© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Dollarama Conference Call for the Fiscal 2019 First Quarter Results. Mr. Neil Rossy, President and Chief Executive Officer; and Mr. Michael Ross, Chief Financial Officer, will make a short presentation, which will be followed by a question-and-answer period open exclusively to investors and financial analysts. For your convenience, the press release along with first quarter financial statements and management's discussion and analysis are available at dollarama.com in the Investor Relations section and on SEDAR. Before we start, I've been asked by Dollarama to read the following message regarding forward-looking statements. Dollarama's remarks today may contain forward-looking statements about its current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements or any other future events or developments. Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate and reasonable under the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. 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, Dollarama cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. For additional information on the assumptions and risks, please consult the cautionary statement regarding the forward-looking information contained in Dollarama's MD&A dated June 7, 2018, available at www.sedar.com. Forward-looking statements represent management's expectations as of June 7, 2018, and except as may be required by law, 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 call over to Mr. Neil Rossy.
Thank you, operator, and good morning, everyone. This morning, we reported our financial results for the first quarter of fiscal 2019. Despite lighter than usual summer sales due to poor weather, we delivered another solid quarterly performance. Our results reflect continued sales growth, a solid gross margin and the positive impact of our ongoing cost control and productivity-improvement initiatives. Looking first at Q1 sales, which increased 7.3% and same-store sales, which stood at 2.6% over and above a 4.6% growth in the previous year. Historically, sales of summer seasonal products have represented the most significant seasonal sales in the first quarter, with the majority occurring in April. Due to poor weather in April of this year, it was unseasonably cold in many Canadian regions. We experienced a delay in customer demand for our summer seasonal product assortment. Excluding summer seasonal product sales, SSS in the first quarter for our year-round assortment was in line with our assumption of 4% to 5% SSS growth. By the end of May, sales of our summer seasonal products were catching up with the lag in sales in the first quarter. The key takeaway here is that we believe this is a temporary and weather-related event and our underlying SSS assumptions for the full year remain unchanged. Looking now at real estate, we opened 10 net new stores during the quarter bringing our total store count to 1,170 stores coast-to-coast. We expect the momentum of new store openings to accelerate as the year unfolds as in prior years, and are maintaining our 60 to 70 net new store target for the full year. Turning now to the previously announced expansion of our existing distribution center in [ CMR ]. Demolition of buildings on adjacent acquired properties is underway, and we are finalizing plans for the new building expansion, which will include a 50% increase in square footage. We estimate this portion of the project to cost approximately $40 million, which is reflected in our revised CapEx envelope. The distribution center will continue normal operations throughout the construction phase. Construction is expected to be completed by the end of fiscal 2019. With the increase in our distribution capacity, we will be able to comfortably support our Canadian growth strategy with a target of reaching 1,700 stores across Canada by 2027. I would like to also provide a brief update regarding our e-commerce project. The transactional site, which will offer select general merchandise by the full case is moving along well. Our objective is to launch a pilot for deliveries in the province of Québec only, by the end of the calendar year. This will allow us to complete our testing in a market that is in proximity to our centralized logistics operations and is a good example size, representing about 25% of the Canadian population. Now over to you, Michael.
