Dollarama Inc.
Dollarama operates Canada’s largest chain of “dollar” stores. They have delivered relatively consistent growth and their plans factor in substantial growth (approximately 70% growth in stores which would also be accompanied with growth in existing stores). Initially a cash business, they have been successful in growing sales through enabling debit card purchases and have also had initial success expanding to accept credit card payments. Furthermore, they have been successful in growing the average price of goods sold, hence the “dollar” store reference. At approximately 30X earnings, it doesn’t seem cheap but relative to its growth opportunity, the premium valuation seems justified. The CEO’s stake in the company is just under 7% of outstanding shares. The key to Dollarama as a successful investment is continued growth of its store base in addition to continued growth in productivity of existing stores.
Ests: 1Q20 2Q20 FY20 FY21
Revs 815.5 936.9 3.8b 4.0b
EPS .34 .47 1.84 2.08
P=35.05 div=0.176, yield=0.5%, TTM EPS=1.67, P/E= 21X, FY20 P/E=19X, 1.86bn net debt, BV equity negative from share repurchases, compares to 1.3bn tangible assets, 2.18b total assets, debt supported by >600m in operating cashflow although WC investment and continued share repurchases continues to consume cash and increase debt.
1Q20 .33 vs .31 +6.5%, est .34
Jun 13, 2019, P=42.21, TTM EPS 1.68, P/E=25X, FY20 P/E=23X
Revs +9.5%, GM 42.1% vs 43.8% (35.9% vs 37.6% on previous standard), OM 20.4% vs 21.5%,
Comps +5.8%, comprised of 4.9% increase in average transaction size, 0.9% increase in transactions
GM down due to shift to lower margin items in addition to timing of logistics costs (pre launch of new distribution centre), expect GM pressures to abate as year progresses (based on guidance to be down less than 1Q).
Restated last year’s results to IFRS 16 re lease accounting, boosted GM and EBITDA vs previous standard, slight boost to EPS
FY20 Guidance: Raised comps 50pbs to 3.0-4.0%, reiterating margins
Temporarily halting share repurchases to maintain leverage ratio, net debt decreased q/q and y/y
Despite margin contraction and slight EPS miss, stock responding strongly, likely to solid comps and increased comp guidance, EPS estimate for the year has come down a little since last Q.
4Q19 .54 vs .48, +12.5%, est .55 down from .57, FY19 1.67 vs 1.52, +9.9% (FY19 EPS 1.66 w IFRS 16)
Mar 28, 2019, P=35.05, TTM EPS=1.67, P/E= 21X, FY20 P/E=19X
Raised dividend 10% to .176, yield 0.5%
Revs +13% to 1.06bn, GM 40.4% vs 41.4%, OM 23.7% vs 25.1%, OpInc +6.9%
Comps +2.6%, comprised of 3% increase in average transaction size partly offset by 0.4% decrease in number of transactions (looks like little benefit from Halloween shift?)
FY19 repurchased 13.79m shares for 533.1m (38.66/share)
FY20 Guidance: comps +2.5-3.5%, 60-70 new stores, GM 38-39% (vs 39.3% in FY19), EBITDA 23.25% to 24.75% (vs 24.9% in FY19)
4Q19 benefited from extra week, 2nd consecutive quarter of OM contraction, Guidance is for FY20 margins to contract vs FY19, EPS estimates looks high
Sales/store +7%, Sales/foot +6%, best growth in a number of quarters likely due to extra week. Sales per new store weakest since at least 2012 thus sales from new stores also weak but could be due to timing of openings.
Looking at methods to stimulate traffic, mgmt. still optimistic in using tracking and analysis tools.
