Q2 2020 Earnings Call
Oh, yes.
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All participants please standby your meeting is about to begin.
Good morning, and welcome to the dollar I'm, a fiscal 2022nd quarter results Conference call.
Neil Raucy, President and CEO , and Michael Roth CFO will make a short presentation.
Which will be followed by a question and answer period open exclusively to financial analyst.
The press release financial statements and management's discussion and analysis are available at dollar Ramadan in the Investor Relations relation section as well as on SEDAR.
Before we start I have been asked by dollar amount to read the following message record regarding forward looking statements.
Delaram. His remarks today may contain forward looking statements are both current and future plans expectations intentions results levels of activity performance goals or achievements of delaram or dollar city or any other future events or developments that may affect Alabama or dollar city.
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 and circumstances.
However, there can be no assurance that such estimates and assumptions will prove to be correct.
Many factors could cause actual results levels of activity performance achievements future events or developments to differ materially from those expressed.
Or implied by the forward looking statements.
As a result dollar amount cannot guarantee that any forward looking statements will materialize and you are cautioned not to place undue reliance on these forward looking statements for additional information on underlying assumptions and risks. Please consult the cautionary statement regarding forward looking information contained in dollar Ram as Mdna dated September 12, 2019, and in dollar Emmis press release announcing the dollar city transaction dated July 2nd 2019.
Both available on SEDAR.
Forward looking statements represent managements expectations as at September 12, 2019, and except as may be required by law dollar AMR 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 Mr. Rossi.
Thank you operator, and good morning, everyone.
This morning, we released our second quarter financial results and we are very pleased with our sustained top line performance throughout the first half of the fiscal year.
These results are particularly encouraging given the current Canadian economic and retail environment.
Factors contributing to this solid performance include our continued focus on category management and various merchandising tactics.
Supported by strong execution by our stores.
We are very focused on stimulating traffic and increasing basket size.
I'm pleased with consumer response today.
We continue to survey our customers to ensure that our offerings and our concept resonates.
While we continue to hear is that dollar AMA as a destination for a broad range of Canadian consumers, who recognize our compelling value and this is a testament to the strength of our business model.
This year has been all about fine tuning that model and about leveraging our strength and we are pleased with our progress.
We have been carefully expanding our product offering where we see opportunity to provide customers with new exciting products at compelling value across existing categories.
We believe that positive consumer response to this expanded offering has contributed to sss growth of 4.7% this quarter.
As a reminder, the official numbers, we disclosed annually are over 4000 active year round skews.
And over 700 active seasonal skews at any one time.
An increase in our SKU count is very manageable for us from an inventory and merchandising perspective.
In addition to providing customers with even more variety.
Based on our strong topline performance to date, the result of a varied and compelling offering coupled with several successful merchandising tactics.
We have revised our full year same store sales assumption upward.
Looking now at the bottom line, we do expect margins to continue to be impacted by a slight decrease in the product margin.
Higher sales of lower margin items, and higher logistics costs throughout the remainder of the year.
As a result, we have narrowed our previously disclosed guidance range for the full fiscal year to the lower half.
We are confident that our sustained focus on stimulating topline growth.
While still maintaining industry leading margin.
Is the right approach in what continues to be a competitive retail environment.
On the operational front, we opened 14 net new stores in Q2 compared to eight in Q2 last year.
Total store count Rose to 1200 50 stores.
Our store pipeline is strong and we are on track to meet our target of 60 to 70 net new stores for fiscal 2020.
Our distribution center expansion project is almost completed and remains on time and on budget.
As previously discussed the current phase consists of the integration of the new building extension with the existing facility and the installation of equipment.
This work is ongoing since last quarter and is expected to be completed before the end of the current calendar year.
Once completed.
Our expanded distribution center will enable us to easily support our long term growth plan of 1700 stores across Canada by 2027.
Finally, before I pass it over to Michael.
A few words on dollar city.
Subsequent to quarter end, we officially closed our previously announced transaction to acquire a 50.1% interest in dollar city, which is expected to be immediately accretive to earnings.
