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Good morning and welcome to the Dollarama Fiscal 2020 Third Quarter Results Conference Call. Neil Rossy, President and CEO; and Michael Ross, CFO, will make a short presentation, which will be followed by a question-and-answer period open exclusively to financial analysts. The press release, financial statements and management's discussion and analysis are available at dollarama.com in the Investor Relations section as well as on SEDAR. Before we start, I have been asked by Dollarama to read the following message regarding forward-looking statements. Dollarama's remarks today may contain forward-looking statements about current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements of Dollarama or Dollarcity, or any other future events or developments that may affect Dollarama or Dollarcity. 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 in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results at 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 underlying assumptions and risks, please consult the cautionary statement regarding forward-looking information contained in Dollarama's MD&A dated December 4, 2019, which is available on SEDAR. Forward-looking statements represents management expectation as at December 4, 2019. And except as may be required by law, Dollarama has no intention, 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 Neil Rossy.
Thank you, operator, and good morning, everyone. This morning, we released our third quarter financial results, and we are very pleased with our strong top line performance for our third consecutive quarter this year. Factors contributing to this solid performance include a 9.6% increase in sales and SSS up 5.3% driven by both higher basket size and transaction volume. This increase in SSS was mainly driven by the success of ongoing merchandising initiatives, supported by strong execution by our buying, operations and store teams. As discussed in prior quarters, this includes improved category management; strong in-store merchandising, a meaningful increase in our SKU count across all categories, among other initiatives; and a new queue line design in an increasing number of stores, with over 75% of the chain already converted. Q3 SSS was also given a boost by the calendar shift caused by a 52-week fiscal year this year following a 53-week fiscal year last year, with 3 additional Halloween shopping days falling in Q3 this year. Based on our performance to date, we have narrowed our underlying full year comparable store sales assumption from a range of 4 to 4.5, the top end of the previously disclosed range. Our increase in sales was also driven by the continued growth of our store network across Canada. We opened 21 net new stores in Q3 compared to 14 in Q3 last year. Total store count rose to 1,271 at quarter-end. Looking towards the fourth quarter, we are on track to open between 60 to 70 net new stores by fiscal year-end. Our sales performance to date this fiscal year reflect the strength of our business model and the continued appeal of our concept to consumers across Canada. Gross margin was in line with expectations, impacted by the same factors since the beginning of the year: a slight decrease in the product margin; higher sales of lower-margin items and higher logistics costs, although, as mentioned at the beginning of the year, the latter is having less of an impact in the second half of the year. Looking at growth plans in Canada. I mentioned that we had a busy quarter on the real estate front with 21 net new stores, bringing the total count of net new stores opened in the fiscal year-to-date to 46. We also made significant progress on our distribution center expansion product since our last conference call, in support of our long-term growth plans of 1,700 stores across Canada by 2027. The expanded distribution center is already operational as we fleet the remaining work, which will wrap up as planned before the end of the calendar year on budget. Looking now at our second growth platform. Our acquisition of 50.1% of Dollarcity became official mid-August, and as a result, Q3 is the first quarter to include our share of Dollarcity's net earnings for the period of August 14 to September 30. This amounts to $1.7 million of net earnings. The fourth quarter will include Dollarcity's net earnings for a full quarter from October 1 to December 31. And we continue to expect Dollarcity to contribute between $0.02 and $0.03 to our fiscal 2020 EPS, excluding the onetime gain on the call option, which Michael will explain shortly. The Dollarcity team continues to pursue its growth objectives with discipline and success, and I am very excited by the long-term potential of our second growth platform. As previously disclosed, the objective is to reach 600 Dollarcity stores by 2029 in the 3 current countries of operation, with the majority of store growth in Colombia. The target for the 2019 calendar year is to open 40 to 50 net new stores. Dollarcity has already opened 41 net new stores in its first 3 quarters. This brings its total store count to 210 with 104 locations in Colombia, 48 in El Salvador and 58 in Guatemala as at September 30, 2019. As a result of this strong performance, Dollarcity expects to not only meet but to slightly surpass the high end of its net new store target for calendar year 2019. I'll now hand it over to Michael to discuss our financial results and outlook in more detail. Michael, over to you.
