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Dollarama Inc
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Good morning, and welcome to the Dollarama Fourth Quarter and Fiscal 2019 Results Conference Call. Neil Rossy, President and CEO; and Michael Ross, CFO, will make a short presentation, which will be followed by a question-and-answer period opened exclusively for financial analysts.The press release, financial statements and the management's discussion and analysis are available at dollarama.com in the Investor Relations section as well as on SEDAR.Before we start, I have been asked by Dollarama to read the following message regarding forward-looking statements. Dollarama's remarks today may contain forward-looking statements about its current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements or any other future events or developments.Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results, levels of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by the forward-looking statements.As a result, Dollarama cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements.For additional information on the assumptions and risks, please consult the cautionary statements regarding forward-looking information contained in Dollarama's MD&A dated March 28, 2019, available on SEDAR.Forward-looking statements represent management's expectations as at March 28, 2019, and except as may be required by law, Dollarama has no intention and undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. I would now like to turn the conference call over to Neil Rossy.
Thank you, operator, and good morning, everyone. Let's start with an overview of our fiscal 2019 financial and operational results released this morning.We reported solid financial results with quarterly sales surpassing the $1 billion mark for the first time, a 13% increase over the same quarter last year. Our annual sales surpassed the $3.5 billion mark, an 8.6% increase compared to last year. We also reported a healthy increase in net earnings and earnings per share both for the quarter and the full fiscal year.We achieved same-store sales growth of 2.6% in Q4 and of 2.7% for the full fiscal year. These results are within the guidance range reiterated in December 2018. Consistent growth in sales and FSS in a competitive and low inflation environment coupled with the continued success of new stores, reflect the sustained positive consumer response to our offering and our value proposition.Based on these strong results, our healthy balance sheet and strong free cash flow, the board approved a 10% dividend increase to $0.044 per common share. This is the 8th increase since the first dividend introduced in 2011.On the operational front, we opened a quarterly record 33 net new stores in Q4, bringing the total net new store count for fiscal 2019 to 65, within the guidance range we maintained throughout fiscal 2019. We have a disciplined approach to site selection, and all of these new stores meet our payback criteria.Our total store count in Canada rose to 1,225. We are confident in our new store pipeline and in our longer-term store target. We are maintaining a target for fiscal 2020 of between 60 to 70 net new stores as we continue to move towards our target of 1,700 stores in Canada by 2027.In support of that long-term growth, our distribution center expansion project is on time and on budget, with the completion of phase 1 in late 2018. Phase 2, which consists of construction work within the existing facility ahead of the integration of the new building extension, is currently underway. The integration of the new building extension and the installation of all required fixtures and equipment are expected to be completed before the end of the current calendar year. Once completed, our distribution center will enable us to comfortably support our long-term growth plan.Turning to e-commerce. We have launched our new corporate website and online store nationally in January 2019. For now, we are offering a selection of general merchandise and consumables by the full case only, and initial feedback from customers has been positive. We are looking at introducing a selection of seasonal items to provide additional convenience to our customers.Before turning it over to Michael, I would like to say a few words on Dollar City. The independently owned chain ended 2018 with a total of 169 stores, with 74 in Columbia, 43 in El Salvador and 52 in Guatemala. 19 net new stores were opened during the fourth quarter for a total of 62 net new stores for the calendar year.We continue to monitor Dollar City's progress and to perform our due diligence before deciding on whether or not exercising our option to acquire a majority interest represents a sustainable avenue for future growth.Michael, over to you.
