Dollarama Inc

TSX:DOL

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, and welcome to the Dollarama Conference Call for the Fiscal 2019 Third 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 financial analysts. For your convenience, the press release along with the third 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 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 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 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 statements regarding forward-looking information contained in Dollarama's MD&A dated December 6, 2018, available at www.sedar.com. Forward-looking statements represent management's expectation as at December 6, 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 would now 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 solid financial results for the third quarter of fiscal 2019. We delivered continued sales growth, strong margins and an 8% increase in diluted EPS over the same period last year. Our strong earnings and cash flows enabled us to return substantial capital to shareholders last quarter, including $288 million in share repurchases and $13 million in dividend. Our sales increased 6.6% compared to the same quarter last year, fueled by Dollarama's 2 key growth drivers: same-store sales; and the contribution of a greater number of stores. Same-store sales growth was a healthy 3.1%, while our store network increased by 5% over the past 12 months to a 1,192 stores at quarter end. As discussed during the Q2 conference call, retailers have been more reluctant in passing on rising cost to consumer in recent quarters. During this time, we have limited our pricing changes mainly to the 25% to 30% of our product mix that we refresh on an annual basis. We also continue to monitor peer activity regarding the passing on of rising costs to consumers through price increase. As we have always said, relative value is at the heart of the Dollarama business model. So in this context, our ability to reach 3.1% of SSS growth speaks to the strength of our brand and our value proposition. At the same time, and as part of our culture of continuous improvement, we are actively looking at other opportunities to stimulate sales, both through basket size and store traffic. Through our improved tracking and analytical tools, we now have better visibility and access to an increasing amount of information. This will enable us to further improve our product offering and merchandising practices. We are firmly committed to offering consumers compelling value across our categories. This is a key element that drives customer loyalty, store traffic and sales growth over the long term. In Q3, we opened 14 net new stores, bringing our total to 32 for the first 3 quarters of fiscal 2019. With the addition of 11 new stores opened since October 29, we are at 43 as we speak. Based on year-to-date results and our store pipeline, we fully expect to reach our target of 60 to 70 net new stores for the current fiscal year with a significant number of store openings to take place over the next 2 months. We are confident in the rigor of our site selection process and our ability to make our stores engaging destination for our customers. Keep in mind that when we set our annual targets, we have full visibility on our store pipeline. It isn't a question of if, but of when. Having more store openings in the last quarter is not a new trend for us and is purely a matter of timing. Looking ahead, we are very pleased with our store pipeline over the next few years. In March of 2017, we raised our 10-year store target from 1,400 to 1,700 stores. Our conviction in this long-term target and the expected parameters remains very strong backed by our ongoing assessment of market potential. Now turning to updates on our ongoing projects. The expansion of our Montréal area distribution center is proceeding as planned. Phase 1, comprised of the construction of the building extension, is well underway and slated for completion by early 2019. This will be followed by construction work within the existing DC ahead of the integration with the new building extension. The existing DC continues to operate at normal efficiency during this expansion work. Project completion, including the installation of fixtures and equipment, is expected to occur before the end of calendar 2019, on schedule and on budget. As a reminder, nearly 80% of our stores are located in central and eastern Canada. Our most recent study of the Canadian logistics market makes us confident that our centralized logistic strategy remains the most efficient and cost-effective strategy for Dollarama. With increased distribution capacity in the Montréal area, we will be able to comfortably support our Canadian growth strategy. Turning to e-commerce. As previously communicated, we are gearing up to launch our Québec-only pilot for the sale of items by the full case by the end of the year. We look forward to testing our platform ahead of a national rollout to give us insight on potential improvements. As previously stated, this site is for customers who desire to buy large quantities of the same item and are currently not well serviced by our brick-and-mortar stores. We are expecting this new service to provide additional convenience and build loyalty with our customers, though not necessarily having a material impact on revenues. While our day-to-day focus remains firmly on our Canadian growth strategy and serving our Canadian customers, we continue to assess the progress made by our partner, Dollar City, an independently owned and operated value retailer in Latin America. As a reminder, in 2013, we signed [ an arm's ] length agreement with Dollar City to share our business expertise and provide sourcing services to Dollar City essentially at cost. We will have the option to acquire a 50.1% interest in the Dollar City group starting in 2020. Dollar City continues its aggressive growth, and as of its latest quarter ended September 30, 2018, operated a 150 stores, including 42 in El Salvador, 47 in Guatemala and 61 in Columbia. This is up from 107 stores as at December 31, 2017. We are pleased by the pace at which Dollar City has been able to open stores, especially in Columbia, a key market in Latin America. We continue to perform our due diligence before deciding on whether or not Dollar City represents a sustainable option for additional future growth. Overall, we are pleased with our success driving same-store sales growth this quarter. We believe that the same-store growth reflects the strength of our brand and our value proposition. Successful direct sourcing, operational efficiency and strong execution provides the flexibility to drive organic sales growth and profitability, which in turn provides the cash to reinvest in our business and generate shareholder returns. This strategy is focused squarely on building value for the long term, and it has been, and remains, at the heart of our business model. I'll now pass it over to Michael to discuss our financial results in more detail.