Hi. Thank you, Neil, and good morning, everyone. So looking now at our financial results. Sales reached over $947 million, and same-store sales growth was also very strong, consisting of a 2.8% increase in average transaction size driven in part by an increase in the number of units per basket, and a 2.4% increase in the number of transactions. This increase in the number of transaction is mainly driven by ongoing in-store merchandising initiatives, which Neil gave some color on, as well as the positive impact of the calendar shift, with 3 additional Halloween shopping days falling in Q3. It is important to keep in mind here that the calendar shift is a net positive for Q3 but creates headwinds for Q4. In fact, Q4 of fiscal 2020, compared to Q4 of fiscal 2019, will include 1 less week of preholiday shopping, which historically is a strong sales week and which is replaced for the purpose of period-over-period comparison by a week at the end of January, which historically is a low sales week. The calendar shift impact in Q4 is greater than it is in Q3. Gross margin stood at 43.7% of sales. As mentioned by Neil, this is in line with expectations as we continue to operate in a low-inflation environment in which retailers are more reluctant to pass on costs to the consumer. SG&A represented 15% of sales this quarter, higher year-over-year as a percentage of sales as a result of the timing of certain expenses and slight increase in labor costs due to wage increases and to calendar shift with Halloween packaway following in Q3 this year. EBITDA was up 4.3% to $273.2 million, representing 28.8% of sales. Net earnings were $138.6 million, a 4.9% increase over the prior year. And diluted earnings per share grew 10% to $0.44. Net earnings reflect the inclusion of Dollarama's share of Dollarcity's net earnings for 45 days and a onetime nonrecurring $2.8 million gain on the call option or $2.1 million after tax. This $2.8 million is an accounting gain and represents the difference between the fair value of the call option based on a third-party valuation and the estimated purchase price of the 50.1% investment in Dollarcity. EPS was also positively impacted by the repurchase of shares through the corporation's normal course issuer bid over the past 12 months. During Q3, a total of 2,772,340 common shares were repurchased for cancellation under the NCIB for a total cash consideration of $129.8 million. Cash flow generated from operating activities increased from $129 million to $203 million, an increase attributable to higher earnings in the current quarter and to a lower use of working capital as a result of the timing of payments of payables, partially offset by higher inventory levels. CapEx for Q3 of fiscal 2020 totaled $39.8 million compared to $33 million of prior year, with the increase attributable to more store openings quarter-over-quarter. Quick note on Dollarcity accounting and the estimated purchase price before turning to fiscal 2020 guidance. The current total estimated purchase price of USD 92.7 million or CAD 122.1 million was recorded as an investment in Q3. As a reminder, this estimate represents 50.1% of a 5x multiple of Dollars City's estimated EBITDA for the 12-month period ending June 30, 2020, minus net debt and subject to other adjustments. We made an upfront payment of USD 40 million upon closing of the transaction in Q3. The balance owing, currently estimated at USD 52.7 million and subject to final adjustments, is to be paid in Q3 of fiscal 2021. It is now included in accounts payable on the balance sheet. Turning now to the outlook. Although we reported strong same-store sales of 5.2% for the first 9 months of fiscal 2020, we are expecting that full year same-store sales will come in between 4% to 4.5%, which is the top end of our previously disclosed range. This reflects the very real impact of the shift in the retail calendar despite same-store sales of 5.2% fiscal year-to-date, which particularly impacts our fourth quarter. As previously mentioned, the shift results in 3 less Halloween shopping days and 1 less holiday shopping week in Q4, which historically is a strong sales week. This was replaced for the purposes of period-over-period comparison by a week at the end of January which historically is a low sales week, as I mentioned earlier. Having said that, holiday shopping is well under way in all of our stores, and we remain in line with and on track to achieve our previously stated guidance ranges and growth objectives. We have a compelling expanded assortment across all categories, and our store teams continue to work hard on various merchandising initiatives to stimulate sales -- growth -- and grow the basket and increase traffic as we continue to open new stores across the country. Note that as per usual practice, we will provide guidance for fiscal 2021 in conjunction with the release of our fourth quarter and full year results on April 1, 2020. So that concludes our formal remarks. I will now turn it over to the operator to take questions from financial analysts.
