Dollarama Inc.

Dollarama Inc. (TSX: DOL) is a recognized Canadian value retailer that offers a broad collection of consumable products, general merchandise and seasonal items both in-store and online. Within Canada, the company has more than 1,333 locations scattered across metropolitan areas, mid-sized cities and small towns.

Key Highlights:

• Increase in net debt: The group reported an increase in net debt to CAD 1,679.836 million in Q1FY22, as compared to CAD 1,443.907 million in Q4FY21. The increase in net debt was primarily due to a lower cash balance of CAD 49.100 million in Q1FY22, as compared to CAD 439.144 million in Q4FY21. Notably, adjusted net debt to EBITDA stood at 2.82x in Q1FY22, increased from 2.68x in Q4FY21, which might dampen the company’s overall financial flexibility.
  

• Sluggish economic scenario to impact operations: Despite the increase in the total number of stores, the operations have been impacted by stay-at-home order and a ban on the sale of non-essential goods in Ontario. Notably, the group’s ~40% of stores are located in the above region. More importantly, due to the ban across Ontario, the management expects an impact on its operations due to the restrictions imposed during the first five and a half weeks of the second quarter of FY22.

Q1FY22 Financial Highlights:

• DOL announced its quarterly result, wherein the company posted its sales of CAD 954.246 million, as compared to CAD 844.798 million in the previous corresponding period (pcp). The growth was primarily driven by higher comparable store sales coupled with an increase in the total number of stores.
• Gross profit stood higher at CAD 403.440 million, as compared to CAD 349.051 million in pcp, thanks to the higher revenue, partially offset by a higher cost of sales (CAD 550.806 million v/s CAD 495.747 million in pcp).
• Operating income stood higher at CAD 176.769 million, from CAD 149.712 million in Q1FY21, supported by a higher gross profit, partially offset by higher SG&A expenses (CAD 158.672 million v/s CAD 137.738 million in pcp) coupled with an increase in depreciation and amortization (CAD 71.402 million v/s CAD 63.975 million in pcp).
• The group reported its net earnings of CAD 113.574 million, increased from CAD 86.079 million in Q1FY21.

Q1FY22 Income Statement Highlights (Source: Company Report)

Risks: Change in consumer preference and trends might lead to a slide in the overall demand for the products, which might subsequently impact the overall performance of the group.

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendation:

For FY21, the company expects to open new 60 to 70 stores and expects its capital expenditure at around CAD 160 million to CAD 170 million. Despite several hiccups, the company reported a surge in its comparable growth store sales of 5.8% on y-o-y, which is encouraging. The group distributed a higher dividend of CAD 14.583 million in Q1FY22, as compared to CAD 13.737 million in Q1FY21, which is impressive. We have valued the stock of DOL by using the P/E-based relative valuation approach and arrived at a target price offering double-digit downside potential (in % terms). We have considered industry (Diversified Retail) mean on NTM basis as a proxy to target multiple. Hence considering the aforesaid facts, we recommend a ‘Watch’ rating on the stock at the closing price of CAD 56.86 on June 23, 2021.

One-Year Technical Price Chart (as on June 23, 2021). Analysis by Kalkine Group

Premium Brands Holdings Corporation

Premium Brands Holdings Corporation (TSX: PBH) is engaged in specialty food manufacturing, premium food distribution, and wholesale businesses with operations in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nevada, and Washington State.

Key Highlights:

• Lower Margin v/s Industry: The group witnessed lower margin than the industry median, as the performance was partially impacted by increased input costs for a range of commodities including, beef, pork, chicken, cheese, corrugated boxes and packaging. Gross margin and EBITDA margin stood at 19.2% and 8.0%, respectively, as compared to the industry median of 27.3% and 12.8%, respectively. The company reported its operating margin and net margin at 2.8% and 2.0%, respectively, significantly lower than the industry median of 9.4% and 6.4%, respectively.
  

• Surge in total borrowings: At the end of Q1FY21, the group reported increase in its total debt to CAD 1,931.8 million, which reflects a surge of ~43% q-o-q and ~23% y-o-y basis. A higher debt tends to dampen the overall financial flexibility of the company and would lead to higher interest costs, which would impact the profitability as well.

Q1FY21 Financial Highlights:

• PBH announces its quarterly result, wherein the company posted revenue of CAD 1,009.8 million, as compared to CAD 935.0 million in the previous corresponding period (pcp). The 3.9% y-o-y growth was due to organic growth, positive impact from recent business acquisitions and a higher selling price.
• Gross profit stood at CAD 193.4 million, improved from CAD 181.0 million in the previous corresponding period (pcp). The increase was primarily due to higher revenue, partially offset by higher cost of sales (CAD 816.4 million v/s CAD 754 million in pcp).
• The quarter was marked by lower Selling, general and administrative expenses costs and lower Interest and other financing costs, partially offset by higher depreciation and amortization expenses. Earnings before income taxes stood at CAD 28.6 million, significantly higher than CAD 15.6 million in pcp.
• Net earnings climbed to CAD 19.8 million, higher than CAD 12.2 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: The demand for the company’s products depends upon the consumer preference, and a change in the preference might lead to a lower sales volume. Ongoing travel ban and lower outdoor activities would result in reduced demand for specific products like barbeque and on-the-go convenience foods.

Valuation Methodology (Illustrative): Price to Earnings  

Stock Recommendation:

The company might witness a surge in the input costs, which would eventually lead to lower profitability and a decline in the margins. A change in consumer preference due to the pandemic might lead to lower sales and cash flows. On the flip side, despite the ongoing restrictions, the group declared a higher dividend of CAD 25.2 million in Q1FY21, as compared to CAD 19.7 million in Q1FY20, which is a key positive. We have valued the stock using the P/E based relative valuation method and have arrived at a double-digit downside (in percentage terms) upside. For the said purposes, we have considered industry (Consumer non-cyclicals) median on an NTM basis. Considering the aforesaid facts, we recommend a ‘Watch’ stance on the stock of PBH at the last closing price of CAD 126.01 on June 23, 2021.

One-Year Technical Price Chart (as on June 23, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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