Dollarama Inc.

Good morning and welcome to the Dollarama Fiscal 2023 4th Quarter Full Year Results Conference call. Neil Rossi, President and CEO of NGP Towners CFO, will make a short presentation 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'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 be proved 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 to not place undue reliance on these forward looking statements. For additional information on the assumptions and risks, please consult the cautionary statements regarding forward looking information contained in Dollarama's MDNA, dated March 29th, 2023, available on CDAR. Forward looking statements represent management's expectations as at March 29th, 2023 and except as may be required by law, Dollarama has no intention, 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 outstanding full year fiscal 2023 results, meeting or exceeding annual guidance across all key metrics. We capped off the year on a particularly high note, delivering exceptional performance in the fourth quarter. Our strong operational and financial results reflect the continued positive consumer response to our year round value proposition, which has only been reinforced in the context of high inflation. Our resilient and flexible business model enabled us to deliver from a procurement, operational and cost management perspective while navigating a dynamic environment. That dynamic environment included lingering supply chain dislocations, which had to be carefully managed. Through fiscal 2023, we were very proactive in rebuilding our inventory to pre-pandemic levels and in circumventing some of the delays in the system impacting all retailers, all while mitigating the impacts of rising freight and logistics costs. Working through this was no easy feat, and I'm proud of the flexibility and capacity demonstrated by our procurement and logistics operations as we accomplished what we set out to do. We kept the goods flowing to our stores throughout the year, including for key seasons, and we successfully brought our inventory and in-stock positions back to acceptable levels by year end. Our inventory position has also grown in tandem with our continued store network growth, strong same store sales performance and the introduction of higher price points. Fiscal 2023 marked the gradual rollout of new price points up to $5 beginning last summer, more than six years after our $4 price point introduction. To date, this new retail offering has been very well received by customers coast to coast. It has enabled us to offer new compelling SKUs. It has allowed us to bring back SKUs that were appreciated in the past but discontinued because of prohibitive costs. In addition, it has enabled us to continue offering several SKUs despite rising costs. We will continue to provide a wide array of compelling products at each of our price points, ranging from $1 or less up to $5, and to refresh our products throughout the year as we always have. We remain extremely disciplined in our pricing strategy across all price points, item by item to preserve our year round relative value. Turning now to our Canadian footprint, we opened 65 new stores in fiscal 2023, consistent with the prior six years, bringing our dollar amistor count to 1,486 stores as at January 29th, 2023. Going into fiscal 2024, we have a solid real estate pipeline with site opportunities across the country. Near term, we are looking forward to the opening of our 1500th net new store, making a significant milestone along our roadmap to reaching our long-term target of 2,000 stores in Canada by 2031. From a logistics perspective and in support of our long-term Canadian growth plans, we commissioned our seventh warehouse just before fiscal year end. At approximately 500,000 square feet and located near our existing logistics operations, the Laval facility significantly increases our warehousing capacity. Finally, as discussed on our last earnings call, we intend to purchase strategically located industrial properties adjacent to our distribution centre in TMR, providing us with additional flexibility to support our long-term logistics needs. That transaction is expected to close in the second quarter of fiscal 2024. On the technology front, we continue to deploy capital towards transformational IT projects to the benefit of the business. One notable example this year has been the digitization and centralization of our recruitment platform for our store operations, which we believe will increase our efficiency and recruitment efforts as we continue to open new stores across Canada and keep our stores staffed in a tight labour market. I am also pleased with our progress on the ESG front throughout the year, including the publication of our climate strategy last June. This included our first-generation climate goal of a 25% GHG intensity reduction for scope 1 and 2 emissions by 2030. This represents the first major step in our climate roadmap in the last year. We have already made very good progress towards achieving this goal, which we are tracking closely. We look forward to providing our next annual ESG update in just a few months. Turning to Latin America, Dollar City continues to perform well, meeting or exceeding our expectations and key performance metrics. Like Dollarama, the Dollar City value proposition resonates with consumers in their Latam markets, resulting in strong store sales growth and store opening cadence. With the opening of 90 new stores in calendar 2022, their total store count is now 440. Dollar City is making excellent progress towards its recently revised long-term store target of 850 stores by 2029 in its four current markets of operation. In conclusion, our outstanding performance in fiscal 2023 only reinforces the relevance of our value retail concept for consumers, the enduring strength of our unique business model and our disciplined execution. This is true for Dollarama in Canada and Dollar City in Latin America. I would like to recognize and thank every Dollarama team member from our stores to our logistics operations and head office for their continued commitment to providing consumers with convenience and the best relative value on every dollar they spend in our stores. In the context of continued macroeconomic uncertainty and inflationary pressures on Our priority is to remain and maintain our value promise to Canadians from all walks of life in fiscal 2024. Our customers can continue to count on us. JP, over to you to review our financial results in more detail.

