Dollarama costs rising with higher wages, duties and lower Canadian dollar

MONTREAL – Dollarama is facing rising costs including higher minimum wages, new duties on imports and the inflationary impact of a lower Canadian dollar.

“We’re hearing about even price increases on incoming inbound freight from the Orient,” CEO Larry Rossy said Thursday during a conference call to discuss third-quarter results.

The Montreal-based retailer said labour costs are rising as five provinces — Alberta, Ontario, Quebec, Nova Scotia and Saskatchewan — have increased minimum wages by an average of 2.5 per cent and a lower loonie is driving the cost of imports that fill its store shelves higher. New Brunswick is set to hike its minimum wage on Dec. 31, followed by Newfoundland and Labrador in 2015.

Costs are also expected to rise when tariffs increase by three per cent on many imported products from China and other countries starting in January.

Dollarama said it plans to offset the higher costs by improving its efficiency rather than cut jobs.

“You have to appreciate that the dollar store business is a labour-intensive business,” Rossy told analysts.

Despite the challenges, the discount retailer beat expectations as its profits surged on improved same-store sales.

Dollarama (TSX:DOL) earned $73 million or 55 cents per diluted share for the three months ended Nov. 2. That compared to $61.7 million or 43 cents per share a year earlier.

Sales increased 12 per cent to $588 million as it benefited from 81 net new stores in the past year and a 5.9 per cent increase in comparable store sales as shoppers bought more higher priced items.

Analysts expected it would earn 54 cents per share on $591.6 million of revenues, according the Thomson Reuters.

The company said there was a 4.8 per cent increase in the average transaction size and a 1.1 per cent increase in the number of transactions. Items priced over $1 accounted for 69 per cent of sales, up from 62 per cent a year ago.

Dollarama opened 11 net new stores in this quarter, mainly in Ontario, British Columbia and Alberta. It remains on track to open 75 to 80 net new stores in its financial year.

“Our sales this quarter were fuelled also by very strong Halloween season sales, as our customers responded positively to our compelling range of Halloween products,” Rossy added.

The retailer hopes better weather this year will result in a stronger Christmas shopping season.

Analyst Irene Nattel of RBC Capital Markets said Dollarama’s ability to boost earnings per share by 28 per cent off last year’s strong results demonstrates the strength of its business model.

“The third-quarter performance underscores Dollarama’s industry-leading performance metrics,” she wrote in a report.

Nattel said Dollarama posted same-store sales growth that outpaced retail rivals Canadian Tire (TSX:CTC) at 3.2 per cent and Wal-Mart at 0.6 per cent.

Analyst Keith Howlett of Desjardins Capital Markets said the discount chain has no near-term competitive threat.

“Dollar Tree now has about 210 stores in Canada, but to date has not materially affected Dollarama’s growth trajectory,” he wrote.

Dollarama has some 928 stores across Canada. It has also partnered with discount chain Dollar City to expand it network of stores in Latin America by adding locations in El Salvador and Guatemala.

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