[Michael Ross, Chief Financial Officer]

Thank you, Neil, and good morning, everyone. So our quarterly financial performance continues to be driven by sustained top line growth, strong margins, the active management of our cost structure and balance sheet plus strong execution on key operating metrics. As mentioned by Neil, sales were up 6.6% at $864 million and same-store sales grew 3.1%. Same-store sales consisted of a 4% increase in average transaction size over and above a 4.5% increase in the corresponding quarter of fiscal 2018, partially offset by a 0.9% decrease in the number of transactions that was partially affected by the additional strong Halloween sales day that fell in Q3 last year, but will be reported in Q4 this year. Turning to our key operating metrics. Q3 gross margin was 38.9% of sales compared to 40.1% in the third quarter of fiscal 2018. We continue to actively manage gross margin and pricing relative to the competitive environment in order to achieve a healthy balance between maximizing returns for shareholders and keeping our value proposition compelling with a view to stimulating long-term continued sales growth. SG&A represented 14% of sales, a 0.5% improvement over the same quarter last year. The improvement is mainly the result of continuing labor productivity initiatives, the timing of certain expenses as well as scaling, which contributed to mitigating the impact of minimum wage increases in certain jurisdictions, primarily in Ontario. EBITDA increased 3.5% to $214.6 million or 24.8% of sales compared to 25.6% of sales. And diluted net earnings per common shares increased by 7.9% to $0.41 from $0.38. We are reaffirming the updated guidance ranges provided in Q2 press release for net new stores, gross margin, G&A and EBITDA margin. Looking at gross margin, it remains very healthy. Based on our current visibility on open orders, it's looking like we will be in the top half of our guidance range for the year. Despite ongoing cost pressures in certain jurisdictions related to minimum wages and other factors, SG&A is trending towards the bottom half of the provided range for the full year as a result of the positive impact of in-store productivity improvements and cost reduction initiatives. Moving to CapEx, capital expenditures, which include investments in IT infrastructures, new store and our distribution center expansion totaled $33 million in Q3. We have revised the range of capital expenditures for fiscal 2019 downwards, based on an updated schedule of progress payments for the expansion of the distribution center. Capital cost in the amount of approximately $10 million initially expected for fiscal 2019, will be incurred in fiscal 2020 and will be included in the capital expenditure range for fiscal 2020. We do not expect this to have any impact on the commissioning date and the expanded distribution facility. Turning to operations, we continue to implement in-store initiatives to increase efficiency and improve customer experience. We have completed the rollout of new cash management processes in stores, which we expect will reduce the time required to count and record cash deposits. We are installing balers in more stores to facilitate the recycling of cardboard, and we are reducing electricity consumption through the installation of LED lights, both in-store and in our warehouses. These initiatives will continue in fiscal 2020. We are also continually optimizing in-store scheduling to improve labor allocations and simplify the scheduling process for the store managers. Finally, a quick comment on capital allocation and use of cash. In addition to maintenance CapEx, our priority for operating cash flows is [ low ] CapEx in new stores and in business transformation initiatives that drives same-store sales and/or margin growth. Our new store pipeline is developed based on a detailed analysis of real estate opportunities and rigorous investment criteria as well as our capacity to successfully develop and launch new stores. Discretionary cash flows after maintenance and [ growth ] CapEx is earmarked to return capital to shareholders. In Q3, we repurchased 7.1 million shares at a weighted average price of $40.56 per share for a total cash consideration of $288.1 million. We consider share repurchases to be an effective use of capital to generate shareholder returns and intend to continue pursuing our current NCIB program. We recently received approval from the TSX to increase the number of shares that may be repurchased under our NCIB program to 30.1 million common shares, representing 10% of the corporation's public flow. The other terms of the NCIB remain unchanged. Last month, we issued $500 million of senior unsecured notes bearing interest at a fixed rate of 3.55%. The notes have a fixed 5-year term and were rated BBB with stable trend by DBRS. The proceeds were used to repay the $400 million, 3.095% notes that matured on November 5, 2018, to repay indebtedness on the revolving credit facility and for general corporate purposes. So to reiterate what Neil said in his opening remarks, we are pleased with our performance this quarter, on the top line, on bottom line and in terms of strengthening our value proposition for the long term, despite a competitive retail environment. We are committed to reaching our operational and financial objectives for the fiscal year, and we are excited by the growth opportunities that lie ahead. That wraps up our formal remarks. I will now turn it over to the operator to take questions from analysts.