Thank you, Neil, and good morning, everyone. Let's start with a quick overview of our exceptional fourth quarter results. Sales in Q4 grew 20.3%, reaching nearly $1.5 billion. Same-store sales grew 15.9%, supported by a double-digit increase in transaction volumes. Our strong top-line performance was driven by a number of factors, including the absence of pandemic-related restrictions, the introduction of higher price points, and the successful product refreshes across our offering. While the trade-down by consumers, which accelerated throughout fiscal 2023, certainly boosted our consumable sales, our overall category mix remained quite stable and generally in line with the historical patterns. To illustrate, based on retail sales, consumables represented 42% of our mix in fiscal 2022 and 44% of our mix in fiscal 2023. General merchandise and seasonal, together, continue to represent the majority of our total sales mix to product categories, which has long made Dahl-Ramma a shopping destination. Gross margin was .6% of sales compared to .2% in Q4 2022. The anticipated decrease reflects a slight change in the sales mix, as described above, and higher logistics costs related to our inventory rebuild. SG&A improved to .2% of sales compared to .5% the same quarter last year. This improvement primarily reflects the absence of -19-related costs. EBITDA increased by .8% and diluted EPS increased by 23%, 2.91 cents for the fourth quarter of fiscal 2023. At year end, inventory stood at 957 million. With a stabilized inventory position from Q3 to Q4, the vast majority of our inventory rebuild is now behind us. A few comments on full year results and the financial metrics guidance we achieved before turning to the outlook for fiscal 2024. We delivered an outstanding sales performance throughout the year, delivering on our value proposition, which resonated more than ever in a high inflation environment. This translated into SSS growth of 12% for the full fiscal year, exceeding our expectations of .5% to 10.5%. We maintained industry-leading gross margins of .5% of sales compared to .9% in the prior year, in line with guidance provided. SG&A came in at .3% of sales compared to .1% for fiscal 2022, an improvement primarily driven by minimal COVID-19 costs and the positive scaling impact of strong sales, also in line with our guidance. On the back of an acceleration in same store sales, active gross margin management and a higher equity pick-up from Dollar City would deliver strong earnings growth with diluted VPS up 27% to $2.76. Turning now to capital allocation. We remained active throughout the year on the NCIB front. In total, we repurchased 8.9 million shares for total cash consideration of $689 million during fiscal 2023. A cash dividend was also declared each quarter, and today the board approved a 28% increase of the quarterly cash dividend to 7.08 cents per share. CAPEX came in at 157 million, primarily due to the timing of the delivery of the racking of our new Laval warehouse, which will not fall under fiscal 2024 CAPEX. In fiscal 2024, we will maintain a balanced approach to capital allocation by continuing to invest in organic growth and return capital to shareholders. We intend to maintain our pace of net new store openings with a target of 60 to 70 net new stores for fiscal 2024, in addition to continued investments in maintenance and transformational capital projects. As such, we expect to deploy between 190 and 200 million in CAPEX and fiscal 2024. The -over-year increase primarily reflects the remaining investments in our Laval warehouse. This CAPEX budget excludes the $87 million property acquisition agreement anticipated to close by the second quarter. In addition to maintaining a dividend subject to quarterly approval, we intend to allocate our excess free cash flows toward the repurchase of shares through our NCIB. We continue to believe that this represents an appropriate and efficient use of excess cash to increase shareholder value. In the current macroeconomic environment, we will continue to actively manage our capital structure and anticipate that our leverage ratio will be below our historical target range of 2.75 to 3 times throughout fiscal 2024. Specifically, in the current interest rate environment, our after-tax cost of debt compared to our earnings yield is not generating meaningful accretion. At your end, our adjusted net debt to EBITDA ratio was 2.71 times. Turning to our financial performance guidance for fiscal 2024, on SSS we expect that the first half of fiscal 2024 we will continue to benefit from strong demand for affordable everyday items in the context of continued inflationary pressures on consumers. Looking at our SSS performance in the first quarter of fiscal 2024, two months in, we are pacing at the same two-year SSS average as in Q4 of fiscal 2023. However, these demand trends are expected to normalize through the second half of the fiscal year. As a result, our SSS growth expectation for fiscal 2024 is in the range of 5 to 6%. While we anticipate higher demand for lower margin consumable products to carry over into fiscal 2024, lower freight costs and logistics costs on imported goods are expected to positively impact gross margins. We have definitely seen a stabilization in global supply chains of late and believe we are in the final stages of its normalization. As such, and based on our current visibility, we expect gross margin as a percentage of to improve year over year and to be in the range of 43.5 to .5% of sales. Wage pressures on SG&A will be more substantial in fiscal 2024 compared to the prior year, partially offset by the positive impact of scaling as well as ongoing efficiency initiatives. Accordingly, SG&A guidance for the full year is in the range of .7% to .2% of sales. Rotating challenges seem to have been the hallmark of the past few years. Our ability to consistently deliver through the pandemic, persistent supply chain issues, increasing economic and geopolitical instability, and rapid inflation speaks to the relevance of our value promise and the resilience of our business model. These factors position us well for continued growth despite the uncertain economic context. That concludes our formal remarks and I'll turn it over to the operator for the Q&A.

