Dollarama Inc

TSX:DOL

Earnings Call Analysis

Dollarama's Q1 FY2025 Strong Performance and Expansion

Dollarama reported an 8.6% increase in sales to $1.4 billion, with same-store sales rising by 5.6%. Earnings per share grew by 22.2%. The company opened 18 new stores, bringing the total to 1,569. Gross margins improved to 43.2% and are expected to remain between 44-45% for the year. The company reiterated its SG&A guidance of 14.5-15% of sales. Dollarama increased its ownership in Dollarcity to 60% with plans to enter Mexico in 2026. Dollarcity's store target was raised to 1,050 by 2031.

Introduction and Overview

Dollarama, a key player in the value retail market, has reported strong financial results for the first quarter of fiscal 2025. The company continues to see robust demand for its core consumables and everyday essentials despite a challenging economic environment.

Financial Performance

Overall sales for the quarter increased by 8.6%, reaching $1.4 billion. This growth was driven by a 5.6% increase in same-store sales, which saw an 8.7% increase in traffic but a 2.8% decrease in basket size. Gross margins improved to 43.2%, up from 42.2% in the previous year, helped by lower logistics costs and renewed shipping contracts. Dollarama remains confident in its guidance of 44% to 45% gross margins for the full fiscal year.

Earnings and Shareholder Returns

Diluted net earnings per share rose by 22.2% to $0.77, reflecting both the strong sales performance and margin improvement. The board also approved a quarterly dividend of $0.092 per share. Furthermore, the company repurchased approximately 1.3 million common shares for $145.5 million, underscoring its commitment to returning value to shareholders.

Expansion and Growth Initiatives

Dollarama opened 18 net new stores during the quarter, bringing the total store count to 1,569. The company continues to see opportunities for expansion in Canada and remains committed to its growth strategy. Additionally, Dollarama expanded its ownership in Dollarcity from 50.1% to 60% by acquiring an additional 10% equity interest. This acquisition, valued at USD 554 million and satisfied through the issuance of approximately 6.1 million common shares, further solidifies Dollarama's growth platform in Latin America.

Dollarcity and Latin American Expansion

Dollarcity has shown impressive growth, increasing its store count to 547 across El Salvador, Guatemala, Colombia, and Peru. Looking ahead, Dollarcity plans to enter Mexico by 2026, with Dollarama holding an 80% equity stake in the new venture. This marks an important milestone as Dollarcity aims to raise its long-term store target in current markets to 1,050 stores by 2031.

Guidance and Outlook

Despite uncertainties in the economic landscape, Dollarama expects comparable store sales to grow between 3.5% and 4.5% for the full year. The company is also tackling SG&A pressures by targeting efficiencies and productivity initiatives, aiming for these costs to be 14.5% to 15% of sales for the year. Dollarama remains optimistic about its growth prospects, both domestically and internationally, while maintaining a strong value proposition for consumers.

Earnings Call Transcript 2025-Q1

[Operator]

Good morning and welcome to the Dollarama Fiscal 2025 First Quarter Results Conference Call. Neil Rossy, President and CEO; and Patrick Bui, CFO will make a short presentation 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, levels of activity, performance, goals or achievements and any other future events or developments.

Forward-looking statements are based on information currently available to the 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 12, 2024, available on SEDAR+.

Forward-looking statements represent management's expectations as at June 12, 2024, 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.

[Neil Rossy, executive]

Thank you, operator, and good morning, everyone. If you joined us for our AGM this morning, welcome back. Earlier today, Dollarama reported solid first quarter fiscal 2025 financial results. Concurrently, we made announcements regarding Dollarcity, including an increase in our ownership interest.

Starting with our first quarter results, we delivered another quarter of strong top line growth and a 22.2% increase in earnings per share. As anticipated, we are seeing a progressive normalization in same-store sales growth, a trend which we expect will carry through the coming quarters and as reflected in our SSS guidance for the full fiscal year.

Consistent with the last 2 years, we continue to experience higher than historical demand for core consumables and other everyday essentials. While demand for general merchandise and seasonal products remains stable overall, customers are deploying their discretionary spending prudently.

