The global equity markets have been upbeat since the beginning of November amid signs of easing inflation and a pause in interest rate hikes by central banks. Besides, investors are optimistic that the Federal Reserve of the United States could start lowering the benchmark interest rates earlier than previously predicted amid easing inflation. The improved confidence has driven the S&P/TSX Composite Index up by 7.7% since November and 4.8% year to date.
Meanwhile, Dollarama (TSX:DOL) has outperformed the broader equity markets this year with returns of 25%. Its solid performance and raising of its fiscal 2024 guidance have driven its stock price. The steep increase has raised its valuation. So, let’s assess buying opportunities in the company ahead of its third-quarter earnings. The company will report its third-quarter earnings for fiscal 2024, which ended on October 29, tomorrow. Meanwhile, let’s first look at its performance in the first two quarters.
Dollarama’s performance in fiscal 2024
Dollarama has reported revenue of $2.8 billion in the first two quarters, representing a 20.1% increase from the previous year. Same-store sales growth of 16.3% and a net addition of 81 stores over the last four quarters drove its topline. Amid the challenging macro environment, the company’s compelling value offerings across the product range continued to resonate with customers, thus increasing footfalls. During the period, the value retailer witnessed a 14.1% increase in transactions and a 1.9% increase in its average cheque size.
Driven by the topline growth, the company generated net income of $146 million during the period, representing year-over-year growth of 19.6%. Meanwhile, its diluted EPS (earnings per share) stood at $1.49, a 29.6% increase from the previous year. Besides, Dollarama generated $683.2 million in cash flows from its operations, thus increasing its cash and cash equivalents by $151.2 million.
The company’s financial position also looks healthy, with its adjusted net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio at 2.4, a decline from 2.7 at the end of fiscal 2023. Now, let’s look at its growth prospects.
Dollarama’s growth prospects
Although inflation shows signs of cooling, it remains higher than the central bank’s guidance of 2%. In an inflationary environment, Dollarama’s low-price offerings could continue to resonate with customers in the coming quarters. Further, it’s strengthening its direct sourcing capabilities to reduce intermediate expenditures and offer its products at attractive price points.
Further, the company is expanding its footprint and expects to increase its store network to 2,000 by 2031, representing a net addition of 475 stores from its current levels. Its subsidiary, Dollarcity, is also growing its store network and plans to reach 850 by fiscal 2029. These growth initiatives could continue to drive its financials in the coming quarters.
Investors’ takeaway
Economists predict the United States’ GDP (gross domestic product) to grow at 1.2% in 2024, representing a substantial decline from 5.2% in the third quarter. Amid the economic slowdown, I expect equity markets to remain volatile. So, a defensive stock like Dollarama, with its solid underlying business, would be an excellent buy right now. Besides, it has raised its dividend 12 times since 2011, depicting its financial strength.