Thank you, Neil, and good morning, everyone. Dollarama reported a 12.2% increase in the [indiscernible]. Our financial performance was driven by continued growth and active management of our cost structure. Total sales were up 7.3% to $756 million and the same-store sales increased by 2.6%. Transaction size increased by 2.9%, reflecting consumer demand for our higher-price point items. We did report a 0.3% decrease in the number of transactions. These were impacted by lower customer demand for summer seasonal products, as explained by Neil. Finally, store count grew 5.6% over the past 12 months with the opening of 62 net new stores. Our gross margin was in line with the prior year at 37.6%. SG&A as a percentage of sales improved over last year. This is due to specific cost control initiatives implemented towards the end of last year, for which savings have been realized in Q1 F 2019, and are expected to be realized up until the end of Q2 F '19. These help mitigate the impact of minimum wage increases in Ontario in Q1 F '19. Furthermore, we have several ongoing initiatives both in stores and throughout the organization to improve efficiency and streamline our cost structure in support of product -- profitable growth. Throughout Q1, this included the rollout of new cash handling processes that should reduce the time required to count and record cash deposits. We are also continually optimizing in-store scheduling to improve labor productivity. One of the latest initiatives is aimed at optimizing store inventory management processes to reduce the time required on these tasks. CapEx increased from $19.7 million in Q1 to $64.3 million -- well it was in Q1 F '18 to $64.3 million in Q1 of this year. This is $44.6 million increase, which is primarily attributed to the acquisition for $39 million of the previously leased distribution center, the purchase of which was announced last quarter end. Note that fiscal 2019 CapEx guidance has been revised to a range of $190 million to $200 million to now include the estimated $40 million in construction cost for the expansion. All other fiscal 2019 guidance remains unchanged. Looking now at the active management of our capital structure, our healthy balance sheet and strong free cash flow support the board's decision to renew the normal course issuer bid for another 12-month period. The 2018/'19 NCIB will allow us to purchase for cancellation up to 5% of the issued and outstanding shares as at June 6, 2018, or up to 5.5 million shares between June 20, 2018 and June 19, 2019. This morning at our AGM, shareholders also approved a previously announced 3-for-1 share split. As a result, the split will be effective at market close on June 19, 2018, with shareholders of record at close of business on June 14, 2018, receiving 2 additional shares for each common shares -- share [ health ]. That wraps up our formal remarks. I will now turn it over to the operator to take questions from analysts.
[Operator Instructions] The first question is from Mark Petrie of CIBC.
I wanted to ask specifically about the transaction size result in the quarter end. I wonder if you can just sort of spell out the impact of the slower seasonal sales on that metric or was that mostly seen on the traffic side? And then when you look at the composition of transaction size, are there any changes in trend or in the various drivers within that in terms of adoption of price -- higher price points, number of items, et cetera, et cetera?
Mark, this is Michael. Obviously, the summer season deferral had an impact on the traffic. So that traffic would have most likely been positive otherwise. And for your second question...?
Just in terms of the trends of the various drivers on transaction size, because that metric was also slower than what we've seen in previous periods. Did you feel like the summer seasonal weakness also impacted transaction size? Or what would account for the slowdown there?
It would. Again, as we mentioned also, if you exclude the summer season and you look at the all-year assortments, you'll find yourself more in the 4% to 5% range. So no, there is nothing significant going on other than the gist of it being explained by the summer season deferral.
Okay. And then I guess more broadly, with regards to the competitive environment overall. Obviously, there is a number of cost pressures facing retailers across categories and channels. Just wondering how -- if you've seen any sort of discernible change in the competitive environment. And your expectations for the balance of the year.
Mark, Neil Rossy. Not really. There is the constant ebb and flow of competition in any given category at any given time of the year. But as a whole, there hasn't really been a change in the market that we've seen.
And I guess specifically just with regards to you've had a sort of a full quarter of the minimum wage increase in Ontario in your business. Any difference of trend, I guess, geographically? And I guess, specifically asking about Ontario.
Yes. So no. The savings from the initiatives, some of which we've mentioned to you being related to initiatives that were relate to -- initially that started in mid of last year, which are kicking in Q1 and a portion of that will also be in Q2. Our initiatives that are chain-wide that are not in reaction to a specific region like Ontario for example. So we haven't -- we've mentioned to you in prior quarters, we're still focused on our productivity initiatives that we started in the past and it's just staying focused and continuing on. And so there is nothing other than that going on. We -- you will see throughout the rest of the year some headwinds coming in from Québec minimum wage increase. That's, again in May. May 1. And other provinces also will be showing increases in minimum wage. So all of those are headwinds and hopefully, we can offset a few of those, but again the outlook reflects the fact that compared to last year, we still expect a decrease in the G&A performance if you want.
The following question is from Irene Nattel of RBC Capital Markets.
