Dollarama Inc. is fast outgrowing its name.
Three years after the Montreal-based discount-store giant introduced items costing more than $1 to its shelves, those products now account for more than half of sales and have helped drive the retailer’s results and stock price to new highs, including a record close Wednesday on better-than-expected first-quarter results.
Now, the fast-growing retailer is set to increase its top price even further, to $3 from a current $2.
“This is really selected items in selected areas,” the chain’s founder and chief executive, Larry Rossy, said in an interview.
The company will initially offer a few dozen items at the $2.50 and $3 level in August, out of more than 4,000 items in a typical store. “It’s just nibbling, to see if we can satisfy more customers with the same shopping experience. We’ll see where it goes,” he said.
Mr. Rossy said that, unlike the chain’s price increase in February of 2009, the move is not primarily an attempt to counteract the effects of inflation in China, where the company sources close to 50 per cent of its products.
Rather, it is “a natural evolution” to broaden the chain’s offerings of general merchandise and seasonal products that it can sell for higher prices, he said.
For example, Mr. Rossy said, the company would now sell one-piece infant sleepers: “To offer [a sleeper] at $2, it would be very poor quality, and I don’t want that in our stores. At $3, you can offer that.”
Customers have shown a growing comfort with items priced at more than $1: They accounted for 51 per cent of sales in the first quarter ended April 29, up from 44 per cent for the same period last year, and 12 per cent in the same period three years ago.
That shift, along with the introduction of debit-card payment in stores, has helped to boost the average transaction value to an estimated $8, up from less than $6.50 four years ago.
These changes, along with the opening of 54 stores in the past year, helped to boost sales in the quarter at the 721-store chain to $398-million, up 14.9 per cent over the same period a year ago.
That contributed to a profit of 56 cents a share, up 40 per cent from last year and five cents ahead of analysts’ estimates. “It’s just a fantastic organic growth story,” said Versant Partners analyst Neil Linsdell.
“Dollarama has just been able to dominate the market in Canada,” he said, but added the company will face increased competitive pressure from U.S. giant Dollar Tree Inc., which entered Canada in 2010.
The company also said Wednesday it plans to buy back up to 3.5 per cent of the stock, after increasing its quarterly dividend by 22 per cent earlier this year.
The 70-year-old Mr. Rossy, a member of a Quebec discount-retail family that goes back 100 years, built Dollarama into the country’s dominant dollar-store chain starting with a single outlet in Matane, Que., 20 years ago.
His company stood apart from rival operators early on by sourcing directly from China, giving it better control of what it sold. Mr. Rossy eschewed the “junky” look of other stores by displaying products in a more cohesive manner and ensuring stores were well stocked, clean and well lit. Dollarama also designs products and packaging in-house and offers its own house brands.
Mr. Rossy is known as a hands-on CEO, handling real estate selection and some merchandise buying. He also has a knack for walking the malls and figuring out which higher-priced products sold elsewhere he can source and sell profitably for $1 to $2.
“He’ll come back with a bag of eight items that cost him $200 [at other stores],” said Jack Klaiman, president of Oberfeld Snowcap, Dollarama’s retail real-estate consultant. “He’ll say ‘These cost $200; next year, I’ll be able to sell them for [a combined] $8 or $16.’”
Mr. Rossy sold 80 per cent of the company to Bain Capital in 2004 for $1-billion. Dollarama went public in October, 2009, at $17.50 a share and the stock has since appreciated by almost 250 per cent
BY THE NUMBERS
Number of Dollarama stores across country.
Combined number of outlets of main competitors (Dollar Tree Canada, Buck or Two Plus, Dollar Store With More, Everything For a Dollar, Great Canadian Dollar Store).
Average store size, in square feet.
Average transaction cost.
Portion of first-quarter sales generated from items costing more than $1.
Stock appreciation since IPO in October, 2009.
Source: Dollarama; Versant Partners