Dollarama Inc. (TSX:DOL), the largest owner and operator of dollar stores in Canada, announced better-than-expected second-quarter earnings results before the market opened on September 10, and its stock has responded by rising over 7% in the trading sessions since. Let’s take a closer look at the results to determine if this could be the start of a sustained rally higher and if we should buy the stock today.
The results that surpassed expectations with ease
Here’s a summary of Dollarama’s second-quarter earnings results compared with what analysts had anticipated and its results in the same period a year ago.
| Metric | Q2 2016 Actual | Q2 2016 Expected | Q2 2015 Actual |
| Earnings Per Share | $0.74 | $0.62 | $0.51 |
| Revenue | $653.29 million | $642.75 million | $572.60 million |
Source: Financial Times
Dollarama’s diluted net earnings per common share increased 45.1% and its revenue increased 14.1% compared with the second quarter of fiscal 2015. Its very strong earnings-per-share growth can be attributed to its net earnings increasing 38.6% to $95.5 million, driven by its increase in sales, gross margin improvement, and lower selling, administrative, and general expenses as a percentage of sales.
Its very strong revenue growth can be attributed to two primary factors. First, the company added 72 net new stores compared with the year-ago period, bringing its total store count to 989. Second, its comparable-store sales increased 7.9% in the second quarter, which consisted of a 6.2% increase in the average transaction size and a 1.5% increase in the number of transactions.
Here’s a quick breakdown of six other notable statistics from the report compared with the year-ago period:
- Gross profit increased 21.3% to $250.58 million
- Gross margin expanded 230 basis points to 38.4%
- Earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 35.3% to $146.86 million
- EBITDA margin expanded 350 basis points to 22.5%
- Operating profit increased 36.1% to $135.09 million
- Operating margin expanded 340 basis points to 20.7%
Dollarama also announced that it will be maintaining its quarterly dividend of $0.09 per share, and the next payment will come on November 4 to shareholders of record at the close of business on October 1.
Should you buy or avoid Dollarama today?
It was a fantastic quarter overall for Dollarama, and the results surpassed analysts’ expectations, so I think its stock has responded correctly by rallying. I also think this could be the start of a sustained rally higher, because its stock still trades at favourable forward valuations, because there is still ample room for it to expand, and because it has shown a strong dedication to maximizing shareholder value through the payment of dividends.
First, Dollarama’s stock trades at 32.3 times fiscal 2016’s estimated earnings per share of $2.67 and 27.6 times fiscal 2017’s estimated earnings per share of $3.12, both of which are very inexpensive given its current growth rate.
Second, Dollarama has 989 stores in Canada today, but I think it could easily have over 1,500 locations within the next 5-10 years, and I think it could reach this number without running into issues related to market densification.
Third, Dollarama pays an annual dividend of $0.36 per share, which gives its stock a 0.4% yield at today’s levels. A 0.4% dividend yield may not peak your interest at first, but it is very important to note that the company has increased its dividend for four consecutive years, and its strong operational performance could allow this streak to continue in 2016.
With all of the information above in mind, I think Dollarama is one of the top growth plays in the market today. All Foolish investors should take a closer look and strongly consider beginning to scale in to long-term positions.
