DOL-lars and sense: Strong H1 results/outlook reinforce constructive view, price target to $105
Our view: Strong H1 results supportive of our constructive view and investment thesis, and DOL premium valuation. SSS remained exceptionally strong in Q2, +15.5%, H1 +16.3%, despite tougher comps, as Canadian consumers gravitate to DOL with its positioning as the leading Canadian value retailer. Overall financial results reinforce operating leverage of the business, focus on productivity and efficiency. While H2 guidance is typically conservative, Q3 to date sustaining strong momentum. PT to $105 (+$4).
Key points:
DOL Q2/H1 performance underscores strong positioning with consumers. Despite management conservatism on H2 SSS guidance, based on Q3 to date trends, we are raising our Q3 SSS forecast to +9%, and Q4 to +4.5%. Q3-to-date SSS commentary implies ~10% SSS six weeks in, which combined with H1 average 16.3% takes our F24E SSS +11.5% vs +9.2% previously and revised guidance +10%-11%. We remain particularly impressed with strong traffic and basket size growth, ~5% and ~28% above pre-pandemic levels, respectively, (Ex. 3/4) as DOL captures share of consumer wallet.
Our F24E GM% +100 bps Y/Y to 44.5% (guidance range 43.5-44.5%) is up a straw, reflecting relief on freight and logistics, scaling associated with gradual price point migration to $5, and mix. Key offset is rising SG&A, notably wage pressures and incremental store labour. Our SG&A ratio 14.5% just below low end of guidance 14.7-15.2% reflects scaling on higher revenue assumption. Taking Q2A plus revisions outlined above adds 5% to F24E EPS, and 2-3% to F25E/26E.
Commentary on call re: demand profile consistent with findings from our colleague Mike Tran with respect to the US consumer, published in a note this morning (link), and reinforce our conviction around DOL gaining share of consumer wallet amid ongoing value-seeking behaviour.
NCIB resumed in Q2: 2.9 MM shares repurchased under the 2023-24 NCIB for total consideration of $248.1 MM, average price $86.81. Our model incorporates 2.7% share buyback in F24E, rising to +4.0% F25E, +5.5% F26E assuming normalizing credit conditions, leverage largely stable ~2.5-2.6x, vs historical target 2.75x-3.0x. Capital requirements related to potential exercise of the Dollarcity put likely offset by a temporary reduction in NCIB.
Reiterating constructive outlook and OP rating; PT to $105. Target EV/ EBITDA 16x consistent with 2015-18 average, target P/E 25x at 2.5x discount (Ex. 12). Multiples reflect stability of business model against backdrop of uncertain economy, consumer wallet pressure along with traction on higher price points and Dollarcity opportunity.