Q2 2023 Dollarama Inc Earnings Call
All participants please standby your meeting is about to begin.
Good morning, and welcome to the dollar on our fiscal 'twenty 'twenty three second quarter results conference call.
Neil Rossy, President and CEO and J P. Turner 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 all around my Dot com in the Investor Relations section as well as on SEDAR.
Before we start I have been asked by dollar amount to read the following message regarding forward looking statements.
All around my 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.
Florida <unk> 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 issuance that such estimates and assumptions will prove to be correct me.
Many factors could cause actual results levels of activity performance or achievements future events or developments to differ materially from those expressed or implied by the forward statements.
As a result, Dell or am I 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 statement regarding forward looking information contained in dollar amounts MD&A dated September 9th 2022 available on SEDAR.
Or are they getting statements represents management's expectation as at September 9th 'twenty, 'twenty, two and except as maybe required by law.
Irma 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'll now turn the conference call over to Neil Rossy.
Thank you operator, and good morning, everyone.
All around the 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 dollar on this brand promise remains more relevant than ever.
Our teams are working diligently to ensure that we are providing a convenient.
Shopping experience and the best year round value on the broad assortment of items I'd.
I'd like to recognize the dollar M a team for their contributions and commitment.
Our 18% sales growth was driven by particularly strong demand for 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'll recall last year during the same quarter, we faced bans in Ontario, which impacted over five five weeks of the quarter.
That time over 40% 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 this 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 merchandize that compelling value. It's essential that our stores are well stocked ahead of tea season.
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 and approach, which served all around <unk> 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 31.
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 and exceptionally high volume of goods.
US and our 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 topline 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 marks a year since we started offering our products on the <unk> delivery platform.
Today, we have about 3500 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 door dash and the British Columbia market with just under 100 stores participating.
Sales 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 dollar Armours brand awareness address nation needs and allow us to offer items by the case or unit in a way that integrates seamlessly with our business model, that's better servicing our customer base.
Turning to dollar city in Latin America.
<unk> continues to perform well generating strong sales growth and a solid net new store opening cadence.
During the second quarter ended June 30th dollar City opened 19, net new stores, bringing its total store count to 377, 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 are well stocked and well assorted stores.
We're equally committed to maintaining a relative value by always moving on price left 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.
J P over to you.
Thank you Neal and good morning, everyone.
<unk> delivered another strong for all the 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 34% of sales diluted earnings per share increased by 37.5% to 66.
This earnings growth reflects our excellent top line active gross margin management lower logistics costs, good SG&A performance and a higher equity pick up from dollar city.
Selling down on same store sales. These grew 13, 2% compared to a decrease in S. SaaS of five 1% in the same quarter last year, reflecting COVID-19 restrictions and on target.
This was comprised of 22% increase in the number of transactions coupled with five 8% decrease in average transaction size. This reflects a continued trend reversal since the height of the pandemic.
<unk> store traffic reflect the strength and quality of our value proposition, especially in an inflationary environment. When Canadians are seeking more value for them their money something's all around that has consistently delivered.
Gross margin was 43, 6% of sales compared to 43, 4% in Q2 last year.
The 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 driven by industry wide supply dislocation.
Now that our warehouses and distribution center are busy processing, a high volume of incoming inventory ramp up and those costs will be reflected in our margin in the third and fourth quarters of the fiscal year, two illustrates 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.
As G&A came in at 13, 8% of sales compared to 15, 3% last year, which primarily primarily reflects no incremental direct COVID-19 costs this quarter and scaling from strong sales growth.
Our share of dollar cities and that 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 CIB with the repurchase of three 7 million shares in Q2, and the board approved a quarterly cash dividend of $5 53 per share at.
At quarter end, our adjusted net debt to EBITDA ratio was 279 times within our comfort zone of $2 75 to three times adjusted net debt to EBITDA. We also renewed our in CIB program in July along with allowing for the repurchase of up to seven 5% of our public float between July 2022 of July 2023.
We continue prioritizing the repurchase 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 billion and $15 million and extending all tranches by an additional year in tandem we upsized our U S. Commercial paper program from 500 to 700 million U S dollars.
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 a more.
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 <unk> growth and the timing of logistics cost 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.
Looking at the assumptions on which our guidance ranges are base. These also remained unchanged except for Comparables 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.
Teen restrictions materialize. 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 six 5% to seven.
