Dollarama Inc T.DOL

RBC

[retiredcf]

Their upside scenario target is $115.00. GLTA

August 22, 2023

Outperform

TSX: DOL; CAD 85.20

Price Target CAD 101.00

Dollarama Inc.

High Five! Reiterating constructive view ahead of FQ2

Our view: Forecasting EPS $0.78, (consensus $0.77, range: $0.75-$0.80), when DOL reports Q2/F24E on September 13. In our view, there is a good chance that management nudges F24 guidance upward in conjunction with FQ2 results, underpinned by SSS strength and associated scaling, somewhat offset by higher than normal SG&A growth led by minimum wage increases in QC/ON. In our view, the stock remains attractive with excellent visibility and sustainability of growth runway, Dollarcity optionality, and perennial return of capital to shareholders through both dividend growth and share buyback. Maintaining OP rating, $101 PT.

Key points:

Key assumptions underpinning our forecasts:

• Raising FQ2E SSS +200 bps to +10.5%, reflecting strong value positioning and growing share of consumer wallet. Revised FQ2 two-year stacked 25.1% broadly in-line with FQ1A 25.6% and consistent with management commentary on performance through early June. H2 SSS assumption 4-5% unchanged as DOL cycles consumer trade down that accelerated H2/F23, bringing F24E SSS to +9.2% vs guidance +5-6%. Against this backdrop, it would be reasonable for management to revise F24 SSS guidance modestly upward with positive downstream impact on scaling.

• GM% 44.0% +42 bps Y/Y reflects relief on freight and logistics, scaling associated with gradual price point migration to $5, and mix. Our model assumes no meaningful reversal of trade-down in F24, with GM % cadence favouring H2>H1 and overall GM% 44.3%, toward the high end of guidance 43.5-44.5%. Key offset is rising SG&A, notably wage pressures and incremental store labour. Our F24E SG&A ratio 14.8% at the low-end of guidance 14.7-15.2% reflects scaling on higher revenues.

  • Resumes NCIB in FQ2. According to regulatory filings, DOL restarted the NCIB in FQ2, repurchasing 2.9 MM shares (1%) for $248 MM. For the balance of F24, we expect excess FCF to be deployed on NCIB, with the debt-funded portion of the NCIB deferred until the credit backdrop improves. Our model incorporates 3.0% share buyback in F24E, rising to +4.0% F25E, +5.5% F26E assuming normalizing credit conditions, leverage largely stable ~2.6x, vs historical target 2.75x-3.0x. Capital requirements related to potential exercise of the Dollarcity put likely offset by a temporary reduction in NCIB.

  Forecasts largely unchanged, reiterating constructive outlook, OP rating and $101 price target. Target EV/EBITDA 16x consistent with 2015-18 average, target P/E 25x at 2.5x discount. Multiples reflect stability of business model against backdrop of uncertain economy, consumer wallet pressure along with traction on higher price points and Dollarcity opportunity. Reiterating our view of DOL as a core holding, with the business model resonating particularly well with consumers against the backdrop of economic uncertainty and consumer wallet pressure.