National Bank Financial analyst Vishal Shreedhar expects “solid” second-quarter results and a “favourable” guidance revision from Dollarama Inc. when it reports on Sept. 13 before the bell.
“We continue to hold a positive view on DOL’s shares given its defensive growth orientation supported by strong cash flows, a solid balance sheet and resilient sales performance,” he said. “Over the medium term, we believe that Dollarama will be well positioned to grow earnings given anticipated network expansion, favorable sssg [same-store sales growth] and ongoing development of the international business. In addition, we believe that acquisitions are a possibility.
“Given premium valuation amidst an increasingly competitive backdrop, a key investor question is can Dollarama outperform. We think it can, provided fundamental performance remains strong. In our view, Dollarama is a well-managed retailer, and we expect the company’s growth to remain solid. That said, we acknowledge that DOL’s performance will also be governed, to some degree, by market demand for stocks with defensive properties.”
Mr. Shreedhar is forecasting earnings per share for the discount retailer’s second quarter of fiscal 2024 of 78 cents, a penny above the consensus estimate on the Street and up 12 cents from the same period a year ago. He said that 18.0-per-cent year-over-year growth stems from “mid-teens revenue growth (new stores, low-double-digit same store sales growth), share repurchases over the last 12 months and gross margin expansion, partly offset by higher SG&A.”
He projects same-store sales growth of 11.3 per cent, down from 13.2 per cent a year ago, with basket growth of 1.2 per cent year-over-year and transaction growth of 10.0 per cent. His total sales estimate of $1.404-billion also tops the consensus of $1.395-billion and is up from last year’s result of $1.217-billion.
“We expect the outlook to be favorably revised as part of the release of Q2/F24 results given our expectation of continued sales strength,” the analyst said. “In particular, we believe that the F2024 sssg outlook of 5-6 per cent is low (NBF is 8.4 per cent), given: (i) strong Q1/F24 sssg of 17.1 per cent, (ii) DOL’s indication that the 2-year stack of Q2/F24 intra-quarter sssg was in line with Q1/F24, and (iii) comments from the grocers that the discount segment has maintained strength.
“We note Dollar Tree’s upwardly revised sales and sssg expectations in its Q2/F23 earnings release, reflecting expectations of improved sales performance. We view this to be a constructive sales readthrough to Dollarama.”
In a note released Thursday, Mr. Shreedhar said his recent review of the changes to Dollarama’s inventory of items was “incrementally favourable” and reflects “resilient pricing and a gradual increase of SKUs at higher price points.”
“Our review of retailer commentary indicates a carryover of themes from prior quarters: (i) Pressured consumer spending; (ii) A focus on value; and (iii) Particular softness in discretionary categories. We believe that DOL is gaining market share against the broad retail segment,” he added.
Reiterating his “outperform” recommendation for Dollarama shares, Mr. Shreedhar raised his target to $97 from $95 to reflect an advancement in his valuation period. The average target on the Street is $91.32.