Dollarama Inc

Dollarama Inc (TSX: DOL) is a Canada-based company principally engaged in operating discount retail stores. The company provides a broad range of everyday consumer products, general merchandise, and seasonal items, with merchandise at low fixed price points. General merchandise and consumer products jointly account for the majority of the company's product offerings. 

Key Highlights

• Recently, the company reported the pricing of an offering of CAD 300 million aggregate principal amount of 1.505% senior unsecured notes payable on September 20, 2027. The above funds are likely to use for the repayment of CAD 300 million Series 3 floating rate senior unsecured notes.
• During Q2FY20, the group reported comparable-store growth of 5.4% on y-o-y basis, despite a lower footfall on account of social distancing measures. Furthermore, as per the recent shift in consumer pattern, the business reported 41.7% increase in average transaction size, as consumers were buying in bulk, and have lowered their frequency of store visit.
• The company reduced its debt levels to CAD 1,744.915 million from CAD 1,883.407 million in FY20. The finance costs have declined subsequently, which has supported the company’s margin.

Q2FY21 Financial Snapshot:

• Dollarama posted its Q2FY20 sales of CAD 1,013.592 million, increased from CAD 946.405 million in the previous corresponding period (pcp). The increase was driven by the growth in the total number of stores combined with higher sales of summer seasonal items and increased demands for cleaning products.
• Gross profit stood at CAD 444.750 million as compared to CAD 413.243 million in Q2FY20, thanks to the higher sales.
• Despite a higher gross profit, the company reported a slide in the operating income to CAD 211.409 million as compared to CAD 221.627 million in pcp. The decline was primarily attributable to significantly higher SG&A, coupled with an increase in the depreciation & amortization. SG&A cost was higher on account of higher staff costs for additional shift in each store.
• Net earnings remained slightly lower at CAD 142.496 million, as compared to CAD 143.183 million in Q2FY20, partially supported by lower financing costs and lower income taxes.

Q2FY21 Income Statement Highlights (Source: Company Reports)

Risk: The group is likely to face a headwind from higher operating costs due to higher sanitization expenses. This might weigh on the company’s profitability.

Valuation Methodology: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:  The stock of DOL gained ~20% and ~11% in the last six-months and nine-months, respectively. Despite a current slowdown, the company has consistently added stores in the recent past, which is impressive. However, due to the ongoing economic slowdown, the company might witness a lower consumer footfall, which might hinder the overall sales volumes. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like Metro Inc, Alimentation Couche-Tard Inc, and Premium Brands Holdings Corp etc. Considering the aforesaid facts, current price movement, we recommend a 'Watch' stance on the stock at the closing market price of CAD 51.21 on October 21, 2020.

DOL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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