Release Date: September 11, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Dollarama Inc (DLMAF, Financial) reported strong second quarter fiscal 2025 results with an EPS of $1.02.
- Same-store sales grew by 4.7% in Q2, despite a cautious consumer spending environment.
- Gross margin improved to 45.2% from 43.9% in Q2 of fiscal 2024, driven by favorable shipping rates and lower logistics costs.
- Dollarcity opened 23 net new stores in Q2, bringing the total store count to 570, reflecting strong consumer response in LATAM markets.
- The company repurchased over 2.1 million common shares for cancellation, demonstrating strong capital allocation and shareholder return strategy.
Negative Points
- Seasonal product sales were softer, impacted by unfavorable weather and cautious consumer spending.
- Same-store sales growth is expected to normalize in the second half of the year, implying a lower growth rate compared to the first half.
- SG&A as a percentage of sales remained flat at 13.6%, with expected pressure in the second half due to increased store labor and operating costs.
- Higher logistics costs are anticipated in the second half of the year, which may impact gross margins.
- The company faces challenges in maintaining basket size, which decreased by 2.2% despite an increase in the number of transactions.
Q & A Highlights
Q: Can you provide more detail on consumer spending trends and how they evolved throughout the quarter?
A: The summer sales started very soft due to terrible weather across the country, which negatively impacted all retailers. Sales increased towards the end of the summer but not enough to make up for the slow start. Back-to-school sales were in line with expectations, and it's too early to draw conclusions for Halloween. Overall, general merchandise sales remained stable.
Q: Are you seeing any changes in the competitive landscape, particularly with other players trying to drive traffic by competing more directly with Dollarama?
A: Generally, no significant changes. All retailers in Canada are aware of their relative values and competition. Loblaws introduced a new concept in low-cost food, but we are not primarily in the grocery business. We will continue to monitor all retailers to stay competitive.
Q: Can you elaborate on the strong gross margin performance and any expectations for the second half of the year?
A: The strong performance was driven by lower shipping costs and improved logistics productivity. We expect some headwinds in the second half due to the need to push more volume through the system, but we are comfortable with our full-year guidance of 44% to 45% gross margin.
Q: How are Q3 same-store sales trending so far, and do you expect them to normalize towards your full-year guidance range?
A: It's too early to provide specific numbers, but we are reiterating our full-year guidance of 3.5% to 4.5% same-store sales growth, implying a normalization in the second half. Traffic and demand trends are continuing as seen in Q2.
Q: Can you provide insights into Dollarcity's financial position and potential for capital distribution, especially with the upcoming Mexico expansion?
A: Dollarcity is generating strong free cash flows and has a solid balance sheet. We will leverage existing infrastructure for the Mexico expansion, and Dollarcity may evaluate returning capital to shareholders in the future, similar to Dollarama.
Q: Are there any differences in consumer behavior between Dollarama and Dollarcity markets?
A: Consumer behavior is surprisingly similar across Canada and the four countries where Dollarcity operates. In countries like El Salvador and Guatemala, we are leveraging our infrastructure more effectively, while in newer markets like Colombia and Peru, we are still growing our logistics capabilities.
Q: How does the shift in sales mix affect your assortment planning for upcoming seasons like Halloween and Christmas?
A: The sales mix shift does not significantly affect our assortment planning as seasonal products are committed almost a year in advance. Consumer focus on basics over discretionary items is a normal cycle that we have seen many times.
Q: Are you gaining new types of customers, particularly higher-income ones, given the resilience in traffic numbers?
A: We do not disclose specific customer composition data, but it is natural for higher-income consumers to seek lower-cost alternatives during tougher economic times. This trend is consistent with historical patterns.
Q: Can you provide more details on your in-store productivity initiatives and their impact on labor costs?
A: Productivity in our stores is a continuous focus, and we have various initiatives to combat inflation in wages. Our financial results indicate that these initiatives are paying off, but we do not disclose specific details.
Q: How should we think about the back half comp guidance, considering factors like Halloween timing and seasonal sales?
A: The back half comp guidance of 3.5% to 4.5% implies normalization. Q3 will lose two key Halloween sales days, which will shift to Q4, skewing Q4 more positively. Seasonal sales are crucial, but it's too early to predict their impact.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
