DOL-lovely: Reiterating constructive view ahead of FQ3
Our view: Forecasting another DOL-lightful quarter, Q3E EPS $0.86, +24% YtY (in line with consensus $0.86, range: $0.83-$0.88), when DOL reports on December 13. 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. 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, price target +$8 to $113.
Key points:
• Tweaking SSS estimate by -50 bps to +8.5% and +4.0% in FQ3E/FQ4E, respectively, to reflect moderating consumer spending. F24E SSS at +11.3%, a tick above DOL's F24 guidance (Exhibit 2), reflecting DOL strong value positioning and growing share of consumer wallet. Reminder: After FQ2 results in September, management raised F24 SSS guidance from +5-6% to +10-11%, implying H2 unchanged at +3.75-5.75%, a notable step-down from the H1 average of +16% as DOL laps exceptional H2/F23 comps (Exhibit 5).
• Moderating NCIB. According to regulatory filings, in FQ3 NCIB resumed with 1.7 MM shares repurchased for $166 MM, with magnitude reflecting a closing of $88.1 MM land purchase on August 16. Trimming cadence of go-forward NCIB, model incorporates 2.8% share buyback in F24E, rising to +2.9% F25E, +4.4% F26E assuming normalizing credit conditions, leverage largely stable ~2.4x, vs historical target 2.75x-3.0x. Any capital requirements related to a potential exercise of the Dollarcity put option would likely be offset by a temporary reduction in NCIB.
Read-throughs from recent reporting: The common theme among the companies that recently reported their results (L, MRU, WMT, CTC) is that although inflation is moderating, wage growth continues to substantially lag CPI, with overall consumer spending further moderated by higher debt service costs, driving enhanced consumer value-seeking behaviour. Spending on discretionary items has rolled over (Exhibit 3), consumer focused on essentials and looking for value, playing directly into DOL's core positioning.
Reiterating constructive outlook, OP rating, target +$8 to $113. Forecasts largely unchanged, rolling valuation horizon two quarters forward to TTM Q4/26E (Jan 2026). Target EV/EBITDA 16x consistent with 2015-18 average, target P/E 25x at 2.5x discount (Exhibit 8). 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.