Dollarama at 226 Front St. East in downtown Toronto in December, 2018.Fred Lum/The Globe and Mail
Dollarama Inc. lured back shoppers in greater numbers in its latest quarter, pushing past sales-growth estimates but taking a hit on its gross profit margins.
The numbers were released the same day investors at the company’s annual meeting grilled the Canadian discount retailer about its environmental footprint.
Montreal-based Dollarama had not had traffic growth in more than a year but reversed the tide during its most recent quarter ended May 5, posting a surprise 5.8-per-cent increase in comparable store sales that was more than twice the gain analysts expected. However, the company reported earnings per share that were lower than expected as gross margins narrowed.
Dollarama shares jumped 11 per cent to $46.99 in afternoon trading on the Toronto Stock Exchange. They’ve climbed 45 per cent this year.
Dollarama chief executive Neil Rossy has been tweaking his merchandising tactics to keep attracting customers amid a general stall in price inflation in the marketplace. Rivals such as Dollar Tree Inc. and Walmart have been limiting price hikes in the face of harrowing competition and Dollarama has done the same while keeping a maximum $4 price-point.
The tactics have worked, as evidenced by the increase in both the number of items each shopper bought and the number of transactions over all in the latest quarter. But gross profit margins fell to 42.1 per cent of sales during the period from 43.8 per cent a year ago and remained a concern for analysts.
The decision by the company not to hike prices in the face of rising costs is pinching profit margins and one-time costs related to its new distribution centre are also hurting. Dollarama management says it can offset that with a higher mix of seasonal products in the second half of the year, meaning things such as gardening tools and holiday-related items.
Michael Ross, Dollarama’s finance chief, was tight-lipped Thursday when asked exactly how the dollar-store chain managed to boost sales amid a sluggish environment for retail generally in Canada. But he acknowledged that a move to funnel customers into single-line checkouts has increased impulse purchases for things such as chocolate and batteries, which are the company’s lowest-margin items.
Dollarama now says it projects same-store sales will grow between 3 per cent to 4 per cent this fiscal year versus last year, up slightly from a previous forecast. It is suspending its share buybacks temporarily to maintain a comfortable level of leverage.
The company posted net income of $103.5-million or 33 cents a share, for its latest quarter, less than the average analyst estimate of 34 cents a share. Sales rose 9.5 per cent to $828-million, above analyst expectation of about $813-million.
“We continue to believe new store openings, solid sales at stores open at least one year, and improvements in profitability from new software will drive above-average sales and earnings growth over the coming years," Edward Jones analyst Brian Yarbrough said in a research note.
Investors peppered Dollarama executives with questions at the annual meeting earlier Thursday in an unusually lengthy exchange. They included queries about why there were not more visible-minority members on the board, the latest thinking on the company’s relationship with retailer Dollar City in Latin America, and what level of the company’s products are recyclable.
Mr. Rossy said Dollarama has thousands of products and that some are recyclable and some are not. Much depends on the capability of local municipalities to offer recycling services, he said.
“To ask Dollarama to be the leader to change the way of the world is probably an unrealistic expectation,” he told reporters after the meeting, adding he has made previous efforts to add compostable or highly recyclable products to stores but the effort has fallen flat.
“The customer does not buy it. They won’t buy it. They’re not supporting that cause because it’s more expensive,” Mr. Rossy said. “And so until the customer makes the decision to support what they theoretically like the idea of, as a retailer I can’t change that … which frustrates me."
Dollarama currently operates a network of about 1,230 stores in Canada and plans to open between 60 and 70 new outlets this fiscal year.