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Executives

Larry Rossy - Chair of the Board of Directors and Chief Executive Officer

Michael Ross - Chief Financial Officer and Secretary

Analysts

Perry Caicco - CIBC World Markets

Irene Nattel - RBC Capital Markets

Peter Sklar - BMO Capital Markets

Jim Durran - Barclays

David Hartley - Credit Suisse

Chris Li - Bank of America Merrill Lynch

Derek Dley - Canaccord Genuity

Vishal Shreedhar - National Bank Financial

Keith Howlett - Desjardins Securities

Brian Morrison - TD Securities

Dollarama Inc (OTC:DLMAF) F3Q 2014 Earnings Call December 5, 2013 10:30 AM ET

Operator

Good morning and welcome to the Dollarama Conference Call for the Third Quarter Results of Fiscal Year 2014.

Today's call will be led by Mr. Larry Rossy, Chief Executive Officer. Also, with Mr. Rossy on the phone today is, Mr. Michael Ross, Chief Financial Officer and Secretary. They will begin with a short presentation followed by a question-and-answer period opened exclusively to investors and financial analysts. For your convenience, the press release along with the quarterly financial statements and management's discussion and analysis are available on the Investor Relation section of the website at dollarama.com. They are also available on SEDAR.

Before we start, I have been asked by Dollarama to read the following message regarding forward-looking statements. I would like to remind everyone that Dollarama's remarks today may contain forward-looking statements about its current and future plans, expectations and intentions, results, levels of activity, performance, goals or achievements or any other future events or developments.

Several assumptions were made by Dollarama in preparing these forward-looking statements and many factors could cause actual results, levels of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by the forward-looking statements.

As a result, the company cannot guarantee that any forward-looking statements will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. For additional information on such assumptions and risks, please consult the cautionary statement regarding forward-looking information contained in Dollarama's MD&A dated December 05, 2013, available at www.sedar.com.

Forward-looking statements represent Dollarama's expectations as of December 05, 2013, and except as may be required by applicable Securities Laws, Dollarama has no intention and undertakes no obligation to update or revise any forward-looking statement whether as a result of new information, future events, or otherwise.

I would now like to turn the conference over to Mr. Larry. Mr. Rossy, please go ahead.

Larry Rossy

Mr. Larry is fine. Thank you, operator, and good morning, everyone. This morning, we reported our financial and operating results for the third quarter of fiscal 2014, and overall we are very pleased with the strong growth in sales and improved bottom-line results.

The increase in our third quarter sales was fueled by the continued growth in our store network and strong same-store sales of 4.8%, which now takes into consideration on a comparable basis the higher price point of $2.50 and $3 introduced at the beginning of our third quarter last year.

We are also pleased by the way our organization has adapted to the significant growth in the number of stores, new stores over the past year. Although, we operate with a lean overhead structure, we are able to support this growth as a result of the investments made in our infrastructure and process improvements over the past few years.

In terms of new stores, we have opened 86 net new stores over the past 12 months, compared to 71 net new openings in the same period last year, thereby increasing our total store count across Canada to 847 stores, compared to 761 stores at the end of Q3, last year.

During this quarter, we opened 19 net new stores. We continue to be on pace to open at least 85 net new stores this year. That's 89 new stores with four closing in fiscal 2014, with the most of the new stores located in Ontario in Western Canada, which are markets that continue to be underpenetrated with dollar stores. For fiscal 2015, we expect to open between 70 and 80 net new stores.

From a merchandising point of view, our customers continue to respond positively to our merchandise mix. Where it's seen good results from our $2.50 and $3 price points and we have expanded our selection by offering a greater variety of seasonal merchandise at these higher price points. This quarter, our Halloween season met our expectation and our Christmas season is well underway.

From an organizational point of view, we continue to actively search for a senior executive to fill the vacancy created by the departure of our COO and the search is proceeding as planned. In the meantime, the executive team has taken on additional responsibilities and the operations team continues to deliver strong results, so we will take our time needed and take the time needed to find an appropriate replacement.

I will now turn the call over to Michael. Michael?

Michael Ross

Yes. Thank you, Larry, and good morning everyone. As you saw from our press release this morning, we are reporting a strong performance in our third quarter. Our operating results reflect continuing growth in sales, earnings and earnings per share achieved mainly through continued sales growth, effective cost management and the positive impact of our share buyback program on EPS.