[Operator Instructions] Our first question is from Irene Nattel with RBC Capital Markets.
Just trying to make sure that I'm understanding your commentary around same-store sales. If we exclude the calendar shift, okay, like if we take actual same weeks to same weeks, are you suggesting that underlying same-store sales growth is in that 4% to 4.5% range?
Yes. In fact, we -- so the first 9 months, we accumulated 5.3 -- 5.2% same-store sales. Q1, Q2 and Q3 benefited from the shift. And if we exclude the shift impact, that 5.2% would look more like 4% to 4.5%. You're absolutely right. So meaning, since the annual guidance is 4% to 4.5%, that Q4, if you compare apples-to-apples or excluding the shift effect, would also be between 4% and 4.5%-ish.
That's really helpful. And if we think about the initiatives that are driving this very nice uptick notably in traffic this year, and then kind of thinking about as we move forward in Q4, and I recognize you're not giving F '20 guidance now, but can you talk about the sustainability of some of these initiatives or what you still have to roll out or whether it's all rolled out? Or how you think about keeping this momentum going as we move forward.
So you're talking top line, sorry?
Yes. Same-store sales. Yes. Yes. Yes. And then I have a question on costs after for top line, yes.
Okay. So -- well, right now, I think that as we mentioned to you and I've mentioned on the road shows is that this year, first of all, we benefit from comping a softer year. So we -- that's out there. But also, and you see it in the results, we've been able to stimulate from different initiatives some healthy traffic and unit growth. Obviously, this year being strong on that side, you would expect next year the comp would be harder. But it doesn't mean that the initiatives don't continue working. And the initiatives that you're referring to, we got different ones whether it's the queue line, whether it's assortment management or other, we still, obviously, are working hard to maintain that momentum. But just naturally, next year, it's just going to be harder to comp against a strong year like this year in terms of traffic pickup and unit sales. But between now and the end of the year, I think nothing has changed. We still feel the same momentum that we've had since the beginning of the year.
That's great. And if we could just sort of talk a little bit on the cost side of the equation. Couple of things. First of all, I just want to make sure that we understand -- so the pickup that we -- the pickup -- what drove the same-store sales growth in Q3 also drove a pickup in SG&A that will unwind a bit in Q4? That's the first question. But the second question is around the whole DC expansion and the impact that's had on both gross margin and, I guess, sort of SG&A and inefficiencies. And when we really start to lap that and whether there's any way for us to think about how to quantify that?
Okay. So your first question, you answered very well at the same time. So you're absolutely right, yes. Unlike other years, like -- let's use last year where we -- Q4 picked up an additional day of Halloween. So these have impacts but not as great as this year when you have a whole week, a whole 7-day shift. Now the whole 7-day shift this year is not only 3 days of Halloween, it's the packing away of all your Halloween season and putting in your new Christmas season. So all the labor costs related to that has impacted the Q3 results. And now because it's behind us, obviously Q4 will not have to deal with that, and you will see effectively that G&A ratio come back down, if you want, more into line to meet the range that we have in the outlook right now. For the second question, the DC, you're absolutely right. And as we've stated throughout the year, it's a onetime for -- onetime cost for this year, so it becomes a tailwind for next year. However, as we also mentioned, we've got IMO 2020 kicking in. So those are freight costs that have even started -- freight-in costs that have increased due to the reduction in sulfur cap imposed by the international Maritime Organization. And so I would say a lot of that additional costs will be offsetting the onetime G&A logistics tailwind that we're getting. So I think it's -- we'll try to manage it as mostly as we can, but essentially, you've got a tailwind there, but you also have some headwind coming in. Obviously, the IMO, the freight-in is in your gross margin figure, but these are 2 items that we know about today that I started to disclose that will also have an impact. So that's why I'm mentioning it.
Okay. So in other words, you shouldn't get too excited?
No.
Our next question is from Mark Petrie with CIBC.