On the real estate front, we opened 18 net new Dollarama stores in the quarter, bringing our total store count to 1,569. This marks a good pace out of the gate as we look to open more stores than historically in the first half of the year, which we did successfully last year.

Looking ahead, the path of the Canadian economy and future consumer behavior remains hard to predict, but one thing that is clear is the strength of our value proposition. As Canadian consumers seek out convenience and compelling value for their hard-earned money, we will remain laser-focused executing on our value and convenience promise. We will do so across all product categories, including consumable products, general merchandise and seasonal items.

Turning to Dollarcity. This morning we announced the expansion of our partnership in Latin America as well as an increased equity stake. Like Dollarama in Canada, the Dollarcity value proposition is resonating with consumers in LATAM, which speaks to the relevance of our retail model across geographies and demographics.

A key component of our long-term growth strategy, Dollarcity has generated impressive results year-after-year. The business is led by a strong leadership team, who has been successfully executing our strategy throughout the course of our over-a-decade-long partnership. This is reflected both in Dollarcity's pace of new store openings and growing earnings contribution through the years.

In this context, this morning's announcement marks a natural next step for our partnership and includes 3 key components. First, we have acquired an additional 10% interest in the business for a total implied value of USD 554 million satisfied in Dollarama common shares. This brings our ownership in the Dollarcity business to 60%.

Second, we negotiated a call option to purchase an additional 10% interest by no later than December 31, 2027. Third, we confirm that Mexico will be Dollarcity's next country of entry, planned for 2026. Dollarama will own an 80% equity interest in Mexico, which represents a new country of operation under our partnership.

Mexico has a population of close to 130 million people as well as a dynamic retail market. We believe the local consumer will have an appetite for the Dollarcity value proposition as has been the case in our current LATAM countries of operation. We will enter Mexico with the same care and discipline as we did in Colombia in 2017 and Peru in 2021.

As for Dollarcity's growth in its current markets, we also see further potential. Today, we confirm that Dollarcity has increased its long-term store target in its 4 current countries of operation from 850 stores by 2029 to 1,050 stores by 2031. As at their latest quarter end, they had a total of 547 stores located in El Salvador, Guatemala, Colombia and Peru. This is up from 532 as at December 31, 2023.

The vast majority of this anticipated growth will come from Colombia and Peru. This target excludes the future Mexico business for which it is too early to set such an objective. As demonstrated by our increased ownership interest in Dollarcity, we have confidence in the business's long-term potential as they pursue our growth strategy in key LATAM markets.

At the same time, we are pursuing our growth plans in Canada as a leading value retailer in the country. Combined, Dollarama today benefits from a strong growth platform with more opportunity to serve today's value-oriented customer and to ultimately create long-term sustainable value for our shareholders. None of this would be possible without the incredible efforts deployed by everyone on the Dollarama and Dollarcity teams.

With that, I'll pass it over to Patrick to discuss our financial results and the Dollarcity transaction in more detail.

[Patrick Bui, executive]

Thank you Neil, and good morning, everyone. Let's start with an overview of our KPIs for Q1 of fiscal 2025, before turning to the Dollarcity transaction details. Sales increased by 8.6% over Q1 of fiscal '24 coming in at $1.4 billion.

Same-store sales grew 5.6%, lapping 17.1% growth in the same period last year, demonstrating strong consumer demand. SSS consisted of an 8.7% increase in traffic and a 2.8% decrease in basket size. We continue to expect comparable store sales to grow at a pace of between 3.5% and 4.5% for the full fiscal year.

Gross margin came in at 43.2%, compared to 42.2% in Q1 of '24. The increase is mainly driven by the positive impact of renewed shipping contracts and lower logistics costs. Guidance for the full year remains between 44% and 45% of sales.

SG&A represented 15.4% of sales for Q1 of fiscal '25, compared to 51.1% in the same quarter last year. We are actively working on offsetting SG&A pressures from higher store labor and operating costs through our ongoing efficiency and labor productivity initiatives. In this context, we are reiterating our annual guidance range for SG&A as a percentage of sales of between 14.5% to 15%.

