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Last week, Dollarama (TSX:DOL) reported impressive second-quarter performance, beating analysts’ top- and bottom-line expectations. Its revenue came in at $1.46 billion, against analysts’ expectations of $1.4 billion, while its adjusted EPS (earnings per share) of $0.86 beat analysts’ expectations by around 12%. Besides, the company’s management has raised its fiscal 2024 same-store sales growth guidance from 5-6% to 10-11%.
Its solid second-quarter performance and raising of fiscal 2024 same-store sales guidance have increased investors’ confidence, thus driving its stock price. Dollarama is trading 5.4% higher since reporting its Q2 earnings and is up 19.3% this year. So, let’s assess whether the uptrend could continue by looking at its Q2 performance and growth prospects.
Dollarama’s second-quarter performance
In the second quarter, which ended on July 30, Dollarama posted revenue of $1.46 billion, representing a 19.6% increase from the previous year’s quarter. The same-store sales growth of 15.5% and net addition of 81 new stores over the last 12 months drove its sales. An increase of 12.9% in its transactions and growth of 2.3% in its average transaction value drove its same-store sales. Amid the inflationary environment, the company’s compelling value offerings across its product offerings drove its sales.
Boosted by the top-line growth, expansion of its gross margins, and increased contribution from Dollarcity (Dollarama owns a 50.1% stake in Dollarcity), the discount retailer’s net earnings grew 27% to $245.8 million. Besides, the company generated EBITDA (earnings before interest, tax, depreciation, and amortization) of $457.2 million, an increase of 23.8% from its previous year’s quarter. Also, its EBITDA margins expanded from 30.4% to 31.4%. Now, let’s look at its growth prospects.
Dollarama’s growth prospects
Earlier this week, Statistics Canada announced that Canada’s annual inflation rate increased by 4% in August, an increase of 0.7% from July and higher than analysts’ expectation of 3.8%. Higher gasoline prices drove the inflation numbers. With oil prices projected to remain elevated in the near term, I expect inflation numbers to remain higher than the Central Bank’s guidance of 2% in the near term.
So, in this challenging macroeconomic environment, the company’s stores could witness strong footfall, given its broader product offerings at affordable price points. Further, the company is expanding its footprint by opening 60 to 70 new stores yearly to increase its store count to 2,000 by 2031. Also, Dollarcity has planned to add 392 stores over the next six years to increase its store count to 850 by 2029, which could contribute to Dollarama’s financial growth.
Further, Dollarama is strengthening its direct sourcing capabilities to lower intermediary expenses and increase its bargaining power, thus allowing it to offer its products at attractive prices. Besides, the company is expanding its digital footprint and optimizing its queue line and check-out process to enhance customers’ experience. Given these growth initiatives and a favourable environment, I expect the uptrend in the company’s financials to continue.
Dividend and valuation
Dollarama currently pays a quarterly dividend of $0.0708/share, with its forward yield at a meager 0.3%. Although the company’s dividend yield looks unattractive, it has consistently raised its dividends since 2011, which is encouraging.
The recent surge in the retailer’s stock price has led it to trade 26.5 times analysts’ projected earnings for the next four quarters, which looks expensive. However, given its high growth prospects, I believe DOL’s valuation is justified. So, investors with longer investment horizons can buy the stock even at these levels.
