Dollarama Inc. (OTCPK:DLMAF) Q3 2023 Earnings Conference Call December 7, 2022 10:30 AM ET
Company Participants
Neil Rossy – President and Chief Executive Officer
J.P. Towner – Chief Financial Officer
Conference Call Participants
Irene Nattel – RBC Capital Markets
Chris Li – Desjardins
Mark Petrie – CIBC
George Doumet – Scotiabank
Vishal Shreedhar – National Bank
Peter Sklar – BMO Capital Markets
Brian Morrison – TD Securities
Martin Landry – Stifel GMP
Derek Dley – Canaccord Genuity
Operator
Good morning and welcome to the Dollarama Fiscal 2023 Third Quarter Results Conference Call. Neil Rossy, President and CEO; and J.P. Towner, 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 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 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, 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 forward-looking information contained in Dollarama’s MD&A dated December 7, 2022 available on SEDAR. Forward-looking statements represent management’s expectations as at December 7, 2022 and except as maybe 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 Neil Rossy.
Neil Rossy
Thank you, operator and good morning everyone. This morning, Dollarama released strong third quarter fiscal 2023 financial and operating results highlighted by a nearly 15% increase in sales and a double-digit percentage increase in each of comparable store sales, EBITDA and EPS. Our solid performance across our key metrics speaks to our commitment to providing the best year round value on the everyday products we offer, combined with our ability to provide a convenient and consistent shopping experience.
We continue to see sustained demand for a vast selection of affordable products from coast to coast, notably in the consumable product categories, which has fueled an acceleration in same-store sales. Three quarters into the year, the trend is clear. Our value promise in a high inflation environment is even more relevant as consumers juggle the pressure on their wallets and adjust their spending strategies. We believe that the combination of convenient locations, great value and strong store team execution will keep those new customers coming back.
Last quarter, we provided an update on the rebuilding of our inventory, which has continued in Q3. Higher inventories not only reflects the ongoing replenishment of our safety stock and the purchasing of seasonal items earlier than in the past, but also continued store network growth and strong same-store sales. In terms of product selection, our buying team has been working hard to procure compelling products in all categories and across all our price points, which is now clearly reflected in our stores. This includes the further introduction of items at our new price points of between $4.25 and $5. A gradual rollout which is proceeding as planned. We also remain extremely disciplined when executing on our price follower strategy. Product by product always making sure we are delivering the best year round value possible.
We continue to increase proximity and convenience for our customers as we pursue our profitable growth strategy through the execution of new store openings for fiscal 2023. We opened 18 net new stores during the quarter, bringing the fiscal year-to-date total to 41. As has been the case over the last few years, we expect a busy Q4 on the real estate front and remain on track to reach our full year target of 60 to 70 net new stores. We are mindful of ensuring that our distribution and warehousing network is up to the task to support our long-term store objective in Canada. This includes expanding warehousing capacity in tandem with planned store growth and ensuring we are maximizing the efficiency of our logistics operations over the long-term.
Subsequent to quarter end, and as announced this morning, we were pleased to enter into an agreement to purchase industrial properties located near our existing centralized logistics network, just adjacent to our distribution center here in TMR. The purchase price is $87.3 million subject to closing adjustments. The strategically located property will provide us with additional flexibility to support our long-term logistics needs as we pursue our target of 2,000 Dollarama stores in Canada by 2031. As a reminder, in late fiscal 2022, we signed a long-term lease for its seventh warehouse in Laval. Construction for this new 500,000 square foot built-to-suit facility is expected to be completed by the end of fiscal 2023 as planned.
Dollar City has continued to perform well, generating strong sales and profitable growth since we acquired our 50.1% equity interest well over 3 years ago. There is an extremely strong team in place executing on Dollar City’s business plan and delivering compelling value to markets with an appetite for our value proposition. In a few short years, Dollar City has cemented its presence in El Salvador and Guatemala has pursued its growth in Colombia at a good cadence and successfully entered Peru in May of last year, a fourth market of operation. From the beginning, our objective was to bring our tried and true concept to these compelling growth markets and scale up the business over time, executing our concept in a low risk manner that would not distract from the execution of our plans in Canada. After a decade of experience on the ground, I am proud to see that our strategy and its execution, has been on point.
