Stifel is the only one that went against the grain and lowered their target. GLTA
While Dollarama Inc. exceeded Stifel’s Martin Landry’s expectations with its third-quarter 2024 financial results, the analyst said recent share price appreciation has pushed him to “the sidelines,” leading him to a downgrade of its shares to “hold” from “buy” previously.
“Dollarama has had an exceptional performance in the last three years, growing EPS [earnings per share] by 21 per cent in FY22, 26 per cent in FY23 and 25 per cent in FY24E (calendar 2023), according to our forecasts,” he said in a research report. “This performance has been celebrated and recognized by investors with Dollarama’s shares up 64 per cent in the last two years. Valuation at 26 times forward earnings is 3 multiple points higher than the 10- year historical average. We expect earnings growth and same-store-sales growth will decelerate from current levels as the company faces difficult comparable periods. Hence, with valuation above historical levels and expected earnings growth rates below historical levels, we believe that Dollarama’s shares are fully valued. While it may seem counterintuitive to downgrade a defensive retailer in this environment, we believe that in 2024 investors may reposition their portfolio by adding cyclical companies in anticipation of a return to economic growth, and Dollarama could be a source of funds.”
On Wednesday, the Montreal-based discount retailer reported EPS of 92 cents, up 31 per cent year-over-year and exceeding both Mr. Landry’s 88-cent estimate and the consensus forecast of 86 cents. Same-store sales growth of 11.1 per cent year-over-year fell in line with the analyst’s forecast (11.2 per cent) and topped the Street (9.7 per cent), while EBITDA margin jumped 2.45 per cent to 32.4 per cent (versus Mr. Landry’s 31.1-per-cent projection).
Despite those results, Dollarama shares slid 2.1 per cent during the trading day after management increased its fiscal 2024 same-store-sales growth guidance by just 1 per cent to an increase of 11-12 per cent year-over-year.
“Gross margin guidance remains unchanged despite the strong outperformance in Q3FY24. This suggests a sharp deceleration in EBITDA growth,” said Mr. Landry.
In justifying his rating adjustments, Mr. Landry pointed to three factors.
1. “Difficult comparables periods” ahead for same-store sales.
Analyst: “Dollarama’s same-store-sales have increased by 12 per cent year-over-year in FY23 and are expected to be up another 12.5 per cent in FY24. This strong growth is more than 2 times faster than the company’s historical growth rate of 4-5 per cent, which makes for a difficult comparable in FY25. Additionally, with inflation slowing down and discretionary spending decelerating, we see a risk that comparable sales growth might be lower than historical levels in FY25. Given same-store-sales are a key metric for investors, a lower growth could lead to valuation multiple contraction from current levels.”
2. The retailer could become “a source of funds in a risk-on market.”
Analyst: “We believe that investors could start looking past the current economic recession in Canada and start positioning their portfolio for a return to economic growth. We do not expect this switch to occur in the coming weeks, but we believe there is a likelihood that it occurs in the first half of 2024. Hence, given its strong share price performance over the last two years, there is a likelihood that Dollarama becomes a source of funds at some point in 2024 for investors looking to reallocate capital in a risk-on market.”
3. Its valuation is now higher than historical levels.
Analyst: “Dollarama’s shares are up 64 per cent in the last two years, an impressive performance relative to the TSX Composite Index, which is up 4 per cent. While this strong share price performance has been driven by Dollarama’s strong fundamentals, it has also been boosted by multiple appreciation with DOL’s forward PE multiple going from roughly 23 times to 26 times currently, 3 times turns higher than the 10-year average.”
After introducing his estimates for fiscal 2025, Mr. Landry trimmed his target for Dollarama shares to $100 from $104. The average target on the Street is $104.17, according to Refinitiv data.
“In our view, there is a low likelihood that Dollarama’s valuation expand further from current levels of 26 times forward EPS (1 standard deviation above the 10-year average) for the reasons discussed,” he concluded. “However, we see a risk of potential valuation multiple contraction to 20 times forward EPS, which is one standard deviation below the 10-year average. With regard to our forecasts, we see limited chance of a big surprise to the upside. Hence, under these scenarios, Dollarama’s valuation could range between $78 and $101, which does not represent an appealing risk/reward, in our view.”
Elsewhere, others making target adjustments include:
* Desjardins Securities’ Chris Li to $107 from $104 with a “buy” rating.
“While the potential return (10 per cent) is somewhat limited for a Buy rating, our positive view is based on DOL’s mix of defensive and growth attributes in the uncertain economic environment,” said Mr. Li.
* National Bank’s Vishal Shreedhar to $108 from $104 with an “outperform” rating.
“We 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,” said Mr. Shreedhar.