the resulting customer loyalty. As we continue to think of ways to best service our customers, we have been expanding our e-commerce presence. To complement our transactional website, which only allows for the purchase of goods by the case, we have been partnering with leading delivery platforms to bring additional convenience to customers looking to purchase products by the unit. This August marked the year since we started offering our products on the Instacart delivery platform. Today, we have about 1,300 stores participating across Canada. This August also marked the launch of a pilot with Uber Eats, with about 200 stores participating in the Greater Toronto area. Finally, we launched a pilot with DoorDash in the British Columbia market, with just under 100 stores participating. Dale's contributions from our online presence, whether from our own site or through third-party delivery platforms, are not expected to become material in the future. They do, however, support Dollarama's brand awareness, address niche needs, and allow us to offer items by the case or unit in a way that integrates seamlessly with our business model, thus better servicing our customer base. Turning to Dollar City in Latin America. The business continues to perform well, generating strong sales growth and a solid net new store opening cadence. During their second quarter ended June 30th, Dollar City opened 19 net new stores, bringing its total store count to 377 in its four countries of operation. We are currently evaluating the store growth potential in Latin America as our entry into Peru continues to go as planned. We expect to revise Dollar City's long-term core target to take this region into account when we publish our Q3 results. Looking ahead, I'm confident that our customers will appreciate our well-stocked and well-assorted stores. We are equally committed to maintaining our relative value by always moving on price last, to the benefit of our loyal customers. Our aim, as always, is to provide Canadians from all walks of life with convenience and proximity, as well as compelling value on every dollar they spend. JP, over to you.

Thank you Neil and good morning everyone. Dalraima delivered another strong quarterly financial performance for the second quarter of fiscal 2023 across all key metrics. We registered strong earnings growth in Q2 with EBITDA increasing by 25.8% to $369 million or 30.4% of sales. Diluted earnings per share increased by 37.5% to $0.66. This earnings growth reflects our excellent top line active gross margin management, lower logistics costs, good SG&A performance, and a higher equity pickup from Boulder City. Drilling down on same-store sales, these grew 13.2% compared to a decrease in SSS of 5.1% in the same quarter last year, reflecting COVID restrictions in Ontario. SSS was comprised of 20.2% increase in the number of transactions, coupled with 5.8% decrease in average transaction size. This reflects a continued trend reversal since the height of the pandemic. The increase in store traffic reflects the strength and quality of our value proposition, especially in an inflationary environment when Canadians are seeking more value for their money, something Dalrama has consistently delivered. Gross margin was 43.6% of sales compared to 43.4% in Q2 last year. This slight improvement in the margin year-over-year primarily reflects lower logistics costs in Q2, which were partially offset by the shift in our sales mix with strong demand for lower-margin consumable products and higher freight costs. The lower logistics costs are mainly a question of timing driven by industry-wide supply dislocation. Now that our warehouses and distribution center are busy processing a high volume of incoming inventory, a ramp up in those costs will be reflected in our margins in the third and fourth quarters of the fiscal year. To illustrate, lower logistics costs had a positive 70 basis point impact in Q2 and a positive 20 to 30 basis point impact in Q1. We should see those lower logistics costs reverse in the second half of the year. SG&A came in at 13.8% of sales compared to 15.3% last year, which primarily reflects no incremental direct COVID cost this quarter and scaling from strong sales growth. Our share of Dollar City's net earnings was $7.7 million compared to $4.1 million last year, reflecting a strong financial and operational performance. On the capital deployment front, we remained active on our NCIB with a repurchase of 3.7 million shares in Q2, and the board approved a quarterly cash dividend of 5.53 cents per share. At quarter end, our adjusted net debt to EBITDA ratio was 2.79 times, within our comfort zone of 275 to 3 times adjusted net debt to EBITDA. We also renewed our NCIB program in July, allowing for the repurchase of up to 7.5% of our public float between July 2022 and July 2023. We continue prioritizing the purchase of shares as a means of generating value for shareholders. Looking at our capital structure, we amended our credit facilities in July, increasing the limit from $800 million to $1.5 billion and extending all trenches by an additional year. In tandem, we upsized our U.S. commercial paper program from $500 million to $700 million. At the same time, we made the strategic decision to convert to sustainability-linked credit facilities, tied to two performance targets related to our overall ESG strategy. This is a concrete example of our continued efforts to meaningfully integrate ESG into everyday decision-making. We are proud to be among the first Canadian retailers to integrate ESG targets to its credit facilities. Turning now to Outlook for the remainder of the year. In March, we provided guidance for fiscal 2023 on select key metrics and the assumptions on which these are based. On gross margin, as mentioned earlier, the change in sales mix driven by our strong SSS growth and the timing of logistics costs associated with rebuilding our inventory position will reverse in the second half of the year. and are factored into the full year guidance range of 42.9% to 43.9%, which remains unchanged. Guidance on SG&A, net new stores, and CapEx also remains unchanged. Looking at the assumptions on which our guidance ranges are based, these also remain unchanged except for comparable store sales. For the first half of the year, our expectations of a favorable sales environment in the context of inflation, as well as the lifting of COVID-19 restrictions, materialized. This was further supported by demand for consumables ahead of expectations, which started in Q1 and sustained in Q2. This resulted in same-store sales growth of 10.3% for the first six months of the year. As we look ahead to the second half of the fiscal year, we expect these trends to be maintained and the sustained inflationary environment to continue to drive higher sales of consumables. As a result, we have revised our SSS assumption for the full fiscal year to a range of 6.5% to 7.5%. In conclusion, we are gratified by the strong consumer response to our value proposition since the beginning of the pandemic, as Canadians continue to grapple with the impacts of inflation. The last few years have only reinforced the resilience and the relevance of Dalrama's business model in the Canadian retail ecosystem. That concludes our formal remarks, and I'll turn it over to the operator for Q&A. Thank you.

Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, 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 while the participants register for questions. Thank you for your patience. Our first question is from Irene Nettel with RBC Capital Markets. Please go ahead.

Thanks and good morning, everyone. Could you provide us with more detail around what you're seeing in terms of basket composition with respect to consumables and seasonal and what the consumer response has been as you've begun to roll out the higher price points?

As far as the higher price points go, it's a little too early to give you feedback on that front. And as far as the mix goes, I'm going to let JP address.

On the mix, Irene, what we're seeing, of course, is very strong performance in the key consumable categories that we all know about. The one thing to keep in mind is, at the same time, we're also seeing a good seasonal performance. So I'll give you an example. For example, in our spring-summer assortment, items like beach toys, barbecue accessories, for example, did extremely well. And maybe one last element to help answer your question is that we're continuing to see some reopening dynamics. So we're seeing people wanting to get together. So for example, in Q2, our party category performed extremely well. So those are some of the elements that we're seeing from a demand dynamics. And a lot of the Q2 trends that that you've noticed in terms of basket size and traffic also remain true so far in Q3.

That's really helpful. So if we think about the back half of the year and particularly as we come into Halloween and the Christmas season, we've had a couple of very strong years, I guess in calendar 21 and 20. So how are you thinking about demand and how are you positioning your inventory for this year.

Yeah, in terms of our inventory position for Halloween and Christmas, I think Neil, in his opening remarks, mentioned the rebuilding of our inventory position. That inventory was on water at the end of Q2. Now it's making its way to our store. So we expect to be in a very solid position for Q3 and Q4. You will see some of our higher price point items also in our seasonal assortment for the back half of the year as well. But it's too early to call how Halloween and Christmas will play out. The one element that we're seeing that we're noticing now is back to school and stationary performing well. And so that's usually a good indicator of our performance for other seasons.

that's really helpful and then finally last question I promise. Any hints as to what types of items we might see in seasonal at the higher price point?

That's a very difficult question to answer. Many types of items at the higher price point in the seasonal categories. You're going to see decorations, you're going to see tableware, you're going to see exciting new items honestly that we could never offer our customer before and I'm sure they'll be a small handful of items that you know over the last two three years we've not been able to offer because they simply left our price point so you'll see a mix at the highest end of a few of the best items we had that we could no longer afford so to speak and you'll see several new items that are simply items we could never offer because they again, even though they're new, were items we couldn't afford before either.

That's great. Thank you. Thanks, Aaron.

Thank you. Our next question is from Brian Morrison with TD Securities. Please go ahead.

Oh, thanks. Thanks very much. There were some $5 shot glasses that I saw in the store that could come in handy this weekend. But I will ask a question with respect to You've got these price increases that have been put through. You've got the value proposition being maintained, and your gross margin was flat this quarter, or slightly up. So with the added flex in the second half from the new price points and inflation stabilizing, I'm just wondering, aside from warehouse logistics costs, as mixed sounds like it's priced in, what else is going to prevent you guys from maintaining the gross margin as we go into the second half of the year?