As such this morning, we were pleased to announce an increase to Dollar City’s long-term store target from 600 stores to 850 stores by 2029 and its 4 current markets of operation. The over 40% store increase compared to the previous target primarily reflects the inclusion of anticipated growth in Peru, which was not included in our previous target and additional anticipated growth in Colombia. These are two attractive Latin American retail markets with each have a growing appetite for Dollar City’s localized value proposition.
As we look to the fourth quarter for Dollarama, which is historically our busiest in terms of sales, we expect inflationary pressures to persist through to our fiscal year end. In this context, we will stay true to our brand promise of providing our customers with convenience as well as compelling value on every dollar they spend in our stores.
J.P., over to you to review our financial results in more detail.
J.P. Towner
Thank you, Neil and good morning everyone. We are very pleased with our financial and operating performance in Q3 with Canadians from all walks of life continuing to seek value and lower prices on the goods they need, which is driving traffic to our stores.
Starting with our top line, our strong sales performance reflects our growing store network and the continued acceleration in same-store sales growth, which came in at 10.8% for the quarter. With a 10.3% increase in customer traffic and a 0.4% increase in basket size, there is no doubt that our value proposition which is proven to be relevant through the economic cycle remains so in the current inflationary context. This is supported by a third consecutive quarter of higher than historical demand for consumable products, while also registering a good performance on general and seasonal merchandise. Finally, we are benefiting from our pricing strategy, including the introduction of new price points up to $5.
EBITDA increased by 11.3% to $386 million or 29.9% of sales and diluted earnings per share increased by 14.8% to $0.70 per share. Our strong earnings growth reflects the continued acceleration in same-store sales, active management of our gross margin and SG&A as well as the higher equity pickup from Dollar City. Gross margin was 43.3% of sales compared to 44.4% of sales in the third quarter of last year. The decrease is primarily attributable to sales mix as well as higher logistics costs. In the mix, we have a larger proportion of sales of lower margin consumables, while the ramp up in logistics costs, as previously discussed, is a question of timing as we process exceptionally high volumes of goods through the back half of the year due to our inventory rebuild.
Our inventory increased just over $1 billion at quarter end, representing a 68% year-over-year increase. A large proportion of that represents in-transit inventory. It also reflects the purchasing of goods earlier than historically in the context of global supply chain disruptions and the fact that we are now seeing a compression in transit times. This means that we have some inventory being received earlier than expected. This combined with store network growth accelerated SSS and planning for historically highest fourth quarter sales explained the significant increase year-over-year. We are now in a good inventory position and safety stock position for the coming quarters. SG&A came in at 14.1% of sales compared to 14.2% of sales last year.
As previously mentioned, we are seeing stronger wage growth in the inflationary context offset by ongoing productivity initiatives and the positive impact of scaling from strong sales. Our share of Dollar City’s net earnings was $9.2 million, up 26% compared to $7.3 million last year, reflecting a solid financial and operational performance as well as the entry into Peru continuing to ramp up. In the third quarter, Dollar City opened 18 net new stores, representing year-over-year growth of 12.8% and bringing their total store count to 395 stores, with 235 locations in Colombia, 83 in Guatemala, 61 in El Salvador and 17 in Peru. This compares 350 total stores at their year end of December 31, 2021.
The ordinary course put right for Dollar City’s founding group commenced this past October. If exercised, we must purchase some of their shares at fair market value. This would be within a framework of conditions which include, but are not limited to transaction size and key person ownership thresholds. We have no indication of the founding group’s intention to exercise this right at this time. Should it be exercised in the near future, we believe we have the financial flexibility to increase our ownership stake, which may have a short-term temporary impact on our capital allocation strategy.