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 impact of inflation. The last few years have only reinforced the resilience and the relevance of <unk> business model and the Canadian REIT.
Ecosystem.
That concludes our formal remarks, and I'll turn it over to the operator for Q&A. Thank you.
Thank you we will now take questions from the telephone lines.
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Our first question is from Irene <unk> with RBC capital markets. Please go ahead.
Thanks, and good morning, everyone.
Could you provide us with more detail around what you're seeing in terms of basket composition.
With respect to consumables and seasonal and what the consumer response has been as you began to rollout the higher price points.
As far as the higher price points go it's a little too early to give you feedback on that front and as far as the mix goes I mean, I'll, let J P interest.
On the mix Irene what what we're seeing of course is.
Very strong performance in the key consumable categories.
We all know about that the one thing to keep in mind is at the same time. We're also seeing a good seasonal performance. So I'll give you. An example for example in our spring summer assortment items like Beach stories barbecue accessories for example did extremely well.
And maybe one last element to help answer your question.
Is that.
We're continuing to see some reopening dynamics so.
We're seeing people wanting to get together. So for example in Q2, our party category performed extremely well. So those are some of the elements that we're seeing from a demand dynamics and a lot of the Q2 trends that that you've noticed in terms of basket size and traffic.
Also remains true so far in Q3.
That's really helpful. So if we think about the back half of the year and particularly as we come into Halloween and Christmas season, We had a couple of very strong years.
During 'twenty one 'twenty. So how are you thinking about.
Demand and how are you positioning your inventory for for this year.
Yeah in terms of our inventory position for Halloween and Christmas.
I think Neal in in his opening remarks mentioned, the the rebuilding of our inventory position that.
That inventory was under water at the end of Q2 now is making its way to our stores. So we expect to be in a very solid position for Q3 and Q4.
You will see some of our higher price point items also in our seasonal assortment for the back half of the year as well.
But it's too early to call, how Halloween and Christmas will play out, but one element that we're seeing that we're noticing now is back to school and stationary performing well and so that's usually a good indicator of our performance for other seasons.
That's really helpful. And then finally last question I promise any hints as to what types of items, we might see in seasonal at the higher price point.
Uh huh.
That's very difficult question to answer many types of items.
Price point in the seasonal categories, you're going to see decorations youre going to see table, where youre going to see.
Our exciting new items honestly that we could never offer our customer before.
I'm sure there'll be a small handful of items that you know over the last two to three years, we've not been able to offer because they simply are.
<unk> left our price point.
You'll see a mix at the highest end of <unk>.
Few of the best items, we had that we could no longer afford so to speak and you'll see several new items that are simply items, we could never offer because they again.
Even though they're new we're items, we couldnt afford it before you.
That's great. Thank you.
Thanks Harry.
Thank you.
Our next question is from Brian Morrison with TD Securities. Please go ahead.
Alright, thanks, very much and there were some $5 shock lapses.
In the store that can come in handy this weekend right.
I will ask the question with respect to you've got these price increases have been put through you've got the value proposition being maintained and your gross margin was flat. This quarter were slightly up so with the added flex in the second half when the new price points and inflation stabilizing I'm just wondering aside from warehouse logistics costs.
Mixed sounds like it's priced in.
This is going to prevent you guys from maintaining the gross margin as we go into the second half of the year.
I think on the gross margin front the bri.
Brian There are three elements first of all you mentioned that the environment remains fairly disciplined and we've been able to use the leavers that.
We all know about to manage inflationary pressures number to the mix.
You touched on it.
Consumables.
Consumables piece.
Has been accelerating in the first half.
Keep in mind that in Q2 were comping against a fairly weak seasonal offering in in.
In the prior year, just given the restrictions that we had to deal with.
And we will be Comping in Q3, and Q4 against a good seasonal performance. So there is.
Some mix.
Some mix happening in the second half and then timing of logistics costs I think we went through it on on the introductory remarks, but those would be the kind of three elements.
To help you think about gross margin for the for the back half of the year.
Okay. Okay. That's helpful. JP and then on dollar city I understand it's a calendar year, but I'm not clear as to why Q2 would not be stronger than the January to March timeframe.
And you did mentioned the new store target coming that we'll hear about next quarter, but perhaps Neil you might be able to provide a high level. How you would compare the Peru market to Canada in terms of opportunity as populations are fairly similar.
