Expecting a “significant moderation” in its same-store sales trajectory and traffic to “normalize,” Scotia Capital analyst George Doumet downgraded Dollarama Inc. to “sector perform” from “sector outperform” on Monday.
“Over the past six quarters, DOL has posted double-digit SSS, well above its longer term trajectory closer to mid single digits ‚” he said. “For the 1H of the period, the elevated SSS was aided by comping pandemic lock-downs. Over the past couple of quarters, however, a continuation of trade-down trends (given the sustained high level of inflation) and the tailwind from the introduction of $5 price point drove the SSS growth. While we think a healthy part of the recent gains will prove to be sticky, we expect a moderation in the SSS (toward the lower-end of mid-single-digit range).”
“DOL has been able to grow traffic at an impressive rate of 20 per cent on a two-year stack over the past two quarters. A jump in consumables demand was the key driver of traffic growth as DOL benefited from the consumer trade-down and gained share from the grocery and other channels. Furthermore, DOL also managed to grow its TAM by gaining share from general merchandise retailers through strategic choice of offerings and leveraging the $5 price point to offer value in broader categories. These traffic tailwinds could turn into headwinds in the upcoming quarters as a moderation in inflation both in the general merchandise and food level (in addition to a soft-landing view) could potentially stabilize/dampen the strong consumers trade-down trend.”
In a research report released Monday titled Value for Customers, Premium for Investors, Mr. Doumet emphasized the Montreal-based retailer shares have overperformed over the last two years, jumping almost 60 per cent versus a flat TSX.
“This was driven by strong EPS growth (CAGR [compound annual growth rate] of 28 per cent vs. historically 17 per cent) resulting from (i) share gains across all categories as inflation bites into consumer budgets, (ii) a jump in traffic (10-per-cent CAGR vs. 1 percent historically) driven by strong demand for consumables, (iii) higher pricing, including the introduction of the $5 price-point and (iv) expanding gross margins driven by lower transport and product costs,” he said. “Returns were also driven by 13-per-cent multiple expansion to 26 times NTM [next 12-month] EPS, 1 standard deviation above its historical average. DOL is yielding 3.6 per cent on our fiscal 2025 estimated FCF, below its historical average and in line with the CAN-10.”
“As much as we don’t like to downgrade compounders, we believe we would almost need a hard landing for the stock to work - as, in our view, we are currently experiencing peak-ish valuation up against a decelerating top (tough comps)/bottom line (stubborn labour inflation) for F25 (and F26). We would recommend investors deploy the proceeds towards other (more value-oriented) discretionary names, especially as the narrative around a softer landing continues to gain traction (i.e., position more risk on).”
Mr. Doumet raised his target for Dollarama shares to $107 from $104, which is the average on the Street.