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Dollarama Inc
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Good morning, and welcome to the Dollarama Fourth Quarter and Fiscal 2020 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, open exclusively to financial analysts. The press release, financial statements and management's discussion and analysis are available at dollarama.com in the Investor Relations section as well as on SEDAR. Before we start, I have been asked by Dollarama to read the following message regarding forward-looking statements. Dollarama's remarks today may contain forward-looking statements about its current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements 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 forward-looking statements. As a result, Dollarama cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. For additional information on the assumptions and risks please consult the cautionary statement regarding forward-looking information contained in Dollarama's MD&A dated April 1, 2020, available on SEDAR. Forward-looking statements represent management's expectations as at April 1, 2020, 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 Neil Rossy.
Thank you, operator, and good morning, everyone. I hope you are all healthy, staying positive, doing what you can to help and keeping safe. It would be impossible to start this call without acknowledging the current situation, which is unprecedented in our lifetime. I know that our shareholders and those who follow our company are very eager to hear about how all of this is impacting Dollarama today and what we see coming. Exceptionally, we will provide you insight into what we have been experiencing in our supply chain, our operations and at store level in the current quarter as well as from a capital structure perspective. Before doing that, however, we believe it's important to discuss the results disclosed this morning for the fourth quarter of fiscal 2020 and for the full year. The numbers demonstrate the solid fundamentals of our business as we navigate these uncertain times. Comparable store sales growth in Q4 was 2% or 3.8% if we exclude the retail calendar shift, which Michael will explain in more detail. Full year SSS was 4.3%, reflecting an increase in both store traffic and transaction side. We reported solid net earnings and earnings per share, both for the quarter and the full year. Gross margin, SG&A and EBITDA margin were within our guidance ranges for fiscal 2020. Our retail footprint expanded with the opening of 66 net new stores across the country, to reach a total of 1,291, and we completed the expansion of our distribution center on time and on budget. Our strong performance in Q4 and fiscal 2020 is proof of the effectiveness of our sales, merchandising and operational strategies in the context of limited price inflation. It also demonstrates the appeal of our value proposition to Canadians across the country, and ultimately, the enduring strength of our unique business model. As Canada's leading value retailer, we are in a solid position to weather the current storm. Michael, over to you.
All right. Thank you, Neil, and good morning, everyone. First, looking at the fourth quarter of fiscal 2020 financial results. We achieved a strong performance across all key metrics. Sales exceeded $1 billion. Gross margin was strong at 44.7% of sales. SG&A was 14% -- 14.6% of sales, EBITDA increased over $329 million, representing 30.9% of sales, net earnings were $178.7 million and diluted earnings per share grew to $0.57. Note that the fourth quarter of fiscal 2020 was comprised of 13 weeks, whereas the fourth quarter of fiscal 2019 was comprised of 14 weeks. The additional sales week in the fourth quarter of fiscal 2019 amounted to $57.7 million. Q4 same-store sales grew 2% year-over-year. Sales in Q4 were negatively impacted by the calendar shift, which resulted in one less preholiday week in the fourth quarter of fiscal 2020, a historically strong sales week, and an additional week at the end of January, a historically low sales week. There were also 3 less Halloween shopping days in Q4 as these were recorded in the third quarter. Excluding the impact of this calendar shift, Q4 same-store sales grew 3.8% year-over-year, including a 1.2% increase in the number of transactions. Now for fiscal 2020. Looking now at our financial results, the full fiscal year can be summarized by strong top line performance, reflecting traffic and unit growth throughout the year, with same-store sales growth of 4.3% on a 52-week basis. Gross margin was also strong, coming in at 43.6% of sales, despite lower product margins and onetime logistic costs in the low inflation environment. We met all of our financial guidance objectives for gross margin, G&A and EBITDA as a percentage of sales. Net earnings were $564 million and EPS increased $1.78 per share, reflecting improved earnings and the accretive effect of our share buyback program. We opened 66 net new stores for the year, also meeting our guidance, and we maintain a good spread of store openings throughout the year versus in prior years where a much larger proportion of stores were opened in the last quarter. We completed our distribution center on time, on budget, as Neil mentioned. CapEx was lower for the year, primarily due to higher investments related to the DC expansion in the prior year. Turning now to the current quarter and our outlook for fiscal 2021. Usually in conjunction with the release of Q4, we provide guidance for next fiscal year. Due to the exceptional circumstances stemming from the global COVID-19 pandemic and our limited visibility on future performance, we have suspended this practice for now. We will revisit this decision ahead of the release of our Q1 earnings, should the situation normalize by them. In new formal guidance, here's what we are seeing so far in the current quarter, which began on February 3 and will end May 3. The strong momentum in