They are but it is very different.
Setup geographically the bulk of your entire country's population is in one city and so because it is a super non standard.
<unk> setup and particular in Peru, and Lima really represents the vast majority of all of the population base in the country.
We've never had the experience.
To operate in a country where almost.
All of our stores from a percentage perspective will end up being within one city and therefore, we don't know whether that will affect cannibalization differently. The challenges of real estate differently et cetera. So we don't we don't want to make too many assumptions as you know, we're we're conservative by nature and Thats probably.
Why.
Youre seeing what youre seeing.
Okay and in terms of the second quarter performance versus the first was the first quarter just extremely strong.
So I mean, we're quite pleased with where the second quarter performance is still I mean, that's 87% year over year growth.
And our equity pickup.
But to your question more precisely I mean, as we're investing to ramp up Peru, and and Neil talked about the App.
<unk> that are underway there I mean, there is definitely there's definitely some drag on the bottom line from the pair with investments.
<unk>.
We'll update you on then.
The December results and unlike.
Growing the business in a single country.
The dollar city business is a more complex business in some ways. Because every time you enter a new market you're not entering the new provinces, rather entering a new country. It's got a whole new set of regulations registrations rules et cetera, and therefore.
Requires exponentially more bandwidth from the team and <unk>.
Energy too to understand how to operate in that new environment and also has a higher cost of course to establish oneself before before the store count and scale.
Call back at that initial investment.
Alright, Thank you both for the color.
Thanks, Brian .
Thank you. Our next question is from Peter Sklar with BMO capital markets. Please go ahead.
Hi, Good morning, Neal you've called out a number of times about mix shift you're seeing in to consumables versus discretionary.
I'm just wondering what your explanation is that do you think youre seeing trade down because the consumer is under pressure so consumers trading down to <unk>.
Dollar rambus seeking more value versus other retailers or is this a permanent structural change in the mix, we're going to see.
So all around but if you could just comment on that please.
Well I would love for it to be a permanent structural change, but unfortunately, I don't think thats. The case I do believe that there's probably some trading down because of the inflationary environment and the pressures on on everybody's wallet.
And I think it's a great opportunity for people to see that the goods we have in our stores.
And all of those sections of our stores all the departments.
<unk>.
Okay.
Quality that will make them happy at a price that obviously is making them happy and it's a great opportunity for us to keep some of those customers that might not otherwise have tested those items are coming into our stores for those items, but to say that it's a change in the system.
I'm not smart enough to know that answer, but I would tell you that I would think that your second theory is the correct here.
Okay, and J P can you talk a little bit about the inflationary trends, you're experiencing specifically with respect to labor and logistics costs.
Yes, so on the logistics front.
It's really a catch up on inventory I mean in Q1, we mentioned a tailwind of 20 to 30 bps from lower logistics costs in Q2 that tailwind of 70 bps.
I mean that was just due to the fact that the supply chain was dislocated and containers were on water now theyre, making their way to our DC and our stores and so the logistics costs are readjusting.
So that's number one number two more strategically at a high level I think we're seeing if you just look at container prices currently.
They're normalizing, which is a good indication of overall supply demand dynamics. So I think we're seeing some normalization of the supply chain environment.
We're nowhere close to being back to pre pandemic levels, but we're in a better situation than probably six to nine months ago.
And then on the labor front.
Okay.
The only thing I'd say is.
A lot of the observations that we made in Q1 are still true and relevant today theyre not better not worse, so nothing material to report on that front.
Okay, and then lastly, if you could just talk about your.
Our success or lack thereof in terms of recruiting labor into the store how is the backdrop there.
Well, it's a challenge.
The challenge like every other industry in the country to be honest I don't think there are any exceptions to that rule.
Retention is a challenge hiring is a challenge but.
Our operations team has done an exceptional job over the course of time.
Making our employees feel the love sort of speak and we listen and that Theyre part of a team and that they are proud proud to work at dollar and that helps a lot.
And it is a very very difficult thing to execute at scale and so that's helped a lot but for sure. We are not an exception to the challenge that has faced every other Canadian business and North American business, and that's labor and labor challenges.
We've put a bunch of initiatives in place, making making all the different pieces of the hiring process smoother and more efficient and less burdensome, both for the potential higher and for our stores and in our experience our currency.
And.
