Dollarama Inc

TSX:DOL

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, and welcome to the Dollarama Fiscal 2022 First Quarter Results Conference Call. Neil Rossy, President and CEO; and J.P. Towner, CFO, will make a short presentation, which will be followed by a question-and-answer period, open exclusively to financial analysts. The press release, financial statements and management's discussion and analysis are available at dollarama.com in the Investor Relations section as well as on SEDAR. Before we start, I have been asked by Dollarama to read the following message regarding forward-looking statements. Dollarama's remarks today may contain forward-looking statements about its current and future plans, expectations, intentions, results, level of activity, performance, goals or achievements and any other future events or developments. Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results, levels of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by the forward-looking statements. As a result, Dollarama cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. For additional information on the assumptions and risks, please consult the cautionary statement regarding forward-looking information contained in Dollarama's MD&A dated June 9, 2021, available on SEDAR. Forward-looking statements represent management's expectations as at June 9, 2021. And except as may be required by law, Dollarama has no intention and undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. I would now like to turn the conference call over to Neil Rossy. Please go ahead, sir.

[Neil Rossy, CEO, President & Director]

Thank you, operator, and good morning, everyone. The Dollarama team continued to demonstrate its ability to adapt in order to serve Canadians safely and with purpose. We delivered another solid performance for the first quarter of fiscal 2022. We generated a double-digit increase in sales, along with strong same-store sales growth and industry-leading margins. This is despite additional COVID-19 restrictions implemented across Canada in early April. These included strict measures directly impacting select retailers in Ontario, where we have 40% of our stores. The COVID impact in the first quarter was similar to what we experienced in the fourth quarter. That is we entered the quarter with solid momentum, in this case, right through early April, with same-store sales growth in the mid-teens. Then in the last month of the quarter, our sales were negatively impacted by additional measures taken by provincial governments in response to the pandemic's third wave. The ban on the sale of nonessential goods in Ontario, which is the most significant of these measures, was in place for the last 23 days of the first quarter, and it currently remains in place today and is set to expire on June 11. Against this backdrop, sales nonetheless increased by 13% year-over-year. Same-store sales were up nearly 6%, driven by higher sales of seasonal items, including Easter holiday and spring-summer products. The opposite occurred in the same period last year, with customers buying large quantities of household and cleaning products, not Easter decorations. Looking at real estate, we have started off the year with a good new store opening rhythm, having opened 12 net new stores this quarter. This is compared to 10 in the same period last year. As a result, you can expect an uptick in the quarterly number of net new stores openings as we reach the second half of the year. Turning to Dollarcity. As planned, they opened their first store in Peru last month, thereby entering a new and fourth market of growth in Latin America. Like Colombia, the product offering in Peru includes products up to USD 4 price point, adjusted in the equivalent local currency. Our local management team continues to deliver a solid operational performance in all countries of operation. We're pleased with their progress and ability to execute on the business's growth strategy. On the ESG front, I am pleased with the progress we have made, integrating sustainability initiatives company-wide over the last 2 years and during a pandemic. We published our second ESG report this morning, now available on our corporate website. As a team, we are more committed than ever to managing our operations and resources responsibly and to serving our customers with purpose. Looking ahead, and despite near-term impact of COVID-19 restrictions, which remain in place, our solid momentum in the first 2 months of the fiscal year reflects the relevance of our unique business model and the compelling product offering to Canadian consumers from all walks of life.I would like to thank our customers for navigating this situation with us and for their continued loyalty. Our customers have been very supportive and at times quite vocal about their desire to shop at Dollarama during the pandemic, and we appreciate that enormously. This has only further reinforced the role we play in the Canadian retail ecosystem. With that, I'll hand it over to J.P. to discuss our results in more detail. J.P., over to you.