I think on the gross margin front, Brian, there are three elements. First of all, you mentioned that the environment remains fairly disciplined and we've been able to use the levers that we all know about to manage inflationary pressures. Number two, the mix, you touched on it. The consumables piece has been accelerating in the first half. Keep in mind that in Q2, we're comping against a fairly weak seasonal offering in the prior year, just given the restrictions that we had to deal with. And we'll be comping in Q3 and Q4 against a good seasonal performance. So there's some mix happening in the second half. And then timing of logistics costs, I think we went through it on the introductory remarks, but those would be the kind of three elements to help you think about gross margin for the back half of the year.

Okay, that's helpful, JP. And then on Dollar City, I understand it's a calendar year, but I'm not clear as to why Q2 would not be stronger than the January to March timeframe. And you did mention the new store target coming that we'll hear about next quarter, but Perhaps, Neil, you might be able to provide a high level how you would compare the Peru market to Canada in terms of opportunities. Populations are fairly similar.

They are, but it is a very different setup. Geographically, the bulk of your entire country's population is in one city, and so because it is a super non-standard country setup, in particular in Peru, and Lima really represents the vast majority of all of the population base in the country. We've never had the experience to operate in a country where almost all of our stores, you know, from a percentage perspective, will end up being within one city and therefore we don't know whether that will affect cannibalization differently, the challenges of real estate differently, etc. So we don't want to make too many assumptions. As you know, we're We're conservative by nature, and that's probably why you're seeing what you're seeing.

Okay, and in terms of the second quarter performance versus the first, was the first quarter just extremely strong?

So, I mean, we're quite pleased with the second quarter performance still. I mean, that's 87% year-over-year growth in our equity pickup. But to your question more specifically, Precisely, as we're investing to ramp up Peru, and Neil talked about the efforts that are underway there, there's definitely some drag on the bottom line from the Peru investments, which we'll update you on in the December results.

And unlike growing a business in a single country, the dollar city business is a more complex business in some ways because every time you enter a new market, you're not entering a new province, you're rather entering a new country. It's got a whole new set of regulations, registrations, rules, et cetera, and therefore requires exponentially more bandwidth from the team and energy to understand how to operate in that new environment. It also has a higher cost, of course, to establish oneself before the store count and scale claw back at that initial investment.

All right. Thank you both for the call. Thanks, Brian.

Thank you. Our next question is from Peter Squire with BMO Capital Markets. Please go ahead.

Good morning. Neil, you've called out a number of times the mix shift you're seeing into consumables versus discretionary. I'm just wondering what your explanation is that. Do you think you're seeing trade down because the consumer is under pressure, so consumer is trading down to Dollarama, seeking more value versus other retailers, or is this a permanent structural change in the mix we're going to see at If you could just comment on that, please.

Well, I would love for it to be a permanent structural change, but unfortunately, I don't think that's the case. I do believe that there's probably some trading down because of the inflationary environment and the pressures on everybody's wallet. And I think it's a great opportunity for people to see that the goods we have in our stores, in all the sections of our stores, all the departments, are of a quality that will make them happy at a price that obviously is making them happy. And it's a great opportunity for us to keep some of those customers that might not otherwise have tested those items or come into our stores for those items. But to say that it's a change in the system, I'm not smart enough to know that answer, but I would tell you that I would think that your second theory is the correct theory.

Okay. And JP, can you talk a little bit about the inflationary trends you're experiencing, specifically with respect to labor and logistics costs?

Yeah, so on the logistics front, it's really a catch-up on inventory. I mean, in Q1, we mentioned tailwind of 20 to 30 beeps from lower logistics costs. In Q2, that tailwind is 70 beeps. I mean, that was just due to the fact that the supply chain was dislocated and containers were on water. Now they're making their way to our DC and our stores, and so the logistics costs are readjusting. So that's number one. Number two, more strategically at a higher level, I think we're seeing, if you just look at container prices currently, they're normalizing, which is a good indication of overall supply-demand dynamics. So I think we're seeing some normalization of the supply chain environment. We're nowhere close to being back to pre-pandemic levels, but we're in a better situation than probably six to nine months ago. And then on the labor front side, The only thing I'd say is a lot of the observations that we made in Q1 are still true and relevant today. They're not better, they're not worse, so nothing material to report on that front.

Okay, and then lastly, if you could just talk about your success or lack thereof in terms of recruiting labor into the store. How is the backdrop there?

