Exteriors of the Dollarama store at the corner of Adelaide St. West and Spadina Ave. in downtown Toronto on Dec 27, 2018.Fred Lum
Fewer customers visited Dollarama Inc. stores in its past quarter, its fourth consecutive quarter of declining traffic in a slowdown that its executives say is hitting other retailers as well.
“There is no question that the retail environment was challenging in fiscal 2019,” Neil Rossy, chief executive officer of Dollarama, said on Thursday after the dollar-store retailer released its fourth-quarter results that fell short of analysts’ targets.
“On the one hand, our competitors were reluctant to pass on higher costs through price increases. And on the other hand, we saw signs of a more sluggish consumer spending at the macro level.”
To lure back shoppers, Montreal-based Dollarama has scaled back on price increases while returning to its dollar-store roots by focusing more on items that cost $1.25 and less and in some departments even stocking more of them, Mr. Rossy said.
The moves come as Dollarama grapples with a slowdown in its business after years of stellar growth that made it stand out among retailers and a stock-market darling after it went public in 2009. Now, the chain’s executives are rushing to tweak their business model to attract more shoppers.
Over the past several years, Dollarama gradually raised its top prices to $4. But last year, sales gains began to slip, prompting the chain to raise fewer prices as competition stiffened and rivals refrained from hiking prices. As a result, Dollarama’s gross profit margins are declining.
“I think, you know, quite honestly, that we did lose sight a bit on making sure that we had all the traffic drivers needed to balance our higher price points," Mr. Rossy told an analyst conference call. “When you take a business from pure $1 store and then you evolve over the years to multiprice points, while being very successful doing so, you’ll learn things.”
He said the retail market is “a little soft generally. I mean you hear other retailers all saying it.” He added he was referring to bricks-and-mortar merchants rather than e-commerce operators.
Some other retailers that sell discretionary items – products that people want but don’t need – have recently reported disappointing sales. In particular, they include chains whose business is tied to the weakening housing market, such as mattress specialist Sleep Country Canada Holdings Inc. and home-improvement retailer Lowe’s Canada, which is closing some stores. Nevertheless, executives at major grocers have said customers aren’t cutting back their spending.
Ben Axler, founder of New York investment firm Spruce Point Capital Management LLC, which last fall raised concerns about Dollarama’s “serious fundamental headwinds” and “unachievable growth targets,” said its latest results reinforce its bearish views.
“Our biggest concern was the sustainability of the gross margins and the gross margins are continuing to decline,” he said in an interview. Spruce Point has a short position in Dollarama’s shares, which means it can profit if the retailer’s stock falls. It has dropped 34 per cent since last June, closing on Thursday at $35.20 on the Toronto Stock Exchange.
Derek Dley, merchandising analyst at Cannacord Genuity Capital Markets, said Dollarama’s growth outlook for fiscal 2020 is lower than he anticipated. He downgraded his stock recommendation to “hold” from “buy” and reduced its one-year target share price to $37 from $45.
He foresees further pressure over the coming months “as investors adjust to Dollarama’s slower growth profile,” he said in a note.
Michael Ross, chief financial officer of Dollarama, said its introduction of credit-card use in April, 2017, has resulted in customers spending twice as much with plastic than with cash. They purchase more on each shopping trip and visit stores less frequently, he has suggested, although the company doesn’t have data to confirm that trend.
In its fourth quarter, Dollarama’s profit rose to $172-million, or 54 cents a share, from $162.8 million, or 48 cents a share, a year earlier. Sales grew to $1.06-billion from $938.1-million, while same-store sales at outlets open a year or more climbed 2.6 per cent. Analysts on average had expected a profit of 55 cents a share and sales of $1.07-billion. Gross profit margins slipped to 40.4 per cent of sales from 41.4 per cent a year earlier.
Dollarama expects fiscal 2020 same-store sales to rise between 2.5 per cent and 3.5 per cent, lower than its historic 4-per-cent to 5-per-cent forecast.