[Jean-Philippe Towner]

Thank you, Neil, and good morning, everyone. Let's start by taking a closer look at sales. Total sales for the first quarter of fiscal 2022 increased by 13% to $954 million, driven by an increase in the total number of stores as well as SSS growth. Looking at same-store sales for the first 9 weeks of the quarter or the 9-week period ended April 4, 2021, we recorded same-store sales of 15.2% compared to the corresponding period of the previous fiscal year, driven by strong seasonal sales, Easter holiday and spring-summer products. However, various provinces across Canada subsequently imposed new or more stringent measures due to the sharp rise in COVID case counts. This included a stay-at-home order and a ban on the sale of nonessential goods across Ontario, which went into effect on April 8, 2021. This had an immediate and sustained impact on sales for the remainder of the quarter. As a result, comparable store-sales growth receded to 5.8% for the full first quarter of fiscal '22. Same-store sales growth consisted of a 9.3% increase in average transaction size and a 3.2% decrease in the number of transactions. The basket consolidation trend has continued, although the increase is more modest than last year. As a reminder, while only a limited number of stores were closed in Q1 fiscal 2022, as many as 104 stores were closed during the same period last year, primarily Québec mall stores, as we're now lapping the pandemic as of the second half of the first quarter last year. This adds a bit more noise to our year-over-year comparisons for this quarter and in the coming quarters. You'll recall that at the onset of the pandemic, we experienced a huge surge in transactions in early March 2020, as customers stocked up on consumables. This was followed by a sharp decline in transactions as the first lockdown was implemented. Turning now to gross margin. We recorded a notable increase in Q1 fiscal '22, with gross margin as a percentage of sales coming in at 42.3%, up from 41.3% last year, as anticipated and discussed during our last quarterly call. This is as a result of increased sales of higher-margin seasonal products. SG&A was 16.6% of sales in Q1 fiscal 2022 compared to 16.3% in Q1 last year. SG&A reflects incremental costs related to COVID-19, including hours for in-store cleaning, sanitizing measures to protect the health and safety of staff and customers. These costs amounted to $18 million in the first quarter compared to $14 million last year. In that case, all incurred in the last 6 weeks of the quarter. Excluding COVID-19 costs, SG&A would have been 14.7% of sales in Q1 fiscal '22 and 14.6% of sales last year. So generally flat year-over-year as expected. EBITDA was $248 million, representing 26% of sales. Net earnings were $113 million, and diluted EPS was $0.37, a 32% increase compared to Q1 last year. Our equity pickup of Dollarcity's net earnings was $3.4 million Q1 fiscal '22 compared to $2.4 million in Q1 fiscal '21. Dollarcity continues to perform well and opened 15 net new stores in its quarter ended March 31, bringing its total store count to 279 stores. The first store in Peru was opened subsequent to their quarter end, so it is not reflected in this total. Our long-term store target for Dollarcity is 600 stores by 2029, and they are right on track. Keep in mind that this target excludes Peru, which is still in its very early stages. In terms of our capital allocation, the Board approved a quarterly dividend of $0.0503 per share. We also actively resumed activity under our share buyback program in the quarter. We repurchased 4.9 million shares for a total of $283 million. Our leverage ratio stood at 2.82x adjusted net debt-to-EBITDA at quarter end. Barring factors outside of our control due to COVID-19, it is our intention to continue share repurchases under the NCIB throughout fiscal 2022, while maintaining our leverage ratio between 2.75x and 3x adjusted net debt to EBITDA. Before turning to our outlook, Neil mentioned the publication of our 2021 ESG report, which is based around 4 pillars: our people, products, supply chain and operations. This year, we've aligned our ESG disclosure with SASB, which is the standard for our industry and areas of activity. On the people front, we provide a comprehensive overview of our talent training and retention programs, which are resulting in lower turnover and an increase in internal promotions at store level. Regarding products, we outlined our achievements and commitments under a robust product quality and compliance programs. We're also reporting on our progress following the full implementation of our 3-pronged approach to vendor compliance in our extended supply chain. And regarding our operations, we provide an update on the measurable initiatives underway to minimize our energy consumption and environmental footprint. We've also committed to building a road map to align with TCFD recommendations in the future. The objective is to further enhance climate change disclosure and have a plan to reduce or mitigate our carbon impact. We have made great strides since the publication of our last report 2 years ago and remain committed to continuing to integrate ESG across our business. Turning now to our outlook. The COVID-19 situation continues to make it difficult to predict the environment in which we'll be operating in the near term, given that the Ontario restrictions has yet to be removed. As such, we continue to only provide limited guidance for fiscal 2022. Looking specifically at Q2 and the near-term impacts of COVID restrictions, which remained in place, strict in-store capacity limits are expected to remain across Canada, at least until the end of the second quarter and to continue to impact store traffic. The ban on the sale of nonessential goods in Ontario, which impacted Dollarama in the last few weeks of Q1, will be lifted on June 11, 2021. It will have been in place for the first full 5 weeks of our second quarter, a crucial period during which Canadians usually start planning for summer activities and stocking up on related seasonal goods. Also keep in mind that Q2 -- also keep in mind that in Q2, we faced tough comps with a strong performance in Q2 last year, largely driven by strong seasonal sales. But despite the significant impact the Ontario ban will have on our SSS in the second quarter and the fact that we face tough comps, our confidence in the underlying fundamentals of our business model remains. This is a temporary headwind, and I can assure you that we're all very eager to be able to once again offer our full product assortment to all of our customers from coast-to-coast as soon as we're permitted to do so. Looking at full year metrics provided last quarter on net store openings and capital expenditures, the guidance on these 2 annual metrics remains unchanged. We did not release full year guidance on gross margin or SG&A, but the color we provided last quarter still stands. Based on results to date and visibility on open orders, we anticipate gross margin as a percentage of sales for the full fiscal year to be relatively flat compared to last year, with continued inflation on raw material prices and inbound shipping costs. For SG&A as a percentage of sales, we should also be generally in line with the prior year, excluding direct COVID costs. That concludes our formal remarks. I will now turn it over to the operator for questions from financial analysts. Thank you.

