BUSINESS

Dollarama Prices Headed For $4 Because China Is Moving Away From Low-End Products

09/10/2015 09:05 EDT | Updated 09/11/2016 05:12 EDT
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MONTREAL - Dollarama says the weaker Canadian dollar is forcing it to raise prices and could lead the discount retailer to increase its current price threshold from $3 to as much as $4 by late next year.

"The probability is in the third and fourth quarter of next year, we'll have to move our price points up,'' CEO Larry Rossy said Thursday during a conference call about its latest results, which beat analyst expectations.

Rossy told analysts the company hopes to get more "clarity'' about the need for higher prices during a trip to China in October.

"In general, we like to maintain our prices as long as we can, but this is really an exceptional time where the Canadian dollar has gone so poorly against the U.S. dollar and everything is bought in U.S. dollars. So to absorb 25 to 35 per cent (in currency swing) is almost impossible.''

Compounding Dollarama's efforts to offer consumers value is the dwindling availability of goods it can purchase for 25 to 35 cents and sell for $1 or $1.25. Rossy said China is no longer focusing on those price levels anymore.

Meanwhile, the Montreal-based discount retailer says new, higher-cost items could also weigh on its decision to raise the chain's current price threshold to $3.50 or $4 by late 2016.

However, Rossy said the new, higher-priced items would not lead to the introduction of new product categories. Food, for example, would remain priced at a maximum of $2.

And the company could mitigate pricing pressures by reducing product sizes.

"So as a consumer, I guess next year will not be a pleasant year from a purchasing point of view because you'll probably be seeing some inflation in all likelihood.''

Dollarama (TSX:DOL) said its earnings surged 39 per cent to $95.5 million in the three months ended Aug. 2 on a 14 per cent increase in sales.

During the second quarter, 76.5 per cent of Dollarama sales were for products priced higher than $1, up from 67 per cent a year ago.

Same-store sales -- a key retail measure of sales from stores open at least a year -- rose 7.9 per cent. It included a 6.2 per cent increase in the size of average purchases and 1.5 per cent more transactions.

Overall sales grew to $653.3 million from $572.6 million.

Net income amounted to 74 cents per common share, up from 51 cents per share or $68.9 million in the prior-year quarter.

Dollarama was expected to earn 61 cents per share on $642.7 million of revenues according to analysts polled by Thomson Reuters.

It has benefited from the addition of 72 net new stores over the past year, including 17 during the quarter. Dollarama operates 989 stores across Canada.

Sales growth is consistent across the country with no real negative impact being seen in oil-producing regions like Alberta.

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