same-store sales and store traffic experienced in the fourth quarter of fiscal 2020 carried over into the first few weeks of the first quarter of fiscal 2021. That is to say that we were off to a good start compared to the same prior year period. So that was for the month -- the whole month of February. As COVID outbreak ramped up in late February to mid-March, we experienced a surge in number of transactions and growing baskets in our stores across the country as customers stocked up and purchased higher volumes of certain products, think household cleaning products, health and hygiene products, food items and craft. After this bump in sales, which lasted a few weeks, transactions began to level off. This is, of course, directly related to the increasingly strict measures imposed by governments all aimed at confining people in their homes as much as possible. These measures are still in place as we speak. As you are aware, these strict measures have included the force shutdown of a huge swath of economic activity across Canada. For our part, we are recognized as an essential business offering everyday necessities in all jurisdictions where the government has mandated the closure of nonessential commercial activity. Currently, about 54 Dollarama stores out of the 1,291 locations across Canada are temporarily closed. With the exception of a handful, all of our closed stores are in Québec shopping malls. Mall stores in Canada that remain open across the country are those experiencing the lowest traffic numbers, down over 50% in the last 8 days of March. Our stores with street access, which represent about 75% of the chain are not experiencing the same dip in traffic. What we are seeing is that people are avoiding malls that are still open and/or keeping trips to enclosed malls to a bare minimum. We are nonetheless keeping as many of our locations open as possible so that customers have access to everyday essentials. This is especially important in communities with limited options to purchase essential products or where they don't have a nearby location to redirect them to. Overall, we expect same-store sales to be negative through the rest of the current quarter due to significant reduced traffic and mall store closures outside of our control. Should additional restrictions be imposed on Canadians, which may be the direction we're going in, we expect Canadians to further limit their outings. So those are the sales trends we have been experiencing. At this point in time, the country is still very much in the midst of this crisis, and it remains impossible for us to forecast the impact on our future performance or the economic context in which we will be operating. If the last few weeks have taught us anything, it's that a lot changed in the matter of days and weeks. What has not changed is that Dollarama remains a key destination for Canadians' everyday shopping needs. For the same reason, we have withdrawn the previously announced guidance for Dollar City's contribution to Dollarama's earnings per share for fiscal 2021. Dollar City has performed well since we acquired 50.1% equity interest in mid-August 2019. They achieved their annual financial objectives and opened 59 net new stores in 2019. They also had a good start to the year, but they currently face the same unknowns due to the COVID-19. The Dollar City team is doing an excellent job managing through this crisis. About 38 Dollar City stores are closed at this time out of 228 locations. The bulk of the temporary store closures are in Guatemala and Colombia, where strict lockdowns are in effect. They are also impacted by strict curfews in Guatemala. So turning back to our Canadian operations. I've given you some color on sales trends already. Now looking at this from a cost perspective, I want to let you know that we are tracking the incremental costs related to COVID-19 separately, and that we will be highlighting the cost impact when we'll release Q1. Nearly all of the additional costs being incurred are labor related. Neil will provide more detail on our initiatives shortly, but costs are primarily related to pay increases and additional employee hours to ensure the execution of the many COVID-19 preventive measures now in place across the organization. We believe these costs are necessary to ensure that we follow the health directives in place and to promote the health and safety of our employees and customers. We will provide a precise figure when we'll release Q1 results in June 2020. As for our capital allocation strategy and our financial position for full fiscal year 2020, we repurchased 7.1 million shares for a total cash consideration of $327.2 million at a weighted average share price of $46.15 per share. The Board also declared a dividend in all 4 quarters of $44.4 per common share. Dollarama's current financial position is strong. We have a solid capital structure with strong cash flows from operations and available liquidity. As at March 30, 2020, so just recent, we had approximately $490 million of cash on hand and approximately $135 million available under unsecured revolving credit facility, which was upsized on February 14, 2020, from $500 million to $800 million. This is net of principal amount of notes outstanding under the U.S. commercial paper program, which is backstopped by the revolving credit facility. Barring additional extraordinary unforeseen circumstances, we believe that cash flows from operations, together with cash on hand and credit available, will be adequate to meet our future operating needs and capital needs. So in terms of our capital allocation strategy, looking at new store openings, transformational CapEx, projects and NCIB, we are proceeding with caution in the weeks ahead until we get a firm handle on the situation. Our long-term growth plans and approach remains unchanged, but the immediate focus of the entire organization is on managing through these challenging times. With that, I will now turn the call back over to Neil.