During the quarter, we increased our sales by 14.2% to $523 million from $458 million in Q3 last year. The increase in sale was fueled by the 11.3% increase in the number of stores compared to the prior year and the 4.8% increase in same-store sales.

As far as transactions are concerned, we are satisfied with the 1.9% increase in the number of transactions, while our average transaction size increased by 2.9%. The overall increase in same-store sales of 4.8% is over and above the strong same-store sales of 6.6% reported in the same quarter last year.

As noted by Larry, Q3 is the first quarter, where we overlapped the introduction of the $2.50 and $3 items, therefore impacting same-store sales. Despite the acceleration of our store openings that we talked about this year, the overall revenue trend remains very strong.

With regards to debit cards, which are also having an impact on the frequency of shoppers' visits, the penetration rate was 41% in our third quarter up from 38% for the same quarter period last year.

This quarter, 62% of our sales were from products priced by higher than $1 compared to 57% in the third quarter of last year. Sales of products of these higher price points have made good progress as the proportion of overall sales every quarter since we introduced the strategy more than four years ago, although products priced at $1 or less continue to represent a significant percentage of our sales.

During the quarter, our gross margin was 37.1% of sales compared to 37.2% sales in Q3 last year. The difference is explained by the 10 bps temporary cost impact associated with the sharp increase in the number of new stores. These costs are mainly related to the additional occupancy and logistics costs incurred for the starts are actually open. As we had mentioned in previous quarters, this cost impact has gradually decreased each quarter this year and should be insignificant in Q4, as the contribution associated with these new stores will eventually offset the above impact as these stores mature.

Our SG&A as a percentage of sale was 18.1% compared to 19% last year. It should be noted that the prior year SG&A included a $3.1 million expense related to payroll taxes on exercise of stock options by senior management. Excluding this expense, SG&A would have been 18.3%.

Our fundamental SG&A costs are lower as a percentage of sales due to the store productivity initiatives recently implemented which have had a positive impact on store labor costs. We remain confident unless an unexpected event should occur to achieve for this full fiscal year an SG&A ranging from 17.5% to 18%, so that range has not changed since the beginning of the year.

Now, let me give you an update with regards to our productivity initiatives. First of all, we are pleased to confirm that we have been slowly reducing the number of manual daily counts at the store level. These have been reduced by 40% and we expect to further reduce these counts over time, which will reduce the amount of hours spent manually counting inventory in the stores for replenishment purposes.

We began the rollout out of the first phase of our Kronos advanced scheduling initiatives in the first quarter and we already benefit from initial rollout of 200 stores so far this year. As stated, during the last call, we expect to have this solution implemented in all of our stores by the end of the current fiscal year. In addition, in the third quarter, we rolled out $4,500 new NCR point-of-sale terminals in all our location thereby upgrading our infrastructure in the stores to new computerized U.S. terminals that are running on the SAP retail platform. This will allow us to implement additional in-store productivity initiatives, including more efficient cash management procedures.

Moving to the bottom line, Q3 net earnings increased by 19.8% to $61.7 million compared to $51.5 million while diluted earnings per share increased by 27.9% to $0.87 per diluted share compared to $0.68 per diluted shares in the third quarter of fiscal 2013.

Cash flows from operations were $77 million in Q3 '14, compared to $65 million in Q3F13. This reflects the improvement in earnings in the quarter. We recently modified our capital structure by refinancing all outstanding debt to the issuance of notes in the amount of $400 million five-year notes. In addition to allowing us to secure long-term financing, the offering has allowed us to lock in at favorable interest rate of 3.095% for five years.

DBRS assigned a rating of BBB with stable trend on these notes. The proceeds of this are being used to pay off the existing debt which stood at $389 million at the end of this third quarter and will be used for difference for general corporate needs.

During the quarter, we also repurchased 0.7 million shares for consideration of 50 million. Since the renewal of our NCIB on June 17th of this year, we have bought back 2.2 million shares for $165 million at an average share price of $74.35 per share.

Overall, we are very pleased with the performance of the company this quarter and the progress made on our key initiatives that will support profitable growth in the future. This ends our formal remarks and we can now take questions, so operator I'll turn the call over to you.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. (Operator Instructions) Our first question is from Perry Caicco from CIBC World Markets. Please go ahead.

Perry Caicco - CIBC World Markets

Thanks. Good morning. The growth of your basket size was a little lower than usual. Is that just the lapping of the [integration] of the higher price spread last year or is there anything else that we should be considering?