Thank you, Neil, and good morning, everyone. First, looking at the fourth quarter of fiscal 2019, our financial performance was once again driven by strong performance across all key metrics. Sales were up 13% to over $1 billion; same-store sales at 2.6%; gross margin was very strong at 40.4% of sales; SG&A was 14.6% of sales; EBITDA up 7.6% to $273.2 million, representing 25.8% of sales; net earnings were $172 million, a 5.6% increase over the prior year; and diluted earnings per share grew 12.5% to $0.54.Q4 2019 CapEx was $56.7 million compared to $51.4 million in Q4 of last year. CapEx, over the past 2 years, has trended upward to support the distribution center expansion project. As Dollarama reports its results based on the retail calendar, fiscal 2019 includes 53 weeks compared to 52 weeks in the prior year. However, for the purpose of calculating same-store sales growth for the fourth quarter and for the full fiscal year 2019, sales made in the 53rd week were excluded to maintain comparability with fiscal 2018.Looking now at the full year results. Sales increased by 8.6% to over $3.5 billion. Same-store sale was 2.7%. We were very pleased with our gross margin, which came in at 39.3%, at the top of our guidance range for fiscal 2019. G&A was impressive 14.4% of sales, beating guidance coming in just below the range and this despite higher labor costs in a number of jurisdictions, reflecting strong execution in our operations. EBITDA as a percentage of sales was 24.9%, also at the top of our fiscal 2019 guidance range.Net earnings were up 5.7% to $548.9 million [Audio Gap] and EPS increased nearly -- by nearly 10% to $1.67 per share, reflecting improved earnings and the accretive effect of our share buyback program.You will note that the cash used for working capital increased by $131.2 million in fiscal 2019. This increase is attributable to: one, an increase in accounts receivable with Dollar City, which are secured by letters of credit; number two, an increase in prepaid expenses related to the timing of rent payments and sales tax and payroll remittance; and three, an increase in merchandise inventory as a percentage of -- as purchases, sorry, were moved up as a result of the timing of the Chinese New Year.For the full fiscal year, we repurchased 13.8 million shares for a total cash consideration of $533.1 million at a weighted average share price of $38.66 per share.Throughout fiscal 2019, we continued the rollout of various initiatives to improve the efficiency of our store operations as well as reduce costs. In-store, we continued to expand the use of mobile applications for tasks accomplished by store associates with handheld scanners, thereby improving the efficiency of store processes. We rolled out several initiatives to reduce inventory shrink as part of our asset protection and loss prevention activity. This includes the installation of smart cameras in almost half our stores, which will continue into fiscal 2020. We also now have improved data analytics tools, which help us identify and target risk areas even more accurately than before.We also implemented new cash management process at store level to improve the efficiency of cash handling activities. We continued to install balers in our stores to improve the efficiency of cardboard and plastic recycling, resulting in less waste and lower waste management costs. We have balers in about 200 stores at this stage, and we'll continue the -- this initiative in fiscal 2020.And we are now systematically using energy-efficient LED lights in all our new stores and installing LED lighting when performing major renovation in existing stores. This reduces energy consumption costs.Looking now at initiatives that can have a direct impact on the top line. We have optimized store layouts in about half of our stores, enhancing the customer shopping experience. All new stores incorporate the optimized layout. This includes single-line queues to stimulate impulse purchases and reduce check out time. Shift automation improvements are also resulting in more detailed shift planning. And based on data analytics, this helps ensure we have the right number of associates on the floor to deal with high traffic and peak periods in stores, so that we can serve our customers efficiently.Now looking ahead. Fiscal 2020 guidance is based on a same-store sales assumption in the range of 2.5% to 3.5%, consistent with fiscal 2019 performance. Our net new store target remains at 60 to 70. We expect gross margin to be in the range of 38% to 39%, SG&A as a percentage of sales to be in the range of 14.25% to 14.75%, and EBITDA in the range of 23.25% to 24.75%.CapEx for fiscal 2020 is expected to be in the range of $130 million to $140 million, which includes the remaining commitments related to the distribution center expansion of approximately $15 million, that's 1-5 million, new store openings, maintenance and renovation as well as IT projects. If we exclude the remaining costs on the distribution center and store growth CapEx, we are aligned with the historical CapEx intensity ratio at approximately 2% of sales.Note that our fiscal 2020 guidance does not factor in any impact from the implementation of IFRS 16, the new lease accounting standard that came into effect on February 4, 2019, for Dollarama. The full impact of the new standard will be presented to the market in conjunction with the release of our fiscal 2020 Q1 financial results.With that, I will now turn the call back over to the Neil for concluding remarks.