And made an upfront payment of 40 million us dollars.
As per transaction terms. This represents just under half of the total estimated purchase price.
Which will be calculated based on dollar cities audited financial statements for the 12 month period ending June Thirtyth.
2020.
This truly marks the beginning of a new phase in dollar EMS growth trajectory.
By establishing a second growth platform in Latin America, and complement to our existing Canadian growth strategy.
We are excited about this market's potential and confident in the dollar city management teams ability to execute on its growth objectives.
As previously disclosed.
The objective is to reach 600 dollar city stores by 2029.
And the three current countries of operation with the majority of store growth to be focused in Colombia.
The target for the 2019 calendar year is to open 40 to 50 net new stores.
Dollar City opened 11 net new stores in its Q1 and an additional 12 stores in its Q2.
This brings its total store count to 192 stores with a 91 locations in Colombia.
45 in El Salvador, and 56 in Guatemala.
As at June Thirtyth, 2019, and nearly at the halfway mark of its annual target.
Michael over to you.
Thank you Neil and good morning, everyone. So looking now at our financial results and updates to our annual guidance sales were up 9% to over $946 million and same store sales growth was also very strong at 4.7% as explained by Neil a moment ago. So comparable store sales growth for the second quarter of fiscal 2020 consisted of a 3.8% increase in average transaction size.
Primarily driven by an increase in the number of units per basket and a 0.9% increase in the number of transactions. This is the second consecutive quarter of strong same store sales as a result of our performance to date. This year, we are revising upwards, our full year same store sales assumption to a range of.
3.5% to 4.5% from a previous range of 3% to 4%.
Neil also touched on gross margin, which stood at 43.7% of sales coming in lower year over year based on performance to date and on the visibility on open orders on product margins for the next three months, we are narrowing our previously disclosed guidance range on gross margin as a percentage of sales to 43 point, 25% to 43 point, 75%.
From 43 point, 25% to 44.5%.
As Jenniffer represented 13.9% of sales this quarter, just slightly higher year over year as a percentage of sales due to timing of certain expenses.
Annual guidance remains unchanged and in the range of 14 point, 25% from 14 point, 75%.
EBITDA was up 3.5% to 281.6 million, representing 29.8% of sales net earnings were $143.2 million, a 2% increase over the prior year and diluted earnings per share growth grew 7.1% to.
45 cents note that annual guidance on EBITDA has also been adjusted to reflect adjustments through the annual gross margin guidance.
Capex for Q2 of fiscal 2020, total 30.4 million compared to $26.8 million in the prior year with the increase attributed to more store openings annual guidance here remains unchanged and the range of 130 million to $140 million.
Looking at capital allocation, our board approved a quarterly dividend of 44.4 cents per share during the quarter. We also announced the renewal of our normal course issuer bid, allowing us to repurchase for cancellation up to 15 million 737468 common shares during the 12 month period from July 5th 2019 to July 4th 2020.
This represents 5% of the common shares issued and outstanding as of the close of markets on July 2nd 2019.
During Q2, a total of 314223 common shares were repurchased for cancellation under the NC IB program for total cash consideration of $15.5 million.
Finally, a few comments on dollar city accounting before we turn to the Q a name.
As per the stockholder agreement, we entered into with the dollar city founding group, while we have a majority stake of 50.1% certain strategic and operational decisions require 100, 100% stockholder approval as such we will not be consolidating dollar city results dollar city is considered an equity investee and this investment will be accounted for using the equity method.
The closing as well as the upfront payment of $40 million you Wes took place on August 14, and so subsequent to Q2 quarter end.
As our resolve this payment along with Dollarsmm of share of dollar cities net income for the period of August 14, 2019 to September Thirtyth 2019 at the end of dollar cities third quarter will be reflected in our third quarter fiscal 2020 financial results.
So next quarter, we will also record the balance of the purchase price current estimated between.
Usforty $5 million and.