Before we get into any other questions, just to be clear though, the minimum wage increase in Québec is of much lower magnitude than Ontario, correct?
Yes. Absolutely. But it's still stronger than what we saw last year.
Right. Understood. And just sort of continuing on the same-store sales subject. Clearly, the weather hit traffic, it hit mix. Can you talk a little bit about the different price points, the impact on the basket size of, sort of, the different price points as you went through, let's call it, sort of March and February versus April? And if you could also provide just a little bit more color around what you've seen in May now that we've got the good weather here.
Okay. So February and March, we had very strong results and it's when April hit that clearly -- and April is the period where we've got the biggest proportion of our summer season. And so it's clearly -- the impact that we're talking to you is clearly related to April. And yes, we've been seeing clearly this past month in May, a catch-up of the seasonal items in most of those summer categories. So that's clear to us.
And has there been any change whatsoever in, sort of, the consumer uptake or consumer response to the summer categories, particularly at the higher price points?
No. We -- there's nothing noticeable that's different than what we've seen in the past. So there is nothing going on there.
And we have seen an acceleration. I know it's still a very few number stores, but, let's say, Miniso has opened probably 20 stores this year relative to last year. Could anything -- are you seeing any impact of that on, sort of, your store volumes in those trading markets?
No. Not at all. I mean Miniso is a competitor, and we follow all our competitors compared to our chain and there's clearly nothing out of sync really to Miniso.
And then just finally if I might, how are you seeing the evolution of credit card, debit card penetration and impacts of that on basket size and trip frequency?
So I think it's consistent to with what we reported last quarter. So again, credit transactions like debit transactions are double that of cash transactions. Credit transactions or baskets are slightly higher than debit basket and penetration, without disclosing the numbers, has continued to increase on the credit side. And it's mostly the cash transactions that are being cannibalized as opposed to the debit transaction.
So just again, just following up on that last piece of Michael's. If credit is cannibalizing cash, then would it be reasonable to expect that we should see a bigger basket size but we may see ongoing -- of the ongoing offset being in traffic? If people are coming less often but spending more?
Yes. That's -- we don't measure that specifically. So we think it's a guess that, that might be impacting the -- that might have an impact on traffic, but again, we don't have anything to substantiate that certainly.
The following question is from Kenric Tyghe of Raymond James.
Michael, I wanted you to help me better understand your hedge accounting and specifically adoption of IFRS 9. As I understand it, historically, you would've taken that mark-to-market through COGS and post IFRS 9 if not capitalized against inventory. I wonder if you could sort of speak to the gross margin impact on a, sort of, before and after IFRS 9 basis, and then more broadly just walk us through the IFRS 9 impact on your hedging.
Right. So, thank you for your question. And allow me to clarify this but -- because in Q1 we did start adopting IFRS 9. So I'll try to keep it very simple. The -- historically, the inventory was recorded in the balance sheet at spot rate and would be adjusted in the P&L. So depending on if you are hedged under the spot rate, you would record a gain in the P&L, and if it was the opposite, you would record a loss. So the P&L, in other words, would bring back the inventory in line with the hedged cost, which is the cost that we manage at the establishment of our price points and the management of our margin. The new tax rule now has us adjusting the inventory, or recording the inventory at the hedged rate off the bat. So you don't need to adjust for a foreign currency gain or loss in the P&L since your inventory is already at the hedged rate and going into your COGS, cost of goods sold, at the hedged rate. So, I don't know if that's clear.
No, that's great, Michael. I think just a follow-up to that one. Would you be able to incline to handicap what the impact on margins in quarter would have been compared to a pre-IFRS 9 world? I'm just trying to, sort of, handicap what that impact would have been in the quarter?
It has absolutely no impact because the only difference is the gross margin is a P&L. So before we were just disclosing 2 amounts separately. Now we're disclosing them net. But the amount doesn't change, the net is the same. So there's absolutely no impact on gross margin.
The following question is from Derek Dley of Canaccord Genuity.
Just following up on that gross margin discussion. Did you guys -- can you quantify the impact of the weakness in the seasonal items on the gross margin? Would it be fair to say the seasonal items tend to carry higher margins?
