Dollarama (TSX:DOL) reported its strong Q2 earnings results on Wednesday morning before the market’s opening bell. The popular Canadian dollar store retailer crushed Bay Street analysts’ estimates in the second quarter of fiscal 2020 by reporting adjusted earnings of $0.46 per share. Its earnings were not only higher than analysts’ expectation of $0.41 per share, but also rose by 2.2% on a year-over-year (YoY) basis.
On Tuesday, Dollarama stock closed at $51.69 per share — up 1.5% for the day. It’s expected to extend these gains on Wednesday after solid second-quarter results.
What drove Dollarama’s Q2 earnings higher?
In its second-quarter earnings report, Dollarama’s management highlighted strong demand for summer seasonal items and improving store traffic. These two factors drove the retailer’s latest quarterly sales up by 7.1% year to date to $1 billion. It was significantly higher as compared to its previous quarter sales of $845 million and analysts’ estimates of $976 million.
Note that Dollarama’s stores faced a significant drop in traffic in the first quarter due to COVID-19 related closures. Therefore, its improving store traffic with each month (in the second-quarter) comes as a big relief and is also likely to boost the retailer’s future earnings estimates.
More good news for Dollarama investors
Dollarama’s comparable-store sales — including its temporarily closed stores — rose by 2.5% YoY in the second quarter. If we exclude sales of these closed stores, then the company’s comparable-store sales inched up by 5.4% YoY.
It’s an important positive development for Dollarama investors, as its comparable-store sales in open stores were nearly flat in the previous quarter, while it fell by 2.4% YoY if we took temporarily closed stores into account.
How COVID-19 is hurting Dollarama
Apart from hurting Dollarama’s store traffic earlier this year, the COVID-19 is also fuelling its costs. In Q2 ended August 2, 2020, the Canadian retailer’s pandemic related costs stole about $1.9 million from its gross profit margin.
The company’s total direct costs related to COVID-19 measures more than doubled to $34.3 million in Q2. Previously in the first quarter, Dollarama reported $15 million as its pandemic-related direct costs.
A significant rise in these costs implies that a prolonged pandemic could increasingly hurt Dollarama’s profit margins.
Reduced opening hours at 83 stores
The ongoing pandemic also has forced the dollar retailer to temporarily close many of its stores or reduce their opening hours. However, the situation significantly improved in the second quarter. At the end of the first quarter, its nearly 104 stores were temporarily closed. But the good news is that none of Dollarama’s store is closed as of yesterday, and just 83 them are operating with reduced opening hours.
Is it the right time to buy Dollarama stock?
Dollarama stock is currently trading with 15.8% year-to-date gains. After registering a 12.5% decline in the first quarter of the calendar year 2020, its stock recovered sharply in the second quarter with 15.7% gains. The stock is extending these gains in the ongoing quarter as it has already risen by 14.5% in Q3 so far.
While many other businesses continue to struggle due to the prolonged pandemic, Dollarama’s second-quarter results reflect significant improvement in its business operations. That’s one of the reasons why I expect Dollarama stock to continue to rally in the coming months as its store traffic comes back to normal after improving in the second quarter.