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 headset before making your selection. If you have a question, please press star 1 on your device's keypad. You may cancel your question on 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 Natel with RBC Capital Markets. Please go ahead.

Thanks and good morning, everyone. Great end to the year. I'm wondering if we could start, please, with what you're seeing in terms of consumer demand, demand for both consumables and GM seasonal, and what the consumer response has been in particular to the higher price points.

Good morning, Irene. It's been pretty even across most categories. A slight strength, I guess, or strengthening of our consumables more than the non-consumable category, but really we've seen an increase across all categories, and the same for seasonal.

And price points, Neil?

Price points also very well accepted and aligned with existing price points. So I think the gradual execution of the same relative value has been well accepted by our customers.

That's great. Thank you. And a couple of points of qualification, if I might, just around elements of the F24 guidance. In particular, with the SG&A, quite an interesting step up. What factors are at play there, and what causes things to end up at one end or the other? And then on the NCIB, how should we be thinking about magnitude of NCIB and funding of NCIB in F24? Thank you.

Okay. Thanks, Irene. On SG&A, I think the first important point is to note that we're still facing an extremely tight labor market, and we see unemployment rates where they are, and they're still fairly low levels. In the second half of fiscal 23, we've seen an acceleration in wage pressures. We talked about it on the last earnings call, and we expect that trend to continue in fiscal 24. I think we'll be able to offset a portion of that through revenue scaling and efficiency initiatives, but there's going to be a remaining impact to the bottom lines. And what's also important to note in addition to wages is that we're seeing increased traffic in our stores, which means more hours spent on replenishing our inventory, replenishing our shelves. We're also in the last innings of our inventory rebuild, which means the goods are making their way from our DC to the stores, which also requires more labor hours. But the vast majority of the SG&A increase is driven by the wage environment.

Thanks, JP. And the NCIB?

On the NCIB, the first important comment is that we intend to remain very active on our NCIB program. When we talk in the press release and in my comments about the leveraging, it's important to note that that's not occurring as a result of our intent to pay down debt, but simply a result of EBITDA growth, which will naturally bring our leverage down over the next few quarters. And when I say our leverage down, I mean modestly down. I don't expect our leverage to be in a completely different zip code. So we intend to remain very active on the buyback.

That's great. Thank you.

Thanks, Harry.

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

Oh, thank you. On the NCIB, can I just clarify that? So you're simply going to finance through your surplus free cash flow. We should not expect any additional leverage to facilitate, correct?

That's correct.