Thank you, Michael. As Michael has emphasized, we have limited visibility on future performance. But as an essential business, we remain committed to keeping stores well stocked with affordable everyday products and offering the same compelling value proposition that has made Dollarama a household name and the weekly shopping destination for millions of Canadians. In order to do that, we also have a responsibility to promote everyone's health and safety. Let me walk you through what we are doing across the company to make that happen. Dollarama teams in stores, warehouses, the distribution center and head office are doing everything possible to meet the needs of consumers in the days, weeks and months ahead, and they are doing an amazing job. At the store level, the daily routines of our associates and field management team have changed dramatically in the last few weeks. First, we have implemented a broad range of measures in line with the directives from public health authorities to curb the spread of COVID-19, while still allowing customers to shop our stores. These include additional cleaning and disinfecting procedures with a focus on frequently touched surfaces that are done throughout the day from door handles to carts, to pin pads and checkout counters. We have reduced opening hours and added labor hours in stores to allow more time for these sanitizing procedures and for restocking. Second, we have put in place a number of measures to enforce physical distancing of 2 meters as much as possible. These include spacing out the queue line, encouraging customers to pack their own items in their own reusable bags, to pay with debit or credit cards and to control the number of people in the store at one time. To support the implementation of these measures and their execution every day, we have increased employee hours in store. This includes the addition of a full shift in each location for a dedicated safety and sanitization coordinator responsible for controlling the number of people in the store at one time and other specific cleaning tasks. We also implemented a 10% temporary pay increase effective from March 23 until July 1, for our -- all of our frontline employees in stores and in our distribution center and warehouses. We continue to evaluate the measures to be taken based on feedback from our employees and customers. We want to ensure that the precautionary actions we are taking are effective, and we continue to assess how to recognize the work our team is doing. We also need to stay abreast of requirements and recommendations in what is still a fast-changing environment, including from a best practice standpoint. Now let's look at our warehousing operations and our distribution center centralized here in the Montreal area. Our DC operations are labor-intensive and our team there is doing incredible work to promote health and safety. This ranges from restricting access to the building, health checkpoints, including taking everyone's temperature before they start their shift as well as segregation and physical distancing measures on the floor and throughout the building in what is, by nature, a dynamic work environment. Our teams have shown creativity and initiative, and have refined contingency plans in light of the specific challenges posed by COVID-19 to ensure that our operations can keep running under various scenarios. Our new work processes now in place for a few weeks are working well and also continue to evolve. Despite these additional measures, the flow of goods to our stores is keeping pace and reaching required levels with the support of our strong logistics network and distribution capabilities. Upstream in our supply chain, the situation has also stabilized. After halting production for a number of weeks in February due to COVID-19, our overseas suppliers have steadily come back online and continue to ramp up production week-after-week. We are working with them to prioritize goods to be shipped given the exceptional situation. The important thing is that we don't foresee any material supply chain issues from a direct sourcing standpoint when it comes to the vast majority of products sourced from China, and we are effectively back to business as usual in terms of volumes. A number of products, namely consumables, have been selling more quickly than usual across our store network. Also a situation that is by no means unique to Dollarama. The large majority of such goods are sourced domestically from U.S. and Canadian suppliers. Our teams are working hard to maintain the flow of goods for these product categories such as hand sanitizer and antibacterial wipes, which continue to face exceptional demand levels. We are working through this with our vendor partners and are confident that we will be able to offer our assortment for the foreseeable future. As you can see, the focus across the organization is on maintaining a robust supply chain and on serving customers in unprecedented circumstances, and we are making the investments required to promote the health and safety of our employees and customers. I want to take a moment to recognize and thank all of our employees, especially our store associates and field management team, our D.C., warehouses and logistics folks for their incredible efforts and dedication to helping Canadians through these difficult times. As I said at the beginning of this call, we are living through an unprecedented situation. It is affecting our customers and our employees. We are working hard to keep stores open, well-stocked and sanitized to meet their needs. We continue to evaluate measures we can take to support our employees in the short and in the long term. I am confident in our ability as Canadians to get through these current challenges together. With that, I will now turn it over to the operator.
[Operator Instructions] The first question is from Irene Nattel with RBC Capital Markets.
