Multiple Raised TargetsFollowing Wednesday’s release of better-than-expected second-quarter 2024 financial results and guidance raise, Stifel analyst Martin Landry thinks Dollarama Inc.’s market share gains “still have a runway,” reiterating his view of the discount retailer as “an appealing investment proposition for investors navigating these volatile times.” Shares of the Montreal-based company jumped 5.9 per cent to an all-time high after it reported revenue of $1.455.9-billion for the quarter, up 19.6 per cent year-over-year and exceeding Mr. Landry’s $1.395.9-billion estimate. Earnings per share jumped 30.1 per cent to 86 cents, topping the analyst’s expectation by 11 cents.
“Dollarama reported strong Q2FY24 results with a 15.5-per-cent increase in comparable store sales,” said Mr. Landry. “According to management, performance was strong across all categories (i.e. consumables and general merchandise), which suggests that trade down patterns are also creating tailwinds for discretionary categories, a much different dynamic compared to the majority of Canadian retailers. Gross margin increased by 30 basis points year-over-year, exceeding our expectations, while SG&A pressures did not materialize as expected given strong organic growth, making for an exceptional quarter with EPS increasing 30 per cent year-over-year.”
Mr. Landry thinks Dollarama’s momentum “remains strong” in the third quarter, leading him to believe its guidance raise, calling for full-year same-store sales of 10-11 per cent (up from 5-6 per cent previously), “remains conservative.”
“Given that Q3FY24 comparable sales growth are tracking at 10 per cent growth year-over-year, Dollarama’s FY24 guidance suggests flat to negative SSS in Q4FY24, which we view as too conservative,” he added. “Our full-year SSS estimate of 12.5 per cent stands higher than company guidance. Additionally, given the strong organic growth, SG&A expenses are expected to come in at the low end of the guidance as wage increases are being offset by scale benefits.”
“Dollarama expects its FY24 comparable store sales to increase by 10-11 per cent on the back of a strong year last year and higher than the historical growth rate of 4-5 per cent. This outsized growth is not surprising given the macroeconomic environment and trading down patterns, but it raises questions as to how SSS will fare in FY25. In our view, SSS growth is bound to slowdown next year given the moderating inflation, comping of the $4-plus price point rollout and lapping of the strong market share gains achieved over the last two years. While our visibility is limited, we expect FY25 SSS growth to normalize towards the company’s historical range of 4-5 per cent. However, should SSS growth come flat or even become negative it could pressure DOL’s valuation multiple.”
Mr. Landry raised his same-store sales expectation for the remainder of the year, leading him to boost his EPS estimate to $3.38 from $3.15. That represents a 23-per-cent gain year-over-year, which is the best growth rate in his coverage universe. His 2025 rose to $3.82 from $3.54.
“DOL’s shares performed well on the back of these results, up 6 per cent and reaching an alltime high,” he said. “In our view, investors will likely hold on to this winner until at least year-end given the low risk profile of DOL and recent outperformance. Focus will turn towards FY25 and how the company will perform against a difficult comparable.”
“In our view, Dollarama should continue to benefit from trade down patterns. Hence, heading into year-end, DOL’s shares are likely to continue to be a safe heaven for investors given limited alternatives which provide such growth rates combined with low operational risk.”
Maintaining a “buy” rating, he hiked his target for Dollarama shares to $104 from $96. The average target on the Street is $97.65, according to Refinitiv data.
Elsewhere, other analysts making target changes include:
* Desjardins Securities’ Chris Li to $104 from $93 with a “buy” rating.
“We believe the strong 2Q results and FY24 guidance raise show that sales momentum remains in DOL’s favour as consumers continue to seek value,” he said. “3Q-to-date SSSG is still strong at 10 per cent (21-per-cent two-year stack). While the strong share price performance (20 per cent year-to-date) could keep DOL range-bound in the near term, we expect it to remain an outperformer in our coverage, supported by good earnings visibility, sales upside, margin tailwinds and a strong balance sheet.”
* National Bank Financial’s Vishal Shreedhar to $104 from $97 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,” he said.
* Canaccord Genuity’s Luke Hannan to $94 from $85 with a “hold” rating.
“While we still believe in Dollarama’s long-term growth profile — a result of its lack of meaningful competition, industry-leading profitability and free cash flow generation, and healthy ROIC — we believe the shares are appropriately valued given the context of its near-to-medium-term earnings growth outlook,” said Mr. Hannan.
* Scotia’s George Doumet to $99.50 from $95.50 with a “sector outperform” rating.
“DOL reported another strong quarter- and while it was mainly top line driven, we also got better than expected margin expansion and SG&A containment,” said Mr. Doumet. “The company’s new guidance implies a flat/low-single-digit SSSG exit to the year, which we can argue is conservative. When compared to the mid-point of guidance, we believe we could see higher contributions from gross margins (driven by lower product/transport costs and higher price) and lower SG&A (driven by operating leverage). Net/net our F24 and F25 EPS estimates are up 5 per cent and 4 per cent. Dollarama remains our top defensive idea.”
BMO’s Tamy Chen to $105 from $95 with an “outperform” rating.
“Overall, DOL continues to resonate as a highly preferred retail destination for Canadians in this high inflationary environment. We expect SSS momentum to continue into FQ3/24 before decelerating in FQ4/24 as DOL laps tougher year-ago comps. We believe there is potential upside to management’s F2024 SSS guidance range of 10-11 per cent; our revised forecast is 12.3 per cent,” she said.