Dollarama Inc

TSX:DOL

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, and welcome to the Dollarama Conference Call for the Fiscal 2019 Second Quarter Results. Mr. Neil Rossy, President and Chief Executive Officer; and Mr. Michael Ross, Chief Financial Officer, will make a short presentation, which will be followed by a question-and-answer period opened exclusively to investors and financial analysts. For your convenience, the press release along with the second quarter financial statements and management's discussion and analysis are available at dollarama.com in the Investor Relations section and on SEDAR.Before we start, I've 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 or 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 under 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 statements will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. For additional information on these assumptions and risks, please consult the cautionary statement regarding the forward-looking information contained in Dollarama's MD&A dated September 13, 2018, available at www.sedar.com. Forward-looking statements represent management's expectations as of September 13, 2018, and except as may be required by law, Dollarama has no intention and undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.I'd like to turn the conference call over to Mr. Neil Rossy.

[Neil Rossy, CEO, President & Director]

Thank you, operator, and good morning, everyone. This morning, we reported our financial results for the second quarter of fiscal 2019. We delivered a solid performance with continued sales growth, strong margins, tighter cost management and a 13% increase in diluted EPS over the same period last year. Top line growth of 6.9% reflects same-store sales of 2.6% and the growth of our store network from 1,125 stores to 1,178 stores over the past 12 months.The Q2 SSS growth rate primarily reflects our decision to limit price increases in order to deliver an even more compelling value proposition for customers, a key factor in our long-term success. We also faced a difficult comp, given that SSS for the same quarter last year was very strong at 6.1%, driven in part by sales of products in connection with Canada's 150th anniversary celebration. That being said, we did recover the shortfall in summer seasonal sales reported in Q1.In the first 6 months of fiscal '19, we opened 18 net new stores compared to 30 in the same period last year. We expect an acceleration of new store openings in the second half of this year as -- and are maintaining our full year target of 60 to 70 net new stores. This pattern of opening a higher number of stores in Q3 and Q4 is consistent with prior years and is really just a timing issue.Now turning to e-commerce. As previously communicated, we are gearing up to launch our Québec-only pilot for the sale of items by the case this fall. We look forward to testing our platform in our home province ahead of a national launch.Finally, regarding our distribution center expansion, construction work is well underway, and we are very pleased to be moving along on time and on budget. Most importantly, existing DC operations continue to run smoothly in parallel as our store network continues to grow.Over 6 months into the fiscal year, we are on track to deliver strong earnings growth and a sustained long-term financial performance for the benefit of our shareholders. We will achieve this while maintaining our compelling value proposition for consumers.I'll now turn it over to Michael for more detail on our financial and operational performance as well as guidance updates for the full year.

[Michael Ross, Chief Financial Officer]

Okay, thank you, Neil, and good morning, everyone. So our quarterly financial performance was driven by continued sales growth, strong margins and the active management of our cost structure while up against some challenging comps.Sales were up 6.9% at $869 million, and same-store sales grew 2.6%. Transaction size increased by 3.1%, while the number of transactions decreased by 0.5%. Gross margin was 39.7%, up 0.1% over the same quarter last year. SG&A was 13.7% of sales, a 0.2% improvement over the same quarter last year. And EBITDA was 26% of sales, up 0.3% over the same quarter last year. Diluted net earnings, reflecting the share split, rose to $0.43, representing a 13.2% year-over-year increase.We are revising our assumptions for same-store sales and enhancing our guidance on gross margin, G&A and EBITDA. Based on the results of the first 6 months, and in light of decision to hold back on price increases, we are setting our assumption for full year same-store sales at a range of 2.5% to 3.5%, down from the previous range 4% to 5%. Despite a more conservative sales forecast, we are increasing gross margin guidance by 50 basis points to a range of 38.5% to 39.5% of sales. Q2 gross margin was slightly higher than the prior year as a result of changes to the product mix and lower occupancy cost as a percentage of sales. We initially expected inflationary headwinds on goods purchased in China to have a notable impact on gross margin in the second half of this year. However, based on our visibility on open orders, the impact should be less than anticipated, leaving our margins for the remainder of the year stronger than originally expected.We are also enhancing SG&A guidance to a range of 14.5% to 15% of sales or an improvement of 50 basis points. SG&A as a percentage of sales improved in Q2 due to cost control initiatives implemented towards the end of last year, resulting in savings realized in Q1 and Q2 of fiscal 2019. These helped mitigate the impact of minimum wage increases, primarily in Ontario. SG&A margin also continues to benefit from in-store labor productivity initiatives, tighter control over operating expenses and scale. Accordingly, we are increasing EBITDA guidance by 100 basis points to a range of 23.5% to 25% of sales.In terms of CapEx, which amounted to $26.8 million in Q2 F '19, our guidance remains unchanged for the full fiscal year and fully reflects costs associated with the expansion of our distribution capacity. Guidance of 60 to 70 net new store openings for the year also remains unchanged.Now turning to operations. We have several ongoing initiatives to improve efficiency and further streamline our cost structure in support of long-term profitable growth. We have completed the rollout of new cash handling processes to reduce the time required to count and record cash deposits. We are also continually optimizing in-store scheduling to improve labor allocations and simplify scheduling process for store managers.It has now been over a year since we started accepting credit cards as a payment method across the chain. I'm pleased to confirm that credit card penetration continues to meet our expectations and to grow from quarter-to-quarter. In Q2 F '19, credit cards were used to pay for 18.4% of sales. This is compared to 12.4% of sales in Q2 F '18. Note that the expected cannibalization has been higher on transactions settled in cash than on transactions settled by debit card. Note that we will not be updating this metric on a quarterly basis. This is a one-time disclosure to put things into perspective after a full manual cycle of transaction since the introduction of this payment method.As part of our normal course of business, we also continue to monitor and measure consumer sentiment regarding their shopping experience. The results we have seen this year suggest that our compelling value proposition remains strong and that consumers continue to enjoy their shopping experience in our stores.Finally, a comment on capital allocation. In Q2, we repurchased 1.1 million shares at a weighted average price of $52.10 per share for a total cash consideration of $55.4 million. In the first half of this fiscal year, we have deliberately slowed down share buyback in light of CapEx requirements for the DC expansion, but buybacks can be expected to accelerate going into Q3 and Q4, subject to market factors outside of our control. Our NCIB was renewed in June 2018, and we remain confident that the buyback is an appropriate use of cash and an effective strategy to drive shareholder value.In summary, we delivered a strong bottom line performance in Q2, despite lower-than-historical comp on the top line, and we will stay focused on delivering our key metrics for the remainder of the year as reflected by our enhanced guidance. That wraps up our formal remarks. I will now turn it over to the operator to take questions from analysts.