Well, I guess -- I mean, you're talking about the Q1 and it is sort of not that -- it's not significant enough to carve it out if you want. So just there was -- so there's 2 things. Seasonal items have the highest margin, you're right. But it's not like -- Q1 is the lowest quarter of the year, it's 20% of your sales -- total sales of the year, whereas Q2 is 25%, Q3 is usually 25%, and -- I'm reporting on last year's percentages. So Q1 was -- so the impact here of summer even though it's seasonal wouldn't be that material on gross margin.
Okay. So the impact of weather was far more material on revenue than gross margin. Is that what you're saying?
Yes.
Okay. And then just on your inventory position, I mean, how comfortable are you guys with the inventory position heading into Q2 just given the delay in the seasonal items sales? It looks like inventory was up just under 5% year-over-year.
Yes. So it was up because of the slower sales in Q1. So that's mainly the reason there. So as we mentioned, we've kind of caught up on the summer season to date, and we still have another 2/3 of the quarter to go by.
The following question is from Vishal Shreedhar of National Bank.
On your prior disclosure, you provided us with more data on Latin America. Just wondering what made management decide to give investors that incremental data. What was the thought process behind that?
Okay. So the -- well no -- we're 5 years now in working with our partners and getting closer and closer to the call option date, which is February, 2020. And we started to default last year revenues, which were about 1%-ish of the sales, and now that we're getting closer and closer to call option, we just want to make sure we disclose a minimum of information. We do have a nondisclosure agreement, but we've agreed on this minimum information disclosure to -- so that the investment community can all have the same starting point if you want, in understanding what Dollar City is. And so that if we do eventually exercise the call, everyone will have the same information and if we don't, well, that would be it.
Can Dollarama move in advance of that 20 -- February 2020 date? Or even after it, via negotiation or is that pretty firm set?
Well, contractually, it's February 2020. So you can do anything outside contracts, but that means that you have to renegotiate it. But the contract says February 2020.
Is the tick-up price and the amount -- the amount of majority stake, has that been determined? Or is that still subject to -- if you decide to proceed. Is that still subject to negotiation?
Well, I prefer to stop there in terms of giving out more information. So we'll -- that's something we're not ready to disclose.
Okay. Have you noticed any -- I'm moving on to Canada now. Have you noticed any change in your Canadian growth trajectory as Dollarama continues to expand? I mean fairly sizable business now. You're opening stores at a fairly rapid clip. Are you noticing cannibalization is becoming a bigger factor, and is it tougher to get growth because you have so many stores now?
No. I'd say -- we've always had cannibalization, and -- I mean since the IPO, there has always been cannibalization. And yes, you might have more and more but when we do open up a store, we factor that. And I mean if you -- we've given you some information on our economics. The cost to open up a store, it's still the same it was 5 years -- 8 years ago at the IPO, namely $400,000 net of tenant allowances. Inventory levels have been higher but yes, our average sales have gone up from 2.1% of the IPO to 2.9% today. So obviously, the payback has been very strong and improving. So there is -- we are not limited in terms of opportunities of staying within that range. So -- but again, we are very disciplined, however, and we don't just open up anywhere or any location. And -- but we're still committed to what we disclosed the last time in terms of hopefully able to reach 1,700 before 2027.
Okay. And just the last one here. Has management -- is management considering advertising similar to what traditional retailers do? Or are you still pleased with this model as it stands?
We have no intentions to do anything differently going forward than we have in the past.
The following question is from Brian Morrison of TD Securities.
Michael, just going back to the summer seasonal product, do you anticipate there is a degree of loss sales here in aggregate this year relative to initial expectations? Or is the message that May in Q2 is tracking ahead of your 4% to 5% range? And further just to clarify, this merchandise you're referring to, does it all fall into the higher margin seasonal category or is there some of it fall into the spectrum of consumables in general merchandise?
Okay. So what we -- one, it's hard to know if you'll miss sales or not, it's possible. Two, we won't tell you how much we -- we don't disclose how much of that we recuperated and -- but the information you do have is that we're sticking to our 4% to 5% same-store sales range for the year.