Michael Ross

Hi. It's Michael. It's mainly the overlapping. In Q2, you saw 6.2 with positive transaction and a greater average basket size, but that's because we had to $2.50, $3 item comping against Q2 last year which didn't have those items, but in Q3 because of the overlap had an impact on the average basket.

The percent of items sold above $1, which is at 62% was flat to Q2, do you expect that percentage to grow from here?

Larry Rossy

Well, if you look at the trend of the past years, typically the quarter where you had seen this more significant ramp up has always been Q2, so Q2, Q3, Q4 is more or less a stable and that's because of the seasonal items. They have much more of the $1 items in those, so we don't have specific targets. We are not stating that in the future necessarily it will grow up, but I think it's reasonable to think that it can.

Perry Caicco - CIBC World Markets

You have been adding more national brands to your assortment recently. Do you think has had an impact on your same-store sales either during or after the quarter?

Michael Ross

No. One, I don't think we have been adding more national brands, but certainly that's not something that's impacting us.

Perry Caicco - CIBC World Markets

Okay. Thank you.

Operator

Thank you. The following question is from Irene Nattel from RBC Capital Markets. Please go ahead.

Irene Nattel - RBC Capital Markets

Good morning, everyone.

Michael Ross

Good morning.

Irene Nattel - RBC Capital Markets

Just continue about the evolution of the SG&A. You have got the Kronos labor scheduling going on and also the cash terminals should eliminate some non-value added tax, so as we think about moving into F'15, should we continue to see an improvement in SG&A as a percent of sales?

Michael Ross

Okay. Irene, it's Michael. Just to give you a bit of color as to how SG&A works, right now since the beginning of the year, if we carve out the store acceleration impact, productivity at store level has increased steadily. Then you had the impact of store acceleration more towards the beginning of this year and which will disappear towards the end of this year.

Also, where we've been introducing for deploying the cash register in all our stores, so obviously the implementation of that on the overhead which is the other part of the G&A has had an impact of increasing the cost, so that's why seen a bit of choppiness in the G&A.

Moving forward, Let's first talk about F'14. As we stated earlier, we still are sticking to what we said initially at the beginning of the year as we think that G&A will continue to improve in Q4 and therefore bring us on a yearly basis to our cost to sales ratio of between 17.5 and 18.

I think it's reasonable to think that G&A, we are doing, putting all the efforts to, one, offset the headwinds for F'15 to at least protect G&A at the level we are going to be landing at the end of the year and depending on the headwind there, we will see if we can improvement it further, but certainly we have initiatives underway whether it's through the Kronos Phase I labor scheduling initiative, the reduction of inventory counts, cash management of the register, so all of those are initiative to offset any future headwinds and we also at the end of the year the color we give do for next year, but that's kind of what we can say for now.

Irene Nattel - RBC Capital Markets

That's great. Another question if I could. I think that this Halloween season was the first time that you used historical scanned data to really with the flow of the timing of the flow of different products into the stores. Could you talk a little bit about the impact that had on overall sales of Halloween and what you may be doing in the Christmas, please?

Larry Rossy

Irene, if I understand your question, it's Larry, for Halloween, we got better flows into the stores, which actually didn't mean much from the way we calculate what each store should have. That's going to happen next year. What it is, it saved us some labor in our warehouses. Last year, we were renting space in warehouses and we worked on a more just in time system to receive our Halloween merchandise, so we had some labor savings as a result of our initiatives this year.

Now, as a result of the POS information that we are starting to get, it's helping us order I would say and this is all new to me too. We are not longer manually creating our orders for the [orient] store by store and that the very manual process that we always went through for all seasons. The computer now is fueling us suggested orders based on POS information relating to let's say an item sold out at the beginning of September and it's calculating how many sales we missed on that item from September through the end of October when Halloween came in, so that's happening for all of the seasons and that should help us with our carryover on seasons I am expecting our carryovers to go down.

I am expecting I would like to see our sales go up, because it's filling in spaces that we never understood in the past by spacing, the loss of sales, so this again is in the experimental stage and evaluating order-by-order as it goes out and either feeling comfortable or uncomfortable with the suggestions that are being made by the computer, but generally speaking am happy with what I see and I expect that will have less carryover as a result that will have been better management of our selection in each store as they require next year. What all this will mean, wait-and-see. I don't want to make predictions on this, but it's kind of exciting after doing this manually for 20 odd years.