Thank you. I guess, news for Neil, when I think about inflation starting to decline and possibly a bit of a mixed shift away from consumers, it's clearly driving traffic right now. Is there a risk of feeding some of the market share you're gaining or what steps or any steps you can take to ensure those gains are maintained?

I think the best way to ensure it is to make sure that the customers that we're gaining, if we are in fact gaining customers, are satisfied that the lower prices that they're paying for their goods are for goods that are equally good or better. As long as we continue to source and procure goods that satisfy our customers' level of quality control and assortment and we remain the best everyday value, we will likely keep many of those customers. But the risk is always there, of course, that when they're in another store, when times are slightly less challenging, that they'll simply pay more. We can only do so much, but I think the goal is to satisfy them in the sense that if they've come and they're new and they buy and they're satisfied and they've paid less, hopefully, they'll be happy to pay less for it.

Okay, last question, JP. Dollar City new store growth should have been about the 8% equity income growth that you realized in Q4. Maybe just some details on the performance, be it sales or gross margin performance, what took place there? I would have expected it to be a slight bit higher.

Yeah, so Q4 Dollar City, we saw excellent top line performance. The challenge was the inventory rebuild, like we had to go through in the second half of last year. So they faced some of those temporary challenges, but a good portion of that is behind them and behind us. So I think you can assume that if it weren't for those challenges, you would have seen the higher net income pick up in Q4.

And that's behind us now?

For the vast majority.

Okay, great. Cool. Thanks very much. Thanks, Brian.

Thank you. Our next question is from George Nume with Scotiabank. Please go ahead.

Yeah, good morning, Neil and JP. Congrats on a good quarter. For me, it's the two part question on the gross margins. How much of the 60 basis point compression was mixed versus higher logistics costs in this quarter? And maybe looking at that with Cisco 24 guidance. Is it more of a second half story? And there's a pretty large range in the guide. Maybe what factor is determined if it falls in the lower end or in the upper end of that range?

So when you look at the Q4 gross margin compression, it's a mix of logistics and mix. And I'd say it's around 50-50. When you look at fiscal 24 and you think about our guidance range, the big driver, of course, is number one, the mix. Keep in mind, last year in the second half, we had the trade down happening. So we had the mix shift. And then in the first half of this year, assuming the trade down continues, there could be an impact on the mix. On the flip side, we entered into new ocean freight contracts at the end of Q4, which are in effect. And that will impact us positively throughout the year. So those are probably the two biggest drivers, the full year improvement in ocean freight costs and the mixed story, which is a first half, second half story.

Thanks for that. And on the same sort of sales guidance of 5-6%, what are you guys thinking in terms of transaction count versus transaction size for the year?

Very, very hard to tell. We've seen good traffic pick up on the back of the trade down and market share gains. As I said, on the gross margin comment, a lot of that was weighted and skewed towards the second half. So there's probability that it's more a first half thing than a second half thing. But jury's out and we'll see how the year evolves.

Okay, thanks. And just one last one, if I may. On the step up in capex for fiscal 24, should we think of that as a level to build off of going forward? Or is that maybe, can that come tick down a little bit? And maybe for JP, how should we think of working capital release, if at all, for fiscal 24?

So on the capex, the envelope for last year, so fiscal 23 was 160 to 170. We landed 157. That's really the baseline. In fiscal 24, we have some additional capex and therefore the racking of our LaBelle warehouse and all the finishes that will need to be made there. But the baseline is really fiscal 23 levels. And then when you think about working capital, you saw from Q3 to Q4, we had a positive working capital influx from our inventory position that's now stabilized. As we said in our remarks, a lot of the supply chain pressures are now behind us. That being said, anything that happened, but from what we're seeing right now, we're seeing a more stabilized supply chain. And therefore, if inventory stabilizes, you shouldn't see the same type of working capital pressures as you see in fiscal 23.

Great. Thanks for your answers. I'll get back.

Thanks, George.

Thank you. All right. Next question is from Vishal Sridhar with National Bank. Please go ahead.

Hi. Thanks for taking my question. Just on your expectations for your head on same-source sales growth, the 5% to 6% same-source sales growth, wouldn't that functionally represent inflation in the system right now? And wondering how management is thinking about real same-source sales growth. Does this outlook imply flat or negative real same-source sales growth, that same-source or less inflation as we look into fiscal 24?

