Expanding Store Network And Tactical Initiatives Drive Strong Growth Potential In LATAM Markets

Key Takeaways

• Expansion in Latin America and increased stake in Dollarcity showcase strong growth potential and future revenue enhancement.
  
• Improved operational efficiencies and strategic capital allocation, including share repurchases, support earnings per share growth and margin improvement.
  
• Rising logistics and labor costs, alongside declining basket size and execution risks in new markets, threaten Dollarama's sustained profitability and revenue growth.

Catalysts

Operates a chain of dollar stores in Canada.

• The pace of new store openings in LATAM, particularly in regions like Colombia, Guatemala, El Salvador, and Peru, and plans to enter the Mexican market by 2026, indicate a strong forward-looking growth potential that could significantly boost future revenue.
  
• Dollarcity's increasing earnings contribution, nearly doubling its net earnings compared to the previous year, along with the increased ownership stake from 50.1% to 60.1%, can positively impact future earnings growth.
  
• Continued strong demand for consumable products and the ability to maintain significant same-store sales growth, despite softer seasonal product sales, suggests ongoing revenue resilience and stability in challenging economic conditions.
  
• Improvements in gross margin, driven by more favorable contracted shipping rates and lower logistics costs, alongside the implementation of efficiency and labor productivity initiatives, can enhance net margins.
  
• Active share repurchases and the execution of capital allocation strategies, such as the NCIB program and increasing dividends, can contribute to enhanced EPS growth over time.

Dollarama Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dollarama's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.9% today to 19.7% in 3 years time.
• Analysts expect earnings to reach CA$1.5 billion (and earnings per share of CA$5.16) by about November 2027, up from CA$1.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.4x on those 2027 earnings, down from 38.3x today. This future PE is greater than the current PE for the CA Multiline Retail industry at 20.4x.
• Analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.58%, as per the Simply Wall St company report.

Dollarama Future Earnings Per Share Growth

Risks

• The reliance on favorable shipping rates and logistics costs for gross margin improvements may not sustain if these costs rise again, potentially affecting profitability in future quarters.
  
• There is a noted decrease in basket size by 2.2%, which, if persistent, could indicate challenges in driving revenue growth through increased sales per customer.
  
• Softer seasonal product sales due to unfavorable weather and cautious consumer behavior could impact revenue growth if these trends persist.
  
• Increasing store labor and operating costs, despite current offsetting efficiency measures, may lead to sustained pressure on net margins if labor costs continue to rise.
  
• Expansion into new markets like Mexico carries execution risks and requires significant investment, which could impact capital allocation and return on investment if not managed successfully.

Valuation

• The analysts have a consensus price target of CA$142.45 for Dollarama based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$7.4 billion, earnings will come to CA$1.5 billion, and it would be trading on a PE ratio of 33.4x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of CA$148.49, the analyst's price target of CA$142.45 is 4.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.