On the capital allocation front, our NCIB activity was more moderate with the repurchase of just under 1 million shares in Q3, which is simply due to more cash allocated to inventory rebuild in the quarter. The Board also approved a quarterly cash dividend of $5.53 per share. At quarter end, our adjusted net debt to EBITDA ratio was 2.79x unchanged from the prior quarter and within our comfort zone is 2.75x to 3x adjusted net debt to EBITDA. We expect to continue to be active under our NCIB program in Q4. In October, we launched and successfully completed the bond offering of senior unsecured notes for proceeds of $700 million as part of the active management of our capital structure. I’d like to congratulate the team for accomplishing this in a challenging credit market.
Proceeds from the issuance were used this past November to repair bonds and short-term debt maturities. On the back of our continued ESG effort which includes our first climate strategy published last summer, we were pleased to have our MSCI rating upgraded from BBB to A this past October. With significant progress made over the last 24 months, we continue to move ahead with our sustainability commitments, which we view as a journey wherein we must continuously raise the bar.
Turning now to the outlook for the remainder of the year. On gross margin, the change in sales mix and the timing of higher logistics costs are reflected in the narrowing of our gross margin range for fiscal 2023 to between 43.1% and 43.6% of sales. This represents the middle of our previously disclosed guidance range. Guidance on SG&A net new stores and CapEx remain unchanged. On CapEx, our property acquisition agreement is expected to close in early fiscal 2024 and as such should be reflected in next year’s CapEx envelope.
Looking at the assumptions on which our guidance ranges are based, these also remain unchanged except for same-store sales. With stronger than historical demand for lower margin consumable products and our very strong SSS performance, we have increased our SSS assumption for fiscal 2023 from a range of 6.5% to 7.5% to a range of 9.5% to 10.5%. This assumes that demand trends year-to-date hold that we do not return to a COVID lockdown scenario and that weather for the most part cooperates.
That concludes our formal remarks. I will turn it over to the operator for the Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Thank you for your patience. The first question is from Irene Nattel with RBC Capital Markets. Please go ahead.
Irene Nattel
Thanks and good morning, everyone. I was wondering if you could please give us a little bit more color around what you are seeing now in terms of consumer demand trends with consumables versus non-consumables and also reaction to the higher price points?
Neil Rossy
Sure. So, the reaction to our higher price points have been no reaction at all from the perspective of verbal feedback or any reaction that we would fear when introducing a higher price point. I think it was very well received. They saw the value in the goods that we had at the prices that we offer. And so it was business as usual from that perspective. As far as our category performances, certainly the impact of trade-down and consumables pushed our SSS in Q3 and our Q3 Halloween and back-to-school performance was good. But again, when you layer on the positive impact from consumables, you end up where we were in Q3.
Irene Nattel
Okay. So, but just to – sorry, drill down a little bit more the sort of the normal historical Dollarama categories, you didn’t see any consumer hesitation and what are you seeing in terms of early holiday consumer behavior?
Neil Rossy
So, no consumer hesitation across all the classic categories, simply a lift in our consumable category. For Christmas, it’s too early to call. There is a bunch of timing elements that have to be considered this year. Last year, we saw consumers shop earlier than usual due to restrictions and lockdowns. And this year, we are seeing the normalization of that pattern and returning to a purchasing pattern more in line with pre-COVID, where sales seem to come closer to the date of the actual holiday.
Irene Nattel
That’s great. And just one final one if I may and this goes to gross margins and shipping container costs. Certainly, we have seen a very nice sort of rolling over of those. How should we be thinking about gross margins as we look ahead to F ‘24?
J.P. Towner
Yes. So in terms of next year’s gross margin, Irene, you are right, we are seeing a normalization of the supply chain environment and compression in lead times as we mentioned earlier. And that normalization of supply chain is reflected in lower container costs which are trending back to pre-COVID levels. So when you think about next year gross margin kind of have to put what is definitely a tailwind from lower container cost against a currency that has moved slightly higher and some mix impact of consumable demands remain. So when you put it altogether keeping in mind that we are always a price follower and our priority for next year will be to maintain our relative value proposition as it’s always been. When you put it altogether, I think we are in a slightly favorable gross margin environment coming in fiscal 2024.