With respect to our share of Dollarcity, which still stood at 50.1% for the Q1 reporting period, their net earnings contribution for the quarter increased by 68.3% compared to the same quarter last year to $22.1 million. We will continue to account for this investment, including the New Mexico partnership as a joint arrangement using the equity method.

Back to Dollarama, our Q1 diluted net earnings per share increased by 22.2% to $0.77 per share. On the NCIB front, we remain active in Q1 with the repurchase of just under 1.3 million common shares for cancellation for a total consideration of $145.5 million. The Board approved a quarterly cash dividend of $0.092 per share.

Turning now to the Dollarcity transaction. Neil walked you through the key highlights. Let's take a look at the details. First on the acquisition of an additional 10% equity interest in the Dollarcity business. The transaction was satisfied by the issuance of approximately 6.1 million common shares of Dollarama for a total implied value of USD 554 million.

The shares were issued via private placement and represent approximately 2.1% of our total issued and outstanding shares. The transaction is expected to be neutral to our net earnings per share for fiscal 2025. By satisfying the purchase price through the issuance of common shares, there is no near-term impact on capital allocation strategy, both in terms of investing in organic growth and optimizing shareholder returns through share repurchases and a modest quarterly dividend.

Another component of the transaction is the additional call option enabling us to purchase a 10% ownership interest in the current business and a corresponding 5% interest in the future Mexico business. The option window will remain in place until December 31, 2027. The call option provides a more established path to increased ownership, should we choose to exercise it.

Overall, beyond the addition of the call option, our existing governance and modus operandi with the Dollarcity founding group remain largely intact and we have approached the Mexico partnership in the same spirit. The preexisting Dollarcity put option also remains in place, but obviously at a lower percentage given our increased ownership.

We have strong local partners who know the Latin American market well. Our long-term partnership has only strengthened our relationship and we look forward to staying on this path of strong execution and profitable growth. This transaction simply solidifies our commitment to the growth platform and its long-term potential while in parallel pursuing our profitable growth in Canada.

With that, I will now turn the call back to the operator for the Q&A with financial analysts.

[Operator]

[Operator Instructions] Our first question comes from the line of Irene Nattel with RBC Capital Markets.

[Irene Nattel, analyst]

Just if we could please start with Dollarcity. And I guess the first question is, how did you arrive at the value for the 10% that you are acquiring? And I guess the related question is how to think about the growth trajectory in earnings from Dollarcity, now that the mature stores are a larger proportion of the total store base?

[Patrick Bui, executive]

Yes, thanks, Irene, for the question. A few things. The USD 554 million for 10% represents in our view a fair assessment of Dollarcity. The Dollarcity platform has an attractive growth profile, as you can see in the growth of the equity pickup. It's been strong if you look historically and we anticipate that in the future. And it's also predicated on strong return economics because it's based on the Dollarama business model. And so again, we think that's a fair representation of the value of the business.

[Irene Nattel, analyst]

Okay. Understood. Did you -- is it, I'm being asked a lot of questions about the multiple that you might have paid, or did you approach it on a DCF basis, a multiple basis? What's the best way for us to think about it?

[Patrick Bui, executive]

Yes, I can't -- we're not in position to guide you on how you should, or we value the business. We come back to the point that it was a negotiated value and it represents a fair assessment of Dollarcity.

[Irene Nattel, analyst]

Fair enough. Certainly, it drives with our assessment of value of Dollarcity. And I guess, the final question on Dollarcity is, can we or should we expect you to disclose incremental color around the Dollarcity performance metrics or KPIs? Because we really haven't had anything until -- since you exercised the call option.

[Patrick Bui, executive]

Yes. I mean, we will follow all accounting standards and requirements, which will most likely require additional disclosure by the end of the year. And that disclosure will evolve as the business grows and the business represents a greater portion of the overall business.

But I think we do provide historical equity pickup growth. So it gives you a sense and we've updated today our target in terms of store openings, so you also have a sense of unit growth in time as well.

[Irene Nattel, analyst]

That's great. And then just turning to the rest of the business, you did note sort of strong demand for essentials and consumables. But can you talk a little bit about what you're seeing in consumer behavior that sort of leads you to conclude that people are being more cautious even in your store? And I guess overall demand profile?

