Dollarama Inc.
DOL-icous!: Deep value positioning underpins FQ1 strength, PT to $101
Our view: Strong Q1 results supportive of our constructive view and investment thesis, and DOL premium valuation. Exceptionally strong SSS +17.1%, up sequentially despite tougher comps, reflects strong value positioning, particularly sought after in the current high inflation environment, and overall financial results reinforce management focus on productivity and efficiency. Management erring on the side of prudence by maintaining F24 guidance but indicated potential revisit come FQ2 results early September. In our view, trends point to strong SSS/GM% through F24, offset somewhat by higher than normal SG&A growth led by minimum wage increases in QC/ON. PT to $101 (+$3).
Key points:
DOL Q1 performance reflective of DOL positioning with consumers, despite management conservatism around revising guidance, we are nudging F24E/F25E upward to reflect FQ1 results and solid performance five-weeks into FQ2, partly offset by higher SG&A. Q2-to-date SSS commentary implies +11% SSS five-weeks in. Raising our Q2E SSS from +7.5% to +8.5%. For H2, SSS assumption 4-5% unchanged as DOL cycles consumer trade down that accelerated H2/F23, bringing F24E SSS to +8.7% vs +6.1% previously and guidance +5-6%. We are particularly impressed with strong traffic and basket size growth, now ~5%/~32% above pre- pandemic levels (Ex 3/4) as DOL captures share of consumer wallet.
Our F24E GM% +80 bps Y/Y to 44.3% (guidance range 43.5-44.5%) is essentially unchanged and reflects 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 14.8% toward the low-end of guidance 14.7-15.2% reflects scaling on higher revenue assumption.
NCIB in focus with heightened discipline around capital allocation. No share repurchases in FQ1 as management prudently preserved cash to fund the forthcoming land acquisition, new stores cadence favouring FQ1, racking at the new Laval warehouse, and a shorter buyback window. For the balance of F24, excess FCF to be deployed on NCIB, debt-funded portion of the NCIB deferred until the credit backdrop improves. Our model incorporates 2.9% share buyback in F24E, rising to +4.0% F25E, +5.5% F26E assuming normalizing credit conditions, leverage largely stable ~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 $101. Target EV/ EBITDA 16x consistent with 2015-18 average, target P/E 25x at 2.5x discount (Ex. 13). Multiples reflect stability of business model against backdrop of uncertain economy, consumer wallet pressure along with traction on higher price points and Dollarcity opportunity.