Haven't been the biggest fans based on their rating and previous target but at least they're now moving in the right direction. GLTA
DOLLARAMA INC.
Trade-down Winner And Excellent Execution
Our Conclusion
Same-store sales (SSS) growth of 15.5% highlights both DOL’s compelling
proposition and consumers’ drive to value. We see SSS growth guidance as
more credible at 10%-11%, but likely still holding upside even as inflation
slows and traffic trends stabilize. Margin discipline is also impressive, though
labour pressures are still mounting and we expect negative opex leverage in
F2025 will normalize earnings growth to low to mid-teens. Clearly momentum
is strong, but we continue to see valuation as capped. Our price target rises
to $99 on higher estimates rolled ahead to F2025. DOL is Neutral rated.
Key Points
Same-store Sales Growth Highlights Positioning And Relevance: DOL’s
SSS growth easily exceeded our expectations and clearly supports the
increased outlook of 10%-11%. Traffic growth of 12.9% highlights DOL’s
value positioning with consumers, and we expect traction to remain strong
even as absolute growth rates slow. Though multi-year trends are very noisy,
we take note that Q2 marks the first quarter since F2022 with no sequential
improvement in traffic trends vs. pre-pandemic. We believe this implies traffic
growth has likely peaked and will most likely moderate from here.
Management highlighted balanced growth across categories, so the strong
outperformance in consumables has slowed, or at least general merchandise
has caught up. As detailed in our Q2 preview, our price checks show inflation
has decelerated, which could lead to a bit more pressure on basket size. But
we still believe the 10% to 11% outlook embeds conservatism given H1 was
16.3% and Q3 to date is trending to ~10%.
Opex Control Shines, But Labour Pressures Not Likely Easing: SSS
growth was excellent, but the opex control also impressed and improved
materially from recent quarters; on a per-store, per-week basis SG&A only
increased 11.7% (vs. 17.2% in Q1). Management highlighted that it sees the
lower end of the unchanged 14.7% to 15.2% range as achievable, and our
estimates align with that. Even still, we do not believe labour rate increases
will soon pass. Ontario will move up another 7% next month, and we expect
provinces will continue to increase above long-term averages. Opex leverage
of 21 bps was driven by the excellent SSS, though as this decelerates we
expect unfavourable leverage in H2 and into F2025.
Valuation Remains Our Sticking Point: Dollarama is trading at 27.5x our
NTM EPS estimate, which places it about 1.2 standard deviations above the
five-year average. While DOL clearly deserves a premium valuation, we
believe it is difficult to argue for multiple expansion in the coming 12-18
months given the expectation for EPS growth rates to normalize back into
the low to mid-teens. Share buybacks will remain a key outlet for excess
cash and will support valuation, but activity will be constrained to cash flows
and we expect leverage ratios to remain well below the long-term target of
2.75-3x given the premium of earnings yield to the after-tax cost of debt.