Dollarama Q3 Financial Results: Rich Valuation is Warranted

Dollarama Inc. (TSX:DOL), Canada’s largest dollar store chain by market cap, reported third-quarter 2019 financial results on December 4, 2019

SmallCapPower | December 10, 2019: Dollarama Inc. (TSX:DOL), Canada’s largest dollar store chain by market cap, reported Q3/19 financial results on December 4, 2019, before markets opened. Results were highlighted by EPS of $0.44 on revenue of $947.6M and EBITDA of $273.2M. Third-quarter results were mixed compared with analysts’ estimates of $0.45 and $938.0M, and EBITDA of $279.6M for the quarter.

Figure 1: Dollarama Financial Highlights

Source: Company reports, Ubika

Same-store sales growth beats consensus estimates and was above the high end of its peer group. Third quarter, same-store sales growth of 5.3% was above the consensus estimate of 3.8% and is above the high end of the peer group of 4.6% (Figure 2). Net revenue rose 9.6% year-over-year to $947.6M and was driven primarily by strong same-store sales growth, which also included a 2.8% increase in average transaction size, and a 2.4% increase in the number transactions per store. The increase in number of transactions per store was driven mainly by merchandising initiatives offering an assortment of one-use items for holidays such as: Halloween and Christmas.

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Gross margins contracted by 61 basis points. Lower gross margins were due mainly to higher sales of lower cost, lower margin items, and higher transportation costs. For F2020, the Company is guiding for pressure on gross margins as the economy continues to operate in low inflationary environment, in which retailers are more reluctant to pass on costs to the consumer to maintain market share. SG&A increase by 67 basis points and was a result of increased labour costs. EBITDA increased by 13.1%, representing 28.8% of sales, while net earnings were $138.6M, a 4.9% increase over the prior year and EPS grew 7.3% to $0.44.

Recall, in July, Dollarama exercised its option to purchase 50.1% of Latin American Dollarcity. On July 2, 2019, Dollarama announced that it would purchase a 50.1% equity interest in Dollarcity for ~US$90M, or a 5x forward EV/EBITDA multiple, implying forward EBITDA of C$70-80M for Dollarcity. The transaction is expected to be accretive to DOL’s EPS, adding C$0.02 to C$0.03 in F2020, and C$0.05 to C$0.07 in F2021. During the third quarter, Dollarcity contributed $1.7M below expectations of $4.2M, due to timing inconsistencies with Dollarcity quarter end. Based on management guidance, Dollarcity is expected to contribute $26M to earnings for F2021.

Figure 2: Dollarama Peer GroupSource: Capital IQ, Ubika

Key takeaways. Solid year-over-year net income and sales growth that is in the top range of its peers. Dollarama trades at a premium valuation, with EV/EBITDA multiples and EV/Sales multiples in the high end of its peer group. However, in our view, this premium valuation is warranted, with same-store sales growth and net income margins well above industry peers. We believe that the Company has sound fundamentals against the backdrop of economic uncertainty. In a recessionary environment, Dollarama could likely perform well as households tighten their spending and look for value. With consistent year-over-year revenue growth and net income growth, Dollarama is a stock that investors should keep on their radar and consider purchasing on pull backs.

Shares of Dollarama closed Monday’s trading session down 2.2% to C$44.53. Dollarama stock trades at a market cap of $13.9 billion.

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