Dollarama profit jumps 13% as Halloween demand offsets supply chain headaches

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Discount retailer Dollarama Inc. has raised some prices to cope with rising costs, but is so far holding off introducing a new price point beyond the $4 threshold.

Retailers across Canada are grappling with higher costs for shipping and raw materials, as well as wage pressures caused by labour shortages. And many are passing on those costs to consumers.

Dollarama has coped through markups on certain items, as well as changing some products – for example, by offering a smaller quantity at the same price. The company is watching competitors’ prices on a weekly basis, and follows pricing trends it sees in the market, executives said on a conference call to discuss its financial results on Wednesday.

“Really, it’s a very, very fluid situation as the market adapts to the new reality of different costs. Obviously, retailers cannot absorb all of it, and eventually it gets passed on to the customer,” chief executive officer Neil Rossy said on the call. “What we have as our focus is what we have always had, and that is remaining the best relative value in the market.”

The Montreal-based company is expecting inflationary pressures and higher shipping costs to continue next year. But while Mr. Rossy acknowledged that introducing higher price points is among the strategies the stores could employ to offset cost increases, he said on Wednesday that there are no plans to do so.

“Dollarama’s improving profit margins should be a positive sign that the company will be able to pass along cost increases to customers as inflationary pressures grow over the next several quarters,” Edward Jones analyst Brian Yarbrough wrote in a research note on Wednesday.

Strong demand at Halloween helped to boost Dollarama’s third-quarter net earnings, which grew more than 13 per cent to $183.4-million or 61 cents per share, compared with $161.9-million or 52 cents in the same period last year.

The growth in sales of seasonal products, which have a higher profit margin than other items, contributed to the company’s bottom line.

The company has responded to disruptions in global shipping – including container shortages – by prioritizing shipping goods that are most at risk of being out of stock. Because seasonal items are purchased months ahead of time, the stores had sufficient inventory for Halloween, and the same is true for the Christmas season, chief financial officer Jean-Philippe Towner said on the call on Wednesday.

Dollarama, which has roughly 1,400 stores across Canada, reported sales of $1.1-billion in the 13 weeks ended Oct. 31. Compared with the same period last year, sales grew by 5.5 per cent, driven largely by new store openings.

Comparable store sales – an important metric that tracks locations open more than 13 months – rose by 0.8 per cent. Compared with two years ago, comparable sales were up 7.9 per cent.

The company noted that shopping patterns have been shifting as people venture out more, and are not stocking up as much on each trip: Dollarama’s average transaction size fell by 2.8 per cent in the quarter compared with last year, but its number of transactions grew by 3.7 per cent.

Costs related to COVID-19 have also fallen significantly, to $1.1-million in the quarter from $10.9-million in the same period last year.

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