$55 million use as a liability in Q3.
As a reminder of the total purchase price.
For this 50.1% equity interest is estimated at between $85 million and 95 million use space on a five times multiple of dollar cities estimated EBITDA for the 12 month period, ending June Thirtyth 2020, minus net debt and subject to other adjustments as per the terms of the stock purchase agreement entered into on July seven 2019.
The current purchase price estimate is based on financial projections, whereas the final purchase price will be calculated based on audited financial statements for the 12 month period, ending June Thirtyth 2020, the balance will be settled in the third quarter of dollars Ram us fiscal year 2021.
So that concludes our formal remarks, I will now turn it over to the operator to take questions from financial analysts.
Thank you Mr., Ron we will now take questions from the telephone lines. If you have a question and you are using a speaker phone. Please lift your handset before making your selection.
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Please press star one at this time, if you have a question.
There will be a brief pause whether participants register for questions. Thank you for your patience.
Our first question is from Karen short with Barclays. Please go ahead.
Hi, Good morning. This is actually Renato basanta on the line for Karen.
Good morning. So my first question is really on the comp.
I was just wondering if you could talk a little bit about the cadence of comps in the quarter and then potentially.
Three three Q and then also if there was any impact of weather.
On the comp as well.
Okay. So.
Well it was.
The the comedy was steady throughout the quarter. So it's been.
Continuing the momentum since Q1.
As to the weather.
I think you've heard from others.
That weather impacted them. So at the end it had an impact also if we would have had.
Nicer weather.
We think it would have certainly helped out.
A bit more.
But essentially I mean, we're very happy with the results we got the throughout the whole three months.
Okay. That's helpful. And then just Steve just on the traffic.
Yes, I am curious if this was if your result was in line with your with your internal expectations, you're clearly showing some good growth in consumables categories.
So I'm wondering if the consumer consumables growth.
Is driving that type of traffic that that you would have expected.
So the.
So first of all as we said since the beginning of.
Of the year, where we were working hard on because we don't have the benefit of the recent introduction of higher price point or inflation. So we're definitely working on stimulating.
More traffic and more units sound that has been our tactics. So yes.
We're happy to see that.
The results Ken.
Support the efforts that we've been putting and.
Thats, where.
Definitely looking to do and it's not just in consumable. It's many of our the majority of our categories.
Consumable definitely as we said picked up and the mix and that's because of initiatives that we had internally, but just so that it's clear with everyone. It's not just consumer.
Okay and then just just last one for me can you just talk a little bit about the queue line rollouts for the rest of the stores.
Thank you said that you do about 200.
Here, but I'm, just wondering why that rollout can't be accelerated given it looks like it's been and it could be a pretty decent comp driver. Thanks.
Yes, so you're right that that's about the pace that we have at it we open it up as as quickly as we can we have other initiatives also will that benefit us and so we are doing.
The maximum too.
To to deploy all these initiatives and we'll be looking to fill up the capital.
The Capex envelope this year to make sure that.
We do so so you can be sure that we're maximizing on that aspect.
All right Thats very helpful Best of luck.
Thank you.
Thank you.
Our next question is from Edward Kelly with Wells Fargo. Please go ahead.
Hey, guys. Thanks for taking my question. This is Anthony bond deal on for Ed.
So just quickly on the updated gross margin guide can you just help us understand more fully your decision decision to trim. The top end of the guide I know you'd mentioned some improvement in product mix coming through the remainder of the year in the last call was that not as much as expected.
Has there been a change in the competitive environment, we should be thinking about thanks.
Okay, So you're talking about the margin.
Did I Miss the beginning June shop.
Yes, okay. So so that you know.
We explained to you last quarter there are three pieces that.
Impact gross margin this year, there's one that's.
At one time or this year, which is related to logistics costs, the impact being greater in Q1, and Q2 and not as much in Q3 Q4 because of the.
The.
Scaling impact.
Because sales are strong stronger Q3, and then Q4.