So sorry, could you just be a bit more specific in terms of the SG&A sort of timing impact in terms of dollars in Q3? And then presumably, that just comes right out of Q4 as well?
Right. So well, we -- a big part of the 100 bps increase relates to packaway and the labor costs to change from one season -- one big season to another big season. So it's not just 20 feet that you're changing, it's 3 full or 4 full aisles of stuff. So -- and it all falls in that week. So all of that cost will -- you won't have to incur in Q4. So the gap year-over-year in G&A will shrink compared to what it is in Q3.
Okay. So fair to say G&A rate would have been up in Q3 even absent this impact, but that's what pushed it to such a material increase?
Yes. Yes.
Okay. Okay. So outside of the shifts in merchandising, which is clearly having an impact on your mix, what's your current perspective on pricing and the sort of regular course of price increases outside of the 25% to 30% sort of SKU refreshes?
So the market is generally stable. We're not seeing any inflation in our competitors. And for the moment, we don't see any markups coming in the near future. But obviously, it's something we pay close attention to. And as we've stated in the past, we'll never be the first to move our prices up but rather always try to be the last. And so for the moment, we don't see that happening.
Okay. And then in terms of the merchandising sort of shifts and the impact on mix, do you think that the most significant impacts from that have been felt already? Or do you think that there are sort of incremental steps from here that will sort of further move, shift the balance between same-store sales and gross margin?
I think in terms of mix, we definitely have a big portion up to date. We told you that for the queue line example that's stimulating part of that mix change, that 66% of the chain is already covered, moving closer and closer to 70%, 75%. But -- so I'd say -- so that definitely would transpire next year. So in other words, if -- a lot of the reduction is already -- I mean the shift -- the mix shift is a lot attributed to that and done, so you'll just have a little bit more next year on that.
Okay. And then I think last quarter, you said it was still too early to say. Are you able to give us any sense today in terms of the impact from the increased number of SKUs that you've been able to get on the floor through the course of this year?
No. We're not going to disclose that. We're continuing to study the impact of that. But no, we -- we're -- we know it helped the top line, and we just haven't decided whether that's a level we want to sustain or not yet. So we're still looking at studying that.
Okay. And then just the last one. I know you've been sort of testing self checkouts. Maybe that --- I think that test is expanding or maybe it's now a full rollout. What's the penetration today? And can you give us a sense of the economics, either in terms of the dollar savings from that or sort of a payback or something?
Yes. So we're still studying self-checkouts. And the -- what we're looking -- and this is more top line initiative -- top line-generating initiative and that we're piloting this carefully to measure the additional revenues that we get from the initiative of putting in these self-checkout machines. So we say top line because we noticed that in key periods like we're in today, we -- there's a lot of traffic and waiting lines, and we actually pick up stuff left and right and fill up baskets of -- people dropping their -- what they were going to purchase because they're tired of waiting. And...
But to be clear, that's not a new phenomenon.
No.
It's been happening forever. So this is just -- this is an initiative that helps resolve that.
Right. And -- yes. So we're approximately 20 stores today and in a pilot mode, if you want, of continuing to understand the impact.
Right. So the rollout of the self-checkouts or eventual slow but sure rollout is all dependent on how well we can make sure that those machines serve our customers. And it's an evolution and there's a lot of work to be done because we like to do things a certain way at Dollarama. And so we're trying to integrate the correct security that doesn't cause our customer any downside. We're trying to implement ways for them to have the availability to buy shopping bags conveniently and on and on. So it's not just a study about returns, it's a study about execution. And then when we feel we've got the right execution, we'll ramp up the speed of execution. But it's quite complex because it also affects the flow of the entire front of your store. And so it's actually a fascinating study because every single store is a new study, and we want to make sure the flow of our stores is efficient because they're not very big footprints and we have a lot of traffic, as you know. And so it's a slow but steady rollout. It won't be a fast one.
Our next question is from Vishal Shreedhar with National Bank.
On the slight decrease in product margins that you've noted this quarter and in prior quarters, should we think about the only way to eliminate that slight decrease in product margins is if inflation comes back to the market? And if it doesn't, then that slight decrease in product margin pressure will continue?