[Operator]

[Operator Instructions] And the first question is from Irene Nattel from RBC Capital Markets.

[Irene Ora Nattel]

Can we start with same-store sales, please? And would you be able to provide us with color on what you've seen in terms of same-store sales and category demand ex-Ontario versus Ontario? In other words, in the provinces where there has been less disturbance.

[Jean-Philippe Towner]

Thanks, Irene. So first of all, I would step back. And if we look at Q2, the first part of Q2, as I mentioned in the script, is impacted by Ontario until June 11. And we have some capacity limits, notably in Alberta, which we'll have to deal with and are starting to ease up probably in the second half of June. That being said, once you adjust for the restrictions, the underlying performance would be in line with expectations, keeping in mind that we're lapping against strong comps in Q2 last year.

[Irene Ora Nattel]

Consistent with expectations, what were the expectations with which they are consistent?

[Jean-Philippe Towner]

We don't provide specific disclosure on that. But what we can say is for the provinces that were not impacted by the restrictions, it is what you would have expected from us based on our historical performance.

[Irene Ora Nattel]

Okay. I'm going to just stick with this. I'm going to take 1 more attempt at this, J.P. So would it be reasonable to expect that the torrid pace of, sort of, what -- of the first 10 weeks or the first 9 weeks of Q1 would not have been maintained, but that nonetheless underlying same-store sales would remain robust?

[Jean-Philippe Towner]

I mean it's hard to predict how Ontario will come back and then we're still...

[Irene Ora Nattel]

Well, I'm talking about excluding Ontario, excluding Ontario.

[Jean-Philippe Towner]

Excluding Ontario, I think there's good momentum in the underlying business. And that's as far as we can go on this.

[Irene Ora Nattel]

Okay. In terms of category demand, would there be -- would we be continuing to see the strong demand for the types of products that we would have seen strong demand for through the pandemic? So seasonal, outdoor, household -- basic household goods, what's the category demand like excluding party for obvious reasons?

[Jean-Philippe Towner]

So when you look at the category demand, first of all, keep in mind that last year we had good mix performance in Q2. And for this year our -- for Q2, although we don't provide specific guidance on that, we're seeing decent performance from our seasonal categories.

[Irene Ora Nattel]

Okay. And 1 last question from me, and then I'll hand it over. You mentioned the sort of shipping costs, but are you having any -- we're hearing a lot of discussion, obviously, around delays in shipping and difficulty in actually accessing containers. What is your experience currently?

[Neil Rossy, CEO, President & Director]

So everybody is having a hard time getting containers, Irene, around the globe. And nobody is an exception to that particular challenge. I would say that Dollarama's business model mitigates those risks more than it does for most because the majority of our goods are proprietary that we import ourselves. And therefore, we sit on inventory of those goods. That inventory provides a buffer that most people don't have for those goods. And that buffer allows us to prioritize, which containers are going for which goods at what time to help mitigate the risk of running out of any given item. So to date, the challenges that everybody is experiencing have not impacted our sales. And as long as it doesn't go on for a year, that will be the case. But certainly, the availability of containers and the cost of shipping is a major challenge for everyone.

