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A woman walks past a Dollarama in downtown Montreal, on April 23, 2020.

Christinne Muschi/The Globe and Mail

Dollarama Inc. reported flat same-store sales in its first quarter, ahead of the discount retailer's expectations as it grappled with shifting consumer patterns amid the COVID-19 pandemic.

While most Dollarama stores have been deemed essential services and remained open during the pandemic, the company cautioned during its last earnings report that sales had contracted after an initial surge in purchases – as people stocked up on items such as canned goods and cleaning products – in early March. At the time, chief executive officer Neil Rossy said he expected comparable sales to fall in the first quarter.

Instead, the Montreal-based company reported on Wednesday that its comparable store sales were roughly flat, growing 0.7 per cent in the three months ended May 3. That figure excludes the impact of any store openings or closings, including Dollarama stores that were forced to close because of COVID-19.

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Including the impact of store closings, comparable sales decreased by 2.4 per cent. As of May 3, the chain had 1,301 stores, 104 of which were temporarily closed. Most of the stores that were forced to close were in malls, largely in Quebec. Since then, more stores have reopened: At the beginning of this week 32 Dollarama stores remained closed.

Public health measures across Canada led to a significant decline in Dollarama’s store traffic. Like other retailers that remained open during stay-at-home orders, such as grocery stores, Dollarama said that shoppers were visiting less frequently while buying more items during each visit. The chain reported a 22.6-per-cent increase in the size of transactions on average, and a 17.9-per-cent decrease in the number of visits. That trend has continued.

“What we see is, still, caution. People coming not as often, but buying more,” chief financial officer Michael Ross said on a call to discuss the results on Wednesday.

As stay-at-home measures have gradually begun to ease across Canada, the discount stores are seeing some momentum in the early part of the second quarter, including sales of summer-related products such as pool and outdoor toys, and barbecue supplies. In the first quarter, Dollarama saw lower demand for seasonal products and party supplies, while customers continued buying higher numbers of cleaning products, food and health and hygiene items. Those lower-margin consumable items impacted the chain's profit margins. ​Some of the stores' vendors have also instituted large price increases, which in some cases could be passed on to customers, Mr. Rossy said. However, he stressed that the chain is working to hold prices steady as much as possible, particularly on essential goods.

"We don't want to be taking advantage, in any way, of our customers," he said.

It is still unclear whether sales of seasonal items will continue to be low. Dollarama is buying Halloween and Christmas goods such as decorations at its usual levels and will carry inventory over into next year if needed, Mr. Rossy said, but is taking a “conservative” approach to consumables such as chocolate. The chain is also assessing whether demand will remain high for items such as sanitizer, and is taking “our best educated guess” on the level of supplies it will need in future.

Higher operational costs related to COVID-19 also affected margins, including a temporary 10-per-cent wage increase; added staff shifts to handle increased cleaning protocols and to control traffic into stores; spending on plexiglass shields at cash registers; and reduced store hours. The company said it had $15-million in direct costs related to the pandemic during the first quarter. Dollarama increased its borrowings during the quarter to improve liquidity during the pandemic.

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During the crisis, Dollarama faced criticism from some employees who said the company had not implemented safety measures quickly enough. Some staff complained publicly about not having access to protective masks early on, for example. Weeks after many grocery stores across Canada had installed plexiglass shields at checkouts, some Dollaramas were putting up ersatz barriers using plastic wrap while they waited for shields.

During the company’s annual general meeting, which was held online on Wednesday, Mr. Rossy was asked how Dollarama intends to repair the damage to its reputation resulting from such reports. Mr. Rossy disputed the idea that the company’s reputation has taken a hit, saying that he has received letters from employees thanking management for keeping stores open during a time of economic disruption; as well as positive feedback from customers regarding the stores’ safety measures.

“Our reputation is still perfectly intact and as strong as it’s ever been,” he said.

Dollarama’s total sales for the quarter increased by 2 per cent to $844.8-million, driven mainly by 65 new store openings since the same period last year.

The company’s net earnings fell to $86.1-million or 28 cents per share, compared with $103.5-million or 33 cents per share in the same period last year.

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