Right. So as you know, we do -- there are 2 components. One is the refresh. So we refresh 25% to 30% of our goods every year. And through that process, we're able to maintain some decent margin levels. With the other 70%, you're right. So as Neil was saying earlier, we don't -- we're all getting inflation, competitors and ourselves. And if they're not passing on that cost, we're not. So the day that they start passing on, we will. And that will help pick up some of the margin for sure. And over and above that, as we've stated in the past, if you'll find ways to stimulate more unit sales, more traffic, well, obviously, that helps. It helped this year, and hopefully it will continue helping us in future years.
Okay. Okay. So moving on to the SG&A. So thank you for helping us understand that a big part of the SG&A was due to some -- the increases due to timing shift. But you had indicated that even without that timing shift, SG&A would have still been up year-over-year. Just wondering if the efficiency initiatives that Dollarama has been imprinting over the last few years, and I know they're not as big as they used be, is that effectively behind us and now we should think of SG&A -- Dollarama not being able to lever SG&A outside of these calendar shifts?
Right. So -- yes. And one, you're right, is that the lower-hanging fruits are behind us. The big projects are behind us. Now it's more grinding it out. And so where -- 2 things impact that number: the initiatives themselves offset by inflation, so depending on the inflation level; but also on scaling. So in years of higher sales, the scaling impact helps that percentage. And so those are the main factors influencing that. So you're right. Right now, we're -- it's more about grinding it out. We do have a lot of initiatives whether they are on the gross margin side with logistics, whether they're at store level or overhead. So we've got initiatives going on everywhere, but they're not as big as -- or the impact of it is not as strong as you saw historically. So moving forward -- well, you've got the guidance for this year, and in March we'll come back for next year's guidance.
Okay. And just on the third-party valuation for Dollarcity. Obviously, it came in a little bit higher than what management anticipates to pay for the business. But still, I guess in that 5x EBITDA range, which is considerably lower than the trading valuation for Dollarama's core business, I'm just wondering if management was surprised that those valuations came in so close and if there's any details or parameters you can provide on that third-party valuation given that we can't see Dollarcity details.
Right. So the initial -- the price we're paying on Dollarcity is based on negotiation that happened back in 2013. So it's a formula that you apply. And so that's what we record. But accounting rules require us to -- at the date of the exercise of the call option to have an independent valuation done, and -- which they did, and it came out to where it is today. It's not for us to challenge and that we rely on that expertise. And it came out to where it is. There's a difference. And for accounting purposes and tax purposes, we -- that's the amount we go by. There's nothing more I can say on it.
Our next question is from Peter Sklar with BMO Capital Markets.
I just have one question for Neil. Neil, you and Michael are always referring to your merchandising initiatives and the impact that's having on traffic and basket, et cetera, margin. Can you talk -- and Michael has used the expression assortment management, which is kind of a hit -- a hint, but can you elaborate a little bit more what some of these initiatives are? Is it just normal blocking and tackling that your buyers and/or merchants are executing every day?
Yes. Honestly, I think to date, the answer is 95% of it is normal blocking and tackling. And I won't make it sound more complicated than that because it's not. But to do it as well or better than everybody else is a constant challenge on a day-to-day basis. And I guess our focus on that and our ability to execute that in an efficient manner through an entire business that has been built to execute a very restrictive amount of price points in a fashion that is profitable is what allows us to do it. I would never sit here and tell you that if our business was built to do it for items up to $200, we can do it nearly as efficiently as we do for the items that we do it for. So I think with all due respect to the genius of the buying team, they have the advantage of working within a system that's so highly restrictive and so highly efficient because of its focus on a certain number of price points that it allows us the ability to remain ultimately focused, let's just say.
Okay. And are your buyers also your merchants?