3Q19 .41 vs .38, est .42
Revs +6.6% to 864.3m, GM 38.9% vs 40.1%, OM 22.6% vs 23.5%, OpInc +3%
Comps 3.1% vs 4.6%, comprised of 4% increase in average transaction size partly offset by 0.9% decrease in number of transactions (partly due to Halloween shift)
Increased share repurchase authorization to 10% of public float
Sales from new stores looked lighter than they have been in quite a while but could be timing of initiatives
In competitive environment, mgmt. will be using their “improved tracking and analytical tools” to “further improve product offerings and merchandising practices”
Store count 1192, +5% y/y which is meaningfully slower than in past years, 10-year target of 1700 is 43% higher than current store count which would be about +3.6% p.a
Mgmt is pleased with rollout of Dollar City in Latin America and continue to assess if it’s a sustainable option for growth (they have the option to purchase a 50.1% stake in Dollar City in 2020)
For FY Guidance, mgmt. expects GM to be at upper end of the range (YTD at lower end) and SG&A to be at lower end (YTD slightly below lower end), YTD EBITDA at upper end,
Mid Quarter Update
Same shortseller that targeted MAXR put out a sell on DOL seeing 40% downside risk.
Report claims price increases have reduced store traffic (last quarter mgmt. talked about minimizing price increases), claims questionable accounting practices claiming the company has booked gains on fx hedges which will be eliminated going forward (how’s that questionable?) in addition to competition (nothing new), higher labour costs (again not new and mgmt. has done a good job offsetting these)
Comps have slowed and so has earnings growth, the multiple has compressed which seems to reflect recent earnings growth. 3Q will have a difficult comp as management indicated last quarter (1 fewer days and cut-off before Halloween but this is just a shift into 4Q). A continued deceleration of growth would likely be negative although a stabilization and potential acceleration could be positive. New stores have so far been well absorbed on a sales basis.
2Q19 .43 vs .38, +12%, est .43
Sept 13, 2018, P=52.07, TTM EPS=1.61, P/E=32X, FY20 P/E=27X
Revs +6.9% to 868.5m, GM 39.7% vs 39.6%, OM 23.8% vs 23.6%, EBITDA 26% vs 25.7%, stores +4.7%, new stores appear to be performing well
Comps 2.6% vs 6.1%, comprised of average transaction size +3.1%, number of transactions -0.5% as mgmt. decided to minimize price increases as they are experiencing lower than expected cost inflation and likely the competitive environment, and lower sales of Canada Day related sales which were very strong last year (Canada 150). Sales did however recapture the weather-related shortfall from last quarter.
In June the share repurchase program was renewed, can purchase up to 5% of shares.
FY19 Outlook, raised GM to 38.5%-39.5% and EBITDA margin to 23.5%-25%, lowering expected comps to 2.5%-3.5% down from 4-5% partly due to minimizing price increases
YTD opened 18 new stores vs 30, maintaining FY19 goal of opening 60-70 so openings should accelerate in 2H
Results are a bit softer than some would hope (stock traded down 17%), still not bad but not necessarily indicative of its premium valuation although this is likely to be a softer patch (following strong results last year), While limiting price increases due to lower cost inflation is positive (mgmt. expects expanding margins), due to competitive environment might be negative however the company is still improving margins (offensive move rather than defensive?). Mgmt indicated stores near Dollar Tree have not experienced change in behaviour. Also the company refreshes 25-30% of its products every year, new products’ prices set with healthy margins.
Mgmt. pointed out Q3 will be 1 day shorter than last year which will have a negative compare to last year given it’s before Halloween but will be a benefit to Q4.
I don’t get the sense that the wheels are falling off, I think it’s a confluence of things stretching out over a few quarters compounded by lower price increases due to lower cost inflation which hurts comps but increases margins, I’d expect anniversarying these soft results next year would look favourable.
1Q19 .92 vs .82, est .93
05/07/2018
Revs +7.3% to 756.1m, GM 37.6% vs 37.6%, OM 20% vs 19.8%, EBITDA 22.5% vs 22.1%, stores +5.6%
Comps 2.6% vs 4.6%, comprised of avg transaction size +2.9%, number of transactions -0.3%
Poor weather resulted in lower summer sales than usual but catching up in 2Q, ex summer sales, comps were in expected range, mgmt. pleased with cost control and productivity improvements improving SG&A margin (15.1% vs 15.5%) despite higher minimum wage
FY19 Outlook unchanged but CapEx increased again to 190-200m
Interestingly, last quarter investors/analysts were concerned with lower productivity of new stores, this quarter new store productivity improved markedly
4Q18 1.45 vs 1.24, est 1.40, FY18 EPS +23% to 4.57
03/29/2017
Dividend increased 9%, proposed 3/1 split, expanding Montreal dist centre ~50%
Sales +9.8% to 938.1m, GM 41.4% vs 41.4%, OM 25.1% vs 24.7%, Comps 5.5% vs 5.8%
Comps comprised of average transaction size +4.6%, number of transactions +0.8%
FY19 Outlook unchanged but Capex revised to 150-160m (ip from 110-120) due to expansion of dist centre and land purchase, FY18 EBITDA mgn 25.3%, FY19 guidance 23.5%-25%
Gross Debt 1.67bn vs 1.33bn last year, 1.1bn at fixed rate (maturities 11/18, 07/21, 11/22, remainder variable, CFO 637m vs 505m
Solid results continue, stock has been flattish since mid November probably as investors wait and see the impact from higher minimum wages.