Thank you, Michael. Before we close out the call, I would like to say a few words about our priorities for fiscal 2020. There is no question that the retail environment was challenging in fiscal 2019. On one hand, our competitors were reluctant to pass on higher costs through price increases. And on the other hand, we saw signs of a more sluggish consumer spending at the macro level. We responded with purposeful decisions with the long term in mind, in full knowledge of the potential impact this could have on same-store sales.We made the strategic decision to be aggressive in maintaining our strong value proposition. Throughout the year, we limited price increases and focused pricing action on the 25% to 30% of our offering that we refresh every year. We believe this was the right approach, and I am very pleased with our results in this context. Our performance in fiscal '19 -- 2019 demonstrates the resilience of our business model, which rests on well-executed organic growth, our direct sourcing strength and our multi-price-point strategy.I've said it before and I will say it again, Dollarama is a price follower, not a price setter. The compelling value we offer is what makes us a true destination for Canadian consumers during economic highs and lows, and we will continue with this same winning approach in fiscal 2020. We will closely monitor peer activity as we always have, and we will seize opportunities as they arise. Our priority is to continue to reinvest in our strong value proposition, always with the consumer in mind. I mentioned on our last call that through our improved tracking and analytical tools, we now have more accurate information and visibility on product performance. We see this as an exciting opportunity going forward. This includes further enhancing our product assortment through our 20% to 25% -- our 25% to 30% refresh activities and improving category management.Without going into the details for competitive reasons, we see opportunities to maximize our capabilities within our existing categories and price points to increase store traffic and to drive sales. And there are further gains to be made from the continued execution and implementation of the numerous operational initiatives mentioned earlier by Michael. Our business model is strong and our growth potential remains compelling in the short term and into the future.With that, I will now turn it over to the operator to take questions from financial analysts.
[Operator Instructions] The first question is from Irene Nattel with RBC Capital Markets.
Neil, just following up on your last commentary, so as you drill down into category and SKU sort of sales behavior and velocity with these new tools, are you confident that you have, number one, the -- well, I guess you have the right categories, but within the categories, do you have the right offering irrespective of price points? And do you think that you have the right mix of price points to sort of drive accelerated traffic and basket?
Irene, the answer to that question is historically I think our sales have answered for me. Going forward, we feel that there is still a nice runway ahead of us with these tools to be able to increase our traffic generators and push more unit sales. And so the answer as to whether we have the perfect mix, I hope not. I hope the mix that we've had, that's generated what we have, historically continues to be what it was. But I hope that there remains and continues to be a whole realm of improvements to be made to our assortment, so that we have that much more to squeeze out of the lemon, so to speak. So I think when we study it, which we're -- have been doing for the last few months and continue to do going forward and put more focus on that piece of our business, we remain very confident that there is some exciting opportunities to improve the mix and all the other finer points of category management and placement.
That's very helpful. And I know that you've also been doing a lot of work to really try and understand what the impact has been of the rising penetration in electronic payment. So I guess my first question is, can you quantify for us what that would have been in Q4? And also whether you've really been able to pin down whether, in fact, your customers that are now spending electronically, are spending double, but coming half as often?
Right. So Irene, it's Michael. So penetration debit and credit card is still strong. And yes, the basket of credit and debit is double that of a cash transaction. And credit typically may be a slight higher than debit, but more or less the same. But that continues to grow and at rates higher than prior years.
Okay. And have you been able to triangulate whether, in fact, that specific customer is coming less often, as a result of the higher spend on the individual basket?
No, we don't -- because we're starting to overlap, we don't have that benefit, that information yet to conclude that. So it would be just speculative right now.
Okay. That's great. And then finally, just one question around SG&A. Sort of that big uptick that we saw in Q4, was that really just mostly the extra week? Or was there some timing in there? And because it was a much -- the growth rate was much higher than what we usually see from you guys.
Yes. So there's a bit of timing, and a good portion of it is definitely that 14th week. Because January is the lowest selling month of the year, but yet, the fixed expenses or the -- if you want, the overhead definitely had a greater impact because of that. So that was certainly a factor.
The next question is from Mark Petrie with CIBC.
On the last call, Neil, you highlighted how you wanted to put a greater emphasis on the lower price point items and that it would start with merchandising tactics, but could evolve to sort of skewing the assortment to those price points a little bit. Could you just update us in terms of what sort of response you've seen from your efforts so far, your level of satisfaction with that reaction, and how you're sort of thinking about it now and for fiscal 2020?
