Dollarama rises on strong quarter, but gross margins decline raises concern
MONTREAL -- Dollarama Inc. shares surged more than 11 per cent Thursday after the discount retailer boosted its sales growth forecast for the year on hopes that its strategy to increase traffic and sales numbers pays off.
The Montreal-based retailer's shares gained $4.72 at $46.93 in early afternoon trading on the Toronto Stock Exchange.
The company said Thursday that it expects comparable store sales growth of between three and four per cent, up from the 2.5 to 3.5 per cent identified at the end of the last quarter.
Dollarama has focused on augmenting customer traffic and unit sales because it has limited room to raise prices, even as some costs rise, said CEO Neil Rossy on a conference call.
"We continue to operate in a low inflation environment, in which retailers are more reluctant to pass on costs to consumers."
Rossy declined to elaborate on the company's tactics for attracting more customers, and getting them to buy more items per visit, but said he was pleased with the results that saw comparable store sales grow 5.8 per cent in the first quarter.
He said the company could also see some cost reductions from manufacturers in China, as operators shift production out of the country to avoid U.S. tariffs.
"The movement of those orders from the Chinese mainland has certainly left some production gaps in China, and so the market for orders for the rest of the world is a little softer," said Rossy.
"We're trying to take advantage of that, but it's still too early to appreciate the impact that may or may not have."
Earnings for the quarter ending May 5 came in at $103.5 million, or 33 cents per diluted share, up from $101.5 million or 31 cents per share a year ago, as revenue grew by 9.5 per cent.
Sales for what was the first quarter of the company's 2020 financial year totalled $828.0 million, up from $756.1 million in the same quarter last year.
Analysts on average had expected a profit of 34 cents per share for the quarter and $813 million in revenue, according to Thomson Reuters Eikon.
Boosting sales is important as the company has already taken advantage of easy efficiency gains in recent years, said chief financial officer Michael Ross.
"It's harder and harder, the lower hanging fruits are definitely behind us, and now it's grinding it out and generating as much as we can."
The company is wrapping up a major distribution centre construction project, the cost of which weighed on first-quarter margins.
The gross margin of 42.1 per cent of sales, compared to 43.8 per cent last year, was also impacted by customers buying more lower-priced items and cost inflation.
The company, which had 1,236 stores at the end of its latest quarter, said it expects to add 60 to 70 net new stores by the end of the fiscal year.