It's an excellent question. I would say that there's a combination of the buying team and the ops team that decides on the merchandising of our stores. And the Art Department or our internal marketing piece of the business also helps with that. So when we're bringing in an item, the buyer has a specific department in mind. That will be communicated to the Art Department. The Art Department will try to integrate that family of art or look that we have in that certain area of the store. That will simplify the task for the store on knowing where it goes if it's not obvious. And obviously, our codes that we use internally, in the top right corner, on most items, et cetera, also gives guidance to our stores on where the items go. And then the stores within the store itself, the ops team will have full discretion on where and how they think the actual section should be set up and what's the most logical for the customer who's doing the shopping, and then they'll try to standardize that across all stores so that you have that same feel, look and experience when you go from store to store. So it's a combination of the ops team, the art team and the buying team that decide those things.
Our next question is from Derek Dley with Canaccord Genuity.
I was just wondering if you could provide a little bit more color just on some of the categories that helped drive the strength in same-store sales. I mean I'm assuming seasonal items were one of them. But did you see any sort of differences in some of your other categories?
No. No, not really. But you're right. I mean obviously, Halloween was a big part as Christmas will be a big part in Q4. But for the rest, as we mentioned, that in terms of mix, the consumables continue to do very well. And the rest of our items, I'd say also, it's -- there's nothing that stands out other than Halloween in Q3.
And then when you -- in your press release, I think you've commented that there -- the margins were unfavorably impacted by product mix or a shift to lower-margin categories. I mean is consumable below -- like would that be the lower-margin category you're referring to?
Yes. Well, again, there are 3 components. There's that onetime logistics costs related to the DC, there's the fact that we're not doing markups and there's the mix impact, absolutely. All 3 have been -- of those factors have impacted Q1, Q2 and Q3 and we expect to impact Q4 again. And 1 of those 3 logistics will fall off for next year, the onetime logistics costs. That will not continue on next year.
Our next question is from Chris Li with Desjardins Bank.
Maybe just the first one for Michael. Michael, you mentioned IMO 2020 as being a potential headwind for gross margin next year. I know there are lots of moving parts. But how much visibility does the company have in terms of the magnitude of the impact? And is there a plan to try to mitigate that impact?
Yes. So we do have visibility, and we're working on plans. We didn't learn this now. It's -- last quarter, we started to factor that in. And I'd say we're -- it's a 50% fine-tuned, understood, and we're trying to figure other ways to mitigate part of that. But it's definitely going to hit us. But to what magnitude is something we're still working on.
Okay. And then maybe just a follow-up on just transportation cost. I guess, not next year, but the year after, Canada, there's going to be a mandate for the electronic logging devices for trucks. I know you guys are more skewed towards rails. But do you see that also having a potential big headwind? Or is that something that is not as meaningful?
With the headwind, I don't seeing -- see it as material for the time being for next year. But we're certainly looking at it right now.
Okay. And then my last question. I guess it's been almost a year since you guys did a national rollout of your bulk selling initiative. Can you give us an update on how that's going?
Yes. So it's a -- and Neil, you can add color. It's going well as expected, again not material. We don't expect it to be material by the end of this year or next year again. But it's going according to what we had anticipated and also learning some stuff through it. So Neil, I don't know if...
Yes. It's progressing nicely. We're building our capabilities, so we've added Halloween. And now we have Christmas, a very select amount of items. But we keep opening doors to the actual functioning of the website, and we're seeing very nice acceptance. Our customers are happy with the efficiency of the execution when they place an order. But again, as Michael said, this is an addition to our current business. It will never be a substantial piece of the business. It's meant to serve a specific purpose. And that is, when our customers require a larger quantity of our items and don't wish to go store to store, we will offer those best-selling items on our site, and we will also consider any requests for items that are not on the site that we currently sell in the stores if the quantity is large enough as well.
And just a follow-up on that. Is it helping you to target maybe a new customer base like the small and medium businesses or prisons or hospitals or schools that you historically haven't penetrated because you didn't have that? Or is that not really having a big impact on those customers?
We had some of those customers before. It's giving those customers an easier way to interact with their needs and Dollarama's ability to provide those needs. To be clear, our goal is not to become a wholesaler. We are a retailer. And as you can see, if you visit our site, we are charging the exact same thing on the site as we do in our stores. So there is no advantage or disadvantage to the customer from a retail perspective. It's purely a question of efficiency, of getting the goods to them in an efficient manner. And there's no question that small businesses and hospitals and schools and daycares and what have you for the goods that we sell will find this a very useful tool.