[Operator]

[Operator Instructions] First question is from Irene Nattel from RBC Capital Markets.

[Irene Ora Nattel, Managing Director of Global Equity Research]

I'd like to drill down a little bit on the same-store sales number. It's not the first time you guys have faced tough comps, but it feels as though something has changed a little bit in the environment. Can you talk about what you're seeing in traffic, what you're seeing in basket size, what you're seeing in basket composition and whether from where you sit, you're seeing any kind of change in consumer willingness to shop at Dollarama?

[Michael Ross, Chief Financial Officer]

Okay. So Irene, it's Michael. So okay, so if we look at all the facts, first of all, we're comping against a strong quarter, number one. We mentioned also during this quarter 1 category we have souvenir in which you find Canada Day, [Foreign Language], Montreal also had a special event last year. Just for that category, the same-store sales was 31% last year. So that explains part of what's going on and, obviously, part of the 6.1%. The other thing, too, is that we introduced a $3.50 and $4.00 price point 2 years ago in August. And last year's higher comp was -- reflected the increase associated to the penetration, the introduction of the new price point, so that's where you get the biggest bang, if you want, from introducing higher price points. All of this, combined with the decision we took in Q2, which will most likely last throughout the year, is not to do some markups. So not doing markups, combined with a strong tailwind from introducing higher price points from a strong quarter last year, has the impact that we're talking about. And so why did we not do the markup? So let me just back up 2 seconds why we didn't do it. The -- first of all, you all know that we refresh every year 25% to 30% of our goods. And through that process -- all of this is happening with the current economic situation in mind. So the margins are set accordingly. These are new products, and so that's one part of why we're able to sustain some healthy margins from this. The other part is that -- seeing that we have no inflation, but also looking at market conditions. So we told you in Q4 and Q1 that since the minimum wage headwind was announced that we weren't really seeing that being passed on to the consumer by competition anyways in our product line. So we still didn't see that in Q2 and have decided to protect our compelling value not to transfer these costs out to the consumer in the way of not doing markups. So these are not markdowns, we are simply not doing markups like we do every year for a certain number of items. So that is what we've decided to do. Now what we also did during the quarter, knowing that all of this would be discussed, obviously, but we do that every year, is ask [Foreign Language] to do a survey across Canada in terms of reassuring us that the model is still working, that people come to Dollarama because of the compellingness of the offering. And that was reconfirmed clearly in their report. So that -- so there's nothing from a business model point of view or structurally that is impacted, which is confirmed through this survey. And the other thing in terms of traffic, you mentioned traffic, traffic is hard to measure specifically. So this is not scientific, as we've told you in the past, this is our guess of -- our best guess as to what's going on. We think here there are 2 factors that impacted traffic in this quarter. Part of it relates to Canada Day last year, the other one to plastic penetration. So I mentioned in the script that credit card penetration went up from 12% last year to 18% this year. Debit penetration was 44% last year and 43% this year. So debit penetration did not decrease that much, it went down just 1% from 44% to 43%. And credit card went up from 12% to 18%, 6%, so for a net of 5%. Now it's an increase in plastic of 5% year-over-year. Debit card, in the past, would only increase by 2% or 3% year-over-year, so this is double the normal penetration increase that we've seen. And we suspect, again, this is not scientific, that part of that has had an impact. We continue to do more in-depth work to understand traffic as we've always done, and -- but that's what we're coming up with for the moment.

