Gardeners, grillers fuel Dollarama sales surge in Q2, but Halloween an X factor

Gardeners, grillers fuel Dollarama sales surge in Q2, but Halloween an X factor
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MONTREAL — Dollarama Inc. enjoyed a seven per cent sales boost and flat profits in its second quarter as Canadians loaded up on seasonal items for home and patio during the pandemic’s summer months — but a potential shift in Halloween buying habits has executives spooked.

“Our sales mix reflects the fact that our customers are spending more time at home — think more gardening, more barbecue, things of that nature,” CEO Neil Rossy said on a conference call with analysts Wednesday.

While purchases of impulse items such as candy and chewing gum dropped off, the spike in summer products like pool toys meant higher margins, he said.

Limited vacation options due to ongoing travel restrictions in the height of summer meant Canadians turned inward, and even indoors, to fill their days. “Cleaning up the backyard and redoing the living room have all been impactful for Dollarama,” Rossy said, noting a run on cleaning products that has left it sold out of Lysol wipes.

How consumers will handle Halloween and Christmas remains a major X-factor for the second half of the year, however.

Typically, Halloween is “a strong weight” anchoring third-quarter sales for Dollarama — a go-to source of costumes and candy — while the winter holidays make the fourth quarter its “biggest season,” said chief financial officer Michael Ross.

“We believe it will have a negative impact, but to what extent we don’t know,” he said of the pandemic. “And the same for Q4 but for Christmas.”

“We’re all guessing,” Rossy added. “This is a debate about whether society is fearful or aggressive to have fun at this point in time, and none of us have the answer to that.

Dollarama started the quarter with 104 of its more than 1,300 stores temporarily closed — mainly in Quebec malls — due to provincial health measures, while the vast majority of the others operated under reduced hours. By June 19, all stores had reopened on top of 13 new locations, with only six per cent now running at reduced hours.

Meanwhile the average purchase amount ballooned by 42 per cent, mitigated by a 26 per cent drop in the number of transactions.

“Customers continue to consolidate their trips, but they leave the stores with larger baskets,” Rossy said.

The coronavirus incurred incremental costs of $32.4 million last quarter due to additional health measures and a temporary wage increase, which ended in early August after being extended for a month and a half beyond the expected date.

Employees received a 10 per cent pay increase beginning in late March while warehouse workers saw a $3 raise on an income that typically starts near minimum wage, which in Quebec is $13.10. The so-called pandemic pay program applicable to most of Dollarama’s 20,000-plus workers cost it about $11 million last quarter, leaving it with profits of $142.5 million.

The Montreal-based company has faced criticism from advocacy groups and workers who are demanding higher wages and better working conditions after the retailer spiked the pay hike.

Rossy rejected the notion of discontent in the ranks.

“The morale in the field is excellent and the hiring status is excellent. We’re very happy with that situation, and our employees seem to be very, very comfortable, at ease with how we’ve handled the situation to date,” he said.

Dollarama and several other retailers launched their pandemic pay programs as COVID-19 began to spread throughout Canada, triggering unprecedented working conditions amid a shopping frenzy that left some store shelves bare as companies scrambled to restock products.

Dollarama’s allure persists despite low-price rivals like Walmart and Costco and the rise of e-commerce, said analyst Brian Yarbrough of Edward Jones.

“They can go in markets that are much, much smaller than what a Walmart needs…to open one of these massive supercentres,” Yarbrough said.

Proximity and shopping efficiency are another advantage. “It’s the convenience — in and out.

“Online continues to gain steam, but I still think there’s a large part of the population that likes to go out, likes to look for these deals. Kind of that treasure hunt mentality,” he said.

Dollarama topped expectations as it reported a second-quarter profit of 46 cents per diluted share for the quarter ended Aug. 2 compared with a profit of $143.2 million or 45 cents per diluted share in the same quarter a year earlier when it had more shares outstanding.

Sales in the quarter climbed to $1.01 billion from $946 million a year ago.

“Compared to the roller coaster we experienced in Q1 with the shift from panic buying to full lockdown, the situation stabilized on several fronts during Q2. We saw a steady improvement in customer traffic throughout the quarter,” Rossy said.

Analysts on average had expected a profit of 42 cents per share and $975.7 million in revenue, according to financial markets data firm Refinitiv.

Comparable store sales excluding temporarily closed stores grew 5.4 per cent, while comparable store sales including temporarily closed stores rose 2.5 per cent.

This report by The Canadian Press was first published Sept. 2, 2020.

Companies in this story: (TSX:DOL)

Christopher Reynolds, The Canadian Press

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