A Dollarama store in Toronto.Carlo Allegri/REUTERS
Dollarama Inc. shares experienced their biggest one-day decline of 2018 in heavy trading on Thursday, after the national discount retailer’s second-quarter revenue, earnings and sales growth were weaker than analysts expected and the company indicated that it has been reluctant to raise prices due to competitive pressures.
The Montreal-based company’s stock — which has outpaced the Toronto S&P/TSX composite index over the past three years but began to lose momentum against the market benchmark earlier this year — was down $9.50 or 18 per cent at $42.57 shortly after 1 p.m.
That erased all of Dollarama’s stock’s gains since they jumped up $4.32 to close at $44.91 on Sept. 7, 2017, after the company announced last year’s second-quarter results.
Dollarama Inc. announced early Thursday that it earned $141.8 million for its fiscal second quarter ended July 29, up from $131.8 million a year ago.
Despite the increased profit, the 43 cents per share of earnings was below the analyst estimate of 44 cents per share for the quarter, according to Thomson Reuters Eikon.
Additionally, sales grew to $868.5 million, up from about $812.5 million in the same quarter last year, but were about two per cent below the analyst estimate of $887.6 million.
Analyst Irene Nattel of RBC Dominion Securities acknowledged the second-quarter margin and cost improvements offset “tepid” same-store sales growth but lowered her price target for Dollarama’s stock to $52, from $55, to reflect a deceleration in Dollarama’s sales growth.
Dollarama executives told analysts in a conference call that they had decided to delay pushing through a price increase for its customers for now because the cost of its imported goods has been more stable than expected and cost reductions introduced last year have offset the impact of higher minimum wages.
“We initially expected inflationary headwinds on goods purchased in China to have a notable impact on gross margin in the second half of this year,” chief financial officer Michael Ross said.
He added that, based on its orders with Chinese suppliers, the impact should be less than anticipated “leaving the margins for the remainder of the year stronger than originally expected.”
In terms of labour costs, the company’s competitors haven’t pushed through the cost of higher minimum wages in Ontario to consumers and Dollarama decided to follow their lead, he said.
Dollarama’s decision to postpone its usual price mark-ups will probably remain intact for the rest of the year, although they can be introduced quickly if circumstances change, Ross said.
“It’s a daily decision,” chief executive Neil Rossy said. “It’s really an item by item study, as it always has been during our whole history, and that’s how we try to remain competitive across the entire store.”
Rossy acknowledged that the decision to hold off on price increases had a negative influence in same-store sales, an important metric in the retail industry, which grew 2.6 per cent in this year’s second quarter.
The same-store-sales growth compared unfavourably with the year-earlier growth of 6.1 per cent, but Rossy said that was especially strong because of souvenir sales geared to Canada’s 150th anniversary.
However, Rossy added that Dollarama was also able to improve its gross margin to 39.7 per cent of sales, from 39.6 per cent, and diluted net earnings per common share increased by 13.2 per cent to 43 cents from 38 cents last year.
Ross also pointed out that, based on experience in the first half of fiscal 2019, the company expects higher gross margin and EBITDA margin (a pretax measure of earnings) and lower percentage of revenue spent on sales and administration for the full 2019 financial year.