Dollarama Inc.

Good morning and welcome to Dollarama's second quarter fiscal 2026 results conference call. On today's call are Neil Rossi, President and CEO, and Patrick Bowie, CFO. They will begin with brief remarks followed by a Q&A with financial analysts. Before we begin, please note that today's remarks may contain forward-looking statements about Dollarama's current and future plans, expectations, intentions, results, or any other future events or developments. Forward-looking statements are based on information currently available to management and on reasonable estimates and assumptions made by management. Many factors could cause extra results, future events, or developments to differ materially from those expressed or implied. You are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements represent management's expectations as at August 27, 2025. 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. You are invited to consult the cautionary statement on forward-looking statements in Dollarama's management's discussion and analysis dated August 27, 2025. All forward-looking statements on today's call are expressly qualified by this cautionary statement. In addition, Dollarama may refer to certain non-GAAP and other financial measures during the call. please consult the Non-Gap and Other Financial Measures section of Dollarama's MD&A, dated August 27, 2025, for definitions, reconciliations, with appropriate gap measures, and other information. The quarterly disclosure documents related to this call are available in the Investor Relations section of Dollarama.com and on CDAR+. I will now turn the call over to Neil Rossi.

Thank you, Operator, and good morning, everyone. In the second quarter of fiscal 2026, Dollarama delivered strong financial results and achieved several international milestones. Let me start with international expansion. In the middle of the quarter, we celebrated the opening of Dollar City's first store in Mexico, a large and high potential market. Later in the quarter, we completed our acquisition of Australia's largest discount retailer, welcoming the local management team and 5,000 new colleagues. While vastly different in approach, Both market entries are the culmination of strategic objectives that have long been in motion. They represent two additional complementary growth platforms which only strengthen and diversify our long-term strategy. They also broaden the strength of our team with a greenfield entry into a huge market and our first transformation of a large existing business. This is all made possible by our successful core Canadian business, which serves as the foundation that fuels our broader ambitions. Let's now look at our performance in Canada. We generated healthy same store sales, both in the quarter and since the beginning of the year. This reflects the underlying strength of our business model, the relevance of our value proposition for Canadian consumers, and the team's impeccable execution. Consumables were once again a driver behind our sales, with general merchandise and seasonal remaining stable. This speaks to the appeal of our overall assortment at any given time of year. It also shows that Dollarama continues to cement its place in the regular shopping habits of Canadians, whether for everyday essentials or discretionary goods. To achieve this, we work incredibly hard day in, day out, to offer products at compelling value by maintaining our pricing when possible for our customers in this volatile trade environment. We will stay the course in our efforts, relying on our agility and expertise as buyers to maintain our relative value in the market to the benefit of consumers. On the real estate front, we opened 27 net new stores in Q2, bringing the total number of net new stores year to date to 49, and our footprint in Canada to 1,665 locations. Halfway through the year, we are well on our way to achieving this fiscal year's target of between 70 to 80 net new store openings, which, as a reminder, is exceptionally higher than in previous years. The development of our future Western Logistics Hub, situated just north of Calgary, also continues to progress well. Site preparation activities began during the quarter with construction scheduled to start in September. We are pleased to be on plan and on budget at this stage of the project, with the site expected to be operational by the end of 2027. Turning now to Dollar City, which generated another strong performance, both operationally and financially, in the second quarter. The business is experiencing similar underlying trends as Canada in terms of customer appeal reinforcing the relevance of our business model across geographies and demographics. During the second quarter, Dollar City continued to add stores at a healthy clip, opening 14 net new locations. This brings their total store count in all five countries of operation in Latin America to 658. That number includes our first Dollar City in Mexico, located in Guadalajara, Jalisco. While it is still very early days, we are quite pleased and encouraged by the initial reception from customers. We look forward to opening several additional locations in Mexico by fiscal year end. Finally, I'd like to turn to Australia. Since closing the acquisition of TRS, priority number one has been the onboarding of our new colleagues, sharing our vision for the future, and mobilizing the right people and teams to kickstart a multi-year transformation journey. This work is being led by a strong local management team based in Melbourne, supported by a cross-functional integration office. The teams will be working on multiple fronts to thoughtfully deploy the Dollarama business model over the coming years. I'm pleased to say that the TRS team is ready and motivated and that this work has already begun. On the merchandising front, we are now starting to selectively phase in Dollarama products across categories. This will be a gradual process, which will continue through to the end of fiscal 2027. Along the way, we will be simplifying the price point structure, including lowering the current pricing ceiling. In parallel, our plan is to convert store layouts to deliver that convenient and consistent shopping experience we are recognized for and which directly supports our merchandising strategy. Conversion projects are already underway, representing an important step towards laying the groundwork before we can ramp up conversions in fiscal 2027 and over an approximately three-year period. The gradual phase-in of our merchandise and store format will introduce elements of the Dollarama brand to our stores in Australia. Once stores contain a critical mass of Dollarama products, we intend to bring them under the Dollarama banner. We will also leverage our operational excellence to level up IT infrastructure, store and logistics operations and processes. Work on all these fronts will allow us to get the most out of what is, from a real estate standpoint, a high-quality existing store network across Australia. As a reminder, we currently have 395 locations and our long-term target is to reach 700 stores in Australia by 2034. The goal of the transformation roadmap is to optimize the business and set it up for accelerated growth. Over the next three to four years, we will be implementing major changes across the business. We will proceed methodically, maintaining a slow and steady approach to ensure execution. As this is a multi-year journey, we don't expect the business to materially contribute to our profitability until a few years down the road when the heavy lifting is behind us. As a team, we are very excited about these projects and the opportunities that lie ahead across our growth platforms in Canada, in Latin America, and now Australia, to the benefit of all our stakeholders.

