Dollarama Inc.
Buck-aroo Banzai: Q4/F24 results and F25 guidance supportive of constructive view, PT to $125 (+$7)
Our view: Strong F24 results and F25 guidance are supportive of our constructive view and investment thesis, and DOL's premium valuation. SSS moderating as expected but FQ4 +8.7% (two-year stack +24.6%) better than expected on strong traffic +11.2% as pressure on disposable income drives value-oriented consumer behaviours. Q4/F24 EPS growth +26.4% 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. PT to $125 (+$7).
Key points:
DOL results reinforce our views of DOL as a best idea for 2024, highlighted in our 2024 Outlook. Although SSS/earnings growth are expected to normalize after the torrid pace of F2024 (SSS +12.8%/EPS +29%), we continue to favour DOL for its deep value positioning, resilient model across economic cycles and opportunity to gain incremental share of wallet, and underappreciated Dollarcity opportunity including accelerating scaling underpinned by critical mass of 532 stores and counting.
Nudging F25/26 forecasts upward, EPS +5/+6.5% on higher base, +50 bps to SSS assumption, higher NCIB on FCF. We remain particularly impressed with DOL's strong traffic and basket metrics, +10/+21% above pre-pandemic levels, (Ex. 5) despite modest contraction in FQ4 as DOL captures share of consumer wallet (Ex. 6). Assumptions underpinning our F25 forecasts unchanged save for SSS, F25E GM% and SG&A broadly unchanged at 44.9% and 14.4%, at the high/low end of guidance range, reflecting relief on freight and logistics, scaling associated with gradual price point migration and mix.
Our model assumes 6.5% reduction in share count through F26 under relatively conservative assumptions. Our model incorporates 2.9%/3.7% share buyback in F25E/F26E, fully funded with FCF, which results in leverage moderating from ~2.25x at F24 to 2.1x at Y/E F26E (historical target 2.75x-3.0x) (Ex. 8). Should DOL's Dollarcity JV partners exercise the put option at some point, it would likely result in a temporary reduction in NCIB.