Intense competition will force Dollarama to raise prices slowly due to loonie

MONTREAL – Dollarama says intense retail competition in Canada will prevent the discount chain from quickly boosting prices to compensate for the loonie’s rapid depreciation.

“We’re just not going to pass on this approximately 10 per cent increase in foreign exchange to our customers that quickly,” chairman and CEO Larry Rossy said Wednesday during a conference call about Dollarama’s fourth quarter and 2013 results.

“It will be done diligently and thoughtfully to respect the competitive environment that we’re in,” Rossy told analysts.

The Montreal-based company’s profits grew by 7.6 per cent to $83 million in the fourth quarter, despite one week less business than the prior year.

Instead of an across-the-board price increase, the chain is evaluating each of the thousands of products it sells in its 874 stores across Canada.

Rossy said the competitive environment is tougher and the company’s success has made it a target.

Although it is the largest dollar chain in Canada, offering prices up to $3, Dollarama (TSX:DOL) also faces stiff competition from large U.S. retailers like Wal-Mart and Target that offer low-priced items.

“You have the major retailers giving extremely good values particularly in seasonal merchandise and we have to be on our toes and be very, very competitive, more so than five years ago,” Rossy said.

Chief financial officer Michael Ross said while the currency deterioration isn’t good news, it is manageable. Dollarama has currency hedges that provide it at least six months of protection from changes to the Canadian dollar.

He said the company will absorb some of the currency hit by keeping gross margins within a range of 36 to 37 per cent to ensure it offers value, protects sales and even stimulates the top line.

Dollarama shares set a record high Wednesday after the company’s latest quarterly profit beat expectations and it announced a 14-per-cent boost to its quarterly dividend to 16 cents per share starting in May.

The company’s stocks briefly hit an intraday high of $94.25, above the previous record $90.74 set last November, before giving up some of the gains. The stock was still up $6.87, or eight per cent, at $92.65 in early afternoon trading on the TSX.

Dollarama said it earned $1.17 per diluted share for the 13-week period ended Feb. 2. That compared with $1.04 per share or $77.1 million for 14 weeks in the prior year.

Sales for the quarter were $582.2 million, up 3.6 per cent from $561.8 million last year. Sales increased by 9.9 per cent when adjusting for the extra week of business last year that contributed $32.1 million of total sales.

Sixty-one per cent of Dollarama’s sales came from products over $1, up from 56 per cent a year earlier.

Dollarama was expected to earn $1.09 per share of net income or $1.10 per share of adjusted earnings on $575.8 million in revenues during the quarter, according to analysts polled by Thomson Reuters.

The increase in sales was driven by an 11.3 per cent growth in the total number of stores with the addition of 89 location over the year, including 27 in the quarter, and a 1.1 per cent increase in same-store sales on a 13-week basis — a key retail measure for sales in stores open at least a year. The company plans to open 70 to 80 net new stores this year, mostly in Ontario and Western Canada.

The increased same-store sales was helped by a 4.4 per cent increase in average transaction size, partially offset by a 3.1 per cent decrease in the number of transactions because of weather disruptions that reduced store traffic.

The quarter spanned the important holiday shopping period when many Canadian retailers coped with especially bad weather before Christmas and early in the new year. In January, Dollarama said that its December sales fell significantly due to the temporary closures affecting nearly 10 per cent of the chain, but said customer traffic returned to normal levels in January.

“Unfortunately circumstances beyond our control, such as severe weather conditions, had an unfavourable impact on our sales this winter, with a particularly adverse impact on traffic at store level in the important two weeks leading up to Christmas,” Rossy said.

For fiscal 2013, Dollarama’s annual sales surpassed $2 billion, rising nearly 14 per cent from $1.86 billion in the previous year when it benefited from an extra week of business. Net earnings for the year were $250.1 million, or $3.47 per diluted share, compared with $221 million, or $2.94 per diluted share in 2012.

Irene Nattel of RBC Capital Markets raised her target price by two per cent to $103 after Dollarama posted another “solid quarter.”

“Dollarama’s ability to deliver 10 per cent EPS growth despite weather disruptions in the fourth quarter underscore the strength of the business model,” she wrote in a report.

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