Neil Rossy
I am going to add a little color as well which is while we have tailwinds for transportation and overseas FOBs, we still have major headwinds from domestic vendors and domestic manufacturers, the very opposite of each other. So, they also tend to cancel each other out somewhat.
Irene Nattel
Thank you.
Neil Rossy
Thanks, Irene.
Operator
Thank you. The next question is from Chris Li with Desjardins. Please go ahead.
Chris Li
Good morning. I just have a question first on the SG&A side of things. We saw a little bit of improvement, but despite gross on top line growth. So I wanted to ask if you can comment a bit more on what drove the high SG&A? And also going into next year, does the SG&A picture look a bit better as you start to lap some of these minimum wage hikes and then labor shortage continues to improve? Thank you.
J.P. Towner
So, the wage growth environment remains slightly higher than we expected at the beginning of the year. That’s offset through scaling and productivity initiatives that are ongoing. In addition in Q3 and so far in Q4, when you have traffic increasing by double-digits like we saw in Q3, it doesn’t mean that we have to allocate more hours in the stores to handle number one inventory rebuild and number two, the higher traffic. So when you put it altogether, it was slightly favorable in terms of gross margin – SG&A leverage this quarter. But there is definitely a wage environment that is more accelerating compared to the same time last year and we are managing through it.
Chris Li
Okay, that makes sense, J.P. Thanks for that. And maybe just another one on gross margins more of a near-term question. I appreciate you tightening up the full year range. But even with that range, the implied gross margin for Q4 is still pretty wide, down anywhere from 180 basis points to only a 30 basis point depending on the bottom or top end of the range. So can you maybe share with us some of the puts and takes on margins and it’s particularly in Q4? Thanks.
J.P. Towner
Yes. The way you have to think about that is mix. Number one, mix for consumables, we expect that to remain so far in the quarter. Then number two, of course, the seasonal performance is a key driver of our margin. Neil alluded to it in his prior remarks. So it’s really going to be a question on balance of how do you think about mix for consumables Christmas seasonal? And at the end of the day, those two things will evolve over the coming weeks and will drive our gross margin for Q4.
Chris Li
Okay, that’s helpful. And maybe, Neil, maybe a longer term question for you, I just want to get your thoughts on, does the expected increase in immigration in Canada longer term provides some upside to your store target longer term? And then secondly, when do you plan to give us another update on your store targets for Canada? I know, you gave one a couple of years ago. So maybe we are still 1 or 2 years away from getting an update from you? Thank you.
Neil Rossy
Well, so the focus right now, Chris, is really on executing on our current store target. We released our updated store target less than 24 months ago. So I’d say it’s too early to think about what the next store target could look like or may look like. As far as immigration, I mean, I’d be speculating there is a bunch of things going on. And I don’t think it will be a key driver, positive or negative of our network growth in the next 8 years reaching to our 2,000 store target by 2031.
J.P. Towner
Dollarama would be very happy to see an influx of more immigrants into the country thus helping stimulate the economy and certainly help with the labor shortage.
Chris Li
Yes, that makes sense and all the best and happy holidays.
J.P. Towner
Thank you.
Operator
Thank you. The next question is from Mark Petrie with CIBC. Please go ahead.
Mark Petrie
Yes, good morning. J.P., hoping you can quantify the impact of logistics and freight costs in the quarter. I think it was a tailwind in Q1 and then an even bigger one in Q2, but that was going to revert, what was the impact in Q3?
J.P. Towner
Yes, it’s a good question. I’d say we are in Q3, 20% logistics, 80% mix, approximately for gross margin pressure.
Mark Petrie
Okay. And I guess related to the whole sales mix topic, I am just curious is Dollar City seeing the same sort of shift in consumable sales? Obviously smaller base and different sort of position in terms of growth trajectory, but are they seeing the same sort of shift in behavior?
J.P. Towner
We could copy paste our Canadian comments and apply them to Dollar City. They are seeing very similar trends in Latin America.
Mark Petrie
Yes, okay. And then one other one, I guess, just with regards to price points and sort of the distribution of goods across the range, you guys have always put a lot of emphasis on maintaining a good proportion of products at sort of $1, $1.25 type price points. But clearly, that becomes more challenging just given the broad cost pressures in your overhead. I guess, on the flipside, the market is giving you some license, I think, Neil, you touched on that earlier. So I am just curious sort of how you think about those dynamics today and all the different sort of pieces at play?