[Irene Ora Nattel, Managing Director of Global Equity Research]

That's very helpful. Just 1 follow-up question if I might. Certainly, what we heard from other retailers in the first half of the year is -- around the Q1 earnings release period was, yes, no, we're okay, no inflation, it's okay. The more -- on the Q2 round of calls, we started to hear more noise from other retailers around, yes, we need inflation, we need inflation. I mean the costs are just rising above and beyond minimum wage in other areas. If we were -- if we assume, for argument's sake, that other retailers start to raise prices in Q3 or Q4, how quickly can Dollarama react?

[Michael Ross, Chief Financial Officer]

Very quickly. As we've always -- I mean we do -- Dollarama does that day in, day out, so...

[Neil Rossy, CEO, President & Director]

It's a daily evaluation.

[Operator]

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

[Jennifer L. Panes, Associate]

It's Jennifer Panes filling in for Peter. So my first question, on the products that are priced at $3.50 and $4, what stage are you in introducing those into the stores? Like are there still new products being introduced? Where are you at in that process?

[Neil Rossy, CEO, President & Director]

We're always introducing new products into every price point, and the $3.50 and $4 price points are now at the same maturity level as our other price points.

[Jennifer L. Panes, Associate]

Okay, got it. And then on the categories' performance this quarter, so obviously, the seasonal category involving Canada Day was weaker compared to last year. Were there any other categories that over or under indexed in the quarter?

[Michael Ross, Chief Financial Officer]

Yes, well it varies. And we don't disclose. With this one, if we take -- if we're disclosing it, it's to explain the bigger outlier. But with all the categories, it moves constantly. And that's why we refresh 25% to 30% of our goods. And as Neil just said, we review the buyers on a daily basis. We get sales report, we've got -- and so we have access to the market quite rapidly.

[Neil Rossy, CEO, President & Director]

But to specifically answer your question, there were no other outliers in the categories, the rest of the categories that were significant.

[Operator]

The following question is from Kenric Tyghe from Raymond James.

[Kenric Saen Tyghe, Senior Vice President]

I'd like to just follow up on the value proposition discussion. I mean your value proposition is, and the gap relative to your competitors, is both compelling and wide. Could you sort of speak to what it is you're seeing that is necessitating or justifying your investing in price and, perhaps, in what categories or what price points that's necessary, just given how wide that gap has long been or is perceived to be? I mean something would appear to have changed or are you seeing some changes that are supporting the decisions and the investments you're making in that proposition?

[Michael Ross, Chief Financial Officer]

Yes, we won't -- obviously, we can't go into detail for competitive reasons. So -- but I mean, I would say it touches all categories. It's just something that we're -- it's a balance. And we've mentioned this in the past. We've seen the gross margin grow and grow and grow, and so you just have to make sure you remain compelling in terms of offering. And historically, as I've said and demonstrated, is we've had some heavy headwinds I talked about 6 or so years ago in China, then energy cost the year before -- after that, the FX where we had 30% inflation on half our purchases. And in those periods, clearly, we were in the same level playing field as our competition and felt that these costs, at the end of the day, were being transferred to the consumer. And so this time around, like we said, we didn't feel that, that was going on, and so we're reacting to that. And we've always said we're not the price setters, we're the price followers. In other words, we look at where the market goes, and we adapt to that.

[Kenric Saen Tyghe, Senior Vice President]

Great. Might I mention a quick follow-up? With respect to your updated gross margin guidance, at face value, it looks as simple as the product mix benefit is offsetting the price investment. Is that a fair characterization? Or are there other inputs in your back half of the year, a margin expansion story, or other inputs that are perhaps coming off that we should we be thinking about as well? I just want to correctly characterize, understand the increased gross margin guidance given the pricing investments you mentioned and lower input cost inflation that you're expecting, et cetera, et cetera?

[Michael Ross, Chief Financial Officer]

Right. So in terms of gross margins, as of today, we've got pretty good visibility over the rest of the year with open orders. We, the buyers, Neil, have the pulse on suppliers. We also have the -- in terms of tariff where we told you that, that had no significant impact on us to date, and so the -- again, we had anticipated a bit more inflation from China for the second half of the year, which we now feel won't happen. And the occupancy cost, as we open up new stores and continue filling the market, again, there's nothing -- that wasn't a surprise, though. We -- occupancy cost continues. It's just confirming that it continues to be low inflationary and, in fact, better in terms of percentage of sales. So there's -- it's having more visibility on what's going on around us that allow us to move that margin, which is still lower. I mean last year, let's not forget, we finished at 39.8%. And the range now is at the top range of that, 39.5%, so we still expect to be a bit lower than last year but better than what we had initially anticipated.

[Operator]

The next question is from Jim Durran from Barclays.

