Dollarama results hit by spring pandemic sales restrictions

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As pressures on global supply chains continue to mount, discount retailer Dollarama Inc. is keeping an eye on its competitors, and saying it will only pass on added costs to customers if other retailers do so first.

During the COVID-19 pandemic, there have been significant disruptions in container shipping, including higher freight costs and container shortages. Dollarama’s shipping rates are set for the remainder of its current fiscal year, chief executive Neil Rossy told analysts on Thursday on a call to discuss the company’s earnings. But the Montreal-based company is expecting to feel the effects of pressure on container shipping costs next year as it renews those contracts and renegotiates rates.

“Our raison d’être is to be great relative value in the industry. And as long as a value at a price point higher is still the best value in the market, and if we require markups to help manage margins while staying completely competitive on every item, then we’ll use that as a tool as well,” Mr. Rossy said. He added that he continues to resist bringing in $4.50 and $5 price points at Dollarama stores, and that it is too soon to know whether price pressures and elevated shipping costs will continue for a longer period of time.

In the past, Dollarama’s product buyers have coped with higher costs – owing to raw material costs, freight challenges or higher foreign exchange rates – by adjusting factors such as the weight and size of items, the counts in multicount packages, and even changing the materials used in manufacturing certain products such as switching to a type of plastic that is less affected by price increases. Buyers are using various strategies on a weekly basis to offset cost pressures, chief financial officer Jean-Philippe Towner said on the call.

Because of container shortages, Dollarama has prioritized shipping goods that are most at risk of being out of stock. While its overall inventory level is down, this has not resulted in a loss of sales, according to the company. Products for the crucial holiday season are purchased months in advance, meaning that the company’s seasonal holiday inventory will not be affected by supply chain challenges, Mr. Rossy said.

Dollarama reported on Thursday that a ban on selling non-essential products in Ontario this spring drove sales down in its second quarter, dampening the usual peak time for purchases of gardening supplies and other seasonal merchandise.

The pandemic-related restrictions were in place from April 8 to June 10 in Ontario, where roughly 40 per cent of Dollarama’s stores are located, and affected the first 5½ of the quarter. Once the ban lifted, Dollarama reported that comparable sales grew, but not enough to offset earlier declines. Dollarama was also impacted by store capacity limits and stay-at-home orders in other provinces.

Over all, comparable sales in the quarter fell by 5.1 per cent compared with the prior year. Comparable sales measures sales results at stores open for at least 13 months, and excludes temporarily closed locations. More recently however, customer traffic to its stores has been trending upward.

Dollarama reported total sales increased by 1.6 per cent to $1-billion in the 13 weeks ended Aug. 1.

The potential impact of a fourth wave of COVID-19 on non-essential stores remains to be seen. Industry groups have been urging provinces such as Ontario to avoid further lockdowns.

Costs related to COVID-19 have also been falling for many retailers. Dollarama reported that its pandemic-related costs fell to $11.7-million in the quarter, compared with $34.3-million in the prior year.

Dollarama’s net earnings rose in the quarter, to $146.2-million or 48 cents a share, compared with $142.5-million or 46 cents a share in the same period last year.

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