Our next question is from Karen Short with Barclays.
This is actually Renato Basanta on the line for Karen. So first, I just wanted to touch on the competitive environment. Just wondering what you're seeing out there. I know it's generally pretty competitive, but clearly you've been focused on protecting or growing share. And one of your competitors recently had a change in leadership, which could presumably change their approach. So I'm wondering if you've seen anything to indicate a change in competitive intensity out there.
No. I would say the simple answer is no.
Okay. Fair enough. And then just on the new stores, it would be helpful if you could provide some color on new store performance. Wondering how the most recent vintage is performing both versus prior years and also your internal expectations.
So it's -- if you look at F '17 and F '18 cohorts, as we stated in the past, the payback is within 2 years, and it's actually better than prior years. So the cost to open up a store is still around $400,000 net of tenant allowances. And the average sales first year, around $2.2 million; second year, $2.3 million. Average chain sales, $3 million. So it's going very well.
Okay. Great. And then last question for me. Is there anything we should be thinking about with respect to the timing of the introduction of higher price points above $4? In other words, what are really your top considerations with respect to that? And have you seen any changes to those factors that would potentially change the timing with respect to rolling out higher price points?
Okay. So as I've stated throughout the year and that still stands as there's no intention of doing this, this year, most likely not next year. And we'll -- the further out we go, the more likely we will. But for the time being, it's the same speech.
I would say, the one thing that would make it an obvious choice for us and the only thing that will make it an obvious choice for us is when today's $4 is worth $5, we'll talk about it for sure. Until then, there's no rush. It's something we understand that we can do at any time. But we really would want inflation to be a big piece of that decision.
Our next question is from Edward Kelly with Wells Fargo.
I wanted to just quickly follow up to start on the calendar and its impact on the gross margin. Was there some gross margin benefit to Q3 just because of the the higher mix of Halloween sales? And then as we think about Q4, I would think Q4 could be negatively impacted if you have less higher-margin discretionary sales. And I guess what I'm asking you as part of this is, is the gross margin pressure in Q4 maybe a bit bigger than Q3 because of all this?
Now so in terms of gross margin impact, percentage or dollars, no. So the decrease you see in Q3 and Q4 compared to last year that we told you at the beginning of the year to expect that in the second half of the year, the spread between last year would shrink. That's because last year's Q3 and Q4 compared to the year before shrank a lot. So that explains -- because it was the transition of the mix that kicked in last year that you're feeling much more this year. But as we roll into Q3 and Q4, that last half of the year, we told you that the difference would come in a bit, which it did in Q3 and expecting to do in Q4 also compared to the beginning of -- yes.
Okay. As we think about gross margin going forward now, what's the outlook in terms of product and cost inflation? So what you're paying for product. I mean you're -- there's no plan to take pricing, so it seems like the markup pressure will remain. I'm just curious, going forward as we start thinking about next year, is that pressure the same? Is it more? What does mix look like going forward? Is that pressure the same, more? I mean I'm asking all this because as of right now, the consensus in The Street has your gross margin up 25 basis points next year. And I'm wondering if there's hope for stability, to be honest.
Yes. So we're going to give you more guidance in March. All we can talk to you about is today. So we're not seeing opportunities to mark up. We're not seeing that inflation. We have the opportunity to improve margin through more unit sales, more traffic and the refresh. Those are our means for the moment. So -- and we don't have visibility over next year yet. We've got it over the rest of this year but not next year. So we'll have to see when we come back in March.
Right. And when you say that the landscape from a pricing perspective is stable, is there any sign whatsoever of anyone passing through some costs? Or there's just no sign at all of that?
No. Well, it's more generalized. We're not seeing it. Obviously, we are doing some small portion but not as much as historically. So we're not disclosing the details. But generally, for the time being, it's as we've seen it throughout this year. So it's flattish.
Thank you. This will conclude today's conference call. Please disconnect your lines at this time, and we thank you for your participation.