[James Durran]

So as you look at the back half of this year and into next year, and you've kind of reset the bar on some of the assumptions to guidance, like what element of your plans do you feel the most uncertain about?

[Michael Ross, Chief Financial Officer]

Nothing. I mean there's -- aside from what we told you, it's business as usual. I don't know if I can -- it's truly continuing to do what we've always done. Now we're looking at competition, looking at the market and reacting to it. And this time around, as we said, and we were telling you in Q4, we didn't see that minimum wage being pushed to the consumer, except for the restaurants. But in terms of retail, we didn't see that. So that means you absorb it. We -- I'd say, looking good in terms of absorbing from a G&A perspective, for example, where we told you, first of all, that we still have benefits from the annualization of Q3 initiatives began -- which began last year, which kicked in, but also we got better savings than we had anticipated in Q2, which will transpire in Q3 and Q4, which are nonlabor-related other store expenses that have kicked in higher than we anticipated. And we're going to benefit from that. So that's what allows us to move that G&A range down a bit, so that's the good news. And -- but on the top line, we still have to be mindful of that compelling value proposition. We cannot -- it's always a delicate balance. We've always managed it that way, and we continue doing it. And this, for the rest of the year, simply means that we don't mark up as much as we did historically. And that's it.

[James Durran]

Okay. So if I just paraphrase and sum up what I think I've taken away from the conversation on comp store sales and pricing plans for the back half of the year is that it sounds like it's more of a proactive move to avoid running into a meaningful problem down the road as opposed to reacting to concerns because the consumer study you did didn't really express any significant concern. There are some reasonable explanations of chunks of the business that would have naturally been down year-over-year, either -- whether in Q1, Canada Day, et cetera, in Q2, and so you're really trying to make sure you don't run into resistance by the consumer as opposed to reacting to problems with the consumer.

[Michael Ross, Chief Financial Officer]

Yes, I think you have pretty well summed it. You know what I've heard? Just relative to competition, we've heard that Miniso could be an impact to us or Dollar Tree. Just to be clear, again, there's nothing special going on in either case. So that's certainly just to be even clearer with you.

[James Durran]

Okay. And then the last question. Just again, apologies for focusing on the comp store sales number, but it's a real focus right now. Last quarter, the commentary, I believe, was that the weakness in the comp of 2.6% was largely the poor weather and lack of support to seasonal demand. And as the nonseasonal products were comping and consistent with the previous 4% to 5% comp store sales growth range, can you make the same claim still on products that would fall out of the extraordinary in this quarter?

[Michael Ross, Chief Financial Officer]

Well, I think that by not marking up, it touches a lot of categories. So it'll touch, whether it's a seasonal, all year, or in Q2, Q3 and Q4, and each have their own -- Q4 being Christmas, Q3 being Halloween -- and just by the way, mentioning Halloween, do expect Halloween, it's not -- it doesn't impact the rest of the year. But if you compare Q3 to Q4, Halloween this next quarter in Q3 will be 1 day short. And it's an important day short, so we'll gain it back in Q4. But just so everyone knows that the week before -- every day, the week before Halloween is an important day, so there's one more day that's going to be deferred to Q4.

[James Durran]

Okay. Sorry, I will ask one more question, if you don't mind, just on your debt leverage ceiling, right? In terms of your ability to use the buyback, I assume you don't really expect, on a full year basis, much of a change to your free cash flow outlook given the tradeoffs at the guidance change. At what ceiling do you feel you need to pay attention to on your debt leverage?

[Michael Ross, Chief Financial Officer]

It's -- yes, so we're allowed up to 3x, but our comfort zone is 2.7x, 2.75x, adjusted debt to EBITDA. And as we said, with this, aside from the CapEx on the DC and the construction, it's full steam ahead with the share buyback in an opportunistic way, though.

[Operator]

The next question is from Mark Petrie from CIBC.

[Mark Robert Petrie]

I wanted to ask about the pace of store openings, as you noted, a slower start to the year. You did maintain the guidance for this year, but wondering about sort of further beyond that. Obviously, the store potential that you've put out there gives you room to remain at that pace for a while. But does the slower same-store sales assumption change your thinking about how aggressively you want to push new stores out there?

[Neil Rossy, CEO, President & Director]

No, it does not. It does not. And I would also add that if the pace at which we've been opening stores this year is slower than last year, as mentioned, often that just relates to the specific timing of real estate. And if stores are pushed closer to the end of the year, it could be that there's an overlap between a few more stores at the end of this year or a few more stores in the beginning of next year. In the end, we'll keep our pace of 60 to 70.

[Mark Robert Petrie]

And then just with regards to, Neil, I guess, your comment about sort of feeling like the $3.50 or $4 items are sort of at maturity in terms of the penetration within the assortment, we have seen a deceleration, I guess, over time of the percentage of -- or the -- in the increase in the percentage of goods sold above $1.25. What's the current appetite or outlook for pushing to price points above $4?