With that, I'll pass it over to Patrick. Thank you, Neil, and good morning, everyone. Some housekeeping before we get into our second quarter performance, which includes 13 days of results from Australia. Following the TRS acquisition, we now have two reportable segments, the Canadian one, which continues to include our Canadian operations and equity investments in Dollar City, and now an Australian one to cover our newly minted Australian operations. This will allow for the tracking of our performance in Canada as before. Note that we won't be providing guidance for the Australian segment for fiscal 2026, nor will we be disclosing SSS in Australia since we are in the process of developing and implementing an extensive roadmap to transform the business. That said, we don't expect any bottom-line contribution from the Australian segment for fiscal 2026 once integration costs are factored in. Our previously issued guidance for fiscal 2026 applies exclusively to our Canadian segment. And with these clarifications, let's turn now to our second quarter results. In Q2, sales increased 10.3% compared with the same period last year, coming in at over $1.7 billion. This was primarily driven by 4.9% growth in same-store sales in Canada, as well as additional revenue from a growing number of stores. As explained earlier, revenue also included contributions from the Australian segment for 13 days amounting to $25.7 million. Drilling down on same-store sales in Canada, these consisted of a 3.9% increase in the number of transactions and a 0.9% increase in average transaction size. Strong traffic and demand for consumables were the primary drivers behind this performance in an environment where consumers continue to seek value and to deploy discretionary spend carefully. Our full year guidance for SSS in Canada remains unchanged at between 3 to 4%. However, given our strong performance for the first half of the year, we now expect to be in the upper end of that range. The Canadian consumer remains fragile and cautious on discretionary spending in a context of continued economic uncertainty. We are mindful that this may have an impact on SSS in the second half of the year a period of historically strong seasonal sales. Also, remember that we are lapping a 53-week year, which happens every five to six years and causes a shift in the days that fall into any given quarter. That impact will be felt in Q4 when we will be up against a quarter that included Halloween last year, whereas Halloween falls in Q3 this year. The last time that happened was in fiscal 2020. Consolidated Q2 gross margin was 45.5% of sales in Q2 compared to 45.2% in Q2 last year. The improvement is primarily explained by lower logistics costs. We continue to expect some headwind pressure on margins through the second half of the year, namely from mix and higher shipping costs. We do, however, now anticipate ending up in the upper end of our annual gross margin guidance range for the Canadian segment of between 44.2 to 45.2% of sales. SG&E represented 14% of sales in Q2 compared to 13.6% for Q2 of fiscal 2025. The increase versus last year is primarily driven by SG&E from the Australian segment which had a 20 basis point impact. Labour costs are one of the structural differences between our Canadian and Australian segments, as these are higher in Australia than in Canada. SG&E and Q2 also included a 20 basis point impact related to a one-time transaction cost. Guidance expectation for fiscal 2026 SG&E for the Canadian segment remains unchanged. at between 14.2 and 14.7% of sales. EBITDA was $588.5 million compared to $524.3 million in the second quarter of fiscal 2025. Q2 net earnings increased by 12.5% to $321.5 million, resulting in an increase in diluted EPS of 13.7% to $1.16. The Australian segment had a slightly negative but immaterial impact on net earnings and diluted EPS in the quarter. With our now increasingly global operations, you'll see a nut-tick in our effective tax rate of roughly 100 basis points going forward. Following the TRS acquisition, we are now subject to Pillar 2 and we operate in higher tax rate jurisdictions. For Q2, the year-over-year increase to 27% from 25.1% in Q2 of last year is also explained by a non-recurring impact of $6.7 million related to a licensing agreement entered into with Dollar City for the expansion of the business in Mexico. Dollar City continues to deliver impressive earnings growth. Our 60.1% share of Dollar City's net earnings amounted to $38.3 million this quarter, compared to $22.7 million in the second quarter last year. The year-over-year increase is driven by strong same-store sales, a growing store network, gross margin expansion, and increased stake compared to last year. During the quarter, we used proceeds from our US $37.6 million share of the DollarCity dividend from December to make an initial capital contribution of US$18 million for Mexico expansion plans. And just after Q2 ended, the Dollar City Board approved a second cash dividend of US$62.5 million, an amount consistent with the previous dividend. Our share of that dividend again corresponds to US$37.6 million and is expected to be received in the third quarter. In Q2, we repurchased just over 932,000 shares for a total cash consideration of $174.8 million. We also announced today that the Board approved a quarterly cash dividend of $10.58 per share. We intend to continue prioritizing allocating cash to share buybacks to maximize shareholder value subject to market conditions. along with consistent quarterly dividends as part of our balanced capital allocation strategy. In terms of our debt structure, we completed a $600 million bond offering back in June. The proceeds will notably be used to repay the $250 million bond that comes due this fall. In conclusion, We are pleased with the underlying trends driving our performance so far this year and with our capacity to unlock even more value for our shareholders as we expand internationally. We approach this while remaining mindful of the shifting macro environment and how consumers are adapting to it with a focus on delivering compelling value. Our core Canadian business is strong, growing and profitable. And with our free cash flow generation, and multiple complementary expansion platforms, we have valuable optionality to effectively deploy capital. Through sound capital deployment and disciplined execution across our platforms, we look forward to driving long-term growth and value creation for our shareholders. With that, I'll now turn the call back to the operator for the Q&A.