J.P. Towner
Well, I think, we have always tried to have a mix that catered to the range of our customers. So in every category and in every product, where we can, we would like to have $1, $1.25 offering, a $3 offering and a $5 offering in a perfect world, each with its own distinct reason to upgrade so to speak. But in many categories, it’s not possible. Depending on the cost of raw materials of any given item, it definitely has an impact on the discussion, but it continues to be our philosophy that, for example, if I am buying our version of a cotton swab, you will find $1.25 version in our stores, you will find a $2.50 version and you will find a $4 version or a $4.25 version. So, they are all distinct and it’s not about the quality of the actual as well, but it maybe how much cotton we put at the end. It maybe the more expensive one is on a wood stick instead of a paper stick or a plastic stick. There is always ways and reasons for the relative retails you see and having that range for our customers, who of course all have different powers of – fiscal powers to feed and take care of their families. We tried to provide the biggest range we can.
Mark Petrie
Alright. Understood. Appreciate that. And one – sorry, one, just last quick one, the property acquisition, can you just – is that just for additional warehouses or is there sort of an expansion of the distribution center that’s part of this plan as well?
J.P. Towner
So, it’s so conveniently located and the opportunity to buy land in and around our current environment is very, very much as one of the reasons we took advantage of the opportunity. It’s going to be bandwidth for distribution. And it also allows us if required to add warehousing in the future. So on both fronts, it provides that flexibility at the closest location to our current distribution facility, which makes it the most efficient space we could acquire. So that was the reason behind it.
Mark Petrie
Okay, super helpful and all the best and happy holidays.
J.P. Towner
Thank you and to you.
Neil Rossy
Thank you, Mark.
Operator
Thank you. The next question is from George Doumet with Scotiabank. Please go ahead.
George Doumet
Yes, hi, good morning, Neil and J.P. Given that you just gave the number, I don’t want to ask about upside, but just wondering to what extent the 850 takes into account saturation in Peru and Colombia. Maybe how should we think of the opportunity outside of the existing territories for Dollar City?
J.P. Towner
So the way to think about it, George is this is not saturation point in Latin America. This is an update to our 2020 time – 2029, sorry, store target. If you think about the target, then the increase, half of it would come from the addition of Peru in our revision and the other half would be densification of our existing countries and mainly in Colombia. So this is not saturation, it’s just an update to our existing forecast to reflect good execution and good cadence and store openings.
George Doumet
Thanks for that. And Neil, you have mentioned a couple of times the difference between pricing in Asia with the vendors in North American vendors, I just wanted to explore that a little bit and get your thoughts on that? Are you maybe perhaps seeing an early indication that at least North American prices have peaked?
Neil Rossy
We have definitely not seen North American prices peak although every week, I think they have peaked. And every week, they haven’t peaked yet. But – and I cannot truthfully explain, why there is such a massive discrepancy between the trends coming from our goods overseas and in Europe and in other parts of the world, to what’s happening with our North American vendors, but there is a massive discrepancy and that trend has not stopped yet to my amazement. And so we are simply fighting the fight on our buying side, doing the best we can to manage the cost of the goods that we buy domestically and make sure that the values we provide our customers are the best relative values possible. Because the one thing I know for sure is that those pressures that are being put on Dollarama are being put on every other Canadian retailer. And as you know, as the one thing that we can control is that our job is to provide the best relative value to our customers. I can’t control what other retailers do and I can’t control even though I love to what our vendors come in with as far as costs. So we take it as we get it and we try to be as reasonable as we can and as competitive as we can, so that our customers don’t question when they come into our stores who the best relative everyday value across the country would be.
George Doumet
Okay. Thanks for that. Just one last one for J.P., the working capital is up $400 million plus year-to-date. Can you maybe give us your view on where you think it shakes off for the year? And is there any chance as you look to next year that we can maybe see a reversal there?