Okay. And then the merchandise?
I'm sorry, could you repeat that, Brian?
Does it all fall into the higher margin seasonal category, as Derek was asking? Or is it -- some of it within consumables in general merchandise?
There's some in others too, it's not just higher-margin. It's all over the place there.
Okay. And then Neil, when you maintain this 4% to 5% same-store sales growth target, does it feel relative to the prior guidance last quarter that you need to further invest in the value proposition at all in order to achieve this top line target or steady as she goes?
For now, it's steady as she goes. We are always watching, and we may change that as time goes on. It's one of the levers that we need to always keep up or down. But for now, there is no specific action that's happening relative to that discussion.
Excellent. Michael, one last question. Just with respect to the buyback, very light in the quarter, appears to have been substantial room to be more active. Is it safe to assume no change, your appetite to be active?
Brian, well, 2 things here. One, we have a capital investment, $40 million in the DC, and we mentioned to you that our -- even though we're allowed up to 3x adjusted debt to EBITDA, our comfort zone was in the 2.75x range, we're 2.8-ish. So that -- those are kind of the guiding and the reasons for the lower share buyback that you've seen in Q1. But certainly -- and as we mentioned too, there's a construction of the DC cost of $40 million that will be impacting the future buybacks because it has to all be within the same leverage ratio and there was a bit of working capital also impact in Q1. So that kind of -- that's kind of it.
Right. But $40 million is a pretty small number relative to $700 million to $800 million buyback. Do you plan to continue to be active as you have in the past?
Well, absolutely, absolutely. Yes, yes.
The following question is from Keith Howlett of Desjardins Securities.
Yes. I just wanted to make sure I understand the adjustment for the seasonal goods. Is this all seasonal products? Or you've sort of got a category of summer seasonal products that you adjusted for to get the result that you are within the 4% to 5% range?
Right. It excluded seasonal summer season, so -- products. So that's our category. We have a category, which is called summer -- in fact, it's summer A, summer B and -- but it's clearly that these categories that were impacted, summer categories. Elsewhere, we didn't have the weather impacting the other categories. Actually, just the summer.
Just so I understand it. Is this sort of lawn and garden, sandals, this sort of thing or sort of what items are we talking about here?
You got it right on. Summer garden, sandals, summer hats, barbecue, all -- beach toys, pool toys, all the things you would think of when you think of nice warm sunny weather that we just didn't have.
And just in terms of the competitive landscape, do you think you are still appropriately value-priced relative to competitors that are selling at $1 or $1.25?
Yes. I think the answer to your question is, yes. Do I find things like I have for years and years that other retailers are beating us on once in a while and then have to readjust? For sure, all the buyers do. But generally speaking, based on our last rounds of the market, which happens regularly, I feel like our relative value relative to the marketplace remains as competitive as it's been.
And then just finally on the cost initiatives that began, I guess, in Q3 of prior fiscal year and will benefit through to the end of 2Q. Are there specific programs that you can speak to there that we're talking about?
Not really. It hits initiatives at store level mostly. It's labor savings combined with other supplier savings if you want. But it's all in the course of being more efficient, leaner, keeping models simpler, pushing better tools, more information at the store level. So it's kind of in the mix of all that.
The following question is from [ James Ellison ] of Barclays.
I've got 2 quick ones here. So Neil, on the e-commerce pilot in Québec starting at the end of this year, would it be safe to assume that the test would -- for the pilot period would last a full year similar to your prior pilots that you've done?
No. I wouldn't commit to that length of time. I would be disappointed to be honest if there was a full year, but it might. The idea is no matter how much testing we do internally, you always learn things when you grow the volume of a business and put it into real life situation. And so depending on the challenges we find, if there are a lot of challenges, the test will go on longer so that we can provide a better product to the entire country when we go -- want to go live across the nation. And if we find that we're lucky enough that all of our pretesting has caught most, if not all of the things that we hope to execute properly, then the test will last much longer -- much shorter, and we will execute much sooner. So really it's an [ additive ] thing as we go along. We'll be paying attention, very close attention to it. And the moment we think it's a product worthy of full distribution, it will go up.
