Dollarama To Start Accepting Credit Cards
Dollarama (Tor., DOL, $ 110.88) has again demonstrated why the retailer is the favorite of so many analysts by surpassing expectations for a ninth consecutive quarter.
Its action which had been buoyant since the beginning of the year surged 11.2% on Thursday, propelling the title to a new record of $ 111, during the session.
Its earnings per share jumped 24% to $ 1.24 per share in the fourth quarter, 11% more than the consensus of $ 1.12, thanks to better-than-expected sales and better margins.
This performance is all the more remarkable given that the comparative quarters of 2016 and 2015 were also exceptional in terms of comparable store sales that have been open for more than a year.
The 5.8% increase in comparable sales in the fourth quarter is in addition to 7.9% a year earlier and a 8.5% increase two years earlier.
Surprised themselves by the 7.8% jump in average bill and good sales of new items to $ 3.50 to $ 4 in the last quarter, Dollarama executives do not increase the expected growth of 4% to 5% of comparable sales for 2018, not to try the devil.
“I have a hard time convincing myself that we could do better than 4-5% in 2018. I do not see how we could sustain such growth for the fourth year in a row,” said Michael Ross, During the conference call.
As a bonus, the retailer raised its forecast for gross margins and operating margins for 2018, while revealing that the Canadian market could accommodate 300 more stores within 10 years (to 1,700), after analyzing the last census.
These additional stores will somewhat offset the sales of existing establishments, but their larger number will not change their economic returns.
A 10,000-square-foot store costs $ 650,000 (with inventory) and has sales of $ 2.1 million in its second year, said Ross. These sales improved to $ 2.5 million in the third year, before peaking.
New long-term expansion plans in Canada also do not influence Dollarama’s Latin American ambitions where it is still testing the ground with three new stores in Colombia, in partnership with a local operator in El Salvador.
Dollarama: first target price of $ 129
Analysts can only follow the upward movement.
“In the current economic and stock market environment, these superb results will be well received,” said Keith Howlett, Desjardins Capital Markets.
Although the average target price of $ 115.46 from 17 analysts suggests a 4% potential for the stock within a year, Irene Nattel of RBC Capital Markets sees the stock climb to 129 $.
Its target price is based on a multiple of 25 times the profit of $ 5.15 projected in 2019, an assessment that is justified according to it by the visible trajectory that the addition of 6% to 7% to its number of stores Each year and the annual increase of 4 to 5% of comparable sales.
Profitability and share buybacks do the rest and are expected to fuel a compound annual growth of 13% in operating profit and 18% in profit, between 2016 and 2018, it expects.
This is more than the expected 3% to 5% growth for Dollar General (DG, US $ 70.69) and 10 to 16% for Dollar Tree (DLTR, US $ 78.51).
Only the other Quebec retail food retailer Alimentation Couche-Tard (ATD.B, $ 59.85) does better with an expected 22% increase in its profit between 2016 and 2018.
The Alimentation Couche-Tard share is, however, less expensively valued (17.8 times the expected profits in 12 months compared to 26.4 times for Dollarama) because its margins and return on shareholders’ equity are lower To Dollarama, while growth prospects for Couche-Tard, which are partly based on acquisitions, are also less visible.
Edward Kelly of Credit Suisse is not ready to stretch his neck. The trader has produced the best returns in his industry, a multiple of 18 times his operating profit and a target price of $ 108 amply reflect his top performance.
Highly profitable share repurchase for the moment
Convinced that Dollarama will support the best margins in the industry, Neil Lindsdell of Industrial Alliance Securities is raising its target price from $ 110 to $ 120, which offers a potential for 8%.
After a long-time criticism of the record valuation of the stock, the analyst now believes that the company deserves a high premium (17 times its operating profit) compared to the average of 7 to 12 times for its like.
Its earnings and profits do not grow faster than the average four US retailers of low-priced items, according to Bloomberg, but its 157% shareholder return is unmatched.
And for good reason. Dollarama borrows at a rate of 1.65% after tax to repurchase $ 705 million of shares (in 2016), which gives it an earnings yield of 3.9% at an average price of $ 95.07.
The company promises to maintain its institutional credit rating, which requires debt to remain below its operating income of 2.75 times (or six times including store leases).
In addition to this reinvestment of capital and the effect of rising revenues on margins, Dollarama has multiple profitability levers: increased penetration (51%) of debit cards that doubles the average bill, Credit cards that will have the same effect, adding 307 items at prices from $ 3.50 to $ 4, Chinese suppliers still accommodating, a drop in fuel overload for transportation, and so on, listed The company throughout the conference call.
For now, its credit card pilot project indicates that the increased average bill should compensate for transaction fees imposed by issuers.
However, executives urge analysts not to extrapolate recent concessions from its suppliers, as the cost of raw materials increases, among other things.
The average invoice compensates for the least number of transactions
Dollarama noticed that its customers buy more at each visit, but that they frequent a little less the store.
A higher average bill is more cost effective for the retailer than a customer who comes to store more frequently, but who buys less or who chooses the items at the lowest prices on each visit, Ms. Nattel suggested during the conference call, Without being contradicted by the leaders.
Dollarama also benefits from internal measures to reduce cargo losses, manual counting of inventories, and hours worked by employees, among others.
After implementing Chronos, Dollarama continues to improve its in-store productivity with the addition of wi-fi and mobile barcode readers.
Even the maintenance of the store passes there, including waste management.
All these small initiatives should improve its gross margin and operating margin by another 0.5% in 2018.
In addition, Lachine’s new 500,000 square foot modern distribution center increases its storage capacity by 40%.
Dollarama is considering establishing a distribution center in western Canada to serve its new stores.
The company is also developing a digital online sales platform to attract additional B2B customers who wish to purchase and get larger quantities of their products.