So that remains exactly like we had the top 10 and estimated the other one the mix that we just talked about in other words that the Q aligned stimulating more impulse sales and things like that so they are higher sales of lower margin items. So thats in line with what we had expected. So that continues the third one.
Which.
We had an impact relates to the compelling value in other words that other 70%.
So we've decided because of the momentum and what we're seeing right now in other words stimulating that topline that.
We decided to be.
Extra careful if you want or to be strategic in not marking up.
Products again, as we told you, we analyze more and more our products.
And the impact they have and we decide to maintain the course given the results were failing sell that.
In all we we talked last year that compared to the prior years, we had reduced significantly the markups well. This is continuing this year. So we had anticipated.
You know.
Maybe.
Having.
No bid a higher margins, but given the momentum we're seeing.
We've decided to do.
To be more cautious on that side and to to keep on with the topline.
Momentum building.
Got it that's really helpful. And then just real quick on the US China trade situation you have intentions of.
Squeeze a little bit what are you hearing from your overseas partners in China.
And do you expect to see any kind of purchasing opportunity going forward for the end of the year.
Hi.
It's a complicated question and honestly it changes day by day and the answer to that question, but certainly instability weather caused by nation's other than the relationship between Canada and China are not good for the marketplace as a whole and.
Factories that would be creating new molds and putting money into R&D for the us market you know our.
On standby right now and that that has an impact on the retailers or the balance of the world.
You know, whether it's Europe , or Canada or everywhere else, because we all benefit from each other's creativity and productivity as they benefit from ours, we benefit from theirs and and in the end all retailers prefer that the environment is one of stimulation and excitement. So so it really depends on on where that goes and how long. It's for if it's short it's not a big deal. If it's sustained it'll just make it more challenging for us to source goods.
Not so much a cost issue as as a new item issue, but to date, it's still very stable and I don't I don't foresee there being any really big challenges unless it it goes on for a year plus.
And Neal is it fair to add that we're all on the same level playing field. So if that yes, it's a very valid point, which is if it impacts us it impacts every other Canadian retailer equally and so you know it and our market, it's all about relative value and relative creativity and so we're all on a level playing field, regardless of what happens with the China.
US tariff discussion.
Got it thanks, so much guys.
Thank you. Our next question is from Irene sounds with RBC capital markets. Please go ahead.
Thanks, and good morning, everyone.
Neil I was intrigued by the commentary around increase in SKU counts and I was wondering if you could provide us more color around sort of price point categories. The Jack Daniel's and what types of products, you're adding that are really helping to drive your basket and traffic.
Well the beauty Irene is that it's not a specific category or a specific price point thankfully because that would be restrictive we're simply adding to the mix across the board and while we have a better appreciation of.
Is our ability at store level to handle more skews and we have a better understanding of which departments can handle more skews in at any given price point or at any given category and truthfully, if theres a varied mix and I can't really pinpoint you know a category or two that are that are leading the way. There are some in all of them, which is nice because it also makes it far easier for our operations people to integrate the new skews. If they were in a specific section or do we have to redo the entire store plan and thats not the case.
And presumably Neil you're you're serving your enhanced data analytic capability. So it kind of keeps an eye on I guess, the the inventory turns and whether those new skews are coming at the expense of existing skews and kind of do you see yourself, maybe rationalizing some of the older skews. This part of the refresh well, yes. The answer is yes, if it's always.
No. That's the day to day life of a retailer. So so on a daily basis, you know one skew comes one SKU goes and truthfully.
The impact of additional skews on that analysis.
Has no real impact on our day to day, you know add tasks, what's important is that and I guess it simplifies.
The job the fact that we study our skews so frequently and we turn items, so quickly and change items. So quickly and makes the job of adding skews and changing sews easier on us than it would.
If you had a more fixed planogram I guess.
Seems seems logical.
That's great. Thank you Andy.
I'm also interested in your comments around customer value or the consumer value perception, obviously, you've been working hard to invest in that have you recently updated.
The studies that you do and any insights you can share with us there.