[Operator]

The next question is from Brian Morrison from TD Securities.

[Brian Morrison, Research Analyst]

If I can just stick on that note. I think that FX in the quarter flowed through at about $130 million to $135 million. And it looks like it's poised to decline pretty sharply in the coming quarters. So I hear you in terms of the cost inflation, but it's a challenge to see how your gross margin would remain flat. So I'm curious if cost inflation or inflation going forward for the rest of the year is going to be a headwind or a tailwind.

[Neil Rossy, CEO, President & Director]

So Brian, it's a mix. First of all, we have our hedges and our hedges make our costs not the same as spot. Spot is built into the hedge. And the hedge can be positive when things are going down and look negative when things are going up, but they provide the buyers the tool to know and have visibility on the cost of goods as they're buying them. With that, we have the same challenges as everybody else with higher FOB costs due to increased raw material prices. And at their discretion, they have a slowly-lowering hedge as well as has the ability to do some markups to control their margins. So the guidance we're giving on margins, I believe everybody has. And that's a mix of using all the tools at the discretion of the buyers. But relatively stable is probably the best way to look at it.

[Brian Morrison, Research Analyst]

Okay. And then I guess 1 follow-up question. Can you maybe share with us what percentage of units are nonessential in Ontario? It looks to me like same-store sales growth in Ontario in the month of April is probably down somewhere between 35% and 40%.

[Jean-Philippe Towner]

Yes. We don't provide the exact breakdown on SKUs. However, we do provide the breakdown between consumables, general merchandise and seasonal. It's about 42%, 43% -- 42% consumables, 43% general merchandise. It's 15% seasonal. You can assume that most of consumables would be essential. That's the color we've provided in the past on that.

[Brian Morrison, Research Analyst]

Can you just walk in the store, though, it was a shocking number of items that were unavailable? You can't clarify just the net percentage of units that were nonessential?

[Jean-Philippe Towner]

No, it's not a percentage that we've disclosed historically and that we will disclose.

[Operator]

The next question is from Mark Petrie from CIBC.

[Mark Robert Petrie]

Yes. So I guess just following up on the whole topic of inflation and costs. Can you -- I don't know if there's a way to help quantify the magnitude of inflation in your system at all. And sort of how you have reflected that in pricing thus far? And I guess, maybe if you can't sort of get into that, what are you seeing in the competitive environment with regards to price increases?

[Jean-Philippe Towner]

So in terms of inflation, as we've mentioned in the past, we're seeing increase in inbound shipping costs and product costs. And we're working hard to offset those pressures through our refresh and our markups. And that leads us to be able to provide some color on a generally flattish year-over-year gross margin. And that's what we're hoping for, but it's hard to predict how inflation will evolve in the next few quarters. We're doing our best so far to offset it through refresh and markups.

[Mark Robert Petrie]

And just any comments with regards to the competitive environment? And I guess, sort of specifically in times where we've seen this type of potential tailwind with regards to FX and your hedging program. We have seen pretty sizable gross margin expansion, but maybe the competitive environment is somewhat different today and maybe a bit of an offset. I'm not sure, what's your perspective?

[Neil Rossy, CEO, President & Director]

The pressures on FOBs and the pressures on costs are making this a different situation than in the past when you saw a change in the FX.

[Mark Robert Petrie]

Okay. And I guess just following up a bit more, just on -- with regards to sort of price increases. How do you consider your competitors sort of promotional efforts, be it flyers or rollbacks or loyalty? When you consider your price position, given those aren't parts of the Dollarama sort of value proposition, does that -- how does that factor in? Or do you sort of just look at regular price benchmarking in your work?

[Neil Rossy, CEO, President & Director]

The answer is it's painful. As buyers trying to figure out what game to play, what strategy to take, it's very challenging. But I would tell you that the buying team takes everything into account, the everyday price, the advertised price, the once a year ridiculous price, and they use their judgment and decide in their categories how they want to remain competitive. But our everyday low price is the overriding strategy that we take. And as you know, we do not play high low -- the high-low game. It's just not something we've ever undertaken. So I think over the course of time, our customers have come to appreciate that, that everyday low price is our strategy. And it's few times a year when people like to give things away. Then they'll go buy those items at those stores. But for 99% of the year, they understand that we are going to be right in there as far as having the lowest price in the market.

