RE:CIBCAs expected, they raise their target by $16.00. GLTA
EQUITY RESEARCH April 4, 2024 Earnings Update
DOLLARAMA INC.
Customers Flock To DOL And Investors Follow Suit
Our Conclusion
Excellent Q4 results highlight DOL’s compelling value proposition and
relevance in a cautious consumer environment. Same-store sales (SSS)
growth exceeded our forecasts and F2025 guidance for 3.5%-4.5% is a
healthy range given strong comps and accelerating disinflation. We expect
slowing growth will weigh on valuation in time, but this is more than offset by
the scarcity premium DOL commands given its quality in a challenging
environment. We tick up our target multiple to 27x (was 26x). Applied to the
average of our F2025 and F2026 EPS (was F2025), our price target moves to $115 (was $99). Fundamentals are excellent, but DOL remains Neutral rated on account of its premium valuation and expected decelerating growth.
Key Points
Consumer Trade-down Remains Tailwind Amidst Disinflation: The
highlight of DOL’s stellar Q4 results was the 11.2% growth in consumer
traffic. This marks a notable acceleration in the multi-year stack and reflects
DOL’s compelling value proposition and relevance with consumers, which is
only strengthened given the current challenges facing consumers. Strong
population growth is undoubtedly also a tailwind. On the flipside, disinflation
is accelerating as price increases slow. Our checks (~1,000 items) show that
higher price-point goods are being introduced but penetration is stabilizing.
Outlook Is Solid And Generally In Line: Along with Q4, management
introduced its F2025 outlook and ranges were generally in line with
expectations. We believe margin levers are conservatively factored in. Given
the slower spending environment, we are not as optimistic about significant
upward revisions as we were for F2024, but we believe the outlook does
embed DOL’s typical level of conservatism.
Dollarcity (DC) Is Still Small But Becoming A Force: DC delivered strong
Q4 results with its earnings contribution to DOL up 66% from last year and at
a new peak. DC has opened 90+ stores for the second consecutive year and
is well positioned to achieve management’s target of 850 at least a year
earlier than the 2029 target. The company also paid its first dividend, which
amounts to $54MM to DOL. Though the future pace of these payments is
unclear, we expect this to recur in the coming years as DC growth continues
and FCF remains in excess of growth investments.
Balance Sheet Building Capacity, Likely An F2027 Tailwind: Given the
after-tax cost of debt remains above the DOL’s earnings yield, management
continues to limit buyback activity when deploying excess cash flow. This has
resulted in DOL’s leverage ratio falling from 2.8x to 2.2x over the last five
quarters. We expect buybacks will remain capped to excess FCF for the next
couple quarters at least, though this could become a potential tailwind to
accelerate buyback activity by F2027. We have only partially reflected this in
our forecasts. Also note that we have not yet included the proposed buyback
tax, which would clip 7 cents in EPS in F2025E and 11 cents in F2026E.