Yeah. Our same-source sales growth assumption are based on a combination of traffic and basket and unit and price. But I think we're in an environment where on a real basis, we've been fortunate enough, as we talked about a bit earlier, to benefit from trade down and market share gains. So that would definitely be real SSS gains.

Okay. With respect to the quarter, obviously, very strong. Were there any trending events that happened in the quarter that may have impacted demand or anything of any significance? Or was it, I don't want to say business as usual, but was it largely a smooth quarter in terms of demand trends?

I think business as usual is the best way to put it.

Okay. That's it for me.

Thanks. Thank you. Our next question is from Karen Shorten with Credit Swiss. Please go ahead. Hi. Thanks

very much. Good to talk to you again. A couple questions for me on comp. If I understood correctly, it sounds like your comp in 1Q is in that 14 to 15% range. I guess is that accurate. But your full year guidance very much implies a slow down in 2Q to 4Q on a 1, 2, and 3 year basis. So any color on that? Can you give an update on what comp you need to leverage fixed costs given the higher wage sales and comps you made that you guided to? And then I had one other quick question.

Yeah. So on the comp, as I mentioned, we're continuing to pace at levels that are higher than our circle average. I'm not going to comment on our expectations for Q1 SSS, but the levels that we're seeing as of now are higher than the circle averages. In terms of what it means for the second half, as we mentioned, we'll be comping very strong SSS levels in the second half, and therefore the comps will be more difficult than the second half of this year than they are in the first half, and that's baked in our 5% to 6% guidance range. On the scaling for SG&A, the magnitude of wage pressures and wage growth, and when you compare that to our SSS assumptions, there is already some scaling embedded into it, but it's not enough to compensate for the wage headwind that we're facing in fiscal 24.

Okay, that's helpful. And then obviously, we know you talked about inventory in detail, but what would be the right way to think about inventory growth in 2024, maybe on a per store basis, or just how to think about it in general now that you've kind of accelerated to the seat and you're back to a little more normalized level?

Yeah, the way we look at it is from a turns perspective. So we look at the inventory turns. What we're seeing in Q4 of fiscal 23 is inventory turns returning to pre-pandemic levels, some more normalized levels, when we were in the midst of the supply chain crisis, you saw inventory turns going up significantly. So I would expect Q4 to be a decent gauge for how we think about the inventory turns going forward.

Okay, thanks very much.

Thanks, Karen.

Thank you. Our next question is from Chris Lee with Desjardins. Please go ahead.

Oh, hi, good morning, everyone. Maybe first question, maybe for JP, just on the SG&A, the midpoint of your SG&A rate guide.

Sorry, Chris, we just lost you. Chris, we'll circle back. Yeah, we'll move to the next question.

One moment, please. Perfect. Mr. Lee, please go ahead.

Hello. Chris?

Chris Lee from Desjardins. Please go ahead. Your line is now open.

Okay. Sorry, can you hear me better now? Yes. Sorry about that. No, I just want to ask the first question is just on the SG&A guidance. The midpoint is around 14.9%, which is about sort of .2% pre-COVID. I guess my question is, do you think sort of this is the new level, given structurally higher cost pressure because of higher wages, or do you expect the rate to improve over the longer term as you continue to benefit from the positive impact from scaling of the business?

It's truly to tell. I mean, we'll see how the year evolves. There's a factor which is the labor market. There's another factor which is our revenue growth and the scaling. So it's truly to tell if that's the trend for the long term or if it's a yearly thing.

Okay. And then just on free cash flow, just based on your response to George's question earlier, can we assume that free cash flow for this year should be higher than last year?

We don't provide guidance, as you know, Chris, on our free cash flows, but it's usually a function of our EBITDA and our CAPEX envelope, and I commented on our working capital. So I think you can derive the equation.

Okay,

gotcha.

And maybe the last sort of modeling question is maybe on depreciation and amortization. I think last year was up around 35 million. The over a year, again, directionally, should we expect a similar pace of increase for this year?

We don't, again, we don't provide guidance on depreciation and amortization, but keep in mind that it's function of CAPEX, which is relatively in line with last year, and its function of store growth, which is also relatively in line with last year.

Okay,

got it.