So I'll clarify what I said last time. What I said was we want to ensure that within every assortment and every category, there is always a nice offering at the lowest price points of $1 and $1.25. So that every one of our customers, at different budgets and at different points in their lives, has the ability to choose and still have a selection fitting their budget. It wasn't necessarily -- no, it wasn't just not necessarily -- it wasn't to move the focus of our business back to the $1 price point. It was just to make sure that we had those offerings at those price points in every category. And it's something that I think we might have lost a bit of focus on over time. And we wanted to just ensure that we refocus, that all of our buyers were ensuring that that was in fact the case. We always have the lowest price points as part of every offering. And the answer to the progress on that is that it is something that we focused on. It is something that's happening. But as you know, a good percentage of our goods come from different parts of the world and so all of these things take time between the generation and buying of new items. And so I think you'll see that more and more over the next 12 months.
Okay. Yes, I appreciate the clarification and that's helpful. Regarding the same-store sales performance, I know you're not quantifying the impact of the change in the Halloween timing, but presumably, that helped a bit in Q4. So I just wanted to ask what the traffic performance and if you could give a bit more color on sort of how that trended through the quarter. I think typically sort of a mild December, clear roads has benefited you. I know weather was mixed in different regions. But could you just talk about that and sort of expand a little bit on the traffic result?
Okay. So maybe if I start, Neil, and if you want to jump in. But first of all, the Christmas season was very good this year, it was very strong. And since you're the one who brought up the weather factor and not me, it had an impact. And -- but it's things that are part of Q4 realities, but I think that it did have a slight impact maybe and certainly had an impact on the traffic figure, but all to say that it's -- I think that it was a pretty good quarter nonetheless. And there's an element I still believe has an impact, but again, we can't prove it and it's subjective and it's the penetration of higher credit cards and debit cards too.
Okay. And then just -- sorry, just to clarify just in terms of your views on the competitive environment and price inflation, effectively, you're saying it's consistent with what you saw through the course of 2018, and that's your expectation for fiscal 2020? Or could you just sort of...
Yes, that's it.
Yes, yes.
The next question is from Vishal Shreedhar with National Bank Financial.
Wondering -- and I missed the top of this call, thus, you may have addressed it, but wondering if you can comment a little bit on the inventory growth a bit higher than I anticipated. Any color there?
Yes, so it's timing. So the Chinese New Year this year was -- it was brought up from last year. Last year was February 16; this year, February 5, so right at the close of our fiscal year. That always has an impact for us in terms of ordering quantity, so it's purely timing.
Okay. And then as you contemplate the Dollar City option and you look at your balance sheet, would -- should investors consider a scenario where Dollarama would have to curtail buyback to build the capital for that particular option?
Well, for sure, if we do exercise the call, the payment will be within the structure that we have now. And we said that we would respect the 2 point -- up to 3x adjusted debt-to-EBITDA multiple, so that means that there would be less share buyback.
Okay. And this one's a bit of a tricky one, but are there any metrics that investors can look at or which should point investors to look at -- to help us better understand where management views its competitiveness versus its peers? For instance, if traffic rebounds positively, does that mean that Dollarama is now better positioned versus its competitors which was the issue causing the management to curtail the price increases relative to history or the inflation and its mix? I'm not sure if that question was clear, but I'm just kind of looking at what key metrics we can look at to say Dollarama's competitive position has improved.
I don't -- Vishal, I don't know what to say. I think we're focused on our stuff, our metrics, obviously looking at competition. But there's any additional ones besides the -- we do our surveys every year or so, and we give you that information, but otherwise, I guess it's what you've been used to seeing.
Okay. And the long-term same-store sales growth aspiration of 4% to 5%, is that still intact?
Well, no, we haven't talked about 4% to 5%, and I think that's -- we go 1 year at a time, and this year, it's 2.5% to 3.5% and we'll see. Obviously, we would like it to be as high as possible, and -- but for the time being, we're just disclosing 1 year at a time.
Okay. The -- and for the year ahead, and I might be trying to sneak one in here. But in terms of the year ahead for the margin cadence, should we think -- EBITDA margin cadence, should we think H1 down, H2 kind of stabilized, just given the way the trends unfolded in fiscal '19?
I -- Vishal, I won't comment on that. We'll see.
And the next question is from Jim Durran with Barclays.
My first question you might have already answered, but just directionally, like, you've had a lot of time to sort of drill down and see the drivers to what the slowing of your growth might be. Like, beyond some of the things you've already shared with us, are there any incremental things like category or price relativity that you've uncovered through additional analysis that would, I think, contribute to your ability to help achieve your new guidance?