Irene Nattel - RBC Capital Markets

That it is. Just one final question if I may. Can you make any comment on early Christmas demand and how things are going this year so far in Q4?

Larry Rossy

Well, from my perspective, I am happy. I don't follow these numbers on the on a day-to-day or week-to-week basis and you are affected by, whether you are affected by this weak business that we have? You mean? Michael will make comment on this, but generally speaking I am happy if that means anything to you.

Michael Ross

Yes. I think things are going according to plan. We know last year in Q4, we had a strong November and December. The weather impact was mostly in January, so we are monitoring November and December closely, because those were strong months last year, but to-date, I think the best we can say is we are on track.

Irene Nattel - RBC Capital Markets

Thank you.

Operator

Thank you. The following question is from Peter Sklar from BMO Capital Markets. Please go ahead.

Peter Sklar - BMO Capital Markets

Thanks. Michael, on this guidance you have been giving. First of all on the G&A of 17.5% to 18%, just to be clear that's the guidance range for this fiscal year? It's not your long-term guidance, something you may change going forward. Is that correct?

Michael Ross

Yes. That's correct.

Peter Sklar - BMO Capital Markets

You have talked in the past about gross margin that the intention of the company is to get it to the 36% to 37% range that you are almost there. Is that just for the current -- is that a long-term guidance or is that also more of a short-term guidance?

Michael Ross

No. That's a long-term. I mean that's how we work internally in other words. Again, the message was that we weren't sandbagging and working internally on the 40% margin. Right now we are working in the compelling value. As you know it's all about compelling value, and for that we have to manage that margin and our comfort zone is 36% to 37%.

Obviously, looking back to the three quarters that just went by, if you exclude the impact of the store acceleration which is a temporary impact, you would see that we are tracking exactly on last year's gross margin if you want, so in other words, there are opportunity to work the margin down i.e. and I think that a more positive way of looking at it is stabilizing the revenue and stimulating the top line sales. As we do that, also we are working hard to improve on our G&A, so that we can protect that [EBIT] 17%-ish number, so that's always been the case and that continues to be the case.

Peter Sklar - BMO Capital Markets

As a result of all the technology initiatives you have, the point of scale, the Kronos, et cetera. If you make more substantial gains in your G&A margin, is it possible that you would readdress go back to your gross margin intention, see if you could offer further value this is just going to be at the appropriate level of margin long-term.

Michael Ross

Yes. It depends. Again, I think that if you were from the base, I would to protect that 17% margin, so that would assume that if we did happen to improve the G&A, well that gives us more flexibility towards the gross margin line and further reinforce the value proposition.

Peter Sklar - BMO Capital Markets

Right. Okay. Just wanted a question, I am just wondering if you and Larry have had any further thinking about what the ultimate store could be for Dollarama, when you are mature in Canada. I know you had been thinking that potentially you could have a higher concentration stores and cannibalization was not necessarily bad thing. I just wonder if you could give us your most recent thoughts on ultimate store count.

Larry Rossy

I don't think I have ever done that. Again, I will repeat what I have said many times. I thought when it would reach, when we had 100 in Quebec that we had saturated. This province, we are probably 200 and some large stores today and I think we should just continue evolving that way. It's opportunity, it's the better understanding of our business, better understanding of the needs of our [hotel] continue to give good value and let's see what happens. To put a number to it, it's impossible. (Inaudible) go there.

Michael Ross

I think I would add the color that we have given like we did at the IPO was kind of 1,200, so nothing has changed and in terms of that color, Peter.

Peter Sklar - BMO Capital Markets

Okay. Thank you for your comments.

Michael Ross

Thank you.

Operator

Thank you. The following question is from Jim Durran from Barclays. Please go ahead.

Jim Durran - Barclays

Good morning.

Michael Ross

Good morning, Jim.

Jim Durran - Barclays

Larry, I just wonder if you could give us an update on your views on import cost outlook whether it has been pressured coming out of China, or whether we are still holding the line versus last year.

Larry Rossy

Generally speaking, we are holding the line. There are maybe certain products where there is more pressure, but competition is a way of the evening that out and I think we are holding the line. I think we are under control as far as the inflation over there. There is more competition over there, more people wanting to sell us and just wanted to sale period, which you know is always to our advantage. It's been going on for years and I think we have got our cost pretty well under control so nothing's going crazy over there yet and when it does you will know.

