A more optimistic earnings outlook for Dollarama Inc. prompted an upgrade at TD Securities.
Analyst Brian Morrison raised his rating on Canada’s largest dollar store chain to buy from hold, and upped his price target on the stock to $115 from $105, forecasting mid- to high-teen earnings per share growth in the coming years.
“We believe that this should warrant a premium multiple to the market,” Morrison told clients.
The analyst has confidence in Dollarama’s earnings going forward, due in part to its ability to successfully navigate volatility in the currency market.
He expects this will continue, as the company continues to actively hedge its currency exposure and make necessary price adjustments, while maintaining a compelling value proposition for consumers.
Morrison believes Dollarama will need to raise prices to offset its realized foreign exchange rate in fiscal 2017. He estimates they will need to be less than two per cent – or about two or three cents per item.
“This should not be an issue, with its low and multiple price point strategy,” the analyst said, adding that the introduction of $3.50 and $4.00 price points should support Dollarama’s earnings.
Morrison also noted that Dollarama’s valuation is now more reasonable than it was when she downgraded the stock in September 2015.
“It is our view that the current valuation more appropriately takes into account the forecast deceleration of the company’s earnings growth profile,” the analyst said.
He attributes this to Dollarama’s large size and the challenges associated with sustained EPS growth after years of strong expansion, as well as the potential earnings hit coming from a rapid decline in the Canadian dollar.
Dollarama is set to report second quarter results for fiscal 2017 on September 1.