I think that it's not so much a changing of the market categories relative to ours or customers' desires relative to our categories, or the market getting more competitive per se. The greatest changes as we've discussed in the past were the fact that we didn't introduce new price points and the other more obvious factors. And so what we've had to do is put our focus, as mentioned, on making sure that within our current basket, we are maximizing every potential sale and getting as many customers into our stores as possible and driving units, and that's what our focus is currently. But I don't think there's a trend here, a market trend or a competition trend that changed to an extent that I can highlight something that's been diagnosed and is something that can be fixed, so to speak. It's just a continuing improvement and modification of what we've always done. And I'm quite excited about our opportunities to drill down in places we haven't drilled down before, to be quite honest. And so that's our take on it.
And like you mentioned earlier, Neil, the pricing action will be through our 25% to 30% of refresh that we'll do during the year too, which will support the same-store sales outlook.
Right. And just to be clear, it sounds like consideration of going to $5 is not on the table in the near to immediate term?
Exactly.
And in addition, like, from a price comparison standpoint, have you done anything to increase your tracking of competitors' price points on items that you feel are critical?
That's all part of our current project to maximize within the scope of what we're currently purchasing, where it fits in the store, how it fits in the store, what the mix is, et cetera. So that is part of our current project.
And with respect to sourcing, predominately out of Asia obviously, are we still seeing some excess capacity, and therefore, some favorable costs right before we convert to USD?
So the last time we spoke, I said that prices were stable and they continue to be stable. There is not -- I can't say that there's enough movement, down or up, to say that that's changed. So I'm going to stick with stable for the most part.
Yes, well, that's probably a good situation for now. On the online business that you've just initiated, like, how fulsomely is that now deployed? And how long do you feel it'll take to actually have a meaningful impact on your sales growth?
Well, I can't answer the second one, but the first one, we're very happy with how smoothly the rollout went. And we're very happy with customer feedback about the usage and efficiency of the site. We've sort of offered a very limited selection of the more core items and as you know, all by the case, which makes it very different from the typical e-commerce market. The beauty I think is that we're happy with where it's gone so far. And there's -- in the e-commerce world, there's hundreds of levers that we can start playing with slowly but surely and playing with and testing to see what drives more customers to the site. And we're starting to see some repeat customers, which, of course, is also an excellent sign. And I think as businesses and consumers start understanding and appreciating the value of what we offer on that website, there will be a greater and greater number of customers coming back to us to use us as their source for those very basic items. Because even though, let's say, our approach to e-comm is a little less standard than the norm, the final cost to the customer is extraordinarily competitive. And so I think that over the course of time, the traction will grow. Small businesses will find it more and more interesting to buy their stationery there or what have you, and people having parties or conferences or whatever it is, will use it because it's a practical way to get the best price without having to travel store to store to store, which was really the intention in the first place to address a need that we weren't addressing with our bricks and mortar. So we're excited about it, but we have a lot of stores, so for an e-commerce launch to have an impact on our bricks and motor business is a huge demand and a huge request, and we will keep you posted if and when that becomes the case.
And how actively are you going to try and market that?
The answer is slowly but surely we're going to keep pulling on levers. And we just want to make sure that as we do it, we do it like we do everything else at Dollarama, which is thoughtfully and conscious of the bigger business. And so we will do it at the same pace as we've done everything else to date, which is as fast as we think we can do things properly. And so I can't tell you what that will be. Some things will go faster and some testing will go faster and be implemented faster and other people or testing will go slower. But we're new to the business. I don't want to lead you to believe that we're 10 feet behind Amazon. I mean, this is all new to us and it's interesting and it's different. And it has its own little niche, I think in the market, makes us quite different. And I think as people go inspect and go look at it and check it out, they -- and do the math, most importantly, they will see that it is a very competitive offering for what we're trying to achieve. And so we'll keep you posted on these calls as time goes on as to whether we're right or wrong with our philosophy.
Yes. Last question is on SG&A. Like, with the slowing of top line, are there any newer initiatives that you're either already deploying or go -- see going after as the year progresses to try and contain your SG&A growth even more than you've been successful at in the past?
Yes, well, I -- Jim, I went through that. So the ones that I mentioned are -- they were started last year. I'd say the -- we don't have like big new ones this year. It's the sum of all of the prior initiatives that allow us to hopefully offset and even better hopefully improve the ratio.
The next question is from Peter Sklar with BMO Capital Markets.