J.P. Towner
So in terms of working cap, I mean, most of it, vast majority of it is driven by the rebuild of our inventory position in the first half and in Q3. When we look at Q4, we think that we are at an inventory level that starting to be in line with our expectations in terms of safety stock and inventory available for stores. So I wouldn’t anticipate similar pressures in Q4. And then for next year, it’s too early to see through given all the supply chain normalization that’s going on.
George Doumet
Alright, guys. Thanks. Great quarter.
Neil Rossy
Thanks.
Operator
Thank you. The next question is from Vishal Shreedhar with National Bank. Please go ahead.
Vishal Shreedhar
Hi, thanks for taking my questions. Looking at Dollar City and the increase there, wondering if management feels comfortable with the rate of expansion as I know there are other companies using elements of the Dollarama approach to grow in adjacent countries. And just wondering if management fields any thoughts about whitespace being left behind perhaps given your cautious approach to growth?
J.P. Towner
I think we are extremely comfortable with our strategy, that’s the strategy. The slow and steady wins the race tends to be very Dollarama-like approach, we would rather be cautious and mindful to each market we consider to the rollout and how we do that rollout. So that it makes sense. And if there are opportunities left on the table, I guess the way we look at it is if we do the very best job in any country of operations, sooner or later, we are going to win that race. And so if somebody tries to zoom-in and do it hastily unless they are in a way better than we are, which is possible. It’s unlikely that their execution will be at the same level. And in the end, the customer will go to the store that’s doing the best job.
Vishal Shreedhar
Okay. Thank you for that and just changing topics here. There was a day less of Halloween, how should we think about the impact? Was it meaningful?
Neil Rossy
Yes. So, Halloween this year fell into Q4. But the impact is I mean it’s rounding, I wouldn’t qualify it as meaningful, one way or the other.
Vishal Shreedhar
Okay. And how should we think about the labor impact, wondering if it’s stable, or if it’s getting tougher, if there is any color that you can provide on what you are seeing.
Neil Rossy
I mean it’s a labor market, that’s the same for all retailers currently. And so we are doing our best to attract, retain talent. And so far, we haven’t had to curtail opening hours or anything like that. So, we are very pleased with the execution at the store level. And the work that store operations and HR are doing to make sure that we have the best people to serve our customers in our stores. And while we have our COO in the room, Johanne, I am going to say that, it’s harder than it’s ever been just like sourcing it’s harder than it’s ever been because of incredible fluctuations of cost of goods. And in the labor market it’s the very same for our ops people. So, the amount of effort our ops people have to put into doing a great job with our employees, so that they feel like they are getting the attention they should, the training they should, the support that they should, is a huge focus for us, because as you know, we are nothing without goods in our stores and without a team that’s executing on the ground. And so it’s very, very important to us that we are doing the best job we can to attract and retain that talent. And I think Johanne and the team have done an outstanding job.
Vishal Shreedhar
Thank you.
Operator
Thank you. The next question is from Peter Sklar with BMO Capital Markets. Please go ahead.
Peter Sklar
Good morning. Neil and J.P., on this land parcel that you built that – sorry, that you bought for $87 million, like – it seems like a big number. I am not really that familiar with Montréal industrial market. But can you talk a little bit about what you bought? Like, what was the size of the property? What’s on the property? How was the location, etcetera, etcetera?
Neil Rossy
So, you are asking questions that I am not sure I am allowed to answer. But I can say that it is expensive. It is not a deal. I would agree with you 100%. But I would also tell you that when you want something that’s one – the one and only that’s right next to your primary point of execution, the heart sort of the operation, getting goods to the stores, acquiring that land was something that we felt was worth the premium. I would tell you that the efficiencies that we get from that co-location, also, obviously have great value to us that they wouldn’t another buyer. So, if you were just prospecting or you were trying to build something on spec, it wouldn’t make sense to pay what we paid. But for Dollarama, for the strategic needs that we have, and with the efficiencies we will get from that co-location, it made sense for the business. As far as size, etcetera, I will be honest I am not sure what I can say at this point. So, I am going to say prefect.