Got it. And just to confirm, you will be going live in Québec with all the product categories that you feel make sense. It's not like you'd be rolling it out gradually category by category. Is that right?
Yes. That's correct. It will be a representation of our full mix and the only things that won't be there will be things that are simply impractical for us to handle on an e-comm basis. The way we pack and build our goods for our stores because we are not going to change the way our goods are packed or shipped relative to our stores. So for example, we sell glass wine glasses and porcelain white plates in our stores and those, one could argue could make a good e-comm item, but because they don't meet the standards of drop test and other things that we would require to ship by couriers to people's houses, those won't be on the site, whereas other items, which are a nonissue, so blue pens, that you can find in stores, they'll be available on the site. So in every given category, there is multiple reasons why we are or are not listing items. But as a whole, this site will be a representation of what's in our stores and anything that we sell well that is a nonissue for shipping, we will include.
Got it. That makes sense. And just switching gears for a sec. So on the penetration of the $3.50 and $4 priced items, have you seen that you're receiving more options from suppliers? And are you seeing any kind of opportunities to further offer expansion at those price points in the store?
Not an expansion of them per se, but certainly, a nice acceptance by our customers. Our buyers are always looking for goods in all price points, at all price points, and I encourage myself and the other buyers to try to find as many things as we can at our -- at the price points of our origin at $1 and $1.25. And so we're always adding price points -- sorry, items at price points throughout the entire range. Obviously, it's pretty exciting to find a $4 item and more challenging to be super excited about a $1 item as time goes on. But those are the challenges that buyers have faced for years. And so we continue to do our best at items at all price points.
The following question is from Peter Sklar of BMO Capital Markets.
Michael, as I recall the last time you had a weather hiccup, if I can call it that, was the ice storm. And I remember at that time, I can't remember if it was in the quarterly release or you issued a press release, but you said, like the negative impact of the ice storm is this. And by the way, in the quarter to date, these are our same-store sales and that provided a lot of reassurance for investors. So I'm just wondering why you didn't provide that same disclosure that you did at the time of the ice storm.
Well, there are 2 big differences. The last time, it was Christmas. So Q4 F '14 where we had in November, 8.3% SSS; December, minus 7.5%; and January plus 11%. Now the difference between then and today is that Christmas sales were lost. We couldn't sell. We had 2 major winter storms, Québec and Ontario, are the 2 biggest weekends of the year right before Christmas and those were totally lost sales that are much more material than you see today. And so we felt at that time and that was the first time that, that happened with us being a public company decided to disclose that because it was much, much more material than it is today. The difference with this quarter is these are not necessarily lost sales, these are deferred sales. And in order to reassure you that we have recuperated a portion of that summer deferred revenue, we had to wait till today to confirm that. But 2 very different situations.
The following question is from Chris Li of Macquarie.
Michael, just maybe a follow-up on the -- Peter's question. If I look at it maybe from a different angle. So based on what you said that the non-summer seasonal products will comp in roughly 4% to 5% and then you just closed a comp with of about 2.6% for the quarter. So that would imply your summer seasonal products were probably down mid- to high single-digit for the quarter. Am I thinking about this the right way? I just wanted to get a sense of the quantifying -- what the decline was for that particular category.
Yes. Yes, you're right. Approximate, yes.
Okay. So that's helpful. And then just moving on to Dollar City. I mean, in your disclosure, you disclosed sales and when we do the square footage number, it seems like the Dollar City stores are averaging about CAD 230 per square foot versus CAD 280 for Dollarama. Given that you've given us now the disclosure, are you able to gives us more insight into what explains the differences between the 2 banners?
