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.