Conference call comments to follow.
3Q18 1.15 vs .92, est 1.11
12/06/2017
Sales +9.7% to 810.6m, GM 40.1% vs 39.5%, OM 23.3% vs 21.6%, Comps 4.6% vs 5.1%
Comps comprised of average transaction size +4.5%, number of transaction +0.1%
GM improved due to higher product margins, operating leverage
FY18 outlook slightly increased profitability again, GM 38.5-39.5%, EBITDA 23.5-25%, FY19 to open 60-70 stores, GM 38-39%, EBITDA 22.5-24% (likely conservative but factors increased minimum wage in 40% of their stores) assuming comps +4-5%
Mgmt’s target for store count of 1700 is 50% higher than current 1135. It’s easy to see people would assume that would translate to a 50% increase in earnings but if we go back to when this store count is up 50%, that goes back to a base of 757 stores which is close to 5 years ago when the store count was 761. Sales per store is up almost 19%, sales per square foot is up almost 17%, sales per older store is up almost 17% while sales per new store is up almost 30% (meaning a new store is 30% more productive than a new store 5 years ago) all leading to EPS being up 218% so is 35X trailing EPS really expensive? 5 years ago the stock price was about $30 so investors at the time paid 6.9X earnings 5 years later and earnings are still growing solidly justifying a higher multiple than the market. Sure productivity growth might not continue but the solid demonstrated track record should not be easily dismissed. While many people fear the Amazon destruction of retail, dollar stores have so far been very resilient.
2Q18 1.15 vs 0.88, est 1.04
09/07/2017
Sales +11.5% to 812.5m, GM 39.6% vs 38.4%, OM 23.6% vs 21.2%, Comps 6.1% vs 5.7%
Comps comprised of average transaction size +5.9%, number of transactions +0.2%
GMs up due to operating leverage from comps as well as lower % logistics and occupancy costs
SG&A +1.7% thanks to labour productivity and cost reduction initiatives, op leverage.
Repurchased 1.3m shares for $160.2m
FY18 outlook slightly increased profitability metrics, very solid results, company’s productivity initiatives encouraging in advance of ON minimum wage increase next year.
Stock has been flattish since end of April (4 months).
1Q 18.82 vs .62, est .79
Sales +10% to 704.9m, GM 37.6% vs 37%, OM 19.8% vs 18.8%, Comps 4.6% vs 6.6%
Comps comprised of average transaction size +6.1%, number of transactions -1.4%
Results benefited from productivity improvements and cost reduction initiatives, all stores accepting credit cards but due to timing of rollout, did not benefit 1Q results.
Operating metrics (sales per store, square foot, etc.) still going in the right direction, FY19 would see increased costs due to ON increase in minimum wages (~40% of DOL’s to be impacted), co expects to continue to drive productivity improvements.
4Q 171.24 vs 1.00, est was 1.11, FY 3.75
Sales +11.5% to 854.5m, GM 41.4% vs 40.8%, OM 24.7% vs 23.1%, comps 5.8% vs 7.9%
Comps comprised of Average transaction size +7.8%, number of transactions -1.9% as 4Q 16 was +4.2%, products >$1.25 were 64.3% of sales compared to 59.4%, debit card penetration 51.4% vs 49.2%
FY18 outlook: expect to open 60-70 stores, GM 37.5%-38.5%, EBITDA 22%-23.5%, see long term store base now 1700 up from 140