[Operator]

[Operator Instructions] Our first question is from Irene Nattel with RBC Capital Markets.

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

When you talked about your guidance range for the balance of the year, what, if any, assumptions have you made about an ability to put through more price increases? And what are you seeing right now in the competitive environment around price? Particularly given that we've heard some anecdotal evidence that the price environment is easing ever so slightly.

[Neil Rossy, CEO, President & Director]

Irene, it's Neil. We haven't seen the market easing, so to speak, and goods that are in our price range at $4 and less. And so in other stores that whatever that may be, $10 or less. We've seen some movement at higher price goods, but in the goods that we sell and our competitors sell, the market hasn't changed from a comp-shop perspective.

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

So then when you stated in the guidance that you're -- that you expect to be at the upper half of the range on gross margin and lower half for SG&A, you're not assuming any incremental movement on price. Is that correct?

[Michael Ross, Chief Financial Officer]

Right. In other words, it's -- again, it's within the range of the same-store sales, 2.5% to 3.5%, so yes. So as we said in the past, we are doing some markups. We've done some, but at a much lower pace than we've done in prior years. But you're right, the gross margin when we tell you the upper range and in terms of G&A lower range, it's with what we've been guiding to in terms of same-store sales.

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

That's great. And just a couple of other questions, if I may. First to fall, can you tell us what the Halloween impact would've been in the quarter?

[Michael Ross, Chief Financial Officer]

No, we don't disclose the specific, but it did have an impact for sure. We gave you the heads up in Q2 to expect that, and so it does have an impact. And as we said in Q2, we suspect also that the credit card penetration, which continued to increase, had some impact also.

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

Okay. And then just one other, if I may. Neil, in your opening remarks you mentioned that you now have access to more data, which is giving you some insights around traffic and around basket. Could you share with us some of those insights that you're getting, and maybe things that you didn't realize that you were doing or could do differently to help both basket and traffic.

[Neil Rossy, CEO, President & Director]

Well, if I told you that, Irene, I'd be telling everyone the same information that we hold dear to our hearts. So I can only share with you the fact that as we've worked on our data gathering over the last few years through our POS rollouts, the quality and cleanliness, let's say, of our numbers is getting better and better. And therefore, the visibility we have and the amount of number crunching we can do to give us better guidance is getting better quarter-by-quarter. And so I think we've gotten to a point where I feel better about the tools available to us than I ever have.

[Operator]

Our next question is from Mark Petrie with CIBC.

[Mark Robert Petrie]

You commented, I think, Michael, at the end of your comments that your approach to pricing was strengthening your value proposition for the long term. You've also reiterated your confidence in how consumers perceive value. But clearly, 2018 has been a year where you've been a bit more conservative on pricing. So I'm wondering if you can just sort of reconcile all of that. And is it simply a matter of seeing competitors move prices up that would make you more inclined to resume, sort of, historical inflation? Or are there other factors, like traffic as an example, that also play into that decision?