Jim Durran - Barclays

I am intrigued by your comments about Q2 being a quarter where there's more seasonal opportunity for items at $2.50, $3.What is it about Q4? Let's say, we are with heavy seasonal product content I assume from the holiday period.

Michael Ross

Jim, it's Michael. It's the opposite. What I was saying is that jump from Q1 to Q2 in terms of penetration and is higher than any other quarter-over-quarter because of the fact that in Q1 theirs is -- in Q3 and Q4 you got Halloween and Christmas, which have a lot of $1 items, so your penetration rate doesn't go up. It stabilizes.

Jim Durran - Barclays

Okay.

Michael Ross

Yes.

Jim Durran - Barclays

I understand. How is the development of new price? One thing I believe in the last quarter, Larry, is that there aren't as many items readily available at the $3 level. There may be items available at five, but you need to get them down to three. How is that progressing?

Larry Rossy

Very little. Look this is always a challenge. We are looking at items that when you look at the dollars price point and our other price point all the time at $3 you were all looking at great value to give there primarily because of the new price points and it's a challenge whether it's a high - this is however a good day or a bad day, as far as that goes, I am not sure that they just started, but in general that's a challenge that all of the buyers are looking at all of the time and were not out there saying we want to really become a $3 store.

We want a nice mix of products from between $1 and $3 and we are always taking items, buying items, buying samples at $10 and $15 to try and tweaking them to try and bring them into our price points, but that would offer great value to our customers. This is a challenge that happens every day and will continue for the rest of our days.

Jim Durran - Barclays

Great.

Larry Rossy

At all our price points.

Jim Durran - Barclays

Okay. Last question, just as you are pointing out store growth continues to be focused largely Western Canada, Ontario. I am just interested in a sort of updated thinking you might have about doing at the distribution center in Western Canada?

Michael Ross

Yes. That's been pushed back every year as we better manage our warehouses locally. Four, five years ago, we would have said that we would add one by now, but we are doing so many things like just in time for seasonal et cetera, et cetera that keeps pushing that date back and back and then if I were to predict now, we would say almost 20/20, so as long as we can keep using our facilities improving our facilities with respect to productivity locally, there is no reason to have when it doesn't make economic sense to go out there and put the investment, have another concern out there that has to be monitored although as years go by, we get better and better at monitoring things like that, so there is a benefit to pushing that off, but the main reason to push it off is the fact that we are using our warehousing facilities here locally, so much more efficiently every year that every year we push that need further back…

Jim Durran - Barclays

Yes. I totally agree.

Michael Ross

Yeah.

Operator

Thank you. The following question is from David Hartley from Credit Suisse. Please go ahead.

David Hartley - Credit Suisse

Thanks and good morning, guys.

Michael Ross

Morning.

David Hartley - Credit Suisse

Morning. Question, so SG&A I have asked just call your SG&A per store in Q1, Q2 year ago declined year-over-year. That trend ended abruptly as you expanded a ramped up expansion of new stores to the kind of 85 store level we are working on today, but in this quarter we saw that trend kind of resume where year-over-year per store not as percentage of sales, but per store has actually fallen. I am not sure what your plans are for future ramp up of some of certain new stores, but can we expect that trend to continue in '15 '16?

Michael Ross

David, it's Michael. For certainly this year, I would expect there is some potential for next year on the store-by-store basis and definitely to improve.

David Hartley - Credit Suisse

Okay. Is there certain area in particular or is it the current initiatives that you have already mentioned?

Michael Ross

I don't know. It's more the annualization and the and the continued ramp up into the newer stores of the current initiative.

David Hartley - Credit Suisse

Okay. Is there any concern? I know that your average store size is starting to drop a little bit as you are I guess less pushing more urban-type markets and look for other kind of opportunities. What should we expect in terms of the store size going forward?

Larry Rossy

Well, ideally I'd like to open a 10,000-foot store everywhere, but that's not going to happen. If you try and get into the GTA or in lower Mainland Vancouver, those sizes are this is not available and that's why we will rent and occupy spaces of 7,500 feet. Most of those by the way have basements. They are old, old dollar store or dollars, but old little worse than Thrifty stores, so they have basements and we are using the basement to supply the upstairs of the store, but you will only see that as a 7,000-foot store, I'm not going to show that as a 13,000 foot store if there is another 6,000 feet downstairs which we don't pay rent on. That's probably skewing our numbers a bit, but there's no question as you want to penetrate some of those more urban downtown GTA areas in both in the major cities of Canada. You are going to have to be happy with opening 6,000, 7,000, 8,000-foot stores and deal with the consequences of operations.