We have updated those studies and.
According to our incredibly on the ball CFO I am not one Sarah.
The results of those studies that detail those details I guess, our proprietary knowledge and what well do with them is as to the best of our ability to use them to make our customers and the and the analysts happy.
But when we can.
No in terms of overall, the general comment being that the compelling now the reason they shop at dollar Rama as far the compelling value right, so about where and we're not going to give out.
Details on the specifics, but generally again I think it's it's clear that consumer base.
Again like it was in prior years come to dollars because of the value proposition.
And the and the treasure Hunt to right now that that changing of that changing of of of skews and.
Refresh as as a key part of our success and just finally last one for me kind of tying these two questions together.
As you know is it your intention to sort of.
Churn sort of the skews or add more skews kind of in and out to really enhance that treasure hunt aspect.
We're always trying to do that.
Truthfully, it's easier at times and harder at other times, depending on the creativity of the market as a whole.
That comes back a bit to the point of.
You know how how.
How much from the manufacturers of the world are being stimulated by by expanding global success in a sense. When when you know when world markets are are having a harder time theres less creativity and and so that makes the buyers jobs on a sourcing front, whether domestic or abroad more challenging, but we're always trying to.
Change up our obviously, our weakest skews to for stronger skews.
Thousands of times a year. So so it's an ongoing project.
That's great. Thank you.
Thank you.
Our next question is from Mark Petri with CBC. Please go ahead.
Hi, Good morning, I, just had a couple of follow ups and sort of smaller questions, but regarding the increased number of skews. I mean is this really just a reflection of sort of your store level operating efficiency Thats letting you put more items on the shelf with less safety stock is that is that kind of the gist of it.
Certainly.
That is a part of.
The reason a major part and the fact that our stores are being operated better than they ever have and the fact that our logistics and replenishment is stronger than it's ever been allows us the luxury to reduce safety stocks and to manage the shelf space at store level better than we ever have.
And when did this sort of change or or or tweak began and has it sort of run its course in the stores now or is that still taking place.
I would say it began barcode.
Beginning of the.
And the year was already hitting of the year and I think I think you know that particular discussion about additional skews well probably.
Run its course and about.
Three to nine months.
Okay.
And does this.
Currently.
Okay.
And does this have any impact on sort of labor rates and sort of SGN a leverage in the stores or is this kind of baked and I mean I assume its baked into your guidance, but is this just baked into the ongoing sort of efficiency that you guys are able to extract from stores, yes, the ladder.
Yes, yes.
And then just Michael I guess with regards to the gross margin in Q2, specifically you've called out those three factors can you give us a sense of the magnitude of the impact of each of those three factors.
No well other than what I said, if we mentioned it's because a its.
It has an impact.
And the one where I give you some sense would be a logistics because.
In Q3 and Q4.
In all that should allow the margins have come back in a bit because of the scaling impact.
And.
And for the others.
You know it.
It clearly has if you compared to last year an impact so it's it's a decrease compared to last year.
And now between now and the end of the year, because we do have some flexibility and as I've said earlier.
Given the momentum and I'd say, we're doing less.
For example, mark ups than we did last year and last year was much less than the year before and so we control that aspect and we go with what we see what we feel for the moment and that can evolve between now and the end of the year.
So if we feel there is some good strong topline maybe that will push the margin towards the 38% and or if we can do a topline and margin at the same time, we will we're not throwing margins out the window.
It's done in a.
You know, we we talk about it the regularly and so but we're comfortable with the ranges we gave to you.
Right now and.
And the aim is to continue stimulating that topline.
With the unit and traffic.
Until the.
At least the end of this year.
Yes understood no I appreciate that and then just last on the issue that you called out sort of a timing.
Some timing noise, how material was that and is that just recouped in Q3 or can you just start with that please.
Yes, so it's two things so.
Some of it relates to last year so.
So last year Q2 a bit.
Lower for example than the normal and this year Q2, another situation going higher so it it's a mix like Jan it's always depends on like I've said in the past depends on what products projects are working on and the timing of those projects expenses related to the DC or to other projects.