[Neil Rossy, CEO, President & Director]

I think the primary reason is competition. Since our bread-and-butter is relative value. Certainly, traffic is something that we keep an eye on. But generally, better -- or best relative value drives traffic. And so one generally comes with the other.

[Mark Robert Petrie]

And are there other considerations just relative to like the price points you're at? And that kind of thing?

[Neil Rossy, CEO, President & Director]

For the moment, we're comfortable with our price points and don't have any plans to add price points. Obviously, the ability to do so is always there, and since we've build out the systems to handle multi-pricing, it's a nonissue for the execution. But for now, we feel that there's still runway ahead of us at the current price points, and we're more committed than ever to highlight what I feel is a misconception, potentially on how we're -- it's been said that we are no longer a dollar store, but in reality, we still have a ton of less than $1, $1 and $1.25 items. And so we're going to make an effort in the next year, so to highlight, in our stores, the SKUs at $1.25 and less. Because we feel, as we have from day 1 of our business, that having that option in every department and category is an incredibly important thing because there are and will always be a percentage of our customers that rely on the lowest end of our retail pricing as well as those who have the luxury to enjoy the higher end.

[Mark Robert Petrie]

Okay. And I guess is that -- just following up, is that highlighting of those items? Is that simply sort of a merchandising exercise? Or is that reflective of maybe more of the items in the store at those price points versus the higher price points?

[Neil Rossy, CEO, President & Director]

I think the answer is a 2-phase answer. We're going to start with the highlighting and then depending on the results of the highlighting, we may take further action.

[Mark Robert Petrie]

Okay. And then -- sorry, just one other one. The accelerated gross margin declined, sort of, in Q3, and it sort of implies maybe price investments accelerated in the quarter a little bit. Is that a fair assessment? Or is the greater decline versus the first half simply a matter of more inflation of your -- in your COGS in Q3? And then I guess, just trying to understand how we might think about gross margin in 2020, at least first half versus second half, because the performance does seem quite different in fiscal '19.

[Michael Ross, Chief Financial Officer]

Yes. So well -- and first of all, as we've guided you to the top range of our gross margin for this year, gives you a sense of where we're at for this year. The decline is mainly, as we've said in the past, because we're doing as many markups as prior years. A markup is a direct margin pickup. And as we have done less and less of that, and so that transpired into Q3 and will transpire into Q4 -- will continue into Q4, but the end result on a yearly basis is the guidance we gave you. For next year, we'll see. We'll give you, as we stated that last quarter we'll give you some in March -- next March our outlook on next year. And at that time we'll have a better visibility on F '20.

[Operator]

Our next question is from Jim Durran with Barclays.

[James Durran]

Just back to the transaction trend. What additional insights would you say you have this quarter versus what you shared with us last quarter that would help you grapple with what's going on, on the absolute transaction volume on a comp-store basis?

[Michael Ross, Chief Financial Officer]

I mean it's a difference -- you're talking about the impact on the transaction what -- the difference between this quarter and the last quarter?

[James Durran]

Yes, any additional insights you may have determined as you've watched the last few months unfold in terms of trying to understand what is happening there? Like how much of its just strong prior year versus the credit card impact you've noted? But is -- there are other things that you feel maybe contributing to the transaction growth comp being more challenged than it has been in the past?

[Michael Ross, Chief Financial Officer]

Well, yes, again, and we -- Halloween and credit card is definitely an element and other aspects, as Neil mentioned, that we -- these are things we look at, study. We don't necessarily communicate publicly for obvious reasons, but at least you've got an idea of some of the elements that would have impacted the transactions this quarter.

[James Durran]

And from a competitor standpoint, aside from Dollar Tree, which is an obvious competitor in your space. Like who else would be in a competitive set if -- as you would define it that you pay close attention to?

[Neil Rossy, CEO, President & Director]

Everybody is a competitor in some form or fashion, as you know. But I would say that Dollar Tree and Walmart are 2 retailers that we are the most apt to make sure that we are competitive and have great relative value against, since both of those retailers also live by the value motto. We obviously compete in different categories against all retailers when we're selling our hardware, we compete against the hardware stores; when we sell our health and beauty, we compete against the pharmacies; when we sell our -- the bit of drag that we sell, we compete against grocery. But they represent a much smaller percentage of our business. As a whole, our closest competitors are the dollar stores, both independent and national dollar stores and Walmart.