I really, really want to thank you guys for the incremental disclosure. It's very, very helpful. Lots of questions. I'll try and ask a couple and then pass it on. I guess the first question is, as we think about the assortment inside the store, I would -- clearly, there are certain categories that are growing rapidly and others that I assume have fallen rapidly. How quickly can you adjust or accordion what you actually have on the shelves to meet this shift in demand?
It's an excellent question. I think it's less about the accordion at the moment because the items that you would accordion, let's say, larger or give more space to are the items that all the retailers and the manufacturers can't keep up with regardless. So the antibacterial gels, the antibacterial wipes, those type of items we are getting as much or more than anyone, but the demand is just off the charts. So to grow the section would be, honestly, not very useful because it's really more a question of supply keeping up with the demand and the manufacturers that create those products are all over their heads around the world because many of them are multinational companies. And so I think as much as we'd like to say that we could turn our store into an antibacterial wipe and antibacterial gel store in a minute, it wouldn't be of any use if we couldn't get the goods. So the goods are flowing. Every week, we send those goods in multiple items in both of those categories, for example, to our stores, and even at that, the market is having a very hard time keeping up. So it's a tough question because it's not the norm as far as how we would answer the question.
Okay. Fair enough. And then I guess the corollary question, Neil, is, I think it's fair to assume that seasonal and think like party are way down. You just sort of accumulate that inventory and hold over for better days. Is that how you deal with that?
That's basically how it's being handled. I mean we are able to reduce our commodities for Halloween a little. But the truth is, Halloween orders were in long ago and the production has already begun. And whatever we ask our vendors will simply hurt them as much as it would hurt anyone to have an order that's already been given and canceled, and that's just not the way we handle our business. So most likely, we will take the vast majority of our goods since we are still really in the dark on how Halloween or Christmas would play out at this point in time. And if they play out much as it would be today, then we will warehouse those goods. And thankfully, we're not talking about goods that have a shelf life. In the case of chocolates and candy, those orders tend to be placed later in the calendar year. So we still have time to adjust the consumable stuff that has a shelf life. So that's very helpful.
That's great. And then just moving on to sort of what's actually happening in the stores. I guess Michael provided the color of the difference between the mall stores. Would it not just make sense to close a lot of those stores? Or would you -- can you envision a scenario whereby you do close certain types of stores and keep others open?
Yes. We are considered an essential service, of course, and therefore, we must do our part to keep stores open where it's feasible, and that's always our first priority.
Okay. And then just from a capital allocation perspective. So I guess, Michael, you noted that NCIB, CapEx, new store openings, it kind of seems how a lot of that was on hold for right now. Could you please clarify?
Right. Well, first of all, in terms of CapEx, we do have some initiatives ongoing. If -- however, they're associated to projects that could put employees into danger, expose them more, those are some that we would hold back on. NCIB, we're currently in the blackout period. Once we come out of the blackout period, we'll reevaluate whether or not we should be buying back shares, most likely not until the situation gets better. So that's what we're -- we mean by managing it more closely.
And presumably also new store openings will not happen in the near term or are you obligated to open new stores where you signed leases?
If we're -- if -- there are some that are opening, continue to be opening, others not. You get all sorts of constraints, either permits not obtaining -- not able to obtain permits or situations...
Our current reasoning behind opening or not opening is, more specifically, we are trying to open stores in areas that are underserved from a retail perspective and where there's really no Dollarama anywhere in the region. In regions that have multiple Dollaramas within several kilometers, we're holding off on the bulk of those openings. And the only time we would continue with one of those openings is if all the stores in the area are fully staffed, have no absentee issues, and it would have no impact on our current business. And put none of our employees at risk because everybody, as you understand, is already taxed at the present time.
The next question is from Mark Petrie with CIBC.
Now just following up with regards to the supply chain that you already talked about. Can you just -- so you do not expect any material issue with regards to disruptions from China? Is that right?
We are currently shipping at the exact same pace as last year.
Okay. And I guess, a couple of things that you've talked about more broadly in terms of initiatives, increasing SKUs in-store and also reducing in-store safety stock related to sort of improvements in your -- efficiency improvements in your supply chain, how does the current environment affect those initiatives?
Honestly, I don't think it really affects it per se, but for the handful of items that even if we hadn't had done that, whether you had an extra 30 pieces of one of those items that are blowing out at hundreds and hundreds a day, I don't think truthfully, statistically, it would have been impactful. The question of rotating our goods that are high demand goods and getting them on different cycles on accelerated cycles is something we've been doing for several years. And every year, we continue to work on it. Because it's never as good as we want it to be, of course. But we continue to work on it. And it's situations like this that really put our logistics and flowability to the test. And so far, I'm very satisfied with how quickly we are getting to market on the goods that are beyond the normal call of quantities or replenishment. And so far, so good, I would say.