And then maybe switching gear quickly to Dollar City, I think a couple of quarters ago you mentioned that your partners did not really have an intention to exercise the put option in the near term. I just want to check in to see if that is still the case or if you can comment on

that. For now, that is still the case.

Perfect. And then maybe, Neil, I just wanted to ask you a question. You mentioned that you're seeing some, you know, consumer response to the new high price points has been very strong. I was wondering if you can maybe unpack that for us a little bit, you know, where are you seeing the strength and what metrics are you looking at? And maybe if you can share with us, you know, within the high price point, the vast majority of them being sort of new products that you haven't sold before, because based on our survey, I mean, obviously that's what we're seeing, but I just want to confirm if that's the case, that these high price points are mostly new products that are really resonating with consumers. Thank you.

So the vast majority are definitely new products, as you've clearly noted, and they range across all departments in the store. I think that the strategy we've always tried to be very conscious of in order to not overwhelm both our customer nor our buyers with a, you know, high price point. So we try to specifically buy certain price points for certain categories. So we try to offer a range of values across all departments, and this is simply allowing the buying group to provide even greater values at higher price points while maintaining our same relative value to the market on a new range of goods. And honestly, there's not any given department that really sticks out, so I would tell you it's quite easy.

Perfect. Thanks very much and all the best. Thank

you.

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

Hi, good morning. I was wondering if you can talk a little bit about the rollout of your self-checkout terminals. Wondering if you can give us an update as to where you're at right now, how many locations have these terminals, and what have you seen in terms of customer adoption?

So on self-checkouts, we've completed most of the retrofits on existing locations out of our existing store base. For new stores, it's really a -by-store decision. I wouldn't expect self-checkout to apply to all our new stores. It's really function of traffic and different shopping patterns that we analyze on a -by-case basis.

Okay, so is it fair to say that they're in your legacy stores, everywhere in your legacy stores?

No, they're in about 20 to 25 percent of our legacy stores.

Okay, and what are you seeing in terms of impact on your labor costs with these self-checkout terminals?

It's not a labor cost thing. It's really a customer experience element, and so the focus is to, given the transaction volume traffic growth that we saw pre-pandemic and we're seeing now, is to optimize the checkout lines and make the experience better for customers.

Okay, and just moving on to your new store openings, you keep opening stores at a fast pace, more than one a week. I was wondering, where do you open your new stores? Are you going into smaller rural communities, or are you going into new suburbs around fast-growing cities? Just an idea of where are you putting new stores right now?

Well, much like our buying, our sourcing of properties is vast and varied, and really it's more a question of opportunity than it is a strategy per se. At this point, we're interested in malls, we're interested in strip centers, we're interested in standalone buildings, we're interested in any location that we think will increase the convenience to our customer base and not cannibalize existing stores. So our new store pipeline generally has a very mixed look with regards to the type of real estate opportunity, and for the foreseeable future, that remains the case.

Okay, and my last question is on Dollar City. I know you don't give guidance on Dollar City, but is there anything that you can mention or reiterate to help us model Dollar City this year, in terms of CAD and cadence of earnings, or anything that you want to just remind us?

I mean, a lot of the trends we're seeing in Canada would apply to Dollar City in terms of customer shopping patterns and cadence, and in terms of store base for fiscal 24, we think we'll be able to open 60 to 70 new stores at our Dollar City locations.

Okay, that's helpful. Thank you. Thank you.

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

Neil, these like very high traffic trends that you're experiencing, like you have a feel, is it people coming back to shop more frequently, or are you attracting, do you think you're attracting new customers like immigrants, or are you going to say all of the above?

Well, I would say that if immigrants are landing in Canada and Mercedes-Benz, as well as walking, then it's only immigrants, but otherwise I would say it's all of the above. We really do see just a general trend and interest in checking the value that we've always offered to different groups of people that may not have felt any need to shop at a dollar am, although that breaks my heart, and so it's everyone. It's a general thing across the board, and really the hopes are that they enjoy the experience, they enjoy the value of the shop, and the goods they're buying, and that we keep as many as we

can. Okay, last question on a different topic. This dividend increase you had of 28% is an extraordinary increase. Can you talk a little bit about the thinking of management and the board and why you went for such a substantial increase?