[Neil Rossy, CEO, President & Director]

It's an excellent question. At the moment, there's no appetite to push for price points above $4. There's also nothing stopping us from changing our minds at any point. But for the moment, we have no intention to do that. We remain committed to the idea that selling items at $1 and $1.25 remains a really important part of our business. And we could easily have made all of our lower price point items in our store $1.25 like some of the other retailers in Canada, but we feel that we still can offer tremendous value at $1, and there's no reason to simply paint all of our items with one brush. So we sell hundreds and hundreds of SKUs at $1, and we feel that those items are equally important as our higher price point items are to continue to offer great value at whatever specific item or category we're competing in the market with. So that just gives us another tool to remain even more competitive when putting, for example, items of $1 against items of $1.25 in the market. So we're committed to all of our price points, finding new SKUs within all of those price points, but for the moment, there's no appetite to increase to another price point.

[Mark Robert Petrie]

Okay. And then just with regards to the same-store sales expectations for the back half of the year, the guidance range sort of implies a continuation from here or an acceleration. And so I guess, I'm just curious, what do you expect would be the catalyst to accelerate momentum from here? Is it simply a lack of sort of the nonrecurring issues be it weather in Q1 or the tough seasonal comp in Q2? Or are there other factors to consider?

[Michael Ross, Chief Financial Officer]

Well, yes, that -- for Q3, like I mentioned there, that Halloween day. But otherwise, no, I think it's not that. We don't -- it's normal conditions that we expect.

[Operator]

The following question is from Vishal Shreedhar from National Bank.

[Vishal Shreedhar, Analyst]

On the Canada 150, just to be clear, that isn't a lingering issue, like that souvenir category in the next quarter was back to normal. Is that correct?

[Neil Rossy, CEO, President & Director]

Yes.

[Vishal Shreedhar, Analyst]

Okay. And in the past, I think -- and you can correct me if I'm wrong. I think management used to say, or at least implied, that 4% to 5% was kind of the -- an internal aspiration. And granted, there are some issues this year which may bring it lower than that, should we anticipate over time, and I'm not asking for specific guidance here, but over time, that 4% to 5% to be maintained? Is that new guidance range you gave us something we should contemplate for the longer term?

[Michael Ross, Chief Financial Officer]

Yes, well, one just for -- specifically, right now, it's too early to say for next year. We still have 2 quarters. But as we've said, we we'd be disappointed if we cannot generate 4% to 5% same-store sales. But 4% to 5% same-store sales is an aggressive -- I've always said that, it's a very dynamic target to reach. And so -- but to say can we continue that for next year, we will -- I mean right now, it's too early to say.

[Vishal Shreedhar, Analyst]

Okay. So given that internally, the team would be disappointed if it couldn't hit that aspiration of 4% to 5% and, in this year, things -- inflation isn't coming in as you anticipated, is it fair to say that management is looking at new initiatives maybe to help sales without pricing? I know you said taking up price points is not an issue, but Dollarama does do things differently than other retailers. You don't -- principally, you don't engage in promotions to the extent that others do, you don't use data analytics to the extent that others do. Are there things that you can look at? Or is that not on the radar?

[Michael Ross, Chief Financial Officer]

Well, we do look at a lot of things, absolutely. Obviously, these are not things we'd want to disclose. But obviously, we're always motivated to generate as much sale as possible. And we constantly, as we do for executing on operations and the rest, look to stimulate growth as much as possible. But beyond that, those things we keep to ourselves.

[Vishal Shreedhar, Analyst]

Okay. Related to the -- just the performance this quarter and the last, there were discrete issues in each quarter, which may have caused results not to be what consensus expected them to be. Is there anything else -- like is it the economy? Is it the offer? Are those issues perhaps that you may be seeing a little bit kicking up there? Or is it really just kind of what you highlighted?

[Michael Ross, Chief Financial Officer]

Yes, I think it's more us reacting again with the market, in other words, doing what we've always done. But this time around, it seems like from the last headwinds we were having that the market didn't react like in the past. And so we're just doing exactly the same, just monitoring that and reacting to it to keep that compelling model out there to make sure that we, over time, keep those sales as high as possible and stimulate them as much as possible. So it's not more than that, and that's what we continue to do. And we'll see. And just by the way, Vishal, since you are talking about -- or we are talking about the outlook for next year, we typically give that in Q3, but 2 things are happening. As you all know, there's IFRS 16 that's going to be kicking in next year. And so that's going to require some updating for the investment community and the analysts, so we will have some schedules prepared and meetings done to explain all of this. But at the same time, this will be disclosed in March of next year, for next year, so we have to wait for the full year to go by. And the -- obviously, some of the outlook items like EBITDA, G&A will be impacted by that. So as opposed to giving the guidance in Q3 results or the next December, it will be given in March of next year, for next year. So just as a heads up.

[Operator]

The following question is from Derek Dley from Canaccord Genuity.

