DOL (T) $110.88 Stock Rating: Outperform (Unchanged) Target: $122.00 (Was $113.00) Risk Rating: Below Average (Unchanged) Est. Total Return: 10.4% Stock Data: 52-week High-Low (Canada) Bloomberg $104.94 - $85.75 DOL CN Forecasts : Fiscal year-end: January F2017A F2018E F2019E Revenue (mln) $2,963.2 $3,285.4 $3,590.6 EBITDA (mln) $703.3 $777.4 $841.5 EBIT (mln) $645.5 $710.0 $764.8 Net Income (mln) $445.6 $488.8 $528.5 Diluted EPS $3.72 $4.29 $4.77 Dividends/Share $0.40 $0.44 $0.50 P/E 29.8x 25.9x 23.2x EV/EBITDA 20.4x 18.4x 17.0x Quarterly EPS: F2017A F2018E F2019E Q1 $0.68 $0.78 $0.88 Q2 $0.88 $1.04 $1.16 Q3 $0.92 $1.06 $1.18 Q4 $1.24 $1.41 $1.55 Financial Data: Shares Outstanding (diluted, mln) 117.7 Market Capitalization (mln) $13,046.6 Dividend Yield 0.4% Net Debt (mln) $1,266.7 Net Debt/Total Capitalization (B/S) 92.7% Book Value per Share $0.85 Price/Book Ratio 130.1x Note: 52-week high-low data may not reflect the current trading day. Industry Rating: Underweight (NBF Economics & Strategy Group) March 30, 2017 Dollarama Inc. Q4 F2017 Results The NBF Daily Bulletin Merchandising and Consumer Products A straight-forward beat and other notable business updates HIGHLIGHTS Q4/F17 EPS was $1.24 vs. consensus at $1.11 and NBF at $1.14; last year was $1.00 (1) Dollarama delivered another strong quarter predicated on good sales growth, gross margin expansion, SG&A leverage and share repurchases. The EPS beat versus NBF was largely due to the net impact of higher than expected gross profit (+$0.11 to EPS) and lower than expected SG&A (+$0.01 to EPS), partly offset by higher interest expense and a higher tax rate. (2) Same store sales growth was 5.8% vs. NBF at 4.0%; last year was 7.9%. Basket growth was 7.8% (the highest since at least 2010) vs. NBF at 6.5% and transaction growth was -1.9% vs. NBF at -2.5%. Transaction growth was impacted by difficult y/y comparisons (was 4.2% last year). Revenue was $855 mln vs. NBF at $838 mln; last year was $766 mln. (3) EBITDA was $226 mln vs. NBF at $207 mln; last year was $190 mln. (4) Net income was higher by 17.0% y/y while EPS was higher by 24.4% y/y. Major business announcements (1) Management increased the long-term store potential (in Canada) to 1,700 from 1,400 previously; this target is expected to be achieved in eight to 10 years. Despite expected cannibalism from new stores (over time), store payback will remain ~2 years (perhaps slightly higher). (2) Dollarama also announced plans to accept credit cards in all stores by the end of Q2/F18. Overall, the earnings impact of credit cards is expected to be neutral (increased sales to be offset by increased cost). (3) Management slightly increased its F2018 guidance; the F2018 gross margin rate is expected to be 37.5%-38.5% from 37.0%-38.0% previously. F2018 EBITDA margin guidance increased to 22.0%-23.5% from 21.5%-23.0% previously. Other factors remain unchanged. Our F2018 estimates are above management s expectations. Thoughts and comments (1) We updated our estimates to reflect solid Q4/F17 results and higher guidance. As a result, F2018 EPS goes to $4.29 from $4.11 (up by 4%) and F2019 EPS goes to $4.77 from $4.62 (up by 3%). Management s F2018 guidance implies an EPS range of $3.88 to $4.24. (2) Dollarama also increased its quarterly dividend by 10% to $0.11; NBF expectation was for a 15% dividend increase. Company Profile: Dollarama is a Canadian retailer operating in the high-value, small-format retail segment. The company was founded in 1992. Dollarama sells a variety of general merchandise and consumable products. Maintain Outperform rating; price target is $122 from $113 We value Dollarama at 25.5x our F2019 EPS estimate. Stock Performance 120 90 4.0 3.0 Vishal Shreedhar - (416) 869-7930 vishal.shreedhar@nbc.ca Price ($/share) 60 30 2.0 1.0 Volume (millions) Associate: Ryan Li (416) 869-6767 ryan.li@nbc.ca 0 0.0 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Source: Thomson, NBF
