Green means go: DOL has the right stuff for the current environment and beyond, PT to $114
Our view: Strong results YTD are supportive of our constructive view and investment thesis, and DOL's premium valuation. SSS beginning to moderate as expected but FQ3 +11.1% (two-year stack +21.9%) better than expected on strong traffic +10.4% as pressure on disposable income drives value-oriented consumer behaviours. Updated guidance on SSS implies sharply moderating cadence in FQ4, but on two-year stack upper end ~20%. Our forecasts ~4% SSS through to F25, should be comfortably achievable given consumer backdrop, ongoing inflation and range of item/price points up to $5. PT to $114 (+$1).
Key points:
DOL highlighted as one of our best ideas in our 2024 Outlook. Although we expect SSS/earnings growth to normalize to mid-teens after the torrid pace of 2023 (YTD EPS +30.3%), we continue to favour DOL for its deep value position, resilient model across economic cycles and opportunity to gain incremental share of wallet, and underappreciated Dollarcity opportunity including accelerating scaling underpinned by critical mass of 500 stores and counting.
Forecasts essentially unchanged, YTD performance underscores strong positioning. We remain particularly impressed with strong traffic growth +7% and average basket value +26% above pre-pandemic levels, (Ex. 4) as DOL captures share of consumer wallet. Our F24E GM% 44.5% +100 bps Y/ Y is at the high end of guidance range 43.5-44.5% reflecting relief on freight and logistics, scaling associated with gradual price point migration, and mix, with offset of higher SG&A on wage pressures. Our SG&A ratio 14.5% just below low end of guidance 14.7-15.2% reflects scaling on higher revenue assumption.
Our model assumes 7.5% reduction in share count through F26 under relatively conservative assumptions. Our model incorporates 2.2%/2.9% share buyback in F24E/F25E, funded with FCF. Assuming normalizing credit conditions, we model a 3.7% buyback in F26 funded with a mix of FCF and debt to maintain leverage largely stable ~2.3x (historical target 2.75x-3.0x) (Ex. 9). Should DOL's Dollarcity JV partners exercise the put option at some point, it would likely result in a temporary reduction in NCIB.
Reiterating constructive outlook, OP rating, PT $114 (+$1) essentially unchanged. While today’s 4% trading range likely reflects peaky valuation against the backdrop of tough comps and wobbly consumer heading into 2024, we reiterate our view that DOL is a stock to own, across cycles. Target EV/EBITDA 16x consistent with 2015-18 average, target P/E 25x at 2.5x discount (Exhibit 10) and both slightly below current trading multiples. Multiples reflect the stability of the business model against the backdrop of uncertain economy, consumer wallet pressure along with traction on higher price points and Dollarcity opportunity.