Neil, back on transaction count. So it's been negative for 4 quarters in a row. You don't know whether it's because of increased credit card and debit card penetration. It sounds like you don't believe that's cannibalization, because Michael said earlier in the call that you're meeting your payback targets in all your new stores. So Neil, I'd just like to hear your thoughts on what you think is going on with this persistent negative transaction count?
So I think the answer is that the market is a little soft generally. I mean, you hear other retailers all saying it, bricks and mortar retailers. I think we have to put more focus, as we've said, on making sure that within our mix, which has been very successful, we don't lose sight of the need for those traffic drivers in our stores. And I think quite honestly that we did lose sight a bit on making sure that we had all the traffic drivers needed to balance our higher price points, et cetera. And when you take a business from pure $1 store and then you evolve over the years to multi-price points while being very successful in doing so, you'll learn things. And I think one of our learnings is that even though our overall sales are strong and we're happy with the mix, and our customers continue to be very happy with our differentiated offering and the relativity of our value, we have to be refocus on traffic generating and unit sales because at the end of the day, in bricks and mortar, that's the bread and butter. And so I won't tell you that it's any specific thing, but certainly, our focus has been -- gone back to that, as mentioned on our last call. And I think part of that also was ensuring how important it is to our customer and how important it is to us to make sure that our offering includes the full range of retail price points, so that our customers are addressed properly, and that's part of it.
Okay. So as you look forward, like, you provided the guidance for the current fiscal year of 2.5% to 3.5%. I assume you and Michael put some considerable thought into that guidance. I understand you don't want to give specific numbers, but could you provide some flavor on the components in it, like, what your underlying assumptions were for like-to-like pricing, penetration of higher price point items, transaction count growth, et cetera? Any kind of flavor you can provide would be helpful.
Yes, we know that, Peter. But no, again, I think Neil mentioned it. We're looking obviously to -- we're addressing traffic. We're addressing unit sales, because we don't have the benefit this year of the recent introduction of a higher price point. However, we do, through the refresh, 25% to 30%, expect, through that process, to influence the penetration of higher price points and to deliver within the target we gave you. And so we -- that's our clear focus. And I think as we get to Q1, Q2 and the rest of the year, you will appreciate this more and more.
That was helpful, Michael. And then lastly, Michael, I just wanted to ask, is there any way you could provide guidance on the impact of IFRS 16 before the next quarter, because it's going to be very difficult for investors to forecast your first quarter without some guidance on the P&L effects?
What we will do is IFRS 16, first of all, we'd use the retrospective approach, which means that you will have both years, Q1 F '19 and Q1 F '20 on an IFRS basis, one. Two, we will continue to disclose next year -- for next year, the guidance update, the gross margin, G&A and EBITDA. In fact, G&A shouldn't have too much of an impact, but gross margin and EBITDA on the current basis of accounting and on IFRS. So you will be able to appreciate both methods, and that will -- and we will give you a summary in Q1 of the impacts of IFRS, so you will be able to understand what's going on. And it's basically your operating lease expense that are capitalized, so you'll be increasing. And that information, you have disclosed in the financial statements, but basically, you'll be adding that to your EBITDA, then capitalizing your assets and amortizing it, those assets over the term of the lease. And then you will have also some interest expense and depreciation that we will highlight to you, that -- so that you reconcile both methods. But we will continue with the guidance on the same basis you see it today and that we've disclosed to you today, so we'll have both methods.
The next question is from Derek Dley with Canaccord Genuity.
Michael, just quickly following up on that last comment. From my understanding it, the IFRS, it won't have an impact on your net income or your EPS guidance. It will just essentially increase your EBITDA, but a lot of the resulting increase in depreciation and interest expense. Is that the right way to look at it?
Well, yes. First, we don't give guidance on EPS, but the -- it will have an impact on EPS. Because when you capitalize the -- your asset, the amortization will be straight line, like it was for the operating lease. But the interest, implied interest expense will be done more on a declining balance basis, a bit like a mortgage. So you're at the beginning, and the expense is bigger, and after 15 years, it's small. So that will have an impact on EPS. But as I said, we'll disclose for you or allow you to understand what that impact is. And obviously, it's not a financial economic impact in that the cash flow and everything else is the same. It's purely an accounting situation here.
