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Dollarama Inc (TSE: DOL) Jane Shui & Melody Zhang, Queen’s Commerce.

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Presentation on theme: "Dollarama Inc (TSE: DOL) Jane Shui & Melody Zhang, Queen’s Commerce."— Presentation transcript:

1 Dollarama Inc (TSE: DOL) Jane Shui & Melody Zhang, Queen’s Commerce

2 Company Overview Based in Montreal Quebéc. Provide general merchandise for every day use. Market capitalization: $6.5 billion Canada’s biggest dollar store operator: 870 stores in 10 provinces by Feb. 28, 2014. Market share: 60% Company Description Those living close to the store Value and convenience seeker looking to fulfill various level of basic needs. One-stop shoppers to stock up household items Impulse buyers Target Market Company Management Made up of Dollarama International Inc. (Canada) and Dollarama L.P. (Québec) All Stores are corporate managed Larry Rossy: founded Dollarama in 1992. Chair of the Board of directors CEO since 2004 Michael Ross: CFO Neil Rossy: Chief Merchandising Officer 8.1% of stock ownership Company OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation

3 Company OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation Business Strategy Company Overview Key Financials/Stock Performance Metric NameFiscal Year 12-13 Revenue1858.82 Gross Profit694.84 EBITD315.89 Net Income220.99 Gross margin37.38% EBITD margin16.99% Earnings per share $3.36 P/E ratio25.73 Return on average equity24.2 Compelling value proposition on a wide variety of everyday merchandise to a broad base of customers Growth in sales, net earnings, and cash flows Multi-price point strategy: $1, $1.25, $1.50, $2, and $3 Merchandise mix based on retail value

4 Biggest dollar store operator in the Canadian market Market development opportunities within ON and QC: predicted 34 new stores opening in 2014 in each region Opportunity to expand into new geographic locations in Canada where Dollarama has no or limited presence such as PEI. Careful site selection to minimize cannibalization of sales when adding new stores Management plans to build, expand and upgrade warehouse system and distribution networks These strategic moves allow Dollarama to maintain an edge against its competitors Company OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation Canadian economy, particularly the retail industry is recovering from 2008 economic meltdown Dec. 2013: 3.4% YoY growth rate in Canadian retail industry; CPI inflation rate remains as low as 1.2% Canadian Dollar stores offer unique “Treasure Hunt” shopping experience The industry is highly differentiated compared to American dollar store chains The retail industry will do well in 2013 because of improving economy and consumer confidence Market Leader with High Growth Potential Favorable Macro and Industry Prospects Valuation Stock price is undervalued: DCP analysis suggests an implied share price of $98.66, stock is currently trading at $86.35 as of February 28, 2014 High potential for growth and expansion in the future, explaining the fact the premium at which it is trading High liquidity and healthy financial viability with low exposure to bankruptcy Strong margins suggest efficient business operations Investment Thesis

5 Macro Outlook Company OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation

6 Industry Outlook Company OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation Sources @ Retail Owner Institute, KPMG 2013 Industry Outlook Survey and Dollarama Inc. Industry TrendDollarama Growth Steadily Recovering, increasing investment on geographical location, IT Double Digit Growth rate, market penetration in ON and BC, expansion to AB & BC Marketing expenditureIncreasing marketing initiatives and its online presence Srong brand name, successful brand name and easy accessibility->no significant advertising expenditure CompetitorsAmericanization-expansion of Walmart and TargetConveninent Location, urban shoppers, "convenience store model" PriceLow price, $1 Fixed Strategy to Multi pricing strategyValue oriented, multi price points, industry leader Product SourcingIndirect sourcingDirect Sourcing (52% oversea and 48% North America) Cost ControlOptimize supply chain to reduce SG&A costsImproving distribution channel and warehouse expansion Canadian Retail industry still vital for Canadian economy after the global recession – Total Sales: $457.4 B – Sales in Miscellaneous Stores: $10.7 B (2011) Value Retail industry: an established growing niche market Canadian consumers are value-oriented (PwC) Dollar store industry has high growth potential compared to other players in the value retail industry (Appendix I). Canadian Retail Industry

7 A) High Household Debt Average Canadian consumers personal debt excluding mortgage increased by 0.83% QoQ, and 2.19% YoY to a level of R$27,355 Total debt to disposable income stand at 163%, primary driven by mortgages However, comparatively slower growth in debt level at 3.90% YoY, slowest pace since 1995, which is favorable for the consumers industry B) Fluctuating Foreign Exchange Rate Majority of supply sourced from foreign countries using USD, while sales are made in CAD Appreciation of foreign currency against CAD will hurt the profit margin of DOL Given that DOL is a value retailer, margin is extremely important for it C) Distribution High inventory turnover rate exposes DOL to the possibility of depleted inventory Goods are transported from suppliers to 4 warehouses, distribution centers, and then to stores through various means of transportation, such as sea, train, truck, and etc. Delay or interruption of services could negatively affect business and financial results Risks Catalysts A) General Economic Improvement Positive indicators for the consumers industry – Increasing wages and earnings – Decent aggregate growth – Low unemployment rates – Stable housing price Fed’s tapering: a sign of the government’s confidence in the economy, and its recovery. B) Strong Company Operating & Financial Performances Comparable store sales increased by 6.5 in FY 2013 Sales growth by 19.9% to $561.9M Normalized EBITDA grew by 20.7% to $120.9M Normalized diluted net earnings per share increased by 26.5% Management announced a 27% increase in quarterly dividend for its holders of common shares from $0.11 to $0.14 per share by the end of 2013. C) Sustainable Organic Growth for Years to Come DOL has experienced exponential growth over the years, expanding from 335 stores in 2004 to 789 in 2013. Management has announced that it will open at least 85 new stores primarily in Ontario and Western Canada over this FY. It plans to open 70 to 80 more stores in FY 2015. Catalysts & Risks Company OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation

8 Valuation I Comparables Commentary DOL trades only slightly above average for EV/EBITDA and P/E. Trades at multiples that are still slightly below some of its comparables with lower market capitalization and enterprise value, such as “Five Below” and “Pricesmart Inc”. The higher trading multiples indicate higher consumer confidence in the continuous growth of DOL, and the growth of the dollar industry in Canada. The current dividend yield for DOL is at approximately 0.63%; a strong track record of stable and growing dividend yield will boost investor confidence, and provide extra value for them. Market CapEnterprise ValueEV/EBITDA P/E Consumers(CAN$ in B) 20132014 E2015 E 20132014 E2015 EP/FCFDvd Yld Big Lots Inc.1,721,985,24 x6,29 x5,68 x 10,22 x13,26 x11,84 x12,80 x0,00% Dollar General Corp.19,1421,9010,71 x10,50 x9,46 x18,70 x18,61 x16,13 x30,54 x0,00% Dollar Tree Inc.11,3711,8810,34 x9,12 x8,12 x19,97 x17,22 x15,01 x25,00 x0,00% Dollarama Inc.5,986,2715,71 x15,80 x13,40 x 25,20 x24,78 x19,98 x29,96 x0,63% Family Dollar Stores7,608,179,02 x9,37 x8,59 x17,79 x19,47 x17,52 x1,47% Five Below2,122,1332,03 x29,34 x21,75 x78,51 x59,21 x44,08 x0,00% Pricesmart Inc.2,98 17,11 x17,32 x15,93 x34,39 x31,21 x