Okay. And with regards to labor, have you had any issues in terms of absenteeism or labor availability? Obviously, there's a lot in flux in the market. But just curious if you had any issues to this point and how you're sort of navigating that or what you expect.
Yes, we've had absenteeism. We've had more in some areas, less in other areas for no specific reasons. It's all about each person's comfort, and we support our employees and their decisions. And have made it very clear that they should do what they're most comfortable with, and they're under no pressure. And if they did want to go home, that, of course, their employment would be waiting for them when they were comfortable again. So that's been the first and foremost message that's been put out there. And thankfully, we've been able to continue to operate efficiently, and we have enough staff that have sort of taken the call of duty to make sure that they help us, like the people and the balance of the business that are constantly trying to make sure that as an essential service provider, we are there for our customers across Canada.
Okay. And I guess, just the last question, for stores that have been closed or seen those sort of material hits to traffic, have you had preliminary conversations with landlords on how to sort of handle those situations?
Yes. So we -- obviously, we are in contact, but now these are things that we don't talk about publicly.
The next question is from Vishal Shreedhar with National Bank.
I know it's still in flux, but I was hoping, is there any range or any help you can give us with the CapEx number and the store openings per year? Is it just too difficult to narrow at this point?
No, it's too difficult to narrow at this point, really. So -- and all caused by this situation. So you know what our normal -- you've been used to our normal trends. And so -- but obviously, this year, with what we just mentioned, it becomes hard to forecast. But as we move on, Q1, we'll have more information, and maybe then we'll be able to give you a bit more color.
Okay. And I think it's already clear, but many of your colleagues and peer companies are announcing new efficiency initiatives, perhaps headcount reductions, is that in the cards for Dollarama?
Not at the moment, certainly not. In fact, we are hiring. So quite the opposite. And I don't expect that to change unless there's a change in governmental decisions or governmental body decisions for retailers across Canada who are in our position.
Okay. I know it's a really small business, but maybe your thoughts on online and what you're seeing there?
Well, the online business is doing well. But again, it's completely insignificant compared to our physical store base. The sales are up. But once again, what people want are the things that no store can keep in their stores either. So some of our sales are up for craft items, which is fantastic because I have craft items to sell. But when it comes to things that are being driven by the specific needs of the public at the moment, we have been consciously directing all of our goods to our bricks-and-mortar operations. So when I'm able to buy an extra 250,000 hand sanitizer bottles, for example, which I did last week, I won't allocate any of them to online sales, even if I could sell all of them online in a day, simply because I feel that our -- the reason we are considered an essential service by the government of Canada is because we have the goods that people need at store level in stores. And so we've directed all those goods to our stores.
And Vishal, it's Michael. Just to come back a bit to your question on labor. Just want to mention to everyone that from a G&A perspective, we were not expecting this year, at the beginning of the year, any significant changes in our -- in our ratios from year-to-year. So we were expecting the normal inflation and we, as you all know, have initiatives in stores to offset some of the -- that inflationary cost. However, again, because of the current situation, as Neil mentioned, incurring additional labor costs related to pay increases, additional employee hours to ensure the execution of the many COVID-19 preventive measures, and these costs are necessary to ensure that we follow the health directives in place and to promote the health and safety of our employees and customers. But again, we will be providing precise figures on this in Q1 when we release the Q1 results. So you'll able -- you will all be able to carve it out and understand the exact impact of it.
The next question is from Peter Sklar with BMO Capital Markets.
Michael, in your commentary, you -- throughout the couple of percentages, the 50% and the 75%. I just want to make sure -- could you go through that again? I just want to make sure I understand what those percentages represent.
Okay. You mean in the script initially?
Yes. You talked about the malls, the stores in the malls, et cetera.
Yes. Okay. So right, the -- so we've got approximately 300-mall stores in Canada, 54 of those malls are closed. And for all the 300-ish mall stores that we have, more than 50% of the traffic is down. So it's a significant decrease. The 75 -- so in other words, the mall store account for 25% of the chain and the other 75% of the chain are the other stores. And these other stores are not experiencing the more than 50% decrease in traffic. So it's not as drastic. They are experiencing some decline due to the facts we mentioned to you. And we're seeing this more and more as the initiatives by the government of tightening movement of people and are impacting the traffic of those cells. In other words, the strip and the stand-alone stores.
