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Dollarama is grappling with rising costs for transportation, including ocean freight, and has passed on some of those higher costs to shoppers.Paul Chiasson/The Canadian Press

Retailer Dollarama Inc.’s DOL-T profits rose by 28 per cent in the first quarter, as inflation-related demand for cheaper goods drove higher traffic to its stores. But even at the discount chain, price increases are coming, the company’s chief executive said on Wednesday.

Dollarama already announced a new maximum price point of $5 in March, and is not expected to increase that further. But even at lower price points, the amount of markups has been greater over the past year than in recent years. Like all retailers, Dollarama is grappling with rising costs for transportation, including ocean freight, and has passed on some of those higher costs to shoppers. The retailer is also seeing more sustained pressure on wages than executives expected three to four months ago.

“All competitors have had no choice but to pass on costs, ourselves included, because the quantum of the cost increases … has just been incredible,” chief executive officer Neil Rossy said on a conference call to discuss the company’s earnings on Wednesday. Dollarama’s position has always been that it maintains “relative value,” or prices that are competitive compared with other retailers, but cost increases will continue to be seen at store level, he said.

The Montreal-based retailer reported on Wednesday that its net earnings rose to $145.5-million or 50 cents a share in the 13 weeks ended May 1, compared with $113.6-million or 37 cents in the same period a year earlier.

In addition to inflationary pressures, the removal of pandemic-related restrictions on in-store shopping early in the quarter helped to drive a double-digit increase in customer traffic to Dollarama stores, the company reported.

Dollarama has been ordering goods earlier than usual to counter product shortages resulting from slower shipments, which in some cases have been delayed by six to eight weeks. The early ordering means that as goods come in, Dollarama will incur some higher warehousing costs, Mr. Rossy said, adding that getting goods from factories to warehouses is a “constant battle.” The company expects its inventory position to improve in the second half of its fiscal year.

Some retailers in the United States who have faced similar pressures have recently found themselves with more inventory than needed, as shoppers spend more on going out and travelling, and less on discretionary goods. On Tuesday, Target Corp. said it would be forced to cut prices to clear out excess inventory. But Dollarama chief financial officer J.P. Towner said on Wednesday that this is not a concern for the retailer. He noted that Dollarama has always packed away leftover inventory at the end of each season to bring back the following year, something it is able to do because the items the company sells do not go out of style.

Strong demand for seasonal products and higher sales of consumables such as food and household goods pushed sales up at Dollarama. Comparable store sales – an important figure that measures sales increases not related to new store openings – grew by 7.3 per cent in the quarter, a faster pace of growth than in the same period last year.

The growing sale of lower-margin consumables affected Dollarama’s gross margins slightly in the quarter, though this was offset by lower logistics costs, according to the company. Gross margin was 42.1 per cent of sales, compared with 42.3 per cent in the same period last year.

Retailers have noted that shopping patterns seen during the height of pandemic restrictions have been reversing, with people going out to stores more often and stocking up less during each trip. Dollarama reported that the number of transactions at its stores rose by 14.4 per cent in the quarter, while the average size of those transactions decreased by 6.2 per cent.

New store openings have also helped to drive up sales. The company opened 10 net new stores in the quarter, for a total of 1,431 stores as of May 1. Total sales in the first quarter rose by 12.4 per cent to $1.1-billion.

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