[Patrick Bui, executive]

Yes. I mean, it's more of the same that, honestly, Irene, that we've seen in the past months and quarters. We've seen -- you see in the number 8.7% traffic growth. I mean, clearly, customers are appreciating the value proposition of Dollarama. It's clearly resonating with consumers. And we did mention that we do also think that they're deploying their discretionary spend more prudently.

And so we don't have much more to say on that, other than we also see normalizing SSS, we're at 5.6% this quarter. We've also guided you towards the 3.5% and 4.5% for the full year. And so we do think that there is normalization between now and towards the end of the year.

[Operator]

Our next question comes from the line of Chris Li with Desjardins.

[Christopher Li, analyst]

Just maybe a quick follow-up to Irene's question. So I just want to maybe ask, or slightly differently, is it fair to say that same-store sales kind of gradually moderate as the quarter progressed? And then, Patrick, are you willing to share with us sort of what is the Q2 to-date same-store sales trending so far?

[Patrick Bui, executive]

Yes. Look, we're going to come back on that. We're not going to provide any guidance on Q2. What we can tell you again is we've clocked in at 5.6% for Q1. And we do see signs of progressive normalization that will continue as the year progresses and which will average out for the year at 3.5% to 4.5%.

[Christopher Li, analyst]

Okay. That's good. And then related to that, are you seeing any notable changes in competition thinking, especially maybe on the discretionary side, as you know that the spending there is starting to maybe pare back a little bit?

[Neil Rossy, executive]

No, we're not seeing any notable change in the competition. I think all retailers in Canada are ultra-sensitive to a challenging market and -- but there's been no change from the last quarter.

[Christopher Li, analyst]

Okay. That's helpful. And then maybe a couple of quick ones on Dollarcity. Just wondering, the way the transaction is funded is through the share issuance. Was that kind of -- from the founders that wanted the shares, or like versus just cash? Can you just give a sense of like what was the rationale for the shares versus maybe cash?

[Patrick Bui, executive]

Yes. We think it's beneficial to both sides and we think an exchange of changes -- of shares, sorry, actually aligns interest between both organizations. So we think it was the right way to proceed for this transaction.

[Christopher Li, analyst]

Okay. And my last question is just, I know this is probably the tough one to answer, because you're not there yet, but in Mexico, as you start to look at expansion into that country, what are the opportunities perhaps to leverage maybe your existing infrastructure you have in LATAM to how to be more efficient to get into the country?

Or would the expansion be similar to any other country where there's going to be a period of ramp-up in investment and you hope that you can fund that with free cash flow and that will gradually improve going forward? Just, yes, want to get us a sense if there is opportunities for synergies or leverage, given you already have an existing platform in LATAM.

[Neil Rossy, executive]

It's a combination of both. There will be a ramp-up period for sure, as there is in every country we enter and have entered in the past. And in each of those countries, we will, of course, leverage the team that has created the existing Dollarcity business, which has gotten stronger and larger and more competent over this course of time, just like Dollarama did at the beginning of its business and continues to do, to be honest. So we will both leverage the experience within, but there will be a ramp-up period as there is in every new country.

[Operator]

Our next question comes from the line of Tamy Chen with BMO Capital Markets.

[Tamy Chen, analyst]

Wanted to start with the Canadian business. So this is the second quarter where, yes, your traffic is up, but the basket is smaller. Could you just talk a little bit more about that? Like, why do you think that is? Because I get the sense your expectations through this year is that you're assuming you'll retain most of the gained market share. And you'll be using your playbook for increasing basket size, but it's kind of the opposite right now. So just curious what theories or perspectives you have as to why we're seeing this trend right now between traffic and basket?

[Patrick Bui, executive]

Yes. We talked about it last quarter, Tamy. And frankly, we're not surprised at seeing -- look, if traffic is at a level of 8.7%, it's just consequential that the basket size is smaller. People are coming more often to our stores. Clearly, they value our value proposition, but they're just purchasing slightly less in terms of basket dollars.

[Tamy Chen, analyst]

Right. Okay. And then on Dollarcity, well, first, I'm just curious with respect to increasing the stake, why now? How do you think about the timing for doing this now?