[James Durran]

Okay. And then last question, just, so we're hearing the Canadian grocers across-the-board talk about grocery type merchandise inflation occurring and sequentially increasing. So sounds like they're leading the market technically that their 4-wall comp inflation is sort of in the 1% range and it's picking up to a slightly higher level as we move into Q4 and presumably into 2019. Like how much of an impact can that have on your consumables business broadly defined? Or is that -- is there a disconnect there in terms of how we would view your consumables products versus theirs?

[Neil Rossy, CEO, President & Director]

Well again, grocery and candy, chips, chocolates, all of those categories, for us, are just part of the mix. They're an additional pickup, they're certainly not what's driving people to our stores. And we've made an effort over the years not to be in that business principally. That being said, as a percentage of the goods we sell and even within the category itself within our stores, we see no changes in the goods we sell in those departments from the perspective of pressures that you're referring to.

[Operator]

Our next question is from Peter Sklar with BMO Capital Markets.

[Peter Sklar, Analyst]

Back on the gross margin, so assuming that you held the line on price, like theoretically your gross margin should be flat, not down a 100 basis points -- not down 100-plus basis points all else being equal. So what were pressures on COGS? Was it things like transportation costs, contractual rent increases? Is that how we should think about it?

[Michael Ross, Chief Financial Officer]

No, well one -- okay, so for the components and that hasn't changed from what we said in the past, occupancy more or less stable. There's an increase in transportation cost, energy cost. You have the inflation there. We do have initiatives, by the way, on logistics this year, next year. And also depending on the seasonality has an impact on the cost structure, and on whether or not you do markups or markdowns. So it's the merchandise itself, and it's the other factors I mentioned to you.

[Peter Sklar, Analyst]

So does that mean you took some markdowns during the quarter? Is that what you're saying, Michael?

[Michael Ross, Chief Financial Officer]

No. We didn't take any markups. And there's a refresh of goods also, yes?

[Peter Sklar, Analyst]

Okay. My next question, I want to address transaction count, which I think you could use as a measure of traffic. Your transaction count has been down 3 quarters in a row. This quarter almost down a 100 basis points. On the other hand, based on your commentary, you're very confident about achieving the 1,700 stores. And usually traffic, like negative traffic count is an indication that store footprint is maturing. So I'm just wondering if you can reconcile the 2.

[Michael Ross, Chief Financial Officer]

No, well I mean the -- you're assuming what that -- I don't understand. The -- we're not saying that we're declining in same-store sales, right. So even at 2.5% to 3.5% same-store sales, you're -- you can sustain very easily the growth in store base that we have right now. As we've told you our cohorts -- most recent cohorts have been trading -- trailing, I mean, with very strong paybacks. And so you don't need 4% to 5% same-store sales to justify the 1,700 stores that we were talking about. And so there's still -- with the growth that we envision, any -- the potential to maintain that.

[Peter Sklar, Analyst]

Okay. And then lastly, I just have a question, in the press release in the outlook section, you have a -- one of the like the bullet points under the guidance, where you talk about your assumptions. And one of the assumptions is, the third one, lower-than-expected impact of inflation on product margins for goods imported from China. Could you explain what that is all about? And directionally what it means?

[Michael Ross, Chief Financial Officer]

Yes. So initially, we had anticipated higher margins. We revised our gross margin up. From the beginning of the year if you recall our margin range was 38% to 39%. And we were expecting more inflation from China. We were expecting more impact on tariffs. Those did not materialize as much as we had thought, and so we had revised our range upwards and that's the reason behind it.

[Peter Sklar, Analyst]

So you're saying that has -- that had a positive impact on margin?

[Michael Ross, Chief Financial Officer]

Yes. That's why we increased our margin range.

[Operator]

Our next question is from Vishal Shreedhar with National Bank.

[Vishal Shreedhar, Analyst]

Just wondering why management perceives there to be or is observing limited inflation in the market and the goods which -- with which they then -- compared to where it sells or it competes in. Is it because your competitors are looking at DOL'S growth and DOL'S margins or saying they can compete more effectively there? Is it the consumer health is limiting [ abilities ], the price increases in the market? Different challenges think different things, so just trying to reconcile what your view is?

