Dollarama Inc.

Keith Howlett, Analyst

  • Top-tier growth company with 8–10 years of runway ahead in Canada plus potential international expansion.
  • Highly cash-generative business model, with a fast payback on new store openings of approximately two years.
  • EPS growth driven by same-store sales growth and 60–70 new store openings per year, with 1,170 stores currently open.

Dollarama is the leading operator of dollar stores in Canada. The company operated 1,170 corporate stores as of April 2018—over five times the number of stores as the second-largest dollar store operator, Dollar Tree. Dollarama stores (each ~10,000 square feet) are located in convenient, high-traffic areas, making it an attractive alternative to large-format retailers such as Walmart. The store format has proven successful in strip malls, power centres, urban street-front locations and shopping centres, and in both large cities and small towns. Dollarama provides customers with a consistent and rewarding shopping experience by offering a broad mix of ~4,000 year-round SKUs and ~700 active seasonal SKUs in general merchandise and consumable products at opening price points between C$0.82 (chocolate bars and confectionary) and C$4. In May 2017, Dollarama started accepting credit cards as a method of payment in addition to debit cards and cash.

Dollarama has a proven track record of profitable growth—its EBITDA and EPS grew at a compound annual growth rate of ~19% and ~26%, respectively, from fiscal year 2012 (FY12) to FY18. Strong growth is poised to continue—we expect EBITDA and EPS to grow at a compound annual growth rate of ~10% and ~14%, respectively, over the next two years.

Management believes that the Canadian dollar store industry remains underpenetrated relative to the US dollar store industry. The company is adding
60–70 stores per year and has increased its estimate of the number of Dollarama stores that the Canadian market will be able to sustain to 1,700 (from a prior estimate of 1,400 and an estimate of 900 at the time of the initial public offering in October 2009).

Dollarama has an option, exercisable in 2020, to acquire a majority equity interest in Dollar City, a dollar store operator currently in El Salvador, Guatemala and Colombia with ~120 stores. Dollar City is using the intellectual capital of Dollarama, with the stores and merchandise being very similar to one another.

The company has raised quarterly dividends every year since the first dividend was declared in FY12; it recently increased the quarterly dividend per share to C$0.040 from C$0.037 (post 3:1 stock split basis). Our target price of C$58.00 is based on 30x our forward-four quarter EPS estimate plus C$3.33 with respect to monetizing at least one international expansion opportunity within 10 years.

The author

Keith Howlett

Keith Howlett