[Neil Rossy, executive]

The timing seemed like the right time, both from a business growth perspective and we've been discussing it with our partners for some time and it got to the point where we both felt it made sense for both parties. So it's an evolution of the business and an evolution of the partnership at the same time.

[Tamy Chen, analyst]

And can you talk about why Mexico? Because in your existing arrangement with the founding shareholders of Dollarcity, Mexico wasn't one of the markets. There were a number of other markets that were already included in that existing partnership. So this is a new one. Why specifically Mexico rather than some of the other countries that were already in your arrangement? And this different JV structure as well for Mexico?

[Neil Rossy, executive]

Sure. So it's a very good question. The countries that are part of the initial deal are still in the initial deal and still available to us to grow into over the next several years. But I think one of the learnings that we've had as a partnership is that every new country of operation requires a large expenditure of energy and time and resources and dollars.

And so in order to make the best use of all of those resources, the partnership decided together that Mexico being the largest market in that -- between LATAM and Canada made the most sense as the next market of operation. And that's why we added Mexico to the deal. And the economics are simply something that the partnership together thought was a fair way to approach a new country of size.

[Operator]

Our next question comes from the line of Vishal Shreedhar with National Bank.

[Vishal Shreedhar, analyst]

Given Dollarama's ongoing balance sheet strength and cash generation, would these investments in LATAM and Mexico, would those preclude you from investigating other acquisition opportunities?

[Neil Rossy, executive]

No, they would not.

[Vishal Shreedhar, analyst]

Would Dollarama have to put in capital to fund Mexico's growth or is that self-financing?

[Neil Rossy, executive]

No, Dollarama will have to put capital into Mexico's growth, depending on the pace of the growth, but that's to be seen.

[Vishal Shreedhar, analyst]

Okay. Switching gears here to Dollarama's business. The same-store sales growth trajectory through the year, which is anticipated to gradually normalize, the ending point could be something below what Dollarama historically has achieved, call it mid-single-digits. Would it be fair to say that -- or was there anything that would point you to have us believe that post-2025, after a year of normalization, that Dollarama would not be able to return to its historical level of same-store sales growth? Or should we look at the cadence that we're seeing through fiscal 2025 and expect that to continue?

[Patrick Bui, executive]

Yes. Really the normalization that you're seeing in fiscal '25, Vishal, is very much a function of the high growth that we're lapping in prior years. It's really that. There is no reason to believe that once this rather unusual period passes by that we'll return to normal growth rates that we've seen in the past.

[Vishal Shreedhar, analyst]

And lastly, the optionality to acquire additional stakes in the core existing Dollarcity business and Mexico, do you have a capital allocation priority? I know that's longer term, but is there one that prioritizes over another, or is that to be seen as time unfolds?

[Patrick Bui, executive]

Yes, it's to be seen, but capital return to shareholders has always been very important to our strategy and we don't think that it's one or the other. We think that we could both grow the business organically, strategically and return capital to shareholders.

[Operator]

Our next question comes from the line of Mark Petrie with CIBC.

[Mark Petrie, analyst]

Just a couple of follow-ups specifically on the Dollarcity transaction. Is there sort of a set multiple with regards to the options, or is it fair market value as well?

[Patrick Bui, executive]

Yes. And just first point, so the call option, just to be clear, the call option is a combination of 2 things. It's 10% of Dollarcity and it's 5% of Mexico simultaneously. I mean, we're not disclosing the terms of the call, but think of it as if Dollarcity performs per the plan and market conditions remain similar to today, we'd be looking to exercise that call.

[Mark Petrie, analyst]

Okay. So the call is, it's one call for both of those stakes. Okay, got it. Okay.

[Patrick Bui, executive]

Yes.

[Mark Petrie, analyst]

And just the way you were speaking about it, it sort of implies that you don't really believe you're paying for that option value, or the initial stake in Mexico. Like, the consideration today is for that incremental 10%. Is that the way you're thinking about it, or are there values assigned to these other pieces?

[Patrick Bui, executive]

Yes, the 10% stake for -- it's an implied USD 554 million. I mean, that's really for the 10% stake in Dollarcity.