So it's a mix of all those things, but certainly.
We are not an exception to the challenge, but I am proud of how we've manage it today.
Okay and have you had to curtail store hours at all.
We have not had to curtail store hours.
Thank you.
Thanks Peter.
Thank you. Our next question is from Vishal <unk> with National Bank.
Please go ahead.
Hi, Thanks for taking my questions.
On the 70 bps of benefit.
In Q2 that will subsequently unwind was that what was anticipated in Q1 or a similar magnitude because I know in Q1, you mentioned the 20 to 30 and you said that it would it would unwind in each too, but I don't recall hearing about this potential 70 bps.
So was that worse than expected or better depending on your viewpoint.
No I mean, it's in line with where we expected them we knew that.
Our supply chain with eventually normalize then it would catch up.
We didn't know if it was a Q2 or Q3 thing.
We suspect that there would be in the second half, but what we're seeing now is just the timing.
Timing thing between two quarters and overall for the year is very much in line with our expectations.
Okay.
With respect to the can you quantify the amount.
It's such a large inventory number can you quantify the dollars of inventory, that's that's youre waiting to receive on land.
I mean without without going into specifics I would say.
Out of that.
Out of the 40%.
The year over year increase there is at the end of Q2, there is a significant proportion that was on the water that today would be making its way to our D. C in our warehouses and our stores.
Okay.
How should we think about your in stocks now relative to where you'd like them to be.
Yeah.
In stock position is I think where we'd like them to be and get even better in the next six to eight weeks. So our in stock position ahead of the key seasons that our Halloween and Christmas.
We'll be right in line with where we'd like to see them.
Okay.
Okay and.
And when we think about inventory going forward or are these higher inventory numbers that.
A short term thing or should we think them to revert back to dollar on the standard way of operating.
So I mean, when you look at it on a per store basis.
Vishal and you account for the store growth our inventory per store.
A rough flax number one.
Store growth as I mentioned, but number two also the fact that.
We're preordering ahead of time.
A lot of the seasons and we're increasing our safety stock so.
The inventory levels that you're seeing now is the standard way of operating and where we want to see our inventory given everything. We just went through we were very pleased to have additional in venturing our warehouses during the peak of the supply chain prices and so we're.
Rebuilding our inventory position in our warehouses, we're preordering in the seasons. So that if anything were to happen in the future. We have the same buffer that we had last year.
And maybe just for the foreseeable future certainly for the future.
The world turns back into an extraordinarily stable place.
Two or three or four years from now we may change that a little bit but in the world. We live in currently this is these are the levels we're comfortable.
Okay, and maybe just one last one here in terms of the heightened inventory just remind me on dollar almost.
Our point of view inventory doesn't solve it.
As expected I'm, not saying that that will happen, but if it doesn't sell as expected.
All of them are typically take that in parking away or do the results. It was there.
Discounting as well.
So seasonal goods.
Thankfully, it's not been an issue of any relevance in the last 27 plus years.
But when it happens and it does happen that for sure because.
It happens to the best of it.
Everyone.
That item.
In particular will be addressed and it'll be addressed in different ways, depending on the situation. If it's if it's a.
Three or four or five dollar item, then we may market down to a lower price point and see whether it sells at that price point and if it's a low cost item to start with you know.
Less than $2 will likely find a way to.
Top selling it and either.
Find someone to give it to that can make good use of it.
There are some other part of the world or some less fortunate depends.
Depending on the type of product or we will destroy it because it's simply not worth the time and energy to transfer it from our logistics to our stores.
But generally speaking it is a my new percentage of good guidance and just to be clear, we're not expecting to have to mark down any of our items to get that get them through our system. So the items, we have in inventory, we're very comfortable with them their relevant through the seasons.
And through the years, we are ecstatic to be in the in stock position we are.
So none of the goods that are part of the building up of inventory have anything to do with an item or items that are not selling as well as we hoped.
Alright, thanks for your time.
Thanks Vishal.
Thank you. Our next question is from Patricia Baker with Scotiabank. Please go ahead.
Thank you and good morning, everyone just coming back to you.
Thanks, Doug.
Topic up 22% in the quarter and this kind of follows along Peters.
And discussion do you have any visibility on whether within that higher traffic.
And customers that are new to Colorado.
Yeah look I think.
Two things here I mean over the past two years and through the pandemic.
