Dollarama Inc.

All participants, please stand by. Your conference is ready to begin. Good morning and welcome to the Dollarama Fiscal 2023 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 7, 2022, available on CDAR. Forward-looking statements represent management's expectations as at December 7, 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. This morning, Dollarama released strong third quarter fiscal 2023 financial and operating results highlighted by a nearly 15% increase in sales and a double-digit percentage increase in each of comparable store sales, EBITDA and EPS. Our solid performance across our key metrics speaks to our commitment to providing the best year-round value on the everyday products we offer, combined with our ability to provide a convenient and consistent shopping experience. We continue to see sustained demand for our vast selection of affordable products from coast to coast, notably in the consumable product categories, which is fueled in acceleration and same store sales. Three quarters into the year, the trend is clear. Our value promise in a high inflation environment is even more relevant as consumers juggle the pressure on their wallets and adjust their spending strategies. We believe that the combination of convenient locations great value, and strong store team execution will keep those new customers coming back. Last quarter, we provided an update on the rebuilding of our inventory, which has continued in Q3. Higher inventories not only reflect the ongoing replenishment of our safety stock and the purchasing of seasonal items earlier than in the past, but also continued store network growth and strong same-store sales. In terms of product selection, our buying team has been working hard to procure compelling products in all categories and across all our price points, which is now clearly reflected in our stores. This includes the further introduction of items at our new price points of between $4.25 and $5, a gradual rollout which is proceeding as planned. We also remain extremely disciplined when executing on our price follower strategy. Product by product, always making sure we are delivering the best year-round value possible. We continue to increase proximity and convenience for our customers as we pursue our profitable growth strategy through the execution of new store openings for fiscal 2023. We opened 18 net new stores during the quarter bringing the fiscal year-to-date total to 41. As has been the case over the last few years, we expect a busy Q4 on the real estate front and remain on track to reach our full-year target of 60 to 70 net new stores. We are mindful of ensuring that our distribution and warehousing network is up to the task to support our long-term store objective in Canada. This includes expanding warehousing capacity in tandem with planned store growth and ensuring we are maximizing the efficiency of our logistics operations over the long term. Subsequent to quarter end and as announced this morning, we were pleased to enter into an agreement to purchase industrial properties located near our existing centralized logistics network, just adjacent to our distribution center here in TMR. The purchase price is $87.3 million, subject to closing adjustments. This strategically located property will provide us with additional flexibility to support our long-term logistics needs as we pursue our target of $2,000 Amistores in Canada by 2031. As a reminder, in late fiscal 2022, we signed a long-term lease for a seventh warehouse in Laval. Construction for this new 500,000 square foot built to suit facility is expected to be completed by the end of fiscal 2023 as planned. Dollar City has continued to perform well, generating strong sales and profitable growth since we acquired our 50.1% equity interest well over three years ago. There is an extremely strong team in place executing on Dollar City's business plan and delivering compelling value to markets with an appetite for our value proposition. In a few short years, Dollar City has cemented its presence in El Salvador and Guatemala, has pursued its growth in Colombia at a good cadence, and successfully entered Peru in May of last year, a fourth market of operation. From the beginning, Our objective was to bring our tried-and-true concept to these compelling growth markets and scale up the business over time, executing our concept in a low-risk manner that would not distract from the execution of our plans in Canada. After a decade of experience on the ground, I'm proud to see that our strategy and its execution has been on point. As such, this morning we were pleased to announce an increase to Dollar City's long-term store target to 850 stores by 2029 in its four current markets of operation. The over 40% store increase compared to the previous target primarily reflects the inclusion of anticipated growth in Peru, which was not included in our previous target, and additional anticipated growth in Colombia. These are two attractive Latin American retail markets with each have a growing appetite for Dollar City's localized value proposition. As we look to the fourth quarter for Dollarama, which is historically our busiest in terms of sales, we expect inflationary pressures to persist through to our fiscal year end. In this context, we will stay true to our brand promise of providing our customers with convenience as well as compelling value on every dollar they spend in our stores. JP, over to you to review our financial results in more detail.

