Dollarama (TSX:DOL) operates dollar stores in Canada that sell all items for $4 or less with locations in every Canadian province. Its headquarters, distribution centre, and warehouses are located in the Montreal area.
The company signed a deal this year for a 50.1% stake of Dollarcity, which operates stores in Columbia, El Salvador, and Guatemala. Dollarcity follows a similar concept to Dollarama with products priced up to US$3.
Intrinsic price
Based on my calculations using a discounted cash flow valuation model, I determined that Dollarama has an intrinsic value of $59.61 per share. Assuming less than average industry growth, the intrinsic value would be $47.79 per share, and higher-than-average industry growth would result in an intrinsic value of $79.34 per share.
At the current share price of $45.51, I believe Dollarama is slightly undervalued. Investors looking to add a retail company to their TFSA or RRSP should consider buying shares of Dollarama. I would recommend following the stock and waiting until the end of 2020 as a correction in the market could allow investors to buy the stock at a cheaper price.
Dollarama has an enterprise value of $20.7 billion, which represents the theoretical price a buyer would pay for all of Dollarama’s outstanding shares plus its debt. One of the good things about Dollarama is its low leverage with debt at 11.6% of total capital versus equity at 88.4% of total capital.
Financial highlights
For the nine months ended November 3, 2019, the company reported a mediocre balance sheet with negative retained earnings of $563 million. This is not a good sign for investors, as it suggests the company has more years of cumulative net loss than net income. The company’s asset growth was driven by the addition of $132 million in assets from its Dollarcity stake.
Overall revenues are growing with an increase from $2.5 billion in 2018 to $2.7 billion in 2019 (+9.4%). The growth in revenues trickled down and grew the company’s bottom line from $374 million in 2018 to $385 million in 2019 (+3%)
The biggest change to the company’s statement of cash flows is the US$40 million (CAD$53 million) upfront payment for a stake in Dollarcity.
The company renewed its normal course issuer bid (NCIB) in July 2019, which allows it to repurchase and cancel up to 15,737,468 common shares (approximately 5% of outstanding shares). During the nine months ended November 3, 2019, the company repurchased and cancelled 3,086,563 common shares for cash consideration of $145 million. This is often a strategy used by management to indicate to shareholders it believes the current share price is undervalued.
Dollarama has no outstanding amounts under its credit facility, which is a good sign, as it suggests the company generates enough cash internally to manage its cash outflows.
Foolish takeaway
Investors looking to buy shares of a financially stable retail company should consider buying shares of Dollarama. 2020 will inevitably be a rough year for the markets, and I recommend investors wait for the ideal time to buy in.
Despite the company’s negative retained earnings, the company still boasts an intrinsic value of $59.61, which represents significant upside to the current share price of $45.51. Further, the company’s NCIB and no outstanding draws on its revolver should offer investors assurance of share price appreciation in the near future.