David Hartley - Credit Suisse

Okay. Great. I appreciate your comments to Jim on the $2.50, $3-type price points and better penetration in Q1 and Q2 type quarters, but in Q4 it was your first Q4 with those type items. Would you expect that a year in the current quarter that we are now that you will get, I don't know a better sell through, better awareness around these products that will drive the sell through and have you added more of these type of price point products and if so, by how much?

Larry Rossy

I don't know how much. We have added. If you ask me how many SKUs did we add, I don't know. I really don't know whether I am to [disclose] I really don't know. Now how that it will affect - I am not sure yet. It depends. I wish I could predict weather more than I can predict the sell through of certain items. It will all look great if we have a nice good weather for the next three weeks across Canada. We will look like geniuses. If it starts snowing and we can't get to our stores then it will probably look like less than geniuses, so I don't know. All things being equal, we should be okay not much, not more than that.

David Hartley - Credit Suisse

Okay. Great. I'll pass it on. Thank you very much.

Operator

Thank you. The following question is Chris Li from Bank of America Merrill Lynch. Please go ahead.

Chris Li - Bank of America Merrill Lynch

Good morning.

Larry Rossy

Good morning, Chris.

Chris Li - Bank of America Merrill Lynch

Good morning. Just first question is just longer term question. In order to protect your 17% EBIT margin through more SG&A and expenses leverage. What type of same-store sales you need to generate to achieve that?

Larry Rossy

Well, I mean, the only color we gave and we will continue to give on that, Chris, is that we would be disappointed if we could not generate at least 4% SSS in the future or 5%. I mean, so that's kind of the color we give on that. Okay. That's helpful and maybe related to that is in terms of your SSS for your older stores versus your New Year stores. Can you give us some color how they are comping the older ones versus the new ones?

Larry Rossy

We don't give specifics, but the old one, the comp stores when you say old versus the new that are a comp in a comp-store category. I don't know to tell. I mean it's pretty similar, but I don't think there is no meaningful difference. I am pretty pleased with old stores comps. I have to admit that I didn't think we would get those type of comps stores that have been with us from 10 to 20 years, but so I am pleased now I would have to say that the comp in new store would be a little bit more advantageous in China than China comp an old store but generally speaking I am very what we are doing with, we also understand with all of the older stores, I would say 10 to 20-year stores where we've had for that long, we are probably relocating than expanding, we are doing things to them that they can fall under out of that SSS category for a period of time, but generally speaking I am very happy with the comps on the older stores that have been around for that period of time, but I would probably say that it's easier to get a better comp, better than new store than in old store.

Chris Li - Bank of America Merrill Lynch

Okay, so it's correct to say the older stores. They are comping maybe a little bit more or less close to the over average that you are recording?

Larry Rossy

Yes.

Chris Li - Bank of America Merrill Lynch

Then just with respect to the store closures this quarter, can you elaborate sort of the reasons for the closure?

Larry Rossy

I don't think we had a new store - we have had four for the year.

Chris Li - Bank of America Merrill Lynch

Four for the year? Okay.

Michael Ross

Yes. In Q1 and Q2. Yes. One is in North Atlantic that we all know about and no other reason than other than the relocating the store. They wanted that of the shopping center for a period of time because they're stripping it out or they are big boxing it or they are doing something major and we will be back in there within a year or so.

Chris Li - Bank of America Merrill Lynch

Okay, so that's pretty normal course of business.

Larry Rossy

That is normal business.

Chris Li - Bank of America Merrill Lynch

I guess my last question just with respect to capital allocation given what your recent private debt placement you can provide some little more colors on what you plan to do with the cash?

Michael Ross

Sorry. Could you repeat that?

Chris Li - Bank of America Merrill Lynch

Just capital allocation with your balance sheet, what you are thinking on that?

Michael Ross

Okay. In terms capital structure, now that we have, we will continue to generate strong cash and obviously we fixed it just for five years now, so with the excess cash leads to buy back shares and continue paying dividend and increasing it over time.

Operator

Thank you. The following question is from Derek Dley from Canaccord Genuity. Please go ahead.