Yes, okay, understood. Just sort of following up on your comments about sort of the lack of pricing in the competitive channels, have you seen -- is it a combination of some of your retail competitors? And obviously, it's a loose definition of who we include in competitors, focusing more on some other value offering? Or is it just a pure lack of inflation in the channel overall? I know you mentioned prices in Asia are stable. Can you just give us some more color on that?
I think it's more of the second than the first, much more the second than the first. I don't think the retail market per se in Canada has changed very much. I mean, there's always small dollar store chains popping up and disappearing and the comings and goings of all these things. And then, the big players have always been there. And they've always been focused on their core businesses, I don't think they've changed their focus, like we haven't really changed our focus. So we lean towards the second as the reason, but there's probably a little bit of everything.
Okay. That's helpful. And then just finally, in terms of your new store target of 1,700, when should we expect an update to that total store target? And in terms of the payback that you're looking for in the 1,700 stores, is it fair to say that hasn't changed?
Okay. So yes, the economics on the payback are still very strong. And in fact, the more recent cohorts have been better, better. The first year of opening up stores, not only did the revenues increase, but they were more efficient at opening them up, so the cash comes in sooner. So that's been the case. And when we looked at our 1,700 stores or the 33 net new stores that we opened up this quarter, that's this past quarter, it's all top-quality real estate. So that's still how we look at it. And for the store update, we'll let you know in the future where that takes us.
The next question is from Brian Morrison with TD Securities.
Just a couple of follow-up questions. If I can go back to bulk sales, Michael, you refer to it as a -- obviously, a good opportunity. And the transition was very quick from regional to national. Can you just give us any high-level magnitude of the range of expectations? Is it -- like, are we talking less than 1% of forecast sales? And then, can you confirm that this is excluded from your same-store sales guidance, and you expect it to have an impact on same-store sales?
Yes. So okay, bulk sales will be excluded from same-store sales. And you should not expect for F '20 any significant number there. It's -- yes, it's -- it will be a small number.
So like less than 1%, makes sense?
Yes.
Okay. And then just the other question I had is in your same-store sales growth, it sounds like you can get your guide at 2.5% to 3.5% on refresh alone, can you just confirm that? And then, remind us of the implementation of actively limiting the price increases in fiscal '19. Was this a Q2 event? Or just the color on how it was implemented during the year?
Okay. Just -- okay. So for the first question there, it's a mix of -- the 2.5% to 3.5% will be, yes, refresh and also unit and traffic, that's what we're aiming for. And your second question, Brian, sorry, I missed a part of it.
Yes, I just want to understand the implementation of actively limiting price increases in fiscal '19. Your gross margin degradation really took place in Q3. I want to know, was this a Q2 event where you put in the limitations? How was that implemented through the year?
Yes. So it was in Q2. In fact, we're starting even at the end of Q1. And Q2, Q3 and Q4, as we had told you, was limited in terms of doing markups compared to other years. We did some markups, but much less than we did in prior years.
And your next question is from Keith Howlett with Desjardins Securities.
I just want to follow up that question on the markups. Is the markups a weekly event or a monthly event when you analyze what to do on that? Or is it sort of in very discrete and limited times of year that you look at markups?
A markup is looked at -- or a markdown, or any change is looked at every time an item is looked at. And an item is looked at, at least every 3 weeks. So every 3 weeks, an item is looked at, because that is part of our replenishment cycle so because our replenishment cycle is, at the longest, 3 weeks on any given item internally, it's put in the buyer's space every 3 weeks. And when it's put in the buyer's space, the buyer will have the opportunity to do whatever changing to the item that they wish, whether it's add pencils to the pack, take pencils from the pack out, mark it down, mark it up, change the [ array store ] or anything else. And so it's a constant daily, multiple times a day process.
And then I just wanted to ask about -- you did reference it early, inflation in China, which was an offsetting positive factor. I think you mentioned in Q3, it helped the gross margin go up, because inflation in China was less than your going-in expectations. On that, what is your expectation going forward? And how frequently do you assess that expectation?
Yes. So Keith, just when we look at margins overall, it's not just the impact of one factor, like you mentioned, inflation in the third quarter. So we've never said that one factor influences for that quarter. It's the lump sum, the whole -- all the factors. And this is -- like we said, the buyers review each item and order in advance and comp shop and compare and all that stuff. So it wasn't like in Q3 inflation was this -- impacted that way that has an immediate impact in Q3. And I think, Neil, you mentioned that right now, you're not seeing any major inflation at the time being a bit the same as we mentioned in last December. So the buyers look at that obviously. And -- but they look at all the other factors also in the mix to establish the price point, and therefore, the margin.