<unk> been there for customers and now.
As as trade downs happening due to inflation I think in some categories that are.
Consumable related seasonal some general merchandise.
Some of that traffic is gaining share.
Is that.
<unk> new customers likely is that the frequency of trips increasing also likely.
But you've put one and two together.
I think we're in an environment, where we're gaining market share as a result of everything we know about.
Okay. Thank you J P and then secondly, coming back to your discussion on <unk>.
Commerce on your additional.
Offers guarantee to correct that.
Door to ask et cetera are there any notable trends youre seeing there and the products that people are ordering or is it across the board.
No theres, no noticeable trends and product and I just wanted to provide a little more color that.
The dollar Im a customer generally is well served of course by our store base, which is continuously growing and getting closer to where they live.
But.
There was always a customer that wanted to buy a high volume of.
Specific item and when they went into our stores or into multiple stores to clear that item out it would cause all kinds of problems from a replenishment perspective and of course aggravate other customers, who couldnt find that item in the store after those people have come and gone and so we built our or by the case platform to resolve that need of that custom.
That wanted a higher volume of specific items and we've always understood that theres also a customer that wants to buy.
Single items on an e-commerce platform, but that the economics for dollar am I never really made sense to be quite honest and that's why we never went down that path, but now that there are platforms, who specialize in this particular service it makes much more sense and so the customers that can afford that server.
Because there's a cost to that service to have somebody go pick item by item for you and Havent brought to you or to your house or wherever you live.
It comes at a cost, but it is something that many people can afford.
And so those people generally who can afford them, we're not coming into our stores and so we do feel and.
We have some data to back it up of course that these platforms are a great way for dollar AMA to attract a customer that is not physically going to our stores thankfully that's not many Canadian but it is some Canadian and so that's part of why we are doing this particular exercise because we feel it's another.
Way to service customer that wasn't.
Going into our stores, it's not a significant percentage of Canadian population, but it's a very nice way to complete sort of the service level for the people who want to buy things from dollar.
That's excellent color.
I appreciate that and you never know you might some of those customers might end up going into your stores essentially.
Final question.
Wanted to follow up on the discussion that you had about labor.
You made a reference to the fact that you guys are doing everything you can store level employees feel loved and I'm just curious whether the employees.
We will have any kind of visibility on career progression within dollar am I like for example.
Thank you two examples of people who moved from being installed level are pointing to a manager from the manager at the district manager because thats, probably something that would be very attractive.
Retention.
Very much so so so joanne.
Our COO and team have done a superb job.
And making sure that the clarity of career progression for our employees starting from.
The entry level to managerial level too.
Regional management levels et cetera is clear and an opportunity and something that makes us happier.
Then anything is to see the people we've hired move all the way up through the system and be successful at all of them for their entire careers.
Okay. Thank you Neil.
Thank you.
Thank you.
Our next question is from Matt Hedberg.
With Wells Fargo. Please go ahead.
Yes, good morning.
Thanks for taking my questions Anthony on for Ed.
I just wanted to ask you about the guidance on SG&A, you guys make the comp guidance pretty considerably.
I guess I would've expected some additional fixed cost leverage associated with that higher sales number all else equal. So just any additional thoughts on costs and what youre seeing that might be driving a little more caution there.
Yes.
As mentioned in Q1 I think.
The environment, we're seeing is of course, an inflationary environment and that that is true for the cost of everything and also wages are going up so that is why were.
We're we're not revising our SG&A guidance.
Okay got it that's helpful. And then just unemployment pass through can you just give a little more color on the level of price you are taking.
And how elasticity has been on that product.
Yeah I'd say.
We're in an environment where.
It's remained fairly disciplined.
You know where price followers, so we always adjust loss in our <unk>.
Sol and only purpose is to provide the best value. So.
What we're seeing right now is an environment where.
We've been able to adjust and use the levers that we all know about two to manage our gross margin.
Actively and.
Consumers are responding extremely well as you saw with our Sss performance.
Got it thanks, so much guys.
In Q.
Thank you.
Our next question is from Martin Landry with Stifel GMP. Please go ahead.
Hi, good morning.
I just wanted to follow up on the online discussion.
And in your opening remarks, you mentioned that you don't expect online sales to become material over time.
I was wondering why you don't see much upside for online sales is it because as you mentioned it maybe.
Cost prohibitive at this point.