Derek Dley - Canaccord Genuity

Yes. Hi, guys. Just a question on the new stores. The Urban new stores located on Ontario in Western Canada. Are you guys still getting the same type of payback on new store given the smaller square footage and what I would assume is equal to if not the rental rates are these stores generating incremental revenue covering you are still getting two year a less data upgrade?

Michael Ross

Well, right now it's too early to say for those this year and last year, but that trend and the intention and quality of the location and the intention is that it does nothing in the case right now that it wouldn't.

Derek Dley - Canaccord Genuity

Okay. Then just overall on rental rates in general, with increasing competition from some U.S. players and other retail, and you guys have seen a lift in rental rates.

Larry Rossy

Nothing out of the normal.

Derek Dley - Canaccord Genuity

Okay. Great and then just finally on looking at your guys debit card transaction typically the 2.5 times of the size of the cash transaction?

Michael Ross

2.2 times.

Derek Dley - Canaccord Genuity

2.2? Are you guys looking at revisiting potentially implementing credit cards through the system within the next 12 months?

Michael Ross

It's always on our blackboard and obvious it is an opportunity, and if we do go there it's only it gives us a lift over and about the additional costs associated to the credit card.

Larry Rossy

I would say that's not living to the next year. I don't think that's going to happen in the next year.

Derek Dley - Canaccord Genuity

Okay. Thank you very much.

Operator

Thank you. The following question is from Vishal Shreedhar from National Bank Financial. Please go ahead.

Vishal Shreedhar - National Bank Financial

Thank you very much. I was just hoping, Larry to get your views on the competitive backdrop on perhaps Dollarama's response to the current retailing environment. Is business as usual for you or do you find like you are making adjustments even in the promotional backdrop?

Larry Rossy

I don't like making adjustments in reaction to other retailers. I think we have our way of doing business and I promote sticking to it and then stop worrying about what other people are doing just continue giving the value that we think is great value and if someone wants to react to us that's fine, but to react to other people and react to someone that's now carrying a dollars section. I don't promote that, so it's business as usual for us and you are not going to see us reacting to competition in any way. I think the answer is no to it.

Vishal Shreedhar - National Bank Financial

Okay. Thanks. I was hoping to get a recap on exchange rate fluctuation and how that impacts the business and margins. Do you have sufficient flexibility to control the other factors excluding exchange rates to protect margins in the midst of exchange rate fluctuation or could there be a temporary pricing cost mismatch?

Larry Rossy

We have been managing that 20 to 25 years now, I would like you to repeat your question, because you are saying are there other factors?

Vishal Shreedhar - National Bank Financial

Right. I mean to presumably other factors and effects, so presumably changing the merchandising mix, taking prices up on some items, (Inaudible) we might have highlighted in the past. Just wondering is that need to react quickly to or is there a chance that there could be a pricing mismatch at the stores?

Michael Ross

Yes. Well, first of all there we had a hedging policy so that the buyers know what level of currency they are going into before committing to purchases. We do refresh 25% to 30% of our items every year. As Larry said for the past 20-some years, now whether it's inflation, whether it's currency, whether it's energy cost, whether it's occupation, know where we've been doing that and will continue to…

Larry Rossy

For 20 of those years, we managed it at the right one price point.

Vishal Shreedhar - National Bank Financial

Right.

Larry Rossy

We have the ability now with the multi-pricing to do things, but you don't want to go up and down on your prices, so you going to generally speaking be very careful the way you manage prices and lose $0.05 on the FX, we are just not going to make massive changes, because that may be temporary. There is a lot of other factors involved where we think we can save, overcome, reduce the effect of FX, and so it's a game we play every day we can say, because you don't want to go from a $1 to a $1.25 or $2 to 2.50 or $2.50 to $3 just because we want to continue giving valuable and managing that value is an argument challenge and right now when you have a U.S. dollar that's gaining value, it's a lot easier to manage it when it was going the other way, so it's another challenge that we add to our daily bread. That's what we have to do to try and maintain our grocers, but again to move prices up and down according to what happens on a daily basis on a monthly basis is difficult.

The FX that -- that we bought protect us for a period of time and then we look at it. Right now, for example if I am buying for Halloween of next year, well I am not going to buy Halloween at necessarily what we did last year was to buy it at par. Obviously, where we are being affected and what we rate we use is going to be very subjective and discussed at length here, so do we buy at 105 106 107, how competitive are we going to be and what will that mean to the price et cetera, et cetera, so it's not done cavalierly. It's done with thought and that's the way we do that.