Yes, generally right now, domestic and import prices are stable.
Great. And then just on the rent costs, are you finding that there's any diminution in the rents that you're needing to pay on new store openings?
Not yet. Rent for the new stores over the past 4 or 5 years has been more or less stable, so that continues to be the case.
And then just a question on SG&A leverage, you -- I guess, you did 14.4% SG&A margin or SG&A expense in fiscal '19, and your range is 14.25% to 14.75%. I'm just wondering what factors could cause the leverage in the operating expense rate?
What factors? Well, it's...
Well, I guess you have a history of lowering SG&A rate as you leverage the existing fixed cost base on -- the go-ahead guidance is sort of skewed to that SG&A rate could go up.
Right. So again, we always keep ourselves -- there's the unknown. There are timing costs. But essentially, what we're also mentioning by lowering it year-over-year is that there's opportunity given the initiatives that we have underway. We know, for instance, that in Ontario, there's not -- no increase like we had last year. We're aware of the Québec minimum wage increase. And right there, you've got 70% of your chain. So with that already in the model, that gives us comfort to give you the range we had there.
And then just following on the new store openings, how do they look geographically in fiscal '20?
Again, it's across the country, you've got some -- it follows more or less the population in each province. And leading up to 1,700, comfortable to say that we see it the same way. So you've got more stores in Ontario, then it's Québec, then it's Southwest, then it's the Maritimes.
And so in terms of Québec and the Maritimes where you have the highest penetration, you're still finding lots of -- or significant numbers of opportunities in those markets?
Yes, absolutely.
The next question is from Kenric Tyghe with Raymond James.
Neil, I wonder if you could just walk us through -- you've commented on increased consumer caution that you saw in the quarter. I wonder if you could help us understand the trade-offs between the increased consumer caution in store on the back of the macro, and the expectation one would have of Dollarama seeing increased share of wallet in a slowdown? It would appear from your comments that the increased caution in store is more than offsetting any potential accelerated trade-down or increased share of wallet. How should we just think about that? And if things really did go sideways or further sideways in the Canadian economy, would you expect the increased share of wallet to more than offset the trade-down in-store?
Well, we've lived through economic highs and lows over our history since 1992 as Dollarama, and they come with positives and negatives. When times are good, people have more money to spend. So you can make the argument that there's more spending. When times are tough, people have less money to spend, so more people come to the dollar stores, so to speak, because they have a tighter wallet. In the end, I think our business model has proven to be able to live through both scenarios quite successfully. I don't think just generally that I wish difficult times on my country, so as a business we have to live through both. So we need to be able to go through both successfully. I think instability is never a good thing and the transition between any given period is the hardest part for the retailer because we have to figure out how to react without being not competitive with the other retailers or not forcing things on customers before they're ready for them. So like every other thing that we do, we always try to just make sure that what we're focused on is being the best relative value in our market. And that is the sole job of the buyers, that is the bread and butter of the business, that is the special sauce. So as long as you're walking into a Dollarama and our product is of very good to very -- to a quality that the customer is satisfied with and at the most compelling price in the country, then we've done our jobs in our niche in the market. And so at any given time, we'll be a little better at that and a little less perfect. But as a core concept, it's what we do. And so Michael, you have something to add?
Yes, I think -- yes, as a matter of fact, when we went through the energy crisis in Alberta, that was a great demonstration of comparing how our stores in Alberta performed compared to the rest of the chain. And as we then communicated to you and disclosed to you that the stores, even though they were in an economic downturn in Alberta, performed exactly the same way they did historically, so weren't impacted either negatively or positively during that period.
That's great color. And Michael, just a quick follow-up. If we then look to your gross margin guidance for fiscal '20, how much of that sort of revision is the investment in the value proposition versus the negative mix impact, so to speak, of consumers trading down or increased consumer caution? How should we think about that? Or can you help bridge us between last year and the guidance for this year?
No, I can't give you more information on that, unfortunately, Kenric, but stay tuned, Q1, Q2 and Q3, I think that will be the best fact right there.
This will conclude the question-and-answer session as well as the conference call. We ask that you please disconnect your lines at this time, and we thank you all for your participation.