[Michael Ross, Chief Financial Officer]

If I understood correctly, the question is why we think the market is so competitive in our range of pricing. Is that what the question was?

[Vishal Shreedhar, Analyst]

That's right, Neil.

[Michael Ross, Chief Financial Officer]

Okay. Well, I guess where -- we used to fly under the radar, quite honestly, having 1,200 stores comes with its pluses and its minuses. And one of the facts is that we are everywhere, and therefore, all the other retailers are as aware or more aware than they've ever been of our presence, and that's normal. And so between that and the fact that other retailers are vying for the same customer in food, whether that's our business or not, it drives traffic into other retailers. It creates, let's say, a market of competitiveness and focus that, over the years, I think has just gotten more and more aggressive for the same dollars. And at the end of the day, the Canadian consumer, I think, is the one that benefits from it. But the retailers have a harder and harder time trying to maintain their market position. And they -- at $5 and less, a lot of goods and units transactions transpire at that level. And therefore, it just is a very competitive market more now than ever.

[Vishal Shreedhar, Analyst]

Okay, that's helpful. In the past, management has indicated that their performance across Canada is generally fairly consistent. Is that still an observation that you have?

[Michael Ross, Chief Financial Officer]

Absolutely, yes. Our performance is stable across the country, coast-to-coast.

[Vishal Shreedhar, Analyst]

Okay, wonderful. And this on the bit of a -- maybe be a tough one for you guys to answer, but as management looks at long-term margin power of this company, call it, on a rate basis, I don't know if that's the way you look at. When you look at it, is management's primary goal here to maintain that relative value versus its competitors and the products that it competes in? Or does management also consider that margin rates, as it looks for the long term? Like how do we think about the way you guys will orient as the competition kind of not intensifies or potentially intensifies in your products?

[Michael Ross, Chief Financial Officer]

We will always be guided by relative value. And if that relative value in the market shifts, and we must shift with it, then the margin percentage will be what the margin percentages that we can afford to provide our shareholder, while remaining the best relative value in the market because that is what we sell. We sell new product, we're fresh, bit of a treasure hunt, as many of the basics as one can get for the price range that we sell. But at the end of the day, the reason people come to Dollarama and our primary goal is to provide the best relative value to the consumer.

[Vishal Shreedhar, Analyst]

Okay. And with respect to the buyback, a pretty large buyback indication. How active that's -- how active does management intend to be? And what are the parameters around if it'll be active or not?

[Michael Ross, Chief Financial Officer]

So we continue to be -- well as you've seen, very active, all within our playground, if you want, maintaining leverage below 3x around our comfort zone, 2.75x adjusted debt to EBITDAR with earnings yield now has increased are -- and still higher than our after-tax cost of debt, so we're going -- we're continuing to buyback.

[Operator]

Our next question is from Patricia Baker with Scotiabank.

[Patricia A. Baker, Analyst]

I want to go back to your opening remarks, Neil, about the other -- getting other opportunities to drive sales, traffic and basket. And then you mentioned that you're getting better and better with data quarter-by-quarter, and so you have better tools available. So I'm just curious about whether or not you've begun to deploy these tools or is that is something that will see you deploy, in a greater manner over the course of the next year or so?

[Michael Ross, Chief Financial Officer]

Yes, the latter of your 2 comments. We are in the midst of the first phase of our execution with what we feel is, let's just say, better tools than we've had in the past, and we do think that it will make a big difference from a decision-making perspective and what the results of that will be. I can't speak to you yet, but I'm confident that these tools will be very helpful for the buying and the replenishment of logistics to do their jobs better.

[Patricia A. Baker, Analyst]

And would I be -- would that -- would it be fair for me to say that this is a really -- a new set of tools and a new way of looking at the business or something that you've not done in the past?

[Neil Rossy, CEO, President & Director]

Yes. I think that's a fair way to say it.

[Patricia A. Baker, Analyst]

Okay, that's very helpful. And then Michael, could you refresh for us what the plastic penetration was debit and credit versus cash in Q3?

[Michael Ross, Chief Financial Officer]

Yes, we're not -- as we said in Q2, we'd disclose it after 1 year as promised, but after that we would stop disclosing the numbers. But it still has -- obviously, it doesn't stop from 1 quarter to the other, it continued to grow.