[Jean-Philippe Towner]

And I would just add that, I mean, our strategy has always been to be a price follower, not a price setter. And so if and when we're seeing the level playing field move, we're adjusting accordingly. But it's really with the price following dynamic, not the price setting dynamic.

[Mark Robert Petrie]

Yes. Understood. And I also just wanted to just last -- just ask sort of a broader question. It's a little bit vague, but just with regards to your store format and then the footprint size of the store. Obviously, the pandemic has changed the landscape significantly. Curbside pickup as an example. Obviously, it's going to pull back when stores return to full capacity. But clearly, it does have value for consumers and likely remains an option for many companies and your competitors. At the same time, the convenience element of shopping is obviously really important. And clearly, Dollarama has been really successful with that. So I guess my question is, do you think there's an opportunity to adjust the size and layout of stores or potentially experiment with different formats in response to some of these shifts and potential opportunities?

[Neil Rossy, CEO, President & Director]

So we do have -- just because of the realities of the retail and real estate availabilities over the course of all those years. With 1,300-plus stores, we have 3,500 square foot stores like we have 15,000 square foot stores. And so just as a matter of fact, that we have to deal with on the real estate side, we have sort of an innate testing going on at all times on how to handle those different size boxes. As far as the change of strategy, we have no current change of strategy plan. We're always open to the ability to adapt to the environment, and we're always studying it. But for the moment, we're happy with the current strategy. And we understand how to operate different sized boxes and in different markets those different size boxes are required in order to be able to secure the real estate that we want.

[Operator]

The next question is from Peter Sklar from BMO Capital Markets.

[Peter Sklar, Analyst]

Just wanted to ask you a little bit about your SG&A margin, which you explained during your commentary was -- like the percentage margin was flat year-over-year after taking into account COVID costs. Now there have been times in the past when sales are growing. You do get operating leverage on your SG&A and show a lower margin because there's a fixed cost element to that, but now you're showing a flat margin. So are there cost pressures in SG&A as well, like I'm thinking labor costs, minimum wage? So if you could just drill down a little bit on SG&A.

[Jean-Philippe Towner]

Yes. So once -- as you mentioned, once adjusted for COVID direct costs, our SG&A is generally flat, which is what we expected. In terms of the scaling benefit in the SG&A line, most of it is variable on average. So the only thing to note there is, as a result of the Ontario restrictions, we didn't get the full productivity that we would have liked in Ontario, and we managed to keep our adjusted SG&A flat despite that. And that's probably the only color that explains the scaling offset.

[Peter Sklar, Analyst]

Okay. And then the other question -- another question I have also addressing Ontario. With the limitation on the sale of nonessentials, did you -- like did you change the planogram in your Ontario stores? So did you offer more -- did you change the mix of consumables and food, for example, or any other consumables? Or is it the same planogram?

[Neil Rossy, CEO, President & Director]

So we didn't change the mix for certain. However, we did highlight on our end caps and in our -- at the front of our stores, the items that were most relevant to the consumers looking for a central items, making it as easy as we could for those consumers to find the things that they were legally allowed to buy.

[Peter Sklar, Analyst]

Okay. I get that. And then just finally, I know you get this question every call just on higher price points. But has your language changed around that, given that we're 1 quarter closer to higher price points than the inflationary pressures you're seeing?

[Neil Rossy, CEO, President & Director]

So I'll answer it twofold. One, no, nothing's changed. But two, in that nothing's changed, we've always told you and we'll continue to tell you that we are not against adding price points if the relative value required based on inflation and other factors is what's best for our customers and the offering we can offer them. So for now, there's no guidance to give. That being said, it's always a possibility.

[Operator]

The next question is from Vishal Shreedhar from National Bank.

[Vishal Shreedhar, Analyst]

Just given all the challenges with shutdowns and changes in consumer behavior, wondering how you're positioning yourself for assortments in summer and fall? And do you anticipate inventory -- I know you talked about your deeper inventory relative with the container comment. But do you anticipate any inventory challenges associated with some of these demand spikes?