Q4 F2017 Results: A straight-forward beat and other notable business updates Quarter Summary Q4/F17 EPS was $1.24, above NBF at $1.14 and consensus at $1.11; last year was $1.00. The EPS beat versus NBF was largely due to higher than expected sales, a higher than expected gross margin rate and a lower than expected SG&A rate. Same store sales growth (sssg) was 5.8% versus NBF at 4.0%; last year was 7.9%. Growth in the average basket was 7.8% versus NBF at 6.5%, while transaction growth was -1.9% versus NBF at -2.5%. We note that average basket growth was at the highest level recorded since at least 2010; the previous high was in Q1/F11. The implication is that growth remains strong. Management indicated that transaction growth was significantly impacted by difficult y/y comparisons (transaction growth was 4.2% in Q4/F16). The gross margin rate was 41.4% versus NBF at 40.0%; last year was 40.8%. Our expectation was for gross margin deterioration (in line with guidance); however, management noted benefits from product margins, operating leverage and lower logistic costs. EBITDA margin expansion of 170 bps y/y was significant given that NBF expectation was for slight EBITDA margin deterioration y/y. Further details on quarterly results are available in Figure 4. Rating and Recommendation We reiterate our Outperform rating; our price target is $122 from $113. The price target increase is largely due to an increase in our estimates and the shift forward of our valuation period. We value Dollarama at 25.5x our F2019 EPS. Dollarama currently trades at 25.9x our NTM EPS versus its five-year average of 23.4x. In our view, Dollarama is a well-managed retailer as demonstrated by its strong historical growth and high ROIC, which have been realized despite challenging market conditions. We believe that Dollarama has potential to deliver above-average growth over several years supported by same store sales growth, network expansion and increased operational efficiency. Furthermore, we believe that the Canadian dollar store market has potential for solid growth given a relatively low store penetration rate and increasing demand for value from consumers. Key highlights: Guidance increased: Management updated F2018 guidance, increasing its target gross margin rate to 37.5%-38.5% (from 37%-38%); as a result, F2018 EBITDA margin rate guidance was increased to 22.0%-23.5% (from 21.5%-23.0%). The gross margin rate guidance increase was predicated on stronger than expected F2017 results as well as expected favourable pricing on foreign sourced merchandise (for F2018). o Utilizing management s updated F2018 EBITDA margin rate guidance, sssg of 4%-5% and net new store openings of 60-70 yields an EPS range of $3.88-$4.24. o We increased our F2018 EBITDA margin to 23.7% from 22.9% previously. In addition, our F2018 sssg forecast is 5.4% (above guidance). We increased F2018 EPS to $4.29 from $4.11 previously; our F2019 EPS goes to $4.77 from $4.62 previously. Credit cards to be rolled out across the entire network by the end of Q2/F18: With regards to the credit card pilot which has been operating in British Columbia for about 12 months (subsequently, the pilot was extended to Alberta and New Brunswick), management indicated good progress and ultimately decided to accept credit cards (Visa, MasterCard, American Express) across Canada by the end of Q2/F18.
o Management believes that the incremental sales impact of credit cards will offset higher costs incurred to accept them. Recall that we indicated in our preview note that credit cards would likely be launched with very slight EPS accretion being a potential outcome. We have not adjusted our forecasts to reflect credit cards as we await more data. Long-term store potential increased to 1,700 from 1,400: In conjunction with Q4/F17 results, Dollarama indicated the potential for 1,700 stores in Canada within eight to 10 years; prior forecasts were for a target of 1,400 stores. Management completed a study to re-evaluate market potential in Canada, taking into account such factors as: the 2016 census, household income data, the current competitive landscape, rates of per capita store penetration, performance of comparable new stores and new store payback period. o Despite expected cannibalization as the store count grows/approaches 1,700, management continues to believe that the average capital payback period will remain about two years (perhaps slightly more). Charts and Tables Figure 1: Estimate Revisions We updated our estimates to reflect Q4/F17 results and guidance. As a result, F2018 EPS goes to $4.29 from $4.11 (up by 4%) and F2019 EPS goes to $4.77 from $4.62 (up by 3%). F2018 F2019 Before After Before After Revenue 3,264.6 3,285.4 3,604.5 3,590.6 EBITDA 746.4 777.4 814.5 841.5 EPS $4.11 $4.29 $4.62 $4.77 Quarterly EPS Summary ($) Q1 $0.75 $0.78 $0.83 $0.88 Q2 $1.00 $1.04 $1.12 $1.16 Q3 $1.06 $1.06 $1.19 $1.18 Q4 $1.30 $1.41 $1.47 $1.55 Source: Company Reports, NBF Figure 2: Credit Metrics Dollarama (Consolidated): Q1/F17 Q2/F17 Q3/F17 Q4/F17 F2018E F2019E Net Debt/EBITDA 1.6x 1.7x 1.8x 1.8x 1.8x 1.6x Adj. Net Debt/EBITDAR 2.9x 2.9x 3.0x 3.0x 2.9x 2.8x Net Debt/Capital 75.5% 81.3% 85.7% 92.7% 94.5% 89.8% EBITDA/Interest 27.8x 25.6x 23.4x 21.3x 18.4x 19.6x Note: Operating leases are capitalized at 8.0x. Source: Company Reports, NBF Figure 3: Management Guidance versus NBF In the figure below, we highlight management s F2017 and F2018 guidance versus actual results and NBF forecasts, respectively. We highlight that management typically issued conservative guidance in the past. F2017A F2018E DOL Actual DOL NBF Net New Stores 60-70 65 60-70 70 Gross Margin Rate 38.0%-39.0% 39.2% 37.5%-38.5% 38.7% SG&A Rate 15.5%-16.0% 15.5% 15.0%-15.5% 15.1% EBITDA Margin 22.0%-23.5% 23.7% 22.0%-23.5% 23.7% Capex $160-$170 mln $166 mln $90-$100 mln $99 mln Source: Company Reports, NBF
Figure 4: Q4 F2017 Financial Summary Q4 Q4 F2017 F2016A Cons. NBF Est. Act. Comments Same Store Sales Growth 7.9% 4.0% 5.8% Same store sales growth of 5.8% was driven by average basket growth of 7.8% y/y (NBF was 6.5%) and transaction growth of -1.9% y/y (NBF was -2.5%). The penetration rate of items higher than $1.25 increased to 64.3% of sales from 59.4% last year. Revenue 766.5 839.6 837.9 854.5 Revenue growth of 11.5% y/y was driven by an increase in the number of stores (65 net new stores y/y) and strong sssg. Dollarama added 26 net new stores in the quarter, below NBF expectation of 28 net new stores. Cost of Sales 453.5 502.5 501.2 Gross Margin 313.0 333.7 335.4 353.4 The gross margin rate was 41.4%, higher by 52 bps y/y. NBF expectation was for y/y margin deterioration of 80 bps predicated on the expectation of F/X headwinds which were previously indicated by management. SG&A 123.1 128.3 127.2 The SG&A rate was 14.9%, lower by 118 bps y/y mostly due to the benefits of store labour productivity improvements, cost reduction initiatives at the store level, and positive scaling impact from strong sssg. EBITDA 189.9 204.3 207.2 226.2 EBITDA grew by 19.1% y/y mostly due to sales growth and SG&A leverage; we note that sales dollars grew by 11.5% y/y while SG&A costs only grew by 3.3% y/y. Depreciation and Amortization 12.9 15.2 15.5 EBIT 176.9 191.9 210.7 Interest Expense 6.0 9.1 10.6 EBT 170.9 182.9 200.0 Tax 46.1 49.0 53.9 The effective tax rate was 27.0% vs. 26.8% expected. Net Income 124.8 133.9 146.1 EPS $1.00 $1.11 $1.14 $1.24 Strong y/y EPS growth also benefitted from share repurchases over the last 12 months. Note: Income statement data (except per share data) is denoted in $ millions. Source: Company Reports, Thomson, NBF
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NBF quarterly ratings summary and the total ratings by month can be found on our website under Research and Analysis/Equities/About NBF Research/Quarterly Ratings Summary (link attached) http://www.nbcn.ca/cmst/site/index.jhtml?navid=803&templateid=249 The NBF Research Dissemination Policy is available on our website under Legal/Research Policy (link attached) http://www.nbcn.ca/cmst/site/index.jhtml?navid=712&templateid=243 Click on the following link to see the company specific disclosures http://www.nbcn.ca/contactus/disclosures.html Click on the following link to see National Bank Financial Markets Statement of Policies http://nbfm.ca/en/statement-of-policies/ If a company specific disclosure is not found herein for a listed company, NBF at this time does not provide research coverage or stock rating for the company in question. Additional company related disclosures for Dollarama Inc. (2,3,4,5,6,7) 2 National Bank Financial Inc. has acted as an underwriter with respect to this issuer within the past 12 months. 3 National Bank Financial Inc. has provided investment banking services for this issuer within the past 12 months. 4 National Bank Financial Inc. or an affiliate has managed or co-managed a public offering of securities with respect to this issuer within the past 12 months. 5 National Bank Financial Inc. or an affiliate has received compensation for investment banking services from this issuer within the past 12 months. 6 National Bank Financial Inc. or an affiliate has a non-investment banking services related relationship during the past 12 months. 7 The issuer is a client, or was a client, of National Bank Financial Inc. or an affiliate within the past 12 months.