[Mark Petrie, analyst]

Yes. Understood. Okay. And just coming back to Canada, I just wanted to ask about Easter specifically. Obviously a crucial period for you. The performance of that relative to previous years and also the sort of competitive landscape around Easter specifically?

[Neil Rossy, executive]

The competitive landscape, as I mentioned on a prior question, is relatively stable. And on the Easter side specifically the very same. I would say there's not -- there wasn't much change in the market with regards to that particular holiday season.

[Mark Petrie, analyst]

Okay. And sort of stable spending, like in line with the performance of the quarter? Like it wasn't a tailwind, or a headwind specifically to same-store sales growth?

[Neil Rossy, executive]

It was an okay Easter. Let's put it that way. It wasn't one of our best Easters, it was an okay Easter. But holiday seasons are affected by so many things, including the date of the holiday, the weather during the holiday season. There are so many factors that impact holiday season performance that I have to tell you all these years later, I still have a hard time figuring out, if it's going to be a great holiday season or not. But the offering was there, it was well accepted. But I would not say it was one of our best Easters. It was an okay Easter.

[Mark Petrie, analyst]

Okay. I'll put okay into the model.

[Neil Rossy, executive]

Perfect.

[Mark Petrie, analyst]

We'll see what it spits out. Yes. Okay. Perfect. And I guess just last one, Patrick, on gross margin, you gave a bit of color, but can you just help break down sort of some of the moving parts here specifically? And I'm interested in maybe how freight and logistics impacted you this quarter versus say the second half of last year. And then also with regards to sales mix, I mean, you highlighted consumables. Is it fair to say that that sales mix has returned to being more of a headwind on gross margin than it was through fiscal '24?

[Patrick Bui, executive]

Yes. So let's try to unpack gross margins. So if you look at gross margins this Q1, the 43.2%, I mean, it's better than last year. It's mostly a reflection that there was a lot of congestion at the port last year as people were bringing in containers. So there were onetime costs last year that we didn't have this year.

So that's why you see there's a pickup Q1-over-Q1. We are currently benefiting from lower shipping costs and we expect to benefit that throughout the remainder of the year, although we would caution that if you look at Q3 and Q4 of last year, we benefited from unusually low logistics costs, which we don't anticipate getting this year. So that's how we see the year progressing. And I'll repeat that and that's why we feel comfortable that over the year we'll land in that 44% to 45% gross margin range.

[Mark Petrie, analyst]

Okay. And any comment or color on sales mix and how that's affecting the business versus last year?

[Patrick Bui, executive]

I mean, it evolves, but you need to think of it as quite incrementally as an evolution. And so we play in those bands to maintain the margins within a band. So it's true that there's a higher mix of consumables, but we have levers to keep it within an acceptable range.

[Operator]

Our next question comes from the line of Brian Morrison with TD Cowen.

[Brian Morrison, analyst]

First question on Dollarcity. Patrick, you said that you might provide increased disclosure. Is that -- at the end of the year. Is that because you'd be hitting a 10% of net income threshold?

[Patrick Bui, executive]

Yes. I mean, that's more of an accounting requirement if you want to go into details. It's related to an additional note that we may be required to put in the financial statements.

[Brian Morrison, analyst]

Okay. And then are you able to provide any color with respect to the growth rate of Dollarcity for the rest of this year, just because it's becoming a bigger part of your consolidated income? And secondly, how do you assess the competitiveness of the Mexico market, whether it be Dollar stores or other retail competition relative to Peru and Colombia?

[Patrick Bui, executive]

Yes, I'll deal with the first part of your question. Look, unfortunately, we don't provide guidance on the evolution of the growth of the business, but you would have seen some very strong growth last year in our Q1 numbers and we expect strong growth to continue in the future.

[Neil Rossy, executive]

And on a competitive side, we never really look at new countries of operation and their competitiveness versus some of the other countries we're operating in. We're simply looking at whether the Dollarcity offering is competitive within the environment in that country. And we feel that the offering that the Dollarcity business brings to the market will be an extremely interesting shop, both from a different offering perspective, so items that aren't currently in the market as well as an upgrade on the look and packaging and feel relative to the market. Our execution at retail, within the market, the actual shop. And so all in all, clearly we believe that it's an interesting enough differentiation from the market that we're excited by the Mexico opportunity.