[Derek Dley, MD & Consumer Products Analyst]

Just following up on the price point discussion. I know you mentioned that the $3.50 and $4 items are now in maturity. Can you give us an update on what percentage of your items are priced at those levels?

[Michael Ross, Chief Financial Officer]

No, we -- Derek, sorry, it's Michael, we don't disclose the specifics. We only disclose above the $1.25.

[Derek Dley, MD & Consumer Products Analyst]

Yes, okay. I thought I'd try there. Just in terms of the same-store sales trends then through the quarter, it sounds like, I think from your last call as well, May was relatively strong as you managed to recoup some of the weather-related seasonal items that you didn't sell in April. And it sounds like to me June, maybe the end of June, may have been a bit weak, just given the Canada Day impact. Is that the right way to look at it? You kind of saw a stronger May, a bit weaker June and then a reacceleration in July?

[Michael Ross, Chief Financial Officer]

Yes, I mean those facts are accurate. So summer, even at the last call, we had quite a bit of pickup. We have recuperated a lot of the summer that continued on, and the souvenir category of Canada Day absolutely had an impact. And then it's throughout -- or the rest of Q2, some markups that were initially planned that were not done. And obviously, those will transpire through Q3 and Q4.

[Derek Dley, MD & Consumer Products Analyst]

Okay, great. And then just lastly, about 7 quarters away from the call option on Dollar City, and I get you guys that there's about 1% of sales during the quarter, can you give us any other incremental disclosure where you're at on that? What remains on the key metrics you're looking to evaluate? And just kind of an update on how far along that initiative is.

[Michael Ross, Chief Financial Officer]

Okay. So in terms of Dollar, first of all, the call option date is -- begins February 2020, so that's the official call date, where it begins. Secondly, Dollar City, to date, like we said in the past, is doing very well. Maybe I can update you on the store count. We're at 137 stores today or our partners are, Colombia, 51 stores; Guatemala 44; and San Salvador, 42. Otherwise, things are going very well over there. The business is good. But we still have like critical phases, due diligence process to go through. And so there's still important steps to -- that we need to go through.

[Operator]

The next question is from Edward Kelly from Wells Fargo.

[Anthony Bonadio, Associate Analyst]

This is Anthony Bonadio on for Ed. Just quickly on SG&A. You guys are clearly doing a pretty impressive job of offsetting wage increases and you're cycling already solid cost leverage last year. Can you just give us more color on specific levers you're pulling here in terms of cost control and how do you expect this to play out in the back of the year? And just secondly, is there any other initiatives in the pipeline that we should be thinking about?

[Michael Ross, Chief Financial Officer]

Yes, so the -- as I was mentioning earlier, so we -- there's always different initiatives going on. But -- so we've had one that we had begun earlier last year and have increased our CapEx, in fact, related to that. That's kicking in well this year in Q1 and Q2. But we've also had other initiatives that are nonlabor-related, are more other expense, store expense types that we don't want to disclose the specifics of but have given us better savings than we had anticipated, and these will definitely transpire through the year. And so that was good news to us. And we continue to work at different levels at the store trying to find ways to, as I mentioned a bit earlier, to bring more efficiency in terms of operations but also, on the logistics side, working on initiatives there to be more efficient. So -- and hopefully, these are -- generate strong enough savings to offset normal inflationary pressures that we see year-over-year.

[Anthony Bonadio, Associate Analyst]

Got it, that's helpful. And just as a follow-up on the store productivity, can you quickly just talk about what you're seeing here? It looks like it ticked up a little bit kind of back to more normalized levels this quarter. Is there anything we should be thinking about there to model this?

[Michael Ross, Chief Financial Officer]

I'm sorry I missed that.

[Anthony Bonadio, Associate Analyst]

On new store productivity, it looks like it ticked up a little bit this quarter kind of more in line with normalized historical levels. Is there anything we should be thinking about there?

[Michael Ross, Chief Financial Officer]

No. There's timing, there's -- it's hard to follow specifically from 1 quarter to quarter, but generally, no, like I said. It's a bit more the initiative that we started this year is benefiting us more than we had anticipated. And again, that will transpire in Q3, Q4.

[Operator]

The next question is from Keith Howlett from Desjardins Securities.

[Keith Howlett]

Yes. Just wondering if you could just give some color around what you call price increases. Does this mean that items that you might have moved from $1.25 to $1.50, you left at $1.25? Or what are we speaking about when we talk about price increases?

[Neil Rossy, CEO, President & Director]

No, that's exactly it, but at all price points. So that would have been 1 example. $1.50 to $2, $2 to $2.50, $2.50 to $3, $3.50 to $4, those -- any of those is what we would have been referring to.

[Keith Howlett]

Nice. And you have -- do you typically have sort of a program each year? Or is it more situational what those increases are each year?

[Neil Rossy, CEO, President & Director]

Well, they are a reflection of market competitiveness, so they move iteratively on a daily basis throughout the year.

[Michael Ross, Chief Financial Officer]

So you have more in the past than you have this year.

