Following “strong” fourth-quarter 2024 financial results that capped an “exceptional” fiscal year, Stifel analyst Martin Landry expects the momentum to continue for Dollarama Inc., predicting further market share gains and seeing its guidance “front-end loaded and conservative.”
However, he continues to wait for a “better entry point” from an investing perspective.
“In our view, at 24.5 times forward earnings, roughly one standard deviation above its 5-year average, there is a low likelihood of further valuation expansion from current levels,” he said. “We also see limited upside to our forecasts, and thus we believe DOL’s shares could be ranged-bound in the short-term.”
Shares of the Montreal-based discount retailer surged 10 per cent on Thursday following the premarket release of better-than-expected quarterly results and a 29.9-per-cent raise to its quarterly dividend (to 9.2 cents per common share).
“Dollarama reported impressive Q4FY24 results with EPS increasing 26 per cent year-over-year, higher than both our expectations for a growth of 15 per cent and consensus of 17 per cent,” the analyst said.
“Dollarama has gained market share in the last two years as frugal consumers changed their shopping patterns to offset inflation pressures and rising interest rates. Comparable sales growth increased by 12 per cent year-over-year and 12.8 per cent year-over-year, in FY23 and FY24, respectively, resulting in a two-year stack of 25 per cent year-over-year, one of its best performances ever. While other discount retailers such as Walmart Canada and Costco Canada have also performed well in the last two years with SSS [same-store sales] growth of 12 per cent and 19 per cent respectively on a two-year stack basis, Dollarama has significantly outperformed them. The introduction of the $5 price points has allowed Dollarama to broaden its product offering, increasing its relevance with Canadians.”
Mr. Landry calculates the company’s fiscal 2025 revenue and margin guidance translates into an earnings per share range of $3.80-$4.10, leading him to increase his estimate by 3 per cent to $3.98, representing a growth of 12 per cent year-over-year.
“Our revenue estimates remain largely unchanged with a comparable sales growth assumption of 4.3 per cent year-over-year, roughly in-line with DOL’s guidance for SSS to range between 3.5 per cent and 4.5 per cent,” he said. “We have reduced our gross margin assumption slightly to 44.7 per cent from 45.2 per cent on gross margin headwinds in H2FY25 due to higher logistics costs and increased shrink. However, our SG&A assumptions as a percentage of sales is reduced by 100bps reflecting higher than expected leverage on fixed costs as a result of the strong organic growth.”
Keeping his “hold” recommendation for Dollarama shares, Mr. Landry increased his target by $10 to $110, but he warned the appear “fully valued” and he does see growth slowing. The average target on the Street is $112.75, according to LSEG data.
“DOL’s shares are up over 50 per cent in the last two years and are trading at 24.5 times forward earnings, roughly 1.5 times higher than the 10-year average,” he said. “While Dollarama’s financial performance in recent years justifies a premium valuation, we do not see further multiple expansion potential from current levels. We see a risk of multiple contraction under a scenario where investors rotate into consumer cyclical names in 2024.”
“Dollarama’s pace of same-store-sales growth is expected to decelerate to 3.5-4.5 per cent in FY25 (calendar 2024) following two consecutive years of 12-per-cent-plus growth. We see a risk that the slowing growth rate translates into lower valuation multiples.”
Other analysts making changes include:
* Scotia Capital’s George Doumet to $113 from $107 with a “sector perform” rating.
“Q4 results beat on all fronts (comps, margins, Dollarcity) and saw a healthy (30-per-cent) boost to the dividend. F25 guidance at the mid-point/high-end is ahead of EBITDA street expectations by 3 per cent/6 pr cent,” he said. “While there is an expectation that there is an element of conservatism in the guidance (in typical DOL fashion), we do highlight that basket is down for the quarter (and likely for F25), implying that traffic would need to grow 6 per cent (on top of 13 per cent in F24) in order for DOL to attain its annual SSSG target.
“All in all, we prefer more value-oriented discretionary names (especially as we get closer to that first rate cut) over ‘defensive growth’ DOL , which is trading at a 13-per-cent premium over historical average - despite expectations for SSS and EPS growth to decelerate over the NTM [next 12 months] (from 13 per cent to 4 per cent and 29 per cent to 12 per cent).”
* National Bank’s Vishal Shreedhar to $120 from $112 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.
* Desjardins Securities’ Chris Li to $120 from $107 with a “buy” rating.
“Strong 4Q results and a solid FY25 outlook reflect continuing robust demand from value-seeking consumers and rational competition,” said Mr. Li. “We expect strong growth at Dollarcity to continue, with upside to its long-term store target. Even though growth will normalize, we believe DOL’s premium valuation is supported by high earnings visibility (with upside) as other retailers remain challenged in the near term. The main risk is likely sector rotation. Applying the five-year average P/E implies a $99 valuation.”
“Our positive long-term view is based on structural industry tailwinds and the strength/resilience of DOL’s business model across all economic cycles.”
* RBC’s Irene Nattel to $125 from $118 with an “outperform” rating.
“Strong F24 results and F25 guidance are supportive of our constructive view and investment thesis, and DOL’s premium valuation,” said Ms. Nattel. “SSS moderating as expected but FQ4 up 8.7 per cent (two-year stack 24.6 per cent) better than expected on strong traffic up 11.2 per cent as pressure on disposable income drives value-oriented consumer behaviours. Q4/F24 EPS growth 26.4 per cent at very high end of coverage universe. F25 guidance likely conservative, implies normalization toward historical SSS growth rate, which remains at the high end of our coverage universe. We reiterate our view of DOL as the best positioned Canadian retailer for the current macro backdrop.”
* BMO’s Tamy Chen to $124 from $105 with an “outperform” rating.
“F2025 SSS guidance and management’s tone was better than we expected,” she said. “The company expressed confidence at being able to grow SSS in F2025, driven by continued strong trends at store-level, merchandise refreshes, and population growth. The other standout was strong growth at Dollarcity (DOL’s equity pick-up in F2024 increased 66 per cent year-over-year and Dollarcity declared a first-ever US$80-million dividend).”
* CIBC’s Mark Petrie to $115 from $109 with a “neutral” rating.
* TD’s Brian Morrison to $113 from $106 with a “hold” rating.