Thank you, Neil, and good morning, everyone. We're very pleased with our financial and operating performance in Q3, with Canadians from all walks of life continuing to seek value and lower prices on the goods they need, which is driving traffic to our stores. Starting with our top line, our strong sales performance reflects our growing store network and the continued acceleration in same-store sales growth which came in at 10.8% for the quarter. With a 10.3% increase in customer traffic and a 0.4% increase in basket size, there is no doubt that our value proposition, which has proven to be relevant through the economic cycle, remains so in the current inflationary context. This is supported by a third consecutive quarter of higher than historical demand for consumable products, while also registering a good performance on general and seasonal merchandise. Finally, we're benefiting from our pricing strategy, including the introduction of new price points up to $5. EBITDA increased by 11.3% to $386 million, or 29.9% of sales, and diluted earnings per share increased by 14.8% to $0.70 per share. Our strong earnings growth reflects the continued acceleration in same-store sales, active management of our gross margin and SG&A, as well as a higher equity pickup from Dollar City. Gross margin was 43.3% of sales compared to 44.4% of sales in the third quarter of last year. The decrease is primarily attributable to sales mix, as well as higher logistics costs. In the mix, we have a larger proportion of sales of lower-margin consumables, while the ramp-up in logistics costs as previously discussed is a question of timing as we process exceptionally high volumes of goods through the back half of the year due to our inventory rebuild. Our inventory increased just to over $1 billion at quarter end, representing a 68% year-over-year increase. A large proportion of that represents in-transit inventory It also reflects the purchasing of goods earlier than historically in the context of global supply chain disruptions and the fact that we're now seeing a compression in transit times. This means that we have some inventory being received earlier than expected. This combined with store network growth, accelerated SSS, and planning for our historically highest fourth quarter sales explains a significant increase year over year. We're now in a good inventory position and safety stock position for the coming quarters. SG&A came in at 14.1% of sales compared to 14.2% of sales last year. As previously mentioned, we're seeing stronger wage growth in the inflationary context offset by ongoing productivity initiatives and the positive impact of scaling from strong sales. Our share of Dollar City's net earnings was $9.2 million, up 26%, compared to $7.3 million last year. reflecting a solid financial and operational performance, as well as the entry into Peru continuing to ramp up. In their third quarter, Dollar City opened 18 net new stores, representing year-over-year growth of 12.8%, and bringing their total store count to 395 stores, with 235 locations in Colombia, 83 in Guatemala, 61 in El Salvador, and 17 in Peru. This compares to 350 total stores at their year-end of December 31, 2021. The ordinary course put frights for Dollar City's founding group commenced this past October. If exercised, we must purchase some of their shares at fair market value. This would be within a framework of conditions which include, but are not limited to, transaction size and key person ownership thresholds. We have no indication of the founding group's intention to exercise this right at this time. Should it be exercised in the near future, we believe we have the financial flexibility to increase our ownership stake, which may have a short-term, temporary impact on our capital allocation strategy. On the capital allocation front, our NCIB activity was more moderate with a repurchase of just under 1 million shares in Q3, which is simply due to more cash allocated to our inventory rebuild in the quarter. The board also 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, unchanged from the prior quarter, and within our comfort zone of 2.75 times to 3 times adjusted net debt to EBITDA. We expect to continue to be active under our NCIB program in Q4. In October, we launched and successfully completed the bond offering of senior unsecured notes for proceeds of $700 million. as part of the active management of our capital structure. I'd like to congratulate the team for accomplishing this in a challenging credit market. Proceeds from the issuance were used this past November to repair bond and short-term debt maturities. On the back of our continued ESG effort, which includes our first climate strategy published last summer, we were pleased to have our MSCI rating upgraded from BBB to A this past October. With significant progress made over the last 24 months, we continue to move ahead with our sustainability commitments, which we view as a journey wherein we must continuously raise the bar. Turning now to the outlook for the remainder of the year. On gross margin, the change in sales mix and the timing of higher logistics costs are reflected in the narrowing of our gross margin range for fiscal 2023-2021. to between 43.1% and 43.6% of sales. This represents the middle of our previously disclosed guidance range. Guidance on SG&E, net new stores, and CapEx remain unchanged. On CapEx, our property acquisition agreement is expected to close in early fiscal 2024, and as such, should be reflected in next year's CapEx end vote. Looking at the assumptions on which our guidance ranges are based, these also remain unchanged, except for same-store sales. With stronger than historical demand for lower-margin consumable products and our very strong SSS performance, we have increased our SSS assumption for fiscal 2023 from a range of 6.5% to 7.5% to a range of 9.5% to 10.5%. This assumes that demand trends year-to-date hold that we do not return to a COVID lockdown scenario, and that the weather, for the most part, cooperates. That concludes our formal remarks. I'll turn it over to the operator for the Q&A.