Dollarama’s Q2 review: A worthwhile buy in a high inflation environment

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Objective and introduction

Dollarama Inc., (TSX:DOL:CA), Canada’s largest discount dollar store chain, reported earnings that met analysts’ lofty expectations as consumers continued to lower prices amid high inflation. The company posted strong figures on the top and bottom rows, and reiterated their previous guidance on financial performance and expanding retail growth, highlighting their success through 2022. All figures are in CAD unless otherwise noted opposite.

My recent Q1 review on DOL:CA presented a bullish view, and most of the highlighted tailwinds remain intact. With the macro environment likely to remain challenging as inflation remains elevated and supply chain issues drag on, DOL:CA remains well positioned for success and I rate them “Buy” with a focus. price of $85 over 18 months, down from $82. previously.

Q2 balance sheet

DOL:CA posted $1.2 billion in revenue, posting an impressive 18.2% sales growth and a 13.2% increase in comparable store sales growth. Margins also held up, jumping 0.2% to 43.6% as consumables continued to grow as part of the sales mix. EBITDA increased by 25.8% to $369.4 million, which totaled 30.4% of total sales. DOL:CA generated $193.5 million in net income and recorded earnings per share of $0.66, far exceeding Q2 2021, which was $0.48. SG&A expenses rose just 7.1% to $168.3 million as the company’s tight cost structure held up even during the period of strong growth. Although inventory was high in the second quarter, executives remained confident inventory on hand was appropriate and the mix continued to improve. Dollarcity, the company’s 50.1%-owned South American subsidiary, posted a net profit of $7.7 million for DOL:CA and continues to slowly become an important part of the earnings portfolio. The company also opened 13 net new stores, while Dollarcity opened 19 net new stores. Additionally, DOL:CA has repurchased nearly 4 million shares and, based on the second quarter results, appears to be progressing quite well towards its goals.

to mix together

DOL:CA 2023 Q2 Overview

Executives highlighted other financial and operational measures during the conference call in early September. Net debt to EBITA was 2.79X, in the previously announced comfort zone of 2.75x to 3x for adjusted net debt to EBITDA. JP Towner, chief financial officer of DOL:CA, noted that the company amended its credit facilities in the second quarter, increasing lines from $800 million to $1.5 billion and extending tranches for another year. He mentioned that this included the company’s US commercial paper program, which was increased from $500 million to $700 million. Not only have these facilities been increased, but DOL:CA has specifically tied the sustainability facilities to two performance goals related to their overall ESG strategy. I continue to believe that being a leader on ESG objectives in a retail industry will improve its image in the eyes of investors and consumers in the long run. Given management’s confidence in achieving these goals, the ESG angle is a unique offering that sets DOL:CA apart from its peers.

The company also reiterated its previous guidance, including opening 60 to 70 net new stores this year, achieving gross margin between 42.9% and 43.9%, maintaining general and administrative expenses between 13.8 % and 14.3% and deploy $160MM-$170M CAPEX spend. However, the company raised its fiscal 2023 same-store sales growth assumption from a range of 4.0% to 5.0% to a range of 6.5% to 7.5%. DOL:CA noted in the earnings release that the forecast was driven by stronger demand for lower-margin consumables, including canned foods and other small foods and beverages. Overall, this quarter met expectations. While analysts expected discount retail to outperform as consumers grapple with runaway inflation, DOL:CA continued to operate efficiently and grow at a rapid pace while maintaining margins. intact. Management continued to lay out a stable plan to achieve long-term growth, and this second quarter proved that DOL:CA remains a solid choice as inflation remains elevated.

retail plan

DOL:CA 2023 Q2 Overview

The model shows benefits

DOL:CA continues to progress quietly and the fundamentals support an increase in the share price. While the company’s net cash position has fallen given management’s interest in share buybacks, the company has sufficient cash balances and revolvers outstanding to fund current growth plans. The model predicts a WACC of 6.1%. With rates rising, I expect the cost of debt to rise if DOL:CA tries to take advantage of this environment, even with their previous fixed rate debt ratios of between 1.5% and 3.6%.



I expect $26.8 billion in continued value, given revenue growth of 14% this year and mixed revenue growth of around 6.5% for three years, sales growth of comparable stores continuing to impress. I see margins ending up near the top of the forecast, at 43.7%, for the year. I maintain that other cost ratios are mostly on par with guidance as they were conservative given the strong first quarter numbers. Given an estimate of stock buybacks, a stock price of $85 (see below) may be supported by fundamentals. The stock price is supported by a P/E ratio of 28 on EPS of $3.03 in CY2023 and exhibits an EV/EBITDA ratio of 20.5 CY2023, in line with industry peers and industry estimates. analysts. In today’s price target, I estimate shares outstanding at 285 million, down from 290 million, given that DOL repurchased 3.7 million shares last quarter, and continues to put the focus on this initiative.


Author income forecast


Author’s EV calculation


DOL:CA remains the undisputed leader in discount retailing in Canada and should benefit from high inflation as consumers buy fewer consumables. The company sports robust operations and continues to improve its position in South America through Dollarcity. Although fairly valued, I think DOL:CA is worth a cautious buy, with an 18-month price prediction of $85 CAD.

About Madeline Dennis

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