So, but our revised while it's not revised in this case, but the guidance. We gave you in terms of Gionee reflects.
Reflects this into two.
Okay. Thank you very much.
Thank you. Our next question is from shells further with National Bank. Please go ahead.
Hi, Thanks for taking my questions in the past.
In prior calls management commented on industry inflation, just wondering what your perspective is on that.
And are you do you think are you starting to see it come in or is it.
Still no inflation.
I think generally it stabilized in the markets.
Pretty stable right now from from that perspective.
So stable at no inflation.
Well very let remember what I've said in the past is that.
And little inflation, you know when we do markups.
So from a dollar to $1.25, it's 25% and the lowest market plus 14% so.
There is inflation, but that's what we monitor and but to what level. Unlike Neal said, it's very mild for our addressable products and so for the time being.
So we're always always we're always talking from a dollar perspective right at a general market for spec right from our perspective, it's stable.
Okay.
And just to just to be clear so the actual guidance reduction on gross margin.
It was not a reaction to the environment so much as management scene.
Some initiatives work well and it seems we wanted to continue these initiatives more so and not passing on anticipated price increases and I characterize that right.
Yes in other words, yes, so in other words.
Maybe there are items that we could have done markups that we still decided not to Marco.
Because of you know we feel that Thats. The best long term decision because we don't take decisions just based on short term and and so you're right or another case.
So we did.
Less than last year, we thought we'd be doing more between for the second half of the year and we decided not to so that's kind of.
You know, how it's being worked out but because we see some good.
The momentum on the top line.
Okay and with respect to how you look at your margins and I know you commented a little bit about this earlier.
But but the comment is.
Hi.
How should investors think about whether management is satisfied with the current level of margin or is that not the way to look at it is it more to look at are you generate the right amount of sales growth.
Yeah, I think well you know, it's always that things evolve and time and depends on.
Inflation, how the others react but for the time being it's it's the the balance.
Between what we feel you know, where we feel we're competitive and where we feel comfortable in terms of offering that compelling value and that last thing.
Feeling for a customer that.
We are.
All the best.
A place to go in terms of.
And because we offer ago that compelling value.
And that is constantly monitoring as we said it's not this thing is done every week.
And.
And for the time being.
Were comfortable at the levels that the ranges that we told you.
And the yeah.
Okay. That's it from me thanks for the color.
Yes.
Thank you.
Our next question is from Peter Sklar with BMO capital markets. Please go ahead.
Michael in your explanation of the gross margin impact the decline in gross margin and the fact that you took your guidance down one of the three factors you mentioned was logistics so.
When you're referring to logistics are you referring to the DC expansion are you referring to like broader logistics trucking costs things like that not just to the to the Dcs expansion because the DC as we said last year, we built we bought land and built right beside the current DCN current continued operating and the old BC, let's call it the old DC.
As usual so no disruption from that standpoint, the difference this year and it started at the beginning of the year as we integrated.
The.
The old and the new so you're.
Displacing.
The conveyor belt, we are setting our fracking era, so and we obviously capitalize as much as we could but there was also expenses that.
Cannot be capitalized and that will show up the DC expansion is expected to end this year.
And.
On time and on budget and and so that's why I said and the.
Bigger impact was Q1 Q2, because the sales level is lower and there's less scaling, whereas Q3 Q4 is going to.
Be a bit lower and therefore, the impact on us not as strong.
But next year in other words those costs you don't have anymore.
Okay.
The other thing Michael in terms of your disclosure of dollar city, which will be in the next quarters financial statements clearly there'll be an equity income line and I assume you will continue to provide us with store count information.
Yes have you decided yet are you providing any additional information such as comps or anything like that.
No and the reason its sound like dollar Rama well established now there you have to understand that they are moving in.
Two were or now we're moving in.
Two.
Areas and negotiating yes, menno, whether its occupancy costs or.
Or other and to start disclosing.