Peter Sklar
Okay. Has that deal closed?
Neil Rossy
That deal is not closed. The deal will close Peter in the first half of next year. And that’s when you will see the CapEx trickle in our financials.
Peter Sklar
Right. But there is a building on the property now?
J.P. Towner
There is…
Neil Rossy
The remnants of buildings.
J.P. Towner
There are a few small buildings, but nothing major.
Peter Sklar
Okay. So, it’s basically the land, okay.
Neil Rossy
The land acquisition.
Peter Sklar
Yes. Okay. Understood. And I understand the benefits for you. Just switching gears here, on Dollar City, which is starting to become meaningful for you, now that you have quite a presence in Colombia and I think you have had over a year in Peru, can you talk a little bit about – a little bit more in depth on both of those markets and how they differ and how they compare to Canada and what the returns are like, and the product profile differences, the consumer different, maybe just ramble a little bit on each of those markets now that they are becoming significant?
Neil Rossy
Sure. So, the market all of the markets that we are in, for the most part are similar to Dollarama from a mix perspective. There is a slight tropicalization to the assortment. But for the most part, they are very, very similar, because people are people and we tend to consume the same type of products. Peru has had a terrific start, very promising so far. We are excited about the country. Colombia, of course, a more complex country, more challenging from the perspective of the geography and a more competitive environment of course, because it’s a more established larger country. So – but it has much more runway of course, it’s a much larger scale country. So, we are excited by both countries. And from a product perspective, both countries have been very accepting of our assortment, which is continuously changing, of course. And our buyers, which are amazing partners, do the buying domestic goods and sourcing of all the domestic goods in each of those countries, because each country has its own strengths and weaknesses with regards to consumables for the most part. They have put buyers into place in each of those countries catering to the specifics of those countries. And they are doing a fantastic job. J.P., you have anything to add?
J.P. Towner
No. I think that’s it.
Peter Sklar
Okay. And then just lastly, your partners in Dollar City, and this put arrangement, could you just go through the details a little bit, like, what is the maximum possible obligation for Dollar City to take up ownership? Should they decide to go that route?
Neil Rossy
So, the way it’s designed, the philosophy is that, number one, we have a fantastic partner there. And we want to keep them aligned for as long as possible. And so the way the agreement works is, they cannot put all their shares to us, it’s only a portion. And the key person there being the CEO, is with us for a long time. So, we are talking about shares of more passive investors. That’s number one. And number two, as I mentioned in the script, if it were to happen, we would temporarily for short-term, change our capital allocation to absorb that put option being exercised.
Peter Sklar
Okay. Thank you for your comments.
J.P. Towner
Thanks Peter.
Operator
Thank you. The next question is from Brian Morrison with TD Securities. Please go ahead.
Brian Morrison
Good morning. If I can just go back for a moment to the benefit upon sales from the shift to consumables, I think your latest disclosure, about 44% of your sales last year were consumables. Can you provide maybe a range of where you think that could come in this year, just so that we can understand the magnitude of the shift?
Neil Rossy
Yes. In terms of percentage, it’s something that we disclose annually. So, we will see how Q4 evolves. But the way things are shaping up so far, of course, we have a stronger penetration of consumables. But keep in mind, Brian, and that’s really important when we think about the business and our categories that general merchandise seasonal, in the “normal year” we would consider that performance is good performance, is just that now we have good performance across all categories, plus the impact of trade down. So, you have to put all that together when you think about the mix for this year. But for sure, consumables is going to be slightly more than it was last year.
Brian Morrison
Okay. Maybe changing gears, the NCIB, I appreciate your comments, you are going to be active in the fourth quarter. I am just wondering with the rising costs of debt and the proposed government tax in 2024, if there is any maybe change to your approach over the mid-term with respect to your NCIB?
J.P. Towner
Yes. So, on the mid-term, where we are reviewing in the coming months, how debt should be used for the year to come, let’s call it fiscal 2024, to make sure that we have optimal capital allocation going forward. And I mean we have been clear in the past about after tax cost of debt and earnings yield being kind of two guiding principles. So, we will keep that in mind as we think about next year’s capital allocation. And we will do what’s best for shareholders from a return perspective.
