Dollarama expects bumpy ride
Quebec-based retailer reports Q3 income rose to $100 million
MONTREAL For a company with currency right in its name, Dollarama Inc. has had great success in escaping the effects of foreign exchange rates that have hurt the bottom lines of other Canadian companies.
But when the Mont-Royal, Que.-based company released its thirdquarter results on Wednesday, it was clear that it is bracing for the impact of the low loonie, which it expects to feel over the next few years.
While the company sources the majority of its goods from China, most expenses are paid in U.S. dollars, and though it has managed to mostly slow down the roller-coaster this year through the use of foreign exchange contracts in order to hedge the cost of merchandise, it will soon have to get back on the ride with upcoming contracts more in line with current rates.
“Next year in the first quarter you’ll start seeing some impact (of the weak Canadian dollar) and then continuing through the year,” said chief financial officer Michael Ross during an investor conference call Wednesday.
The company expects this will mean a dampening in margins from a fiscal 2016 gross margin that had been revised up to 38-39 per cent, to a more modest historical level within the range of 36-37 per cent in fiscal 2017.
Dollarama said mitigating the impact of Canada’s weaker dollar has contributed to substantial growth in sales and profit during the discount retailer’s third quarter.
“It’s very hard to manage when the foreign exchange is having the ups and downs at this rate. This is really exceptional,” said CEO Larry Rossy.
“We’re just trying to be realistic and say that (repeating) what’s just happened is not realistic.”
In the third quarter, net income rose to $100.1 million, or 78 cents per share, with $664.5 million of sales. This is up from year-earlier net income of $73 million, or 55 cents per share, and sales totalling $588 million.
Earnings were “well above our estimate of $0.69 per share,” wrote BMO Nesbitt Burns analyst Peter Sklar in a note, adding that the improvement was due to boosting product prices and margins in anticipation of “less favourable” exchange rates in the next fiscal year.
“Fiscal 2016 is benefiting from unusually high margins and earnings, which has been positive for the stock,” Sklar wrote. “However, our view is tempered by the anticipation that margins and earnings will return to more normalized levels in fiscal 2017 as Dollarama implements FX hedge contracts that are more in line with current currency rates.”
Sales were up 13 per cent from the same time last year, in part because of sales growth at existing locations plus the addition of 77 stores so far this year. Dollarama opened 16 stores in the third quarter to put the total number at more than 1,000.
The company will be bumping up its highest price point to up to $4 in the second quarter of 2017, a trend that began in 2009 when the “dollar store” first offered items priced at $2.
Dollarama is still vague on what a big-spender will be able to pick up for $4, as management said it had a tough time finding items that fit its needs when the company went on a scouting trip to China in October.
“We came back without much more clarity,” Rossy explained.