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Friday, March 31, 2017

By Peter Diekmeyer

Dollarama reported strong fourth quarter operating results on Thursday and raised its store expansion threshold from 1,400 to 1,700 stores. The Montreal-based discount retailer’s shares rose to record levels on the news. “Q4 was fantastic,” said Michael Ross, Dollarama’s chief financial officer, in a conference call with analysts. “We had a good Christmas season and were ‘comping’ with strong results last year.”

Dollarama’s key metrics far outperformed the big three Canadian grocers during its fiscal 2017, which ended January 29. Revenues increased by 11.8 per cent to $2.96 billion. However, comparable store sales grew by a stunning 5.8 per cent; this on top of a 7.3 per cent increase the previous year. The impact of recently introduced $4 price points in Dollarama outlets was far greater than officials expected. For example during the fourth quarter, the average transaction size increased by 7.8 per cent.

Dollarama also opened 65 net new stores during the last 12 months, bringing the total to 1,095. The pace of new openings appears to be quickening, with 26 of the new stores coming in the last quarter.

Less than half of Dollarama’s sales come from food products, however a large percentage of its seasonal and ancillary products are grocery “consumables,” which according to a Dollarama spokesperson account for 38 per cent of its sales. The category includes paper, plastics, foils, household and cleaning products, basic health and beauty items, pet food, as well as confectionery, drinks, snacks and other food products.

Ross also announced that Dollarama’s pilot program to test credit cards in its British Columbia, Alberta and New Brunswick stores has been successful. The program thus will be extended and Mastercard, Visa and American Express will be accepted in Dollarama stores across the country by the end of the second quarter.

Credit card usage entails considerable additional costs, which cut into store margins. However, company officials have concluded that the additional volumes generated will offset these costs.

 

Market study signals additional growth opportunity

Dollarama’s revised store potential comes in the wake of a national market study, which looked at a variety of new Canadian census and other data. These include household incomes, the current competitive retail landscape, rates of per capita store penetration, the performance of new and comparable stores and targeted payback rates on new store openings.

The study suggests that Dollarama could increase its previously announced threshold by 300 outlets to 1,700, over the next eight to 10 years. Company officials admit that some cannibalization could occur as the store count rises. This is expected to eventually lengthen capital payback rates related to new openings from two years to “between two and three years.” 

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Dollarama Q4 2017 highlights

  • Sales increased by 11.5% to $854.5 million;
  • Comparable store sales grew 5.8% over and above a 7.9% growth the previous year;
  • Gross margin was 41.4% of sales compared to 40.8% of sales;
  • EBITDA grew 19.1% to $226.2 million, or 26.5% of sales, compared to 24.8% of sales;
  • Operating income grew 19.1% to $210.7 million, or 24.7% of sales, compared to 23.1% of sales; and
  • Diluted net earnings per common share increased by 24%, from $1.00 to $1.24.

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