Returns and things like that were worked against US. So we've decided to we'll give some detail that you've seen and deep AF and we'll revise our AI AFE.
But on a quarterly basis it will be more.
All 50.1% of net earnings.
Plus.
We will give you the basic information, we're disclosing right now but to go into more detail, we feel will not survive some a competitive from a competitive standpoint.
Okay, and then just lastly, Neolab a question question for you if I may.
You've referred to date to the.
The merchandising tactics that you've introduced a couple have surfaced you've talked about the.
The Q the expanded SKU count or are there other.
Merchandising tactics that you can point to that or.
Helping your sales efforts.
Definitely there are those two are key.
Changes I guess as that would be obvious as a shopper add but the other ones are more subtle and.
Honestly, we don't disclose that level of information, but I do appreciate the question. Okay. Thank you Thats all.
Thank you.
Thank you.
Our next question is from Patricia Baker with Scotiabank. Please go ahead.
Thank you good morning, everyone.
Three questions here first of all Michael I, just want to simple clarification I know its been discussed quite a few times in this.
In this call the topic of Markups, you said that you are going to maintain that you've maintained the course, which to me would imply that you would have had the same level of mark ups. This year as last year, but any answer to two to a few questions. You mentioned that there would have been fewer markups is that correct theres fewer.
Yes, there are fewer than last year, you're right. There is fewer than last year, yes. Okay. That's helpful. And then secondly can you talk a little bit about what you experienced in the seasonal category in Q2.
Yes, well I alluded a bit too with the summer was weaker than we would have hoped for.
Okay.
You would have seen a bit of a softness there yes, okay and then thirdly.
Actually relates to what Peter was just asking of Neil just interesting that you've.
Working very hard to stimulate both traffic and units.
Seem certainly seems to be working and I'm not asking for what you're doing with the tactics are I'm just curious.
Are there are there specific tactics that are being deployed.
To traffic and.
Other ones to units or is it all all of the all of what you're doing is directed at both.
Excellent question and.
I would say.
Yes, I'm curious about the traffic piece, mostly right right right and I would say that we have tactics to try to stimulate both as sometimes they're the same tactic and it stimulates both simultaneously and other times some of our tactics stimulate one or the other so I would answer your question by saying all of the above [laughter] Hey, Thanks Neil.
Okay. Thank you.
Our next question is from Brian Morrison with TD Securities. Please go ahead.
Good morning, just in terms of price inflation or around your overall impact on your business I'm wondering if you can share your view on tires expansion and material expansion of party city could it be positive based on.
How you're positioned with Walmart sort of thing where you get positive results.
Your position with Walmart.
Viewed as negative or would you viewed as neutral to your business.
Good question I mean.
If it's hard you say come.
With party city, we we havent seen anything.
To date anyways.
I'd say more neutral.
And where.
And where we are.
More managing.
For us with our model them really.
Other than when we price our items, but the.
It's.
It's too early to.
To to to say, if there is any impact from that but.
Anyways right now I'd say, it's neutral.
Do you feel like you could have any impact upon the price inflation environment or no.
Well I don't think it.
No not at this stage I don't think so.
Okay, Michael just a housekeeping question when I look at your.
EBITDA margin I'm wondering if that will include or exclude the equity pickup of dollar city. It includes the equity pickup of dollar seen and that's a good point.
In other words, it will and it will be.
It will be in the.
The part of the EBITDA.
Thank you very much.
Thank you. Our next question is from direct delay with Canaccord Genuity. Please go ahead.
Thanks. This is luke stepping in for Derik.
The first question I had is on capital allocation, you mentioned that theres going to be roughly roughly a 50 million dollar us.
Payment to complete the purchase price for dollar city, just curious how that affects how you think about approaching the buyback.
The rest of the year.
Yes, so well first of all that's okay. We we made an initial payment.
From our closing August 14, 40 million units or 53 ish Canadian.
The remainder is payable only in the third quarter of next year.
Because once we get the final.
