Retail Expansion In Canada, Mexico And Australia Will Unlock Potential

Key Takeaways

• Expansion of store network in Canada and a new logistics hub aims to enhance revenue and margin growth through improved logistics.
  
• International ventures and acquisitions may drive long-term growth, leveraging market potentials while enhancing operational efficiencies and EPS.
  
• Economic uncertainty, trade tensions, and rising costs threaten Dollarama's margins and financial stability, with growth and expansion efforts bringing execution risks and increased expenses.

Catalysts

Operates a chain of stores and performs related logistical and administrative support activities.

• Dollarama plans to expand its store network from 1,616 to 2,200 stores in Canada by 2034, with a net new store opening range between 70 and 80 for fiscal 2026, which should contribute to revenue growth.
  
• The development of a new logistics hub in Western Canada, expected to be completed by 2027, is intended to improve agility and resilience in logistics operations, potentially enhancing net margins by reducing logistics costs.
  
• Dollarcity's expansion into Mexico, with initial store openings planned for this summer, suggests a long-term revenue growth catalyst, offsetting initial ramp-up costs.
  
• The acquisition of Australia’s largest discount retailer presents an opportunity to transform and optimize their business model over the next three years, possibly unlocking margin and earnings growth through increased efficiencies and scale.
  
• The continuation of share buybacks, which have marked Dollarama's largest annual buyback on record, is expected to support earnings per share (EPS) growth, benefiting shareholders.

Dollarama Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dollarama's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.2% today to 18.9% in 3 years time.
• Analysts expect earnings to reach CA$1.5 billion (and earnings per share of CA$5.59) by about April 2028, up from CA$1.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.4x on those 2028 earnings, down from 35.5x today. This future PE is greater than the current PE for the CA Multiline Retail industry at 22.2x.
• Analysts expect the number of shares outstanding to decline by 2.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.36%, as per the Simply Wall St company report.

Dollarama Future Earnings Per Share Growth

Risks

• The ongoing trade war and retaliatory tariffs on imported U.S. goods, particularly in the consumable area, could negatively impact Dollarama's gross margins due to potential product substitution challenges and pricing adjustments.
  
• The unpredictability factor brought on by the current trade environment coupled with a weakening economic outlook may result in reduced consumer confidence and discretionary spending, potentially affecting Dollarama's revenue and net margins.
  
• The fiscal 2026 guidance suggests expected increases in SG&A as a percentage of sales, driven by higher labor costs and store operating expenses. This could impact operating margins if not offset by increased efficiencies.
  
• The expansion into new markets such as Mexico and the recent acquisition in Australia involve significant execution risks and costs, including potential losses and substantial capital investment, which could adversely affect earnings and financial flexibility.
  
• Variability in shipping costs and currency fluctuations, with mention of a weaker Canadian dollar and rising shipping rates, pose risks to gross margins due to increased cost of goods sold.

Valuation

• The analysts have a consensus price target of CA$166.25 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$185.0, 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 2028, revenues will be CA$7.9 billion, earnings will come to CA$1.5 billion, and it would be trading on a PE ratio of 35.4x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of CA$149.88, the analyst price target of CA$166.25 is 9.8% higher.
  
• 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.