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opinion

Everyone knows spring arrived late to Canada this year. Heck, many people knew in February that April would be cold, given the spring outlooks put out by forecasters.

And yet, here we are in the first week of June, met with a weather-related earnings surprise from Dollarama Inc., the retailer that almost always exceeds expectations. The company said its same-store sales, one of the most important metrics in retail, increased at 2.6 per cent in the quarter ended April 29, versus expectations of at least two percentage points above that.

How in the world did markets get caught off guard on Thursday, with the shares falling nearly 7 per cent? And, more importantly, are investors overreacting?

The first question is easier. Clearly, investors and analysts failed to appreciate just how much of Dollarama’s first-quarter sales come from summer products, from gardening supplies all the way to beach toys. In explaining the miss, the company called summer goods “the most significant seasonal product sales in the first quarter, with the majority of these sales occurring during the month of April.” In analyst questioning on Thursday, chief financial officer Michael Ross acknowledged that sales of seasonal products were approximately, in the words of the analyst, “down mid- to high-single digit[s].”

BMO Nesbitt Burns analyst Peter Sklar asked a key question: Why didn’t Dollarama disclose the weather-related sales problem sooner, before the quarterly results, as it did when the chain was buffeted by ice storms? Mr. Ross said the last time, the fourth quarter of 2014, the ice storms in Quebec and Ontario wiped out pre-Christmas sales it could never recoup. This time, he says, this is not necessarily lost revenue.

This takes us to Question 2, whether this is as big a deal as Thursday’s stock performance suggests. Dollarama says it believes it’s recouping a meaningful portion of the summer sales, meaning they’re deferred to the second quarter, not lost. The company says its first-quarter same-store sales gains for non-summer products were in the 4-per-cent to 5-per-cent range, in line with the annual guidance that it reiterated on Thursday.

Much math supports the idea this is not a huge deal, despite the market’s preoccupation with the same-store sales metric. The first quarter is the best time to miss, as Dollarama typically gets only 20 per cent of annual revenue in those three months, with half coming over the following two periods and 30 per cent falling in the Christmas quarter.

A very rough estimate – i.e., one I did – is that the difference between actual 2.6-per-cent same-store sales growth and expected 4.7-per-cent same-store sales growth in the first quarter is about $14-million across the entire company, or about $20,000 a store for the period.

And yet: Investors on Thursday weren’t as concerned about another retailer heavily dependent on seasonal sales, as Canadian Tire shares were down just 0.65 per cent. Perhaps the weather effects at Canadian Tire were already understood. Perhaps that reflects Canadian Tire’s different fiscal periods, since lost April sales fall in the second quarter, and can thus be made up for in the two months before the June quarter end, and investors would never be the wiser. (Canadian Tire has issued no weather warning, and a call to the company on Thursday afternoon was not immediately returned.)

Maybe, though, there’s a bit deeper skepticism about Dollarama’s fortunes. The company will have to pick up the pace to make its sales guidance for the remainder of the year, and another weather “surprise” would get an even chillier reception.

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