Dollarama Inc. (TSX:DOL) beat quarterly sales estimates on Wednesday as runaway inflation fueled demand for the discount store’s groceries and household essentials. Dollarama President and CEO Neil Rossy saw a double-digit increase in-store traffic as COVID-19 restrictions were lifted in Canada at the start of the most recent quarter. Rossy also observed a strong demand for everyday consumer products and seasonal products at affordable prices.

Inflation Attracts Customers to Discount Stores

North America’s major dollar stores are seeing an influx of shoppers looking to save money as rampant inflation drives up the prices of everything from edible oils to paper products and gas.

Consumables were the most popular this quarter, while Easter decorations were also in high demand, with most Canadians returning to the office and being able to attend parties after pandemic restrictions eased.

Dollarama is a Canadian value retailer offering a wide assortment of consumables, general merchandise, and seasonal items in-store and online. Dollarama also owns a 50.1% stake in Dollarcity, a growing Latin American retailer.

Sales at the Quebec retailer rose 12.4%, from $954.2 million to $1.07 billion, beating analysts’ average estimate of C$1.05 billion. This increase is explained by the growth in the total number of stores over the last 12 months (from 1,368 stores on May 2, 2021 to 1,431 stores on May 1, 2022) and same-store sales. 

Same-store sales growth was 7.3% over and above 5.8% in the first quarter of fiscal 2022 and consisted of a 14.4% increase in the number of transactions and a 6.2% decrease in the average transaction size. This reflects a reversal of consumer buying habits compared to the comparable period of the previous year. 

The increase in comparable store sales was attributable to a strong seasonal performance and higher consumables sales resulting in increased customer traffic in the store network year-over-year. This can be compared to the same quarter the last year that was marked by a ban, effective April 8, 2021, and lifted after quarter-end on June 11, 2021, on the sale of non-essential goods in Ontario, where approximately 40% of the company’s stores are located.

Net income for the company was $145.5 million, or $0.49 per diluted common share, in the first quarter of fiscal 2022, compared to $113.6 million, or $0.37 per diluted ordinary share, in the first quarter of fiscal 2021. Net income improved due to higher sales, and an increase in equity from net income from Dollarcity, partially offset by a slightly lower gross margin.

Gross margin declined by 20 percentage points (to 42.1%). The renewal of the supply of in-store items and the increase in selling prices seem to have compensated for the higher logistics costs and the resumption of purchases of less profitable general merchandise. 

Excluding the effect of COVID-19, general and administrative expenses increased by 12%, an increase of spending double the previous quarter due to the raises of the minimum wage in certain provinces.

Finally, the Latin American subsidiary Dollarcity more than doubled its profit contribution. Its profit of $8.7 million compares with that of $3.4 million a year earlier.

Neil Rossy argues that Dollarama’s business model remains relevant in a high inflation environment. He said: 

“With the lifting of COVID-19 restrictions across Canada early in the quarter, we were pleased to see a double-digit increase in customer traffic, coupled with strong demand for our affordable, everyday consumables and seasonal goods. Our strong performance across key metrics in the first quarter reflects the relevance of our business model and positive consumer response to our value proposition in a high-inflation environment.” 

Rossy also said: 

“Mindful of the challenging environment in which we are operating, we will continue to rely on the levers at our disposal to mitigate ongoing supply chain and cost pressures, while providing consumers with the best relative value on the market.”

“I am also pleased with our continued progress over the last year on the ESG front, including the publication of our climate strategy and roadmap. We approach our sustainability commitments as a journey on which we must continuously set the bar higher. We also believe in setting measurable and achievable goals, that consider our business and operations, the unique role we play in the lives of Canadian consumers, and the expectations of our stakeholders,” concluded Mr. Rossy.  

During the unveiling of its previous quarterly results on March 30, Dollarama announced that it would begin selling items at a fixed price of $5 in June or July, the first increase in seven years. The date of entry into force of this new measure was not specified.

Dollarama started selling items at fixed prices higher than $1 in 2009 to increase product selection and quality. Maximum prizes increased from $2 to $3 in 2012, then to $4 in 2015.

Dollarama’s Board of Directors has approved a quarterly cash dividend for common shareholders of $0.0553 per common share. This dividend will be paid on August 5.

Dollarama stock rose 5% on Wednesday.

CEO Pay Doubles

In 2021, Dollarama CEO Rossy’s pay doubled from pre-pandemic levels. The company said chief executive officer Neil Rossy made $7.83 million in 2021, up from $6.83 million in 2020 and $3.80 million in 2019.

The increase includes higher cash bonuses – Mr. Rossy’s annual incentive pay rose to $1.95 million in 2021 from $1.85 million in 2020 and $1.02 million in 2019.

The pay package also includes an increasing amount of stock awards. Mr. Rossy received $4.59 million in share and option awards in 2021. In 2020, he received a stock-option grant valued at $3.73 million, compared to options valued at $1.63 million in 2019.

Dollarama benefited from higher sales in the pandemic, as demand for items such as cleaning and other household products increased. The company’s stores were classified as essential services and allowed to remain open during various lockdowns across the country. 

Like many retailers, Dollarama was affected by rising shipping costs and container shortages, but those supply chain snags did not hit sales, as the company prioritized shipping items that were most at risk of being out of stock.

Even with increasing costs, Dollarama’s profit continued to rise as expenses related to COVID-19 have decreased. And high inflation typically causes shoppers to become more price-sensitive, a trend that benefits discount stores such as Dollarama.

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