Expansion Into Mexico And New Logistics Hub Will Drive Growth And Increase Shareholder Value

Key Takeaways

• Expanding store count and new logistics hub aim to boost revenue and improve distribution efficiency, enhancing net margins.
  
• Dollar City expansion in Latin America supports diversification, while share buybacks and dividends could raise EPS and shareholder value.
  
• Economic and execution risks due to assumptions, logistics costs, new investments, and Latin America expansion may pressure Dollarama's margins and revenue growth.

Catalysts

Operates a chain of dollar stores in Canada.

• Dollarama's planned expansion to 2,200 stores by 2034 indicates a strong growth strategy, contributing to future revenue increases as they capitalize on market opportunities across Canada.
  
• The development of a new Western Canadian logistics hub is expected to generate significant cost savings, which could improve net margins as distribution efficiency is optimized.
  
• The focus on expanding Dollar City in Latin America, with entry into Mexico planned, provides a new revenue stream and diversification, enhancing long-term earnings potential.
  
• The phased development and scaling of logistics operations in Canada will offer increased resilience and agility, potentially improving operational efficiency and net margins over time.
  
• Dollarama intends to maintain an active share buyback program alongside its dividend strategy, which could positively impact earnings per share (EPS) and shareholder value despite increased capital expenditures.

Dollarama Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dollarama's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.8% today to 18.6% in 3 years time.
• Analysts expect earnings to reach CA$1.4 billion (and earnings per share of CA$5.41) by about December 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 32.4x on those 2027 earnings, down from 35.2x today. This future PE is greater than the current PE for the CA Multiline Retail industry at 20.2x.
• Analysts expect the number of shares outstanding to decline by 1.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.68%, as per the Simply Wall St company report.

Dollarama Future Earnings Per Share Growth

Risks

• Dollarama's reliance on assumptions and estimates for forward-looking statements introduces uncertainty, which could affect its revenue and earnings if those assumptions prove incorrect.
  
• The decrease in gross margin, attributed to higher logistics costs and increased sales of lower-margin consumable products, could pressure net margins and overall profitability.
  
• The significant investment in a new distribution center involves substantial capital expenditure and potential execution risks, which might affect future earnings if anticipated cost savings do not materialize.
  
• Economic uncertainty and cautious consumer spending patterns present risks to Dollarama's revenue growth, particularly if consumers continue to prioritize essentials over discretionary items.
  
• Expansions in Latin America, including the anticipated entry into Mexico, carry execution risks and could impact earnings margins if there are unforeseen challenges or costs during market entry.

Valuation

• The analysts have a consensus price target of CA$144.92 for Dollarama based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$160.0, and the most bearish reporting a price target of just CA$106.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$7.8 billion, earnings will come to CA$1.4 billion, and it would be trading on a PE ratio of 32.4x, assuming you use a discount rate of 6.7%.
• Given the current share price of CA$138.37, the analyst's price target of CA$144.92 is 4.5% higher. 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.