I'd also like to highlight the fact that almost all of those mall store closures are in Québec, where the government has mandated the closure of malls, unlike the balance of Canada.
Neil, you're talking about the bulk of the 54.
Correct.
Yes.
Okay. And then, Michael, one thing you said confused me. So you said as a result, the comp will be negative in the first fiscal quarter. But the stores that are being closed, they will be excluded from the comp calculation, won't they?
Okay. So one -- first of all, I mentioned that would be negative, not for the -- not necessarily for the quarter, I said, for the balance of the quarter, which is basically April.
Okay. And then my question is, how are you treating the stores that are closed in Québec in terms of the comp calculation? Like are they taken out of the comp for just the close period or the full quarter or how you're seeing them?
Yes. Well, we'll disclose that to you in Q1. So if it's -- if we leave it in or if we carve it out, we'll be very clear on that.
Okay. The other thing, can -- I believe Easter is April 12 this year. Neil, can you talk a little bit about, like, typically, which weeks leading into April 12 are the Easter selling season or the Easter selling weeks? And can you talk about how that is shaping up? I would assume that Easter is way down year-over-year. Can you provide any commentary?
So generally, it's around now. I'm not going to give you much more specificity. And generally, you're right, it's down, substantially down. People aren't thinking about eggs right now.
Yes. Okay. And then lastly, Michael, can you make any commentary regarding the dividend? Like I assume that it's the company's intention to maintain the dividend, barring something dramatic happening. But what about -- what's your attitude towards the typical dividend increases?
Well, it's exactly what you said. So we're not increasing our dividend. We're maintaining it until further notice. We don't have a dividend policy, it's Board to Board. And so if things were to change drastically, we'd obviously reconsider. But for the moment, it's steady as she goes.
The next person -- the next question is from Patricia Baker with Scotiabank.
Actually, I had a number of questions. They've all been asked and answered. But I just wanted to get one simple clarification on Peter's first question. The 50% down traffic in the -- in those mall stores, is that -- are you talking about the period there? Is that quarter-to-date? I just want to know the duration.
No. So that would be 6 -- so the -- it's -- yes, from last week...
Yes. Last week.
It was down -- yes, we started to see it last week. Yes.
Okay. So approximately 50% decline in traffic for just a week so far. Yes.
Yes. Since the...
Since last week. Fair enough. Okay, good. I'm glad I asked because I thought it might have been quarter to date. And thank you so much for all the incremental information and good luck.
The next question is from Brian Morrison with TD Securities.
Yes. I echo everyone's thoughts and appreciation for keeping the economy moving forward in a responsible manner here. Michael, quick question on the untapped revolver at year-end. I know you said you have $135 million of liquidity. It got increased to $800 million. Can you just clarify how it went from untapped to $700 million currently? Is that $400 million of cash pulled forward on the balance sheet and the maturation of the floating rate note?
So it's cash on the balance sheet for precautionary measures. So we pulled on to the revolver.
Okay. So -- okay. And then in terms of -- this is early days, I realized it, but I'm just looking at your hedge position, and it looks like you've got U.S. dollar hedged about 6 months forward. Just wondering, as the U.S. dollar -- or pardon me, as the CAD is significantly depreciated, as you look towards the back half of the year, how -- what are your early thoughts on mitigating that?
Yes. So as you know, our hedging policy has always been to allow us to factor the cost of the currency into our pricing. And so we've been hedged -- it's a bit more than 6. Typically, it's 8 to 12 months that we're hedged out. So it's more than 6. And so, yes, we are hedged out. And so any commitment is always taken with that hedged amount in mind.
So the question is, will there be inflation when we get to January of next year?
So yes, so maybe I can take that one. We are doing our best to not raise prices on anything at the moment, obviously, with the increased sensitivity on all sides. That being said, obviously, when our dollar goes from $1.32 to $1.47-ish, it's pretty serious and will have an impact. And also when some raw material costs, like the cost of ethyl alcohol, one of the main ingredients in antibacterial gels, went up 10%, 15% in the last week. All of these things will have an impact at retail at some point in the future. We will do our best to push it off as long as we can. But depending on how long it stays at those rates for, then obviously, at some point, it will get passed on. But for the moment, we have 0 plans to increase costs to our customers. But again, that really is a function of the cost coming to us.
The next question is from Chris Li with Desjardins Securities.
Sorry to ask you this again because I imagine we'll get some questions after the call, but just want to confirm again the comment you made about the mall. So I want to make sure, I heard you right. So about 25% of your stores are mall-based. Of those that are remaining open, they're experiencing on average about 50% decline in foot traffic since last week.