Yeah, we don't have a formal dividend policy, but we try, and we've done it in the past. When we have strong EPS growth, we try and maintain a payout that's generally in line with the circle levels, so that's the thinking process. We had strong EPS growth, and we want to keep a payout that makes sense and have a balanced capital allocation.

Okay, and JP, how do you think about the dividend payout ratio? What's your target range?

There's no target range. It's a -by-year decision. We don't have a formal dividend policy, but we felt that this year was appropriate to maintain it in line with the circle levels.

Okay, thank you. Thank you.

Thank you. Our next question is from Edward Kelly with Wales Fargo. Please go ahead.

Hi, everyone. Good morning. I wanted to just start on the labor front, wage front, and really just taking a step back on a multi-year outlook. I guess the first part of this is, as you think about the wage investment that you are now making, how much of that is in response to turnover, applicant flow, versus just market? How do you feel about where you're going in your average hourly rate? And then as we look sort of beyond the current year, is wage inflation just going to be dictated by market, or do you have a bit more company-specific work that you're looking to do as we think about even the out year?

Yeah, so the turnover and the market question are related because turnover is function of market, and we compete in global labor market across Canada. So we always strive to pay competitive wages, and so we adapt to the market as the market evolves. We've seen, as we mentioned, wage growth acceleration in the second half of this year, and we're adopting to that, and that's reflected in our guidance. So that's really the thinking behind this. There's no anything special or anything more than just the current market environment, like many other retailers have discussed.

And to be clear, we realize that our employees at store level, associates in particular, it's really an entry job. There will always be turnover, and it is a first job for many people. So the focus of the company is to ensure that the environment's safe, it's positive, that there's career opportunities, and that it's a great job. And even though it's not a very high-paying job, it's a job that they enjoy within the constraints of the salaries that one can earn as an entry level job. So it really is a priority for the company to ensure that regardless of pay, those employees are enjoying the experience and that we're providing the proper environment.

Okay, great. And just on the freight component, you've signed a new contract. How does that roll into the year? Is that more of a sort of Q3, Q4 story that wraps into the out year, or do you begin to see some of that immediately in Q1?

Yeah, as we mentioned last year, around the same time, those contracts are for the vast majority renewed at the end of Q4, and it trickles in throughout Q1, and you start seeing the impact in Q2 in the second half of the year.

Great. And just one last one for you on store openings. You've been pretty steady at this 65, number. You know, it's interesting, right? Five years ago, that was sort of five and a half, six percent growth. You know, it's now down to sort of like low four percent. Any thoughts on how that opening number evolves over time? Is that just the number that you're comfortable with, or is there opportunity for that to go higher?

Well, it's the number that allows us to, number one, achieve our growth ambitions with our store target, but more importantly, it's also the number that the real estate market can achieve in our segment in Canada, and we think is reasonable. So we always adjust in function of that real estate market and how it's moving, but it's been a steady pace for the past few years in a place where we feel comfortable and the market feels comfortable absorbing our square footage demand. Great.

Thank you.

Thanks. Thank you. Our next question is from Derek and Zay with Kenocor Genuity. Please go ahead.

Yeah, hi. Congrats on the strong quarter. Just a question on the freight and logistics cost. Can you quantify what the headwind from freight and logistics was during the quarter or during the year?

No. All that is baked in our gross margin guidance, and so we're pleased with our gross margin being flat to up 1%, and it's all embedded in those assumptions. Okay.

Okay, I thought I would try there. Just on the inventory, is most of that inventory or the vast majority of that inventory that you have on the balance sheet now in the DCs or in the stores, or is there still a component of it that's in transit like there was last quarter?

The bulk of it's in the warehouses and the distribution, flowing through the distribution center to the stores, but the answer is the bulk of it's in the warehouses. Okay.

Okay, thanks. And then just following up on one of the questions earlier, have you been introducing any sort of different store sizes or formats within the new store rollouts that you've been having, or should we still be thinking about new stores as roughly just over 10,000 square foot boxes?

That's the right way to look at

it. Okay, great. Thank you very much.

Thank you very much.

Thank you. There are no further questions registered at this time. This will conclude today's conference. Please disconnect your lines at this time, and we thank you for your participation.