Well, it's a challenge. It's a challenge like every other industry in the country, to be honest. I don't think there are any exceptions to that rule. Retention is a challenge. Hiring is a challenge. But our operations team has done an exceptional job over the course of time making our employees feel the love, so to speak, and that we listen and that they're part of a team and that they're proud, you know, proud to work a dollar. And that helps a lot and, you know, is a very, very difficult thing to execute at scale. And so that's helped a lot. But for sure, we are not an exception to the challenge that has faced every other Canadian business and North American business, and that's labor challenges.

We've put a bunch of initiatives in place making all the different pieces of the hiring process smoother and more efficient.

and less burdensome, both for the potential hire and for our stores and our current team. And so it's a mix of all those things, but certainly we are not an exception to the challenge, but I'm proud of how we've managed it to date. Okay, and have you had to curtail store hours at all? We have not had to curtail store hours. Okay, thank you. Thank you, sir.

Thanks, Peter.

Thank you. Our next question is from Michelle Schrader with National Bank. Please go ahead.

Hi. Thanks for taking my questions. On the 70 bits of benefit in Q2 that will subsequently unwind, was that what was anticipated in Q1 or a similar magnitude? Because I know in Q1 you mentioned the 20 to 30, and you said that it would unwind in H2, but I don't recall hearing about this potential 70 bits. So is that worse than expected or better, depending on your viewpoint?

No, I mean, it's in line with what we expected. We knew that the supply chain would eventually normalize and it would catch up. We didn't know if it was a Q2 or a Q3 thing. We suspected it would be in the second half. But what we're seeing now is just the timing difference timing thing between two quarters and overall for the year it's very much in line with our expectations.

Okay, and with respect to the, can you quantify the amount? It's such a large inventory number, can you quantify the dollars of inventory that you're waiting to receive on land?

I mean, without going into specifics, I'd say out of the out of the 40% year-over-year increase, at the end of Q2, there's a significant proportion that was on water that today would be making its way to our DC and our warehouses and our stores.

Okay, and how should we think about your in-stocks now relative to where you'd like them to be?

The in-stock position is, I think where we'd like them to be and they'll get even better in the next six to eight weeks. So our stock position ahead of the key seasons that are Halloween and Christmas will be right in line with where we'd like to see them.

Okay. And when we think about inventory going forward, are these higher inventory numbers, is that a a short-term thing or should we think them to revert back to Dollarama's standard way of operating?

I mean when you look at it on a per store basis Vishal and you account for the store growth, our inventory per store reflects number one the store growth as I mentioned but number two also the fact that we're pre-ordering ahead of time a lot of the seasons and we're increasing our safety stock. So the inventory levels that you're seeing now is the standard way of operating and where we want to see our inventory given everything we just went through. We were very pleased to have additional inventory in our warehouses during the peak of the supply chain crisis and so we're rebuilding our inventory position in our warehouses we're pre-ordering the seasons so that if anything were to happen in the future, we have the same buffer that we had last year.

Okay, and maybe just... For the foreseeable future. Certainly for the foreseeable future, you know, if the world turns back into an extraordinarily stable place, you know, two, three, or four years from now, we may change that a little bit, but in the world we live in currently, these are the levels we're comfortable.

Okay, and maybe just one last one here. In terms of the heightened inventory, just remind me on Dollarama's point of view, if inventory doesn't sell, is it as expected? I'm not saying that will happen, but if it doesn't sell as expected, does Dollarama typically take that and pack it away, or do they resort to discounting as well, to clear?

So seasonal goods, thankfully it's not been an issue of any relevance in the last 27 plus years. but when it happens and it does happen but for sure because you know it happens to the best of everyone that item in particular will be addressed it'll be addressed in different ways depending on the situation if it's a three four or five dollar item then we may mark it down to a lower price point and see whether it sells at that price point if it's a low-cost item to start with less than $2 will likely find a way to stop selling it and either find someone to give it to that can make good use of it in some other part of the world or some less fortunate, depending on the type of product, or we will destroy it because it's simply not worth the time and energy to transfer it from our logistics to our source. but generally speaking, it is a minute percentage of goods.

Yeah, and just to be clear, we're not expecting to have to mark down any of our items to get them through our system. So the items we have in inventory, we're very comfortable with, and they're relevant through the seasons and through the years.

We are ecstatic to be in the in-stock position we are in. So none of the goods that are... part of this building up of inventory have anything to do with an item or items that are not selling as well as we hoped.