[Brian Morrison, analyst]

Okay. Neil, maybe I can follow-up on a question with you on Dollarama as well. If you walk through the store, certainly with the higher price points, you have an impressive increase in your breadth of product assortment. But I'm noticing that specifically in categories such as garden and auto and pet, you're really expanding there.

And I know you say the competitive dynamic is stable, but these are key categories of Canadian [ tires ] and Costco's and mass merchants. I'm just wondering if you expect them to -- I know you compete on relative value, but do you expect their response to be in terms of promotional activity, or competitive response to maybe intensify a little bit?

[Neil Rossy, executive]

So our auto section is still tiny. It's meaningless within the scope of a Canadian tire assortment, et cetera. So even though we might have added a few SKUs and as a percentage, that's a lot, it's really not impactful, I believe, to those other businesses. That being said, we will continue to do the best we can within our stores to provide the most interesting shop.

And there's a limited number of square feet in our stores. So it's not like we can ever turn into a giant competitive retailer to organizations whose sections of gardening or auto is as big as our entire store. That's not our intention. The intention is, within our convenient shop that's easier and easier in and out shop for customers across the country to provide them with the best value we can in any given department.

And that's a constant focus of our buying team. So it's not so much that we're increasing the number of SKUs, because if we were increasing the number of SKUs in those categories, we'd need to be decreasing the number of SKUs in other categories, because store is not getting bigger. So really it's just a question of refreshing, improving the quality, improving the look, making the shop as a whole a better shop.

But as far as what other retailers think of what we're doing and how they react, it's always been, of course, out of our control and in their control. And we expect that all retailers in Canada are going to do the best they can to make their shopping experience for their customers as good as they can. So we remain focused on our business in what we can do.

[Operator]

Our next question comes from the line of Edward Kelly with Wells Fargo.

[Edward Kelly, analyst]

I wanted to ask about SG&A. Overall, you talked about working on some measures to offset what you're seeing from a wage inflation standpoint. I was curious if you could maybe elaborate on what you are doing to help mitigate that, what the outlook for wage inflation is like? And then I guess the guidance would assume that you have less pressure maybe on SG&A as a percentage of sales as you get into the back half. So any added color there would be helpful.

[Patrick Bui, executive]

Yes. So let me provide some commentary in order and disorder, if I could say so. As we progress throughout the year, we do expect SG&A as a percentage of sales to decrease, I mean, simply by the fact that when you look at sales in Q1, they're lighter generally than Q2, Q3 and Q4. So you will get naturally the benefit of scale.

Certainly in terms of getting some scale out of the business and some leverage, I mean, certainly -- and we've been consistent in the past, it becomes increasingly difficult in the business. But we are working on initiatives and most of these initiatives relate to ours with respect to labor. So we've talked in the past examples of [ Soft ], an application that maximizes and optimizes the whole recruiting process. We're working on projects with respect to automating, scheduling and so on and so forth.

So it's not one particular project that will make a difference in itself. It's the collection of all these smaller initiatives that I just mentioned 2 as an example. And add to that the scaling effect in the future quarters, which will lead us once again to that guidance of 14.5% to 15% over the year.

[Edward Kelly, analyst]

Great. And I wanted to just check in on shrink. It hasn't really been mentioned on the call. I'm just kind of curious what you're seeing in your accounts. Anything notable there that we should be thinking about?

[Patrick Bui, executive]

I mean, honestly, not particularly. It's consistent with what we said last quarter. Shrink has obviously increased since the pandemic and even beyond pre-pandemic levels, but it's growing at a very slow pace. And we feel that like we said last quarter, it is plateauing. It is a priority for the team.

We're looking at a host of initiatives. We've launched a bunch of pilot projects to curb shrink. It's a little too early to conclude on these pilot projects, but we don't -- in the same way I mentioned last quarter, we don't see shrink as a major problem.

[Operator]

Thank you. This concludes the Q&A session. Thank you all for participating. This does conclude today's call and you may now disconnect.