Brian Morrison
Okay. And then last question, if I can J.P., just you have got less exposure hedged on your FX for merchandise, relative year-over-year basis. Is this just a data point in time or is it a change in your approach to locking in hedges with Canadian dollar weakness?
J.P. Towner
No, it’s no change in approach to hedge strategy remains the same. There is some timing element to this. So, you shouldn’t read too much into the quarterly difference in hedge exposure.
Brian Morrison
Alright. Thank you.
J.P. Towner
Yes. Thanks Brian.
Operator
Thank you. The next question is from Martin Landry with Stifel GMP. Please go ahead.
Martin Landry
Hi. Good morning. In light of the market share gains that you are making, I was wondering to get more insights on your on your customers? How are you collecting data, if at all? And have you ever considered establishing some sort of a loyalty program to enable you to gather more data on your customers?
J.P. Towner
So, our loyalty program is the best value. And the way we think about that is when you look at results year-to-date, I think and you look at us as performance, I think that the best value for us is kind of the focus. And we are probably not the right segment, just not only in Canada, but globally. The Dollar Store segment is not the best segment for a loyalty program. The focus is on the relative value proposition. And it’s working well. We like the results.
Martin Landry
And then are you collecting any data on your customers? Like, is there any way for you to see, what proportion of customers are earning an income above $100,000 are shopping at your stores?
J.P. Towner
So, we do frequent customer surveys to learn more about our customers. But we are not collecting customer data per se.
Martin Landry
Okay. And is this something that you want to upgrade in the future or not a priority?
J.P. Towner
I would say the focus for now is getting better with our analytics of the data we have. And that’s transaction data, not customer data. So, we know which unit gets sold at what time and what the total bill is and the transaction size. So, when I get better, I am taking all of that data that we have on a daily basis to continue to optimize our merchandising and all the initiatives that we have discussed in the past. And that’s really the focus. We have a lot of data and we want to leverage it as much as much as possible. And that transaction level data.
Martin Landry
Okay. That’s helpful. Thank you.
Neil Rossy
Thank you.
J.P. Towner
Thanks Martin.
Operator
Thank you. The next question is from Derek Dley with Canaccord Genuity. Please go ahead.
Derek Dley
Yes. Hi, great quarter. I just want to follow-up on the discussion on Latin America. Can you just give us some detail, like what is the average store size in Latin America compared to what you have in Canada? And in Canada, you disclosed what it costs to open a new store and including inventory? Can you give us the same metrics for Latin America?
Neil Rossy
Yes. So, in terms of the store size, you would see slightly smaller stores in Latin America than you seen in Canada. And in terms of the cost of opening a store as at fiscal 2022, so last year, it was about the same. Dollar City maybe a little bit more expensive, but not taking materially different. And we are within the 2-year payback in Latin America as well.
Derek Dley
Okay. That’s great. That’s helpful. During the quarter, I mean you had a really strong basket growth. Can you breakdown or just give us some incremental color on how much of that that basket growth was split between price increase and incremental products in each basket?
Neil Rossy
Yes. We have – or the reasons that are obvious, we are not going to go there into our pricing and volume strategies. But we are very pleased with the traffic and the basket size that we saw in Q3, that’s for sure.
Derek Dley
Okay. And then just last one, I believe in Q2, you mentioned a 70 basis point tailwind, it related to inventory going through your DC and it sounds like, you had about a 30 basis point headwind this quarter on that. So, like, do you expect to be able to offset some of that potential upcoming headwind going forward?
Neil Rossy
Yes. I mean in traditional Dollarama fashion, we are doing our best to offset as much of the cost pressure as possible. So, we have done that in Q3 and we will continue to do the same thing and work actively to be as efficient as possible in Q4.
Derek Dley
Okay, great. Thank you very much.
J.P. Towner
Thanks.
Neil Rossy
Thank you.
Operator
Thank you. There are no further questions registered. This concludes the question-and-answer session, as well as today’s conference call. You may disconnect your lines now and thank you for your participation.
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