[Neil Rossy, CEO, President & Director]

No. We do not have any challenges to ensure that our seasonal goods will be here when they need to be. It's more challenging to make sure it happens than it usually is, but it will happen.

[Vishal Shreedhar, Analyst]

Okay. And with respect to addressing the changes in consumer behavior that have happened rapidly for events, for example, more desire for certain seasonal goods, are you changing the space allocated for certain categories to meet that consumer's need?

[Neil Rossy, CEO, President & Director]

At the end of the day, aside from the goods bought domestically that are produced domestically, that there was a demand for, in particular, COVID-related cleaning and health products, the reality is that the balance of those goods are, for the most part, import and import goods take months to get. And so when there is a very quick change to what consumers are looking for, the reality is those things don't translate into product on the shelves. And you can ask that of every importer/manufacturer of sporting goods and fishing products and camping products and hunting products, who are all out of goods and can't get the goods even though there's tremendous demand at the moment because people are having to stay at home and find things to do domestically. So the reality is you can only do so much beyond the things that are manufactured domestically.

[Vishal Shreedhar, Analyst]

Okay. And just a few general comments on the consumer perception of Dollarama through the pandemic. I saw some grumbling on social media, and it wasn't Dollarama's choice, obviously. But that they have gone to the store and they weren't able to obtain what they wanted to and grumbling about what was available at the store. Are you -- in your monitoring of consumer perception of Dollarama, are you noticing any changes on the brand as a result of all these pandemic restrictions that you have to go through?

[Neil Rossy, CEO, President & Director]

Well, nothing breaks the heart of a retailer more than not being able to sell something that you have that the customer wants. But the reality is for any given customer's anger that they can't buy what's one inch from their fingers, we need to follow the laws of the land, as everybody else does. And we do what we can to do our part to enforce those things and follow the rules. And yet, we are sensitive to the customers' frustration. And we look forward to the opening as do all businesses that have been limited in any way in the provinces that are currently locked down or banning certain goods.But there's only so much we can do. Do we worry about our customers? No, I think overall, the vast, vast majority of customers understand we're simply following the rules of the land. And they're super excited, I believe, to get back in the stores and be able to go buy those gardening and summer and picnic things that they've been staring at and excited to get their hands on, and we can't wait for them to get their hands on.

[Vishal Shreedhar, Analyst]

Okay. And just a last 1 here. Given that the consumer is in reasonably good financial shape, do you think that incrementally dampens the appetite for a value brand like Dollarama? And obviously, your comps aren't suggesting that. But wondering, looking forward, if you're seeing any of that incrementally on the margin.

[Jean-Philippe Towner]

I mean, I think the relative value that we're offering is realized, as you pointed out, by a lot of our customers. And that relative value, as Neil mentioned, will remain in the future. And we don't anticipate those dynamics to change in the near future, that's for sure.

[Operator]

The next question is from Karen Short from Barclays.

[Karen Fiona Short, Research Analyst]

I wanted to just ask about freight, actually 2 questions. So on freight, would you be able to provide a little color on what percent of your freight and/or containers are spot versus contracted? And then what percent you're actually seeing in terms of a $1 or cost increase year-over-year?

[Jean-Philippe Towner]

So in terms of dollar increase, we don't go there, as I mentioned earlier. As I said, we're working hard to offset those inflationary pressures and are working hard towards generally flat gross margin year-over-year. In terms of what's contracted versus spot, the exact percentages we've never disclosed, and it's not something we'll provide at this point. But I would go back and fall back on the general gross margin comment to address your question.

[Karen Fiona Short, Research Analyst]

Okay. And then as you discussed, working hard to offset these pressures with the markups. Is there any color you could give in terms of percent of SKUs on markup, say, now versus in like a normal whenever we go back to a more normal time period, just to help frame how you're thinking about that?

[Jean-Philippe Towner]

No. I mean, the only comment is that we are seeing inflation across both inbound shipping costs and product cost inflation. And we're always getting back to the relative value proposition, which is we'll adjust to the level playing field. If that level playing field moves, we will move. If it stays the same, we'll stay the same. But for now we're seeing the level playing field evolve, allowing us to, through refresh and markups, be able to offset some of those inflationary pressures.