[Keith Howlett]

So mid-quarter, you might adjust the prices up, things on the shelf that were $1.25 to $1.50?

[Neil Rossy, CEO, President & Director]

If our competitiveness remains at the levels we want and the market changes their pricing to a higher price point, then that's a possibility.

[Michael Ross, Chief Financial Officer]

Yes, it can be decided very quickly, Keith.

[Keith Howlett]

I see.

[Michael Ross, Chief Financial Officer]

And implement it quickly, yes.

[Keith Howlett]

And then in terms of the fact that there's less inflation in China and, therefore, you're going to have a better gross margin than you anticipated, on that front, you don't want to pass that part of the benefit to the consumer or don't feel you need to.

[Neil Rossy, CEO, President & Director]

Again, it's an item-by-item discussion, Keith. And as long as the buyer feels the relative value of any given item that they're buying compared to the market is good enough, then they won't change the price. If they feel that the value is not as good as they want, they'll -- they have the ability to lower their price, raise their price or keep their retail. And so it's really an item-by-item study as it always has been for -- during our whole history, and that's how we try to remain competitive across the entire store.

[Keith Howlett]

And then just in terms of the performance across the network, looking at regions, is it pretty -- does it remain pretty uniform across regions as it did in prior quarters?

[Neil Rossy, CEO, President & Director]

Yes.

[Michael Ross, Chief Financial Officer]

Yes, yes.

[Keith Howlett]

And then just in terms of the cohorts of stores, is there any change in the performance of the sort of the cohorts of 1 year ago or 2 years ago, or maybe 10 years ago, those stores are less productive and tired? Or is there any change in the sort of performance longitudinally of when the store opened?

[Michael Ross, Chief Financial Officer]

Well, we haven't seen -- typically, the older cohorts that we monitor constantly are pretty much in line, all performed well. So it's not like 1 cohort doesn't perform compared to others, so it's pretty stable from year to year. The newer cohorts, obviously, we look -- as we said in the past, if you look at 2 years ago or a year ago, they were averaging at first year almost $2 million a year or $2.1 million and then $2.4 million the second year. Obviously, the cohorts starting this year with $2.6 million SSS in Q1 and Q2 will be slower, but the prior year cohorts have not -- are doing all well, very well.

[Operator]

The next question is from Patricia Baker from Scotiabank.

[Patricia A. Baker, Analyst]

Michael, I have 2 questions for you. You do the 25% to 30% refresh of the goods every single year. Can you talk in the past, is there, on average of that 25% to 30% how -- what proportion of them would receive a price increase?

[Michael Ross, Chief Financial Officer]

Well, the 25% to 30% is not a price increase. 25% to 30%, these are new items. And they take into effect the current market conditions and their comp shop, like before they introduce them, they check to see how compelling they are. So obviously, these you do every year and you control the margins. So this year, we have very good margins with them. Now the other 70% that you didn't refresh, well, those -- they're still there. Now how can you adjust the compellingness of that given market conditions, and that's what we said, we said, okay, well, let's just make sure that we remain compelling and look at the movement in the market, and we decided not to increase these. We've never disclosed the percentage of markups we did per year, but I can assure you that compared to last year and the year before that, we've done much less this year.

[Patricia A. Baker, Analyst]

Okay. And I guess I -- I mean I understand the whole -- the compelling and what you've decided to do this year. You've made that very clear. But I guess what I was getting at, those 25% to 30%, yes, they are new items, but they're replacing something that was there. And are they -- do they typically come in at a higher price point or it's all over the map? Did they replace...

[Michael Ross, Chief Financial Officer]

Yes, well, it depends. It's not like -- but -- because the -- it's in all price points, and it's -- the penetration has been going up, so if you look at the gist of it, it's at a higher price point average, if you want.

[Patricia A. Baker, Analyst]

Okay, that's very helpful. And then secondly, you referenced that you've done a new [Foreign Language] report, reinforcing the fact that you've got that compelling value in the past. You've shared with us what the perceived -- what the consumer perception of the price point is, can you share that -- any of that data with us today?

[Michael Ross, Chief Financial Officer]

We haven't disclosed it. But essentially, it's the same approach that you've seen. It's looking at the different price points and what the -- and the calculations, too, are a bit different this year, so it wouldn't necessarily be the same. But we'll see whether or not we want to disclose that, but I assure you that the conclusion is that they are still compelling at every price point.

[Operator]

The next question is from Chris Li from Macquarie.

[Christopher Li, Research Analyst]

Just 2 questions here. First, are the tariffs that Canada is imposing on some of the CPG products that are produced in the U.S., like confectionery and candy, is that having a meaningful impact on your business?

[Neil Rossy, CEO, President & Director]

It is having an impact, but it's not a meaningful impact, so far. As things change, we will keep you posted, but so far it is not a meaningful impact.

[Christopher Li, Research Analyst]

And if it does become a bigger impact, do you foresee an opportunity to raise prices? Or is that harder because at consumer products, you more capped that at $2.00.