Yes. Yes, that's all good.
And the 50% is compared to what you guys were experiencing a year ago.
Yes.
Perfect. Okay. And another one, I just want to confirm, Michael, you mentioned in one of your questions. Before COVID have happened, was the view on SG&A rate for the year was going to be largely flat?
Right.
Did I hear that right? Okay.
Yes.
Perfect. Okay. And then just on Dollar City. Can you maybe just remind me what are the terms of purchasing the remaining 49.9% stake that you do not already own? Is it based on a fixed valuation multiple?
Right. So first of all, there's no more call options. There are only put options, and the put option period can only start in 3 years from the anniversary from August 14. And it's at fair market value.
Okay. So it's not based on anything prenegotiated before.
No. No.
Okay. And then maybe, Neil, just looking at sort of past economic downturns, how do your general merchandise category perform? I mean I think that on one hand, is that your lower price point will definitely be a very strong selling point in this environment. But on the other hand, since some of your products are more discretionary in nature, one will expect you'll see a bit of an impact on volume. So maybe can you give us some colors on how that performance went or is going?
Well, I think it's going exactly as you said. You said it perfectly, which is, at the moment, people aren't really thinking so much discretionary. And at the moment, our business is open not because of discretionary. It's open because we're an essential service provider. And so truthfully, if it impacts our sales, which it will, no doubt, compared to a food store, for example, that's okay because the reason we're being kept open is to provide that service and less about the Easter egg or the garden fence. Although, I'm thinking when the summer comes, if a lot of people are staying home, those garden fences might come in handy.
Perfect. And then my last question is more of a high-level question. I know you cannot give any numbers right now. But if I take a high-level look on your gross margin for the next 12 months, can you walk us through some of the major factors that will impact your gross margin either positively or negatively over the next 12 months? I know you mentioned a little bit about raw material costs already, but do you think -- maybe just to elaborate on some of the other factors. That will be much appreciated.
Okay. So let me -- I will do that. And just step back a bit also because we're talking about our short-term situations, but the fundamentals have not changed. The long-term fundamentals are intact at Dollarama. Just so we're all clear. Now we're living a short term, hopefully very short term, a short-term as possible situation. And so coming into the year, last year, we experienced 120 bps decline in gross margin. Three main reasons. Mix change, which was not necessarily a negative. The margin percentage went down, but the margin dollars went up. Then there was low inflation, so reduced the number of markups, which was a negative. And the onetime logistics cost impact. So -- which is no longer a negative this year. So and all of this, this balanced approach allowed us to maintain our compelling value and stimulate more traffic sales and unit sales throughout the whole year and into fiscal '21 as we mentioned earlier. Now we were not expecting significant changes in gross margin percentage this year from where we ended up at the end of fiscal '20. We don't have a onetime effect of DC. IMO 2020 finally is not as significant as we thought. The inflation level was expected to remain constant from year-to-year. And the mix change was not as high, although, it was a positive, was not as high as last year. So that's coming into the year. Now this -- what this situation is creating is that we are experiencing significant mix change, as Neil mentioned earlier. So again, more consumable sales. So that's pushing the percentage margin down. And there's the negative scaling impact that's impacting also the margin and other costs that are related to additional logistics costs due to the increase in frequency of distribution of certain products and so on and so forth. So all of this is impacting negatively the margin, but this is clearly related to the situation that we're going through right now. After all of this and hopefully, everything will come back more to normal. But -- so that's the color on gross margin.
The next question is from Karen Short with Barclays.
Obviously, you've given as much color as possible on, I guess, the last week. But I'm actually just wondering for the week ending the 29th, would you just be able to give us a comp in Canada? Because it does sound like that will get worse before it gets better, who knows how long it lasts, being worse. But if you could just give us a number that would be helpful.
Yes. We've decided not to disclose it. We've debated that and decided not to disclose it for the time being. We prefer giving you the information that we have right now. And clearly, again, all of this has nothing to do with the business model, it has nothing to do with competition. It has all to do with COVID-17. Otherwise going into -- 19, sorry.Otherwise, like I said, coming into the year and starting the year, everything was -- the momentum was what we were -- we disclosed today, but otherwise, where -- we will disclose more information in Q1.
Okay. And then I guess, just wondering with respect to the mix shift between, I guess, consumables and discretionary. Can you -- obviously, there is a margin differential, we all know that. But is the margin in the essential/consumables in line with historical? Or is that actually currently even being squeezed a little bit more, given cost of goods is probably a little bit higher?