[Karen Fiona Short, Research Analyst]

Okay. And then just last 1 for me. I know you've given the color on SG&A. But we've been -- excluding the color you gave on SG&A being flat, there obviously will be COVID costs into the next couple of quarters. Can you just give us some sense of how you're thinking about that? And/or like how much of it is actually now more permanently embedded?

[Jean-Philippe Towner]

Yes. So it's a good question. On COVID costs over the medium to long term, the way we've identified them and segmented them, those are costs that for the vast majority will be out of the business once COVID is over. That being said, for the coming quarter, I think you should expect COVID costs to be in the same range as what we've seen in Q1.

[Operator]

The next question is from Chris Li from Desjardins.

[Christopher Li, Research Analyst]

Traffic was down only 3.2%. Was that better than your expectation? Because I was expecting traffic to be down more given the restrictions in Ontario. Do you think this is a reflection of the fact that Dollarama is a destination store for essential product, and that's why consumers continue to go there even though roughly half the store was closed during part of the quarter?

[Jean-Philippe Towner]

Yes. Two drivers there. The first one, as you pointed out and as I mentioned earlier, the underlying business is sound and is performing in line with expectations. Now you also have to keep in mind that in Q1 last year, because this is a year-over-year metric, we're comping against half a quarter or so of restrictions. So that plays into the year-over-year traffic and basket size numbers.

[Christopher Li, Research Analyst]

Great. Okay. That's helpful. My other question is just on the self-checkout kiosk. Can you give us an update on where you're at? How many have been installed so far? How many more for the year? And then maybe related to that is when all this is sort of implemented, do you think this will help a structural reduction in your labor costs? Or is this more of a way to alleviate some of the bottlenecks at a tilt so that when demand does come back this will help improve your sales productivity even better?

[Jean-Philippe Towner]

Yes. So our focus is on client experience first, and that's a key driver of our decision to implement self-checkout. In terms of what you can expect for CapEx and what's been done and what will be done, I mean, we've done retrofits on stores that -- where we thought we would we get the return that we need to get to justify the investment going forward. And now that those low-hanging fruits have been tackled in terms of return on capital, we'll be deploying self-checkouts in our new stores as they open over the course of the coming year.

[Christopher Li, Research Analyst]

Okay. Sorry. And do you have sort of how many stores are with self-checkout right now? And what's your target for the end of the year?

[Jean-Philippe Towner]

We'll get back to you with the exact numbers.

[Operator]

The next question is from Edward Kelly from Wells Fargo.

[Edward Joseph Kelly, Senior Analyst]

First off, just a follow-up on freight. Can you talk a bit about the timing of when you go through and sort of contract ocean rates? If we look at some of other companies, Five Below seems to have done a good job of sort of getting at it early. We've seen other things at places like Dollar Tree and the impact of that's actually pretty sizable. Just kind of curious as to how you manage through this process. And then if spot rates stay as high as they are, does that create risk in the outyear? Just curious as to how you're thinking about all that.

[Neil Rossy, CEO, President & Director]

So it's part of the daily task of the logistics team, literally every day -- every working day of the year, which is basically every day of the year. They are negotiating contracts twice in a year with the different freight companies. We try to offset the cycles, to make it more practical and have another sort of insurance in that way that there's different times. For the most part, of course, we're covered through all of our contracts. And we want to stay away as a rule as most big companies do from spot because spot generally has risks like it would with hedge -- with FX. And so we hedge. And so that same philosophy is used when we're contracting our freight rate.

[Edward Joseph Kelly, Senior Analyst]

So based upon where you are today, do you feel you have pretty good visibility on ocean spot -- or sorry, ocean rates throughout the rest of the year? Or do -- as investors, do we need to sit here and closely monitor the fact that spot prices just keep going higher?

[Neil Rossy, CEO, President & Director]

I don't think you need to closely monitor.

[Edward Joseph Kelly, Senior Analyst]

Okay. And then I wanted to ask you just about this issue with Ontario and not being able to sell nonessential items. What have you seen historically when those restrictions come off? And how should we think about sort of like pent-up demand, I guess, once we get to July 11? I know you talked about missing some of the critical summer selling season, but I presume everybody's kind of missed that, right? So how optimistic are you that you're going to be able to capture the pent-up demand related to that?