Vishal Shreedhar - National Bank Financial

Thank you very much.

Operator

Thank you.

Larry Rossy

Maybe for the next analyst, I would suggest that we keep it to one question, because we are approaching 11:30, so I would appreciate given the number of questions that were asked that we keep it to one please.

Operator

Thank you. The following question is from Keith Howlett from Desjardins Securities. Please go ahead.

Keith Howlett - Desjardins Securities

Hi. Just on the items for basket. You track that and is that trending downwards?

Larry Rossy

Our basket?

Keith Howlett - Desjardins Securities

Items per transaction.

Larry Rossy

No. We don't disclose items per transaction.

Michael Ross

How many items in the basket size is that the question?

Keith Howlett - Desjardins Securities

Yes.

Larry Rossy

It's not the basket size, but the items per basket. Is that it Keith?

Keith Howlett - Desjardins Securities

Yes. How many items in a typical basket.

Michael Ross

Yes. We don't disclose that.

Keith Howlett - Desjardins Securities

Do you think the higher price points are affecting your items per basket?

Larry Rossy

It can, but again we don't disclose any specifics in that.

Larry Rossy

But I don't think so, I mean if you are asking me to do, I think, I would think so, but again I don't think we have those numbers even. I don't think we have those facts. If we do, I don't get them.

Michael Ross

We do, but we don't disclose it.

Larry Rossy

They don't disclose to me, Keith. I am sorry.

Keith Howlett - Desjardins Securities

Thanks.

Operator

Thank you. The following question is from Brian Morrison from TD Securities. Please go ahead.

Brian Morrison - TD Securities

Good morning. Just want to circle back to the SG&A for a moment if I can. I presume you would have put this in the release, but were there any heightened labor training costs associated with the accelerated store openings. I presume there is minimal if anything?

Michael Ross

Yes. It was minimal of that, but just to be clear, we are going to have other projects. There was some training for example for when we rolled out all the 4,500 MCR cash registers. In Q4, we are going to have other initiative that are going to kick in which will require training in Q1 next year and so on, so because we want to remain active on initiatives so you will always have some form of training efforts or costs that occur whether it's professional fees, consulting or training, but to your specific question in terms of store acceleration I think Q4 whether it's on occupancy cost, whether it's on store labor and all that, because we are going to be comping now the equivalent number of stores year-over-year, I think that the effect will be nil at starting in Q4, so it's diminished consistently from quarter-to-quarter. In Q4, I suspect we’ll have zero.

Brian Morrison - TD Securities

Right just on previous question with respect to SG&A, you mentioned the headwinds that were flowing through and I assume that there was nothing beyond just natural inflation and labor rates et cetera, correct?

Michael Ross

Right, but then you can have other. I don't know what the future reserve, but essentially that's certainly the big component.

Brian Morrison - TD Securities

Okay. Then as SG&A as a percentage of sales, the messages that's going down, but with these initiatives flowing through I am wondering if you are getting a better sense of what the actual dollar savings are in an annual basis?

Michael Ross

No. We don't disclose that. The only one we did was with the store count reduction, but otherwise the only color we give in terms of reduction is this year saying that it's going to go down from 18% last year to between 17.5% and 18% this year and next year we will see, we will wait for Q4 and give you more color on F'15.

Brian Morrison - TD Securities

Thank you, Michael.

Operator

Thank you. The following question is from Irene Nattel from RBC Capital Markets. Please go ahead.

Irene Nattel - RBC Capital Markets

Thanks. Just kicking off the final blocks that everyone always asks about target, any impact on your store traffic? Positive, negative otherwise?

Michael Ross

That is neutral. It had started off positive in Milton, but quickly everything came back to the equivalent.

Larry Rossy

I guess, we are expecting them to be more successful, Irene and have a bigger bang here in Canada. They are struggling as it has been well noted and as a result that I would agree with Michael.

Irene Nattel - RBC Capital Markets

Thank you.

Larry Rossy

Okay. Go to bed.

Irene Nattel - RBC Capital Markets

Thank you.

Larry Rossy

Thank you.

Operator

Thank you. There are no following questions registered at this time. This does conclude today's conference call. Thank you very much for your participation and please disconnect your lines at this time.

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