It's in line. I expect that to go up a bit from our cost perspective in the next week or 2 or 3 or 4, but I don't expect it to transfer into our retail for -- hopefully, not at all. But for the moment, we have no plans to change the retail. But to date, it's historical.
Okay. But it may get squeezed a little bit more...
Well, just as the raw materials get more expensive to our manufacturers.
Right. And then I guess the last question I want to ask is, obviously, you are -- as you pointed out, you are essential and you're doing a great service to everyone in Canada. I actually was wondering, if you had some learnings from '08, '09 that you could point to in terms of how you -- we kind of emerge from this or surface or whatever the word might be. But also, any color on what kind of stickiness you had with customers in kind of the '08, '09 period you saw with fresh eyes. Any color there would be helpful?
Truthfully, I don't think -- we're all looking at each other, and I don't think anything comes to mind. Obviously, when we come out of this, a lot of people will have been hurt financially, which is horrible and I think unavoidable for the safety of -- and the greater good of all Canadians. But we will do our best to keep that in mind when we come out of this thing and make sure that we try to do what we've always done, which is really our hedge on debt and that is to provide the best relative value for the items that we can sell from $1 to $4.
The next question is from Derek Dley with Canaccord Genuity.
Just a quick one. Just wanted to follow up on the gross margin discussion. We've obviously seen a big reduction here in fuel costs over the last month. I'm just wondering how quickly that can flow through your COGS line.
Yes. So there are fuel cost changes, but the challenges faced by our truckers and trucking companies with potentially some of their staff going down either through absenteeism or through actually getting sick or what have you, is offsetting some of those fuel costs for the moment. And of course, when Asia went down at the beginning, a lot of boats were not sailing, et cetera. So overall, we're not really seeing any advantage from a cost perspective for transportation per se, but I do think over the long term, if the cost of oil stays down, it could be helpful. And I hope it will be helpful.
The next question is from Neil Linsdell with Industrial Alliance.
Just talking about your labor requirements and the number of people you have to hire to keep up with all the demand. Are you able to retask some of the employees from the closed stores to alleviate that? And in the stores, have the actual staffing levels changed or you're just retasking what they're doing?
So I'll answer both questions. The levels have changed and we've added labor hours to all stores that are open. And as far as transferring employees from stores that are closed, that is something that our field management team has put a ton of effort into and whoever is willing to transfer has been transferred and will continue to be transferred because our goal is to keep as many of them working as possible. In some regions, of course, it's simply not possible because if your store is off by itself, let's say, 100 kilometers from the next door, it's not practical to go with that concept. But as a whole, we are doing everything we can to transfer employees from stores that go down for any reason as long as they follow all the health and safety protocols that we need to follow.
Right. And in your distribution center, usually, I mean, that's an incredible beehive of activity. Can you go to 24/7 to help space out some of the people more or you're already at that type of capacity?
We're still running our 2 shifts and the building has been split into -- physically into different parts. We have other buildings that are capable of taking on the job should we physically have to divide the building into different buildings, more than just in half. We've segregated our workforces how they come in, when they come in. They all have protocols to follow to watch their machinery before they go to work. Physical distancing, everything we can do to mitigate anybody getting unhealthy, first and foremost. And then obviously, any effect that they have on the business doesn't help anyone either. So it is really our first priority that, that whole distribution idea and piece of our business is extraordinarily important. And so that is where the bulk of our efforts have gone to ensure that we can do the best we can to make sure we have alternate plans should something happen.
Okay. So bottom line is you've had no loss of your capacity to service your stores and you could probably even do more if you went, say, 7/24 to space in...
So far, that is the case. But as we all know, we don't know what tomorrow holds, but we are trying to think about everything we can do to make sure that if tomorrow holds greater challenges, we're ready for them.
Okay. And then just on a broader, I think, supply chain you source from 25 different countries. Any thoughts on further diversifying your reliance on China specifically or taking more products from North America, especially after this is over to build resiliency?
So the concept is nice and has always been nice, but the reality is in order to be -- the best relative cost in the market, we need to be the best relative sourcer globally. And if items were less expensive in other countries, we would theoretically already be sourcing them from those countries. So barring -- paying more to reduce the risk, which is a decision we've made in the past on some items. And as a decision, we may continue to make on others, but I think the bulk of the discussion, we need to be realistic about supplies and where they can come from around the world at the cost that we need to sell them for.
Due to time restrictions, this will conclude the question-and-answer session as well as the conference call for today. Please disconnect your lines at this time, and we thank you all for your participation.