Thanks for your time.

Thank you. Our next question is from Patricia Baker with Scotiabank. Please go ahead.

Thank you and good morning everyone. Just coming back to the discussion of bank store sales and your traffic up 20.2% in the quarter. And this kind of follows along Peter's trade-down discussion. Do you have any visibility on whether within that higher traffic you're getting customers that are new to Dollarama?

Look, I think two things here. I mean, over the past two years and through the pandemic, we've been there for customers. And now as trade-downs happening due to inflation, I think in some categories that are consumable-related, seasonal, some general merchandise, some of that traffic is gaining share. Is that acquiring new customers likely? Is that the frequency of trips increasing also likely? But you put one and two together, and I think we're in an environment where we're gaining market share as a result of everything we know about.

Okay, thank you, JP. And then secondly, coming back to your discussion on e-commerce and your additional offers there, the Instacart, the DoorDash, etc., are there any notable trends you're seeing there in the products that people are ordering, or is it across the board?

No, there's no noticeable trends in products, and I just want to provide a little more color that The Dollarama customer generally is well served, of course, by our store base, which is continuously growing and getting closer to where they live. But there was always a customer that wanted to buy a high volume of a specific item. And when they went into our stores or into multiple stores to clear that item out, it would cause all kinds of problems from a replenishment perspective and, of course, aggravate other customers who couldn't find that item in the store after those people had come and gone. And so we built our buy the case platform to resolve that need of that customer that wanted a higher volume of specific items. And we've always understood that there's also a customer that wants to buy single items on an e-commerce platform, but that the economics for Dollarama never really made sense, to be quite honest, and that's why we never went down that path. But now that there are platforms who specialize in this particular service, it makes much more sense. And so the customers that can afford that service, because there's a cost to that service to have somebody go pick item by item for you and have it brought to your house or wherever you live, comes at a cost. But it is something that many people can afford. And so those people generally who can afford them, we're not coming into our stores. And so we do feel, and we have some data to back it up, of course, that these platforms are a great way for Dollarama to attract a customer that is not physically going to our stores. Thankfully, that's not many Canadians, but it is some Canadians. And so that's part of why we are doing this particular exercise, because we feel it's another way to service a customer that wasn't going into our stores. It's not a significant percentage of Canadian population, but it's a very nice way to complete sort of the service level for the people who want to buy things from Dollar-In.

That's excellent color, Neil. I really appreciate that. And you never know, some of those customers might end up going into your stores eventually. And my final question, I want to follow up on the discussion that you had about labor and Neil, you made a reference to the fact that you guys are doing everything you can to make the store-level employees feel loved. And I'm just curious whether the employees at the store level have any kind of visibility on career progression within Dollarama, like, for example, that, you know, they could see examples of people who've moved from being a store-level employee to a manager or from a manager to district manager, because that's probably something that would be very attractive in, you know, retention.

Very much so. So Joanne, our COO and team have done a superb job in making sure that the clarity of career progression for employees starting from the entry level to managerial level to regional management levels, et cetera, is clear and an opportunity and something that makes us happier than anything. is to see the people we've hired move all the way up through the system and be successful at Dollarama for their entire careers.

Thank you, Neil.

Thank you.

Thank you. Our next question is from Edward Telly with Wells Fargo. Please go ahead.

Hey, guys. Good morning. Thanks for taking our questions. It's Anthony on for Ed. So I just wanted to ask about the guidance on SG&A. You guys raised the comp guidance pretty considerably. So I guess I would have expected some additional fixed cost leverage associated with that higher sales number, all else equal. So just any additional thoughts on costs and what you're seeing that might be driving a little more caution there.

Yeah, no, as mentioned in Q1, I think the environment we're seeing is, of course, an inflationary environment, and that is true for the costs. everything and also wages are going up so that is why we're not revising our SG&A guidance.

Okay, got it. That's helpful. And then just on inflation, Pastor, can you just give a little more color on the level of price you're taking and how elasticity has been around that product?

Yeah, I'd say we're in an environment where It's remained fairly disciplined. As you know, we're price followers, so we always adjust last, and our sole and only purpose is to provide the best value. So what we're seeing right now is an environment where we've been able to adjust and use the levers that we all know about to manage our gross margin actively. And and consumers are responding extremely well as you saw with our SSS performance.

Got it. Thanks so much, guys. Thank you.

Thank you. Our next question is from Martin Landry with Steeple GMP. Please go ahead.