Well, historically, and it continues to be the case, smaller store footprints generally generate higher square foot sales. And so one of the reasons we've grown our footprint over the years in Canada, because we started around the same size as the Dollar City stores back in 1992, is that it's simply a much easier store and more comfortable store to operate well when it's a larger store. So it takes a hit on per square foot returns, but overall, it's the better way to run a business in Canada and down there, it's always safer to start a business at that size range and see whether your concept is accepted well or not like it was in Canada in 1992, and over the course of time, we'll see whether their per square foot sales remain the same. Obviously, the penetration in some of those countries is far from where it will be eventually. And so our penetration and our per square foot sales are based on 20 some years of adding stores and theirs are not. So for so many reasons, we think it's exciting that their per square foot sales are what they are, but the fact that they're higher than ours, it certainly does not concern.
Okay. That's helpful. And maybe last one for Michael. I think last couple quarters, you've mentioned shrink improvement or shrink reduction as a reason for the improvement in gross margin. Can you just help us understand how big of an opportunity that is going forward? Is that a meaningful one? And if so, what other initiatives are you planning to further improve shrink going forward?
Yes. So without giving you details, obviously, shrink is an opportunity. And yes, we do have some ongoing initiatives and part of the CapEx invested in cameras. And so there is a focus on, that, and we do expect some return from that. And so it's part of no -- the initiatives that will allow us to stay within the range of 15% to 15.5% that we're talking to you about. And I think that it should benefit this year and next year too. It's not like a one-shop impact. And it's a progress. So -- but that is going very well to date, and I think that we'll continue seeing some benefits during the rest of the year and next year.
And would shrink be a material consideration when you think about longer-term installing perhaps a self-scan kiosk at some of your stores? Will that a barrier perhaps for that to happen? Or is that still within your plans?
Well, that, we've never discussed that to date. We're not -- we're clearly not there. We're looking at more basic ways to reduce our losses. We're aware of it. We understand that it's there, but it's not -- we're not at that stage yet.
The following question is from Edward Kelly of Wells Fargo.
I wanted to just ask first a quick follow-up on the accounting change for IFRS 9. So if I understand this right, there is no overall impact bigger picture because you're capitalizing the hedge gain and loss in inventory and it flows through to P&L when the inventory is sold. But is there some temporary timing impact of this change because the inventory is not all sold in the current quarter and if you read the filing, it seems to suggest that there is an $8.6 million loss in Q1 that would have been in COGS but now it's in inventory. So wouldn't that have helped gross margin in the first quarter and then unwind later this year? I'm just trying to better understand [indiscernible].
No. Yes, so there is absolutely no difference, no impact, no timing whatsoever on your P&L, and so, I mean it's as simple as that. It's just taking it out of the OCI and putting it against your inventories. It's a balance sheet to balance sheet and when it hits the P&L, it's already adjusted, so instead of having to adjust it in the P&L.
Okay. So there is no P&L impact whatsoever?
No, no, no.
Okay. And then I just wanted to ask you a bigger-picture question around traffic. Traffic is -- let's call it modestly positive, flattish and you've done a remarkable job with driving ticket over time. What are your thoughts sort of like longer-term around the value you provide to your customers, the trade-off between sort of pricing and balancing traffic in margins? And I guess, what I'm trying to ask you is that as going forward, are you okay with traffic sort of where it is at current levels? And is there any thought about trying to accelerate that over time?
So historically, we've had between 0% and 1% traffic. You've got some ebb and flow movement. Right now, we're not preoccupied in the sense of more than we were in the past. So we know the model, the approach, the compellingness is, at the end of the day what counts. So we -- and as we, and you alluded to, and which is our model is keeping that balance between the return to the investor to higher gross margin and the compellingness to the customer. And for sure, compellingess to the competitor is priority #1. We monitor that through the competitive dynamic and what comes up in front of us, we don't have visibility on until we're there for the time being. As Neil said, there is nothing special going on. There is always a competitive dynamic. All the players have different moves at different times, and so we've been used to that. And that's what we do. Is there a structural change, a new competitor, something significant happening right now, no. So for us, it's business as usual and again, it's balancing value proposition with return.
Thank you. This will terminate the end of the conference. We thank you for your participation. You may now disconnect your lines.