Price and that will depend on the EBITDA of.
The results related from June this year to June next year.
So will audit that next year and determine the final price and pay it then and it's all going to be within the leverage.
Our comfort zone leverage ratio, which is approximately 2.75 times adjusted debt to EBITDA.
So ill.
The in other words, it will reduce the share buyback will be doing.
But that will be next year not this year.
Okay.
And this year by the way the initial payment.
It's the same logic, so it's within that.
Our.
Our capex leverage.
2.75 times.
Okay.
And then switching gears I know it was discussed.
A little bit before in an earlier question, but you had mentioned.
Part of the DNA de leveraging from last year part of that was just spacing.
A bit of a tougher comp there wasn't as much as unique spend last year, what was the remainder of that.
Leveraging.
Im sorry.
The.
The remainder of de leveraging of the GMI.
Yes, Yes unit.
Yes, well without going into any detail all I was saying is that.
This year the slight increase we did have some productivity initiatives that work well for us this year.
Okay. So that.
Definitely offset some of the.
Timing differences in other words that we had year over year.
Okay.
Is that.
Yes.
Right, yes, okay.
Thank you.
Our next question is from key talent with the Gentleman Securities. Please go ahead.
Yes, I had some questions on the NIM.
The gross margin in the units per basket the sales of items pre screened $1.25 was a record level of 72%.
Which seems counterintuitive if you are driving units through the queue line in those smaller lower priced items in the queue line.
I'm wondering if you can sort of walk so that all fits together.
Yes.
Without disclosing.
No.
Any.
Details our nuancing between the price points is that.
Like we said what's impacting all this one there is the fact that we stimulated more consumable items. So as you know summer in the queue line would be lower price point items, and but as I said earlier the unit. The build in unit is not just there there are some other categories also saw justice.
To highlight the fact that it's not just and it's not just a chart of buyers.
So.
And the consolidation of of that shows an increase year over year of our.
Of our.
Penetration of above 125 dollar.
Price point.
And then just in terms of the additional skews should are these sort of deal.
Purchases given.
I don't know, we'll suppliers, having excess inventory.
Or are these permanent skews or the somewhere in between.
Now, they're all year there.
I'd like I said.
And.
All categories and it's not like we've zeroed in specifically on.
An item.
It's or.
A group, it's a it touches everything.
So are the is the 4000 skews and the 700 seasonal you. The next time you disclose that.
And your annual documents is that are those numbers going to change. So yes, yes, yes, the already high yes, but at the moment, we're not going to see how much higher so no exactly.
And then just on the.
The stores that you opened in the last six quarters during this period of low inflation and.
Difficult retail environment are you seeing anything different in the numbers.
In the numbers generated by those new store openings.
Im sorry, you are saying in the new store openings in terms of sales the.
The ramp up and payback and all that economics in the last six quarters, you know, it's well six quarters now so I'd say F. 19 cohort what we're seeing is a similar for those that have completed a year. For example are tracking the same way that the prior year cohorts were doing so we have no reason to believe that and we're always looking at and all at two year payback.
Average stores, so we're well into that we have absolutely no worries about that.
And then just one last question on the dollar city, we you know no longer show the sales to dollar city in your revenues.
So the.
So we disclosed in the I am.
More information, including sales on dollar city so.
But that would be done and the AOCF on a quarterly basis, we will not disclose sales information or margin information.
Just store count.
Information and obviously in net earnings information.
Yes, I was thinking of your revenues include about 1% from dollar city will that disappear when all or the majority owner.
No well no because it continues to.
The accounting through.
Dollar Rama, which as a separate entity, so, but what were seeing as normally as as we grow the store base theres more and more direct sourcing and less.
Purchases done through our logistics systems and the only revenues that are recorded in our books are those that go through our logistics system. So as that amount decreases and becomes non material, we will stop disclosing it.
And and so are you.
We won't have to disclose it for that reason.
Great. Thank you.
Alright.
Thank you.
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No. This is promoted confirm also that the whole piece.