Amid the signs of inflation cooling down, a strong employment market, and easing recession fears, the S&P/TSX Composite Index is trading 1% higher this year. Meanwhile, Dollarama (TSX:DOL) has outperformed the broader equity markets by delivering returns of around 10% this year. Besides, it currently trades close to its all-time high. Let’s assess whether the uptrend in Dollarama could continue by looking at its recent performances, growth prospects, and valuation.
Dollarama’s first-quarter performance
Earlier this month, Dollarama posted a solid first-quarter performance, which ended on April 30. For the quarter, the company’s revenue grew by 20.7%. Impressive same-store sales growth of 17.1% and net addition of 76 stores over the last four quarters drove its sales. A solid 15.5% increase in transaction volumes and 1.4% growth in its average transaction size drove its same-store sales. The compelling value offerings and affordable product mix appear to have increased footfalls, driving transactions in this inflationary environment.
The company’s gross margins expanded by 0.1% to 42.2%, while its general, administrative, and store operating expenses increased by 0.1% to 15.1% of its total sales. Meanwhile, adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) and net income grew by 28.3% and 23.6%, respectively. The company also benefited from increased net earnings from its 50.1% stake in Dollarcity. Now, let’s look at Dollarama’s growth prospects.
Dollarama’s outlook
Supported by its broad assortment of products, compelling value, and extensive presence across Canada, Dollarama has strong brand recognition countrywide. The company enjoys a quick ramp-up, with a payback period of two years for new stores, thus resulting in a high return on equity. The average annual sales for stores opened within two years is 2.9 million, which is encouraging.
Amid its higher return on investments, the company is focusing on expanding its store network. It plans to grow its store network to 2,000 stores by 2031. The company is also strengthening its direct sourcing capabilities to offer products at attractive price points, and taking several initiatives to improve operating efficiency and optimize logistics operations to support its network growth.
Besides, Dollarcity’s management expects to add over 400 stores in the next six years to increase its store count to 850 by 2029. So, the company’s long-term growth prospects look healthy.
Meanwhile, Dollarama’s management has provided an optimistic fiscal 2024 guidance, which ends in January 2024. The guidance projects the company to make a capital expenditure of $190–$200 million while opening 60–70 new stores. The guidance also projects the company’s same-store sales to grow by 5–6%, while its gross margins come in the range of 43.5–44.5%.
Dividend and valuation
Supported by its solid underlying business, Dollarama enjoys stable cash flows, allowing it to reward its shareholders through share buybacks and dividend growth. Since June 2012, the company has repurchased 40% of its outstanding shares. Further, it has raised its dividends 12 times since 2011. It currently pays a quarterly dividend of $$0.0708/share, translating its forward yield to 0.3%.
Over the last 10 years, Dollarama has delivered impressive returns of over 580%. Amid solid returns, the company trades at an NTM (next 12 months) price-to-earnings multiple of 26.6, which looks justified given its higher growth prospects.
Bottom line
Given its solid underlying business and excellent growth prospects, Dollarama would be a perfect buy despite its higher valuation and low dividend yield.