[Neil Rossy, CEO, President & Director]

Again, it's purely a question of relativity to the market.

[Christopher Li, Research Analyst]

Okay. And Michael, I think you said earlier that you're not seeing anything special from Dollar Tree Canada. Why is that? Is that because they are much smaller than Dollarama? Or -- I'm just curious to see...

[Michael Ross, Chief Financial Officer]

Well, one, in terms of store build, they haven't moved very much. Two, again, it's not a pure play in the sense that they still have one price point, so any of our price point is above theirs. We're not competing. And -- but they are a competitor. So it's not that they're not a competitor, but there's no significant change from -- in behavior of our stores near the Dollar Trees as there was in the past.

[Christopher Li, Research Analyst]

Okay, that's helpful. And then, Neil, I guess, e-commerce by the case, I know in the past you've subscribed this as a convenience play for a lot of your customers. They don't have to go through multiple Dollarama stores. I'm just curious to hear your thoughts about the opportunity, in the small and medium-size business opportunity. Longer-term, do you think this is -- there's a lot of opportunity for you to penetrate that market? Just happy to hear your thoughts on that.

[Neil Rossy, CEO, President & Director]

The answer to your question is I have no way to evaluate that, and time will tell. If that, in fact, becomes a reality, I would say terrific. But our intention is simply to service our current customer who is not being serviced properly in that it's impractical for them to acquire a large number of any given item in our stores without going to multiple stores. And so whether it ends up helping small businesses or whether it ends up helping school boards or whether it ends up helping a multitude of other things, those are all unrealized opportunities at this point in time, and time will tell. But I wouldn't want to guess something I don't know any better than you just yet.

[Christopher Li, Research Analyst]

Okay. And my last question just on Dollar City, and thanks for reminding us that the call option begins in February 2020, does that mean theoretically that it can delay? You can get past beyond that and exercise later than February 2020, if you choose to?

[Neil Rossy, CEO, President & Director]

Yes.

[Michael Ross, Chief Financial Officer]

Yes.

[Christopher Li, Research Analyst]

Okay. And then I think related to that, I probably have this wrong, and I apologize, I've read somewhere, I guess, there's a provision where if you don't exercise the call option, you have to provide them with a 12-month notice or something to that effect to continue to be their supplier for a number of years. Firstly, is that true? And secondly, would that -- will you have to disclose that publicly, if you actually choose that option?

[Neil Rossy, CEO, President & Director]

No. No, that's not true. And I don't know where you got that, but that's certainly not true.

[Operator]

The next question is from Brian Morrison from TD Securities.

[Brian Morrison, Research Analyst]

I presume I know the answer to this, but I'll ask it anyway. With inflationary pressures different by region, I'm wondering if you ever bantered about having the same number of price points but potentially having product pricing vary in different regions. And then second part of the question, I wonder if to change what seems to be the new 2.5% to 3.5% range, I'm wondering if the key factor here is just you need to see movement by the competition.

[Neil Rossy, CEO, President & Director]

So I'll answer your first question, which is a very valid question. Many retailers have 5, 6, 7, 8, 9 price points across the country. Historically, Dollarama has had 1. Certainly, it's an opportunity for us to remain competitive in some environments with a certain price point and remain competitive in other environments with a different price point. We have studied it and continue to study it. It's a possibility, and it adds a level of complexity, of course, internally. Not one that isn't easily surmountable, but it is -- it does complexify the situation a little. It would be something that we continue to study to see whether it does or does not make sense. And if we did try it, to be clear, we would do it like we do everything else, which is we would try it on a very few products in a very limited area of the country and see how -- what the results are. And if the results are good and we can execute it well and our competitiveness does stay at a very high level, then it's an opportunity for us to consider.

[Brian Morrison, Research Analyst]

Interesting. Sorry, go ahead, Michael?

[Michael Ross, Chief Financial Officer]

No. Just to answer the second part, so yes, it's always watching competition, obviously, yes.

[Brian Morrison, Research Analyst]

Michael, while I have you, I don't mean to ask you an accounting question at a public forum, but I'll do it anyway, just with the delay in what seems to be the Q3 guide for next year. Your initial view on IFRS 16, does this have the potential to have a negative impact upon financial statements, albeit just on paper?

[Michael Ross, Chief Financial Officer]

Well, no. Well, that's an unfair question, Brian. No, the -- it's simply an accounting treatment. So it doesn't change anything in terms of real performance, it doesn't change anything in terms of cash flow or financial capacity or financial strength or -- so it's purely an accounting change. And so we'll communicate that, as I said, with the full explanation in March of next year.

[Brian Morrison, Research Analyst]

Okay, sorry about that. Thank you, Michael.

[Michael Ross, Chief Financial Officer]

Okay. You're welcome, Brian.

[Operator]

Thank you. This concludes today's question-and-answer session. So the conference call has now ended. Please disconnect your line at this time, and we thank you for your participation.