Consumer.
It's pretty.
Simple the reason, we don't believe it will be consequential is that a.
Dollar Ammers strength.
Aside from having.
A powerful assortment and offering and its value is the fact that we are very conveniently located close to most Canadians and so our way of addressing the market has always been to continue to open stores closer and closer to where they live so that.
It is a very convenient shop and since it is a convenient shop and since we already have.
Over 1400 stores in and around our customer base.
Unlike most.
Ah.
E Commerce platforms.
This is really meant to serve the customer.
That does not wish to displace themselves because there is always a cost to buy something on ecommerce. There is always a delivery costs, whether that cost is a cost that you see or is the cost that they are embedded in the cost of the goods I mean, nothing that might get delivered for free it's just not quite worldwide it costs money.
Need to have vans it costs money to have in place driving those vans around and putting things on your doorstep right your mailbox or what have you.
At the end of the day, there is always a cost to bring things to you and therefore that is not.
Any different at dollar ramp up if you go to one of the platforms that we're partners with there is a cost it is a cost that's affordable to.
To a group of people and therefore, a convenience they can afford in a great way for them to get what they want but it's a cost that many canadians cannot afford and therefore those Canadians will continue.
To buy in our bricks and mortar stores and we believe that that will be the case for the vast majority of our shoppers and therefore the percentage of e-commerce customers will be much smaller and therefore less consequential on our bottom line.
Okay. That's helpful and maybe just switching gears to your supply chain.
No.
There is a slowdown in the manufacturing.
In China, and it seems to have tilted a little bit the bargaining power in papers are importers like Mike Rama.
And I was wondering if you've benefited from from better pricing with your suppliers to do does that slow down in Asia.
Certainly we are seeing the market in Asia.
Get softer and therefore easier to contend with.
So I think that's a very valid and astute observation on your part.
By the same token for whatever reason every domestic vendor in North America, Canada, and the U S is still going in the opposite direction and raising everyones cost.
So I'm not sure I fully understand how that works, but I do understand that there's higher labor costs and higher logistics costs, but I can tell you that whatever is happening in China.
It is being countered by the North American experience on the cost front.
Okay. That's helpful. And then last question on dollar city.
Given that you've increased your price point in Canada too.
$5.
I was wondering if U S dollar city increase their price points as well to the follow up what you've done in Canada, We did increase our price points and in Central and South America. However, we increased to $4, because we hadn't gone to $4.
Before a year and a half ago or so and we went to that price point, but.
City will always remain or have a very serious lag to our price points for many reasons, including some of the markets are U S dollar based market.
Et cetera, it's a different business in a different venue and therefore.
The pricing strategy is really one that is all about the market that they're in and the cost of their goods. When those goods are landed in those countries of operation.
Okay. That's helpful. Thank you.
Okay.
Thank you.
Our next question is from Jackie <unk> with Canaccord Genuity. Please go ahead.
Yeah, Hi, just.
Furthering on under discussion at the higher or the highest price point items.
Should we expect these items predominantly to be in the seasonal category or are they going to be spread across some of your other categories as well there'll be spread across the store wherever it makes sense from from the buyer's perspective that the offering is a more interesting offering to the dollar I'm a customer and any given category they will add those.
Items.
And have you seen a response at all from any of your.
Competitors and I use that term loosely just following the introduction of these new price points.
Well everyone is our competitor.
And the same sense that we are everyone's competitor, because we dabble a little bit and everything.
But but the competitors run their businesses and we run ours and I have to admit.
I'm not privy to the strategy sessions that go on in their businesses, but I will tell you that every Canadian retailer is competitive and wants to do the best they can for its shareholders et cetera.
Im sure there, they're walking our stores like we walk everybody stores and so everybody is doing their best but to say that we've seen some particular strategies from some particular retailer that has not been the case.
Hey.
And then just last one switching gears a bit but I believe the put option.
The remainder of dollar city.
Comes into play in a month or so at this time.
Are you comfortable with your with your balance sheet or.
Or how are those discussions going should the owners decide to exercise that option.
The indications at this point.
The put option will not be exercised in October .
Aye.
Or for the foreseeable future so.
We're very comfortable with our balance sheet, if it were to be exercised but at this point, it's not even a concern because.
It's not headed in that direction.
Okay. Thank you very much thank you.
Okay.
Thank you.
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