Hi, good morning. I just want to follow up on the online discussion. In your opening remarks, you mentioned that you don't expect online sales to become material over time. And I was wondering why you don't see much upside for online sales. Is it because, as you mentioned, it may be cost prohibitive at this point for consumers?

No, it's pretty simple. The reason we don't believe it will be consequential is that Dollarama's strengths aside from having you know a powerful assortment and offering and its value is the fact that we are very conveniently located close to most Canadians and so our way of addressing the market has always been to continue to open stores closer and closer to where they live so that it is a very convenient shop and since it is a convenient shop and since we already have over 1,400 stores in and around our customer base, unlike most e-commerce platforms, this is really meant to serve the customer that does not wish to displace themselves. Because there is always a cost to buy something on e-commerce. There is always a delivery cost. Whether that cost is a cost that you see or it's a cost that they've embedded in the cost of the goods. I mean, nothing in life gets delivered for free. It's just not the way the world works. It costs money to have vans. It costs money to have employees driving those vans around and putting things on your doorstep or at your mailbox or what have you. So at the end of the day, there is always a cost to bring things to you and therefore that is not any different at Dollarama. If you go to one of the platforms that we are partners with, there is a cost. It is a cost that's affordable to a group of people and therefore a convenience they can afford and a great way for them to get what they want. But it's a cost that many Canadians cannot afford. And therefore, those Canadians will continue to buy in our bricks and mortar stores. And we believe that that will be the case for the vast majority of our shoppers. And therefore... the percentage of e-commerce customers will be much smaller and therefore less consequential on our bottom line.

Okay, that's helpful. And maybe just switching gears to your supply chain, there's a slowdown in the manufacturing in China and it seems to have tilted a little bit the bargaining power in favour of importers like Dollarama. And I was wondering if you've benefited from better pricing with your suppliers due to that slowdown in Asia.

Certainly we are seeing the market in Asia get softer and therefore easier to contend with. So I think that's a very valid and astute observation on your part. By the same token, for whatever reason, Every domestic vendor in North America, Canada, and the U.S. is still going in the opposite direction and raising everyone's costs. And so I'm not sure I fully understand how that works, but I do understand that there's higher labor costs and higher logistics costs. But I can tell you that whatever is happening in China is being countered by the North American experience on the cost front.

Okay, that's helpful. And last question on Dollar City. Given that you've increased your price point in Canada to $5, I was wondering, have you as Dollar City increased their price points as well to follow up what you've done in Canada?

We did increase our price points in Central and South America. However, we increased them to $4 because we hadn't gone to $4 before a year and a half ago or so. and we went to that price point, but Dollar City will always remain or have a very serious lag to our price points for many reasons, including some of the markets are a U.S. dollar-based market, et cetera. It's a different business in a different venue, and therefore the pricing strategy is really one that is all about the market that they're in and the cost of their goods. when those goods are landed in those countries of operation.

Okay, that's helpful. Thank you.

Thank you. Our next question is from Jack DeLay with Canaccord Genuity. Please go ahead.

Yeah, hi. Just furthering on the discussion of the higher or the highest price point items, should we expect these items predominantly to be in the seasonal category or are they going to be spread across some of your other categories as well?

They'll be spread across the store. Wherever it makes sense from the buyer's perspective that the offering is a more interesting offering to the Dollarama customer in any given category, they will add those items.

And have you seen a response at all from any of your competitors, and I use that term loosely, just following the introduction of these new price points?

Well, everyone is our competitor. in the same sense that we are everyone's competitor because we dabble a little bit in everything. But the competitors run their businesses and we run ours, and I have to admit, I'm not privy to the strategy sessions that go on in their businesses, but I will tell you that every Canadian retailer is competitive and wants to do the best it can for its shareholders, et cetera, and I'm sure there are walking our stores like we walk everybody's stores, and so everybody's doing their best. But to say that we've seen some particular strategies from some particular retailer, that has not been the case.

Okay. And then just last one, switching gears a bit, but I believe the put option for the remainder of Dollar City comes into play in a month or so's time. Are you comfortable with your balance sheet or how are those discussions going should the owners decide to exercise that option?

The indications at this point is that the put option will not be exercised in October or for the foreseeable future. We're very comfortable with our balance sheet if it were to be exercised but At this point, it's not even a concern because it's not headed in that direction.

Okay. Thank you very much.

Thank you.

Thank you. There are no further questions registered at this time. This will conclude today's conference. We thank you for your participation.

Thank you.

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