[Jean-Philippe Towner]

The short answer is we don't know. It will -- what we've seen in Québec was a strong comeback from the customer. That being said, we don't know how it will take place and shape out in Ontario. We're very eager to see and look at our SSS figures post June 11. We're certainly hoping for some level of higher activity, but at this point it's anyone's guess.

[Operator]

The next question is from Patricia Baker from Scotiabank.

[Patricia A. Baker, Analyst]

Most of my questions have been asked and answered. However, just 1 follow-up on the discussion of the self checkout. And we did reference the fact that you start first with wanting to ensure that you have a great customer experience. I'm just wondering what your setup is in the stores where you have self checkouts? How are you manning the cash registers? Or do you have somebody at the cash register even where you have the self checkout? So that the consumer makes the choice about what they want to do?

[Neil Rossy, CEO, President & Director]

Yes. We always have a cashier, and we always have a self-checkout monitor. And depending on the level of business of the store, we could have more than 1 monitor at the self-checkouts and obviously more than 1 cashier at the cashes. But when there are customers and there's a need, we have personnel at both.

[Operator]

The next question is from Graeme Kreindler from Eight Capital.

[Graeme Kreindler, Principal]

Just 1 question. Neil, on past conference calls, you discussed the manufacturing environment during COVID, there was definitely some capacity constraints causing some of the producers of goods to focus more on keeping up with demand with existing products and has taken down some of the innovation. And I think the lack of trade shows and the like could also impact that as well. I'm just wondering, is that impacting at all the ability for Dollarama to implement its mix refresh or potentially implement a new price point given that would feature a lot of new merchandise? Some additional color on that would be appreciated.

[Neil Rossy, CEO, President & Director]

Sure. Certainly, the focus on only making masks and hand sanitizers has evolved into thinking about beyond COVID. So we're starting to see some return to normal at the manufacturing level. The biggest constraint at the moment is freight and the movement of goods around the world. The factories of the world are starting to get ramp back up and capable of producing, but their challenge is getting the goods off the factory floor and into containers. And so that's the current challenge for the manufacturers of the world and the retailers of the world.As far as generating new and exciting, so to speak, it's starting. I would tell you there's still a ways to go. But of course, we know that consumers focus on what they want to buy has changed a little. And thankfully, while consumers are more focused on COVID-related things still, the gap of new creations or new innovation is not having the impact it might in normal times. So I'm hoping that as things get back to normal from a creativity perspective around the world, it will come about the same time when people start focusing on the balance of the goods in the store, and it won't be an issue. But that remains to be seen.

[Operator]

And the last question is from Derek Dley from Canaccord Genuity.

[Derek Dley, MD & Consumer Products Analyst]

I just wanted to just to kind of frame the new normal, I guess, in Ontario, at least for the period. So with 15% nonessential capacity, what does that look like in your stores? Are you going to have the full assortment of nonessential items? And like how do you traffic the amount of people in the stores?

[Neil Rossy, CEO, President & Director]

So there's 2 questions, I think. One was how do we control the number of people in our stores and the other is, is it going to change the offering? Did I understand that correctly?

[Derek Dley, MD & Consumer Products Analyst]

Yes. Yes, that's right.

[Neil Rossy, CEO, President & Director]

So the offering doesn't change. The offering remains the same. Where in the store and how much we highlight COVID-related items may change a bit. And when the reopening starts if barbecue is what customers want, then barbecue will be on the end and COVID will shift over a little. But it will certainly -- both will still be in the store and available for our customers. As far as controlling the traffic in our stores, we've gotten pretty good at it over the course of this thing. And we have a monitor. We do counts. There's a system in place in all stores to ensure that we're following all the rules of the land and doing our part to ensure the safety of our customers and our employees.

[Derek Dley, MD & Consumer Products Analyst]

Okay, great. And I think you guys gave us a breakdown of consumable general seasonal as you typically do, which was great. I guess, outside of Ontario, where you've been able to sell sort of the full suite of products, have you seen that mix return to normal over the last, I don't know, few months or into Q2?

[Jean-Philippe Towner]

Yes. So as I mentioned earlier, the -- once you look at the underlying business and you try and remove the restrictions, our business and our mix is in line with expectations, keeping in mind that we had a strong mix and tailwind from our mix in Q2 last year.

[Operator]

Thank you, everyone. That concludes the question-and-answer session and our conference for today. Please disconnect your lines at this time, and we thank you for your participation.