[Patricia A. Baker, Analyst]

Okay. I apologize I forgot that you weren't going to give it, but it continues to grow is what I wanted to hear.

[Operator]

Our next question is from Keith Howlett with Desjardins Securities.

[Keith Howlett]

I had a question on the traffic numbers. I'm wondering whether you're able to -- I don't know if you'll share it with us, but whether you parse out what the impact of cannibalization is on store traffic.

[Michael Ross, Chief Financial Officer]

Yes, so we do -- we have that information. We know, but in terms of store opening, cannibalization doesn't really have impact if you're opening the same number of stores every year. The impact of the [ words is the same ], so there's no real impact there.

[Keith Howlett]

So there's been no change in the impact of cannibalization on the numbers?

[Neil Rossy, CEO, President & Director]

No, no. And you know back to a question I was asked previously by a colleague. It's often something that gives us confidence that we're far away from what was being questioned or insinuated was that do we feel comfortable with the 1,700 store number. And when the day comes that we start seeing serious cannibalization, obviously, we'll question that number, but we haven't seen any. And based on all of our studies of the market, and if we you look at the penetration south of the border, relative to pop for store, we're far, far away from where we feel -- where we're talking above -- over penetration.

[Keith Howlett]

And then just in terms of the impact of inflation in China. Is that something that affected Q1, Q2, Q3, Q4? It wasn't mentioned as a factor in the gross margin in Q3. Some I'm just trying to make sure. Is the impact of the China of a -- the less China inflation sort of been throughout the first 3 quarters and also will affect the fourth?

[Michael Ross, Chief Financial Officer]

Yes. So in other words, we -- at the beginning of this year, when we gave you the guidance, original guidance, 38% to 39% -- and by the way, we're guiding towards the upper range and better of that. But when we were guiding you towards that, a part of the assumptions was that we would have more inflation in China and for the year, which has not materialized for the whole year, including Q3 and Q4. And as much as we thought and tariff also. So both those factors, with the visibility we get from our open orders, that's why we were comfortable last quarter to revise that guidance and so that remains.

[Keith Howlett]

And then just in terms of the SG&A expense rate, which is, through 9 months is below the guidance range. I had a few questions on the fourth quarter. You mentioned timing was an issue in the SG&A in Q3, so whether there's something that carries over to Q4? And then Q4 has the extra week, and I'm wondering if that has a significant impact on SG&A rate in the negative direction? Or what other factors lead to the guidance being above the current run rate, so to speak?

[Michael Ross, Chief Financial Officer]

Right. So as we mentioned to you in Q2, we had initiative that were nonlabor related at the store level that we were happy to see, where much came out much better than we had anticipated, and I have mentioned that would transpire in Q2 and Q3. Most of it -- I mean Q3 and Q4. Most of it being in Q3, less in Q4. And for the rest, you know, it's -- we're going to feel -- we feel more the impact of the minimum wage in Q4, that's what we're expecting, and that's how we've come up to our range. But nonetheless, at the lower part of our range.

[Keith Howlett]

And does the extra week -- is that a negative to SG&A rate or it doesn't matter?

[Michael Ross, Chief Financial Officer]

Peanuts, it's very small.

[Operator]

Our next question is from Edward Kelly with Wells Fargo.

[Anthony Bonadio, Associate Analyst]

This is actually Anthony Bonadio on for Ed. On -- so just quickly on new store productivity, I know there's a lot of nuances around how this is calculated. But it looks like it's that some of the lower levels we've seen since you guys went public. Can you just quickly speak to what you're seeing on this front? And whether there might be any one-off factors that might be driving this?

[Michael Ross, Chief Financial Officer]

No. It's -- for us, it's been a lot of, as I've said historically, you do the implementations you -- POS, Kronos, WiFi, mobile devices, cameras, and when you implement those in 1 year, you don't get all the benefits in that year. As you move in time, you activate additional function of these, you benefit from that, so it's the total of all that. We've had more -- some newer ones this year touching on loss prevention, touching on -- with the balers. You've had labor initiatives, cash management. So a number of those that have materialized and continue to materialize this year.

[Operator]

Our next question is from Chris Li with Macquarie.

[Christopher Li, Research Analyst]

Just a few questions for me. First, have you given more thought about being a little bit more creative in terms of pricing? I think you mentioned maybe a while back about maybe pricing by region. And I'm also thinking about is there an opportunity to introduce price point kind of in the middle range, like $2.25 or $3.75 to give you more opportunity to optimize your pricing and then -- and sales?

[Neil Rossy, CEO, President & Director]

So Chris, the opportunity to have more price points exists. And we feel it comes at the cost of simplicity for the customer. That the simpler you keep the shop, the easier it is for the customer to appreciate your relative value when they're at other stores. And the more you muddy the water and make multiple, multiple, multiple prices, the harder it is for them to remember what your relative value is. We also don't think that adding price points between the ones we have today will really bring any fruits to bear from a buying perspective because when you're sourcing, and I'll take the simplest of the examples, if it's a 10 pack of pencils at $1.25 and the price of pencils goes up, and I'd have to charge $1.75 for the sake of discussion. I can reduce the pencil count to 8, and make it $1.50 or reduce it down to 6 and make it a $1 for the sake of the discussion. So when there's piece counts, you have that flexibility to help you engineer the product to a price point. And then if you're talking about, for example, anything made out of plastic. If you have a plastic bowl and its [ $300 ] and the price of plastic goes up, you have the opportunity to make the bowl a little thinner as long as it's not going to make the bowl impractical and that's a way to shave some cost off when you have to keep to a certain price point. In the same sense, as being able to add value or add [ grammage ] to the bowl, when you want to add a better value and get to a price point that still makes sense. So there's ways to engineer the products in almost all products to make sure that it fits within our price points. And we've never found our price points to be a limiting factor in the assortment that we provide our customer. As far as having different zones of the country for different reasons or different price points, it is something that we are considering. We take it very, very seriously as a conversation, and we're very sensitive to the idea, but we are looking at it to see if there are some zones in the country that are far more competitive and others that are much less competitive, and sometimes that has to do with the logistics cost to get goods to certain areas, where it's very expensive to get goods to very, very rural areas, the cost of goods everywhere else is more expensive and where it's much less expensive in super urban areas, you may have a much more competitive market that can be addressed or has to be addressed in a different way. So we continue to study that, but unlike traditional retailers who often have 6, 7, 8, 9, 10 pricing zones. If we do it, we're likely to have 2 at most, which would be basically urban and rural or some form or fashion of that idea. But for the moment, it is still at the study stage. If we decide to do it, we'll test it and we'll test it, probably, 1 item then 5 items, then 10 items then if it's positively accepted as a whole, it's a concept that we're not against. But for the moment, it is theory.

[Christopher Li, Research Analyst]

Okay, that's very helpful. And maybe just quick on -- one on Dollar City. The disclosure about the 51.1% -- 50.1%, I believe that's a new disclosure? Any reason that you disclosed that now? Or you're just trying to be more helpful for the Street to understand?

[Michael Ross, Chief Financial Officer]

Yes. Trying to be more helpful. Yes, so it is the first time, and it's just trying to be more helpful for the Street so everyone have the same number.

[Neil Rossy, CEO, President & Director]

As we get getting closer to the date where we have to make a decision, we will continue to provide different information that's more and more helpful for you to do your jobs.

[Christopher Li, Research Analyst]

Okay, that's helpful, great. And Michael just on your SG&A rates. As you look at your pipeline of all the cost reduction and productivity improvement initiatives you have for next year, do you expect you'll continue to have some SG&A leverage? I know that depends on what your comps for outlook will be next year, but even if it continues to be 2% or 3%, is that SG&A leverage -- is that still achievable under that scenario?

[Michael Ross, Chief Financial Officer]

Well, I mean, like we said, we'll give you the guidance in March. And you are right, it depends on sales level also, but the thing I can tell you is, this -- the company and our culture is all about continuous improvement, and we do have some initiatives in the pipeline, whether it's at store level or logistics level. So we absolutely have some opportunities there that we're working on and savings to come. Then it depends on inflation and the other components that we will have at the time where we give you next year's disclosure.

[Operator]

There are no further questions registered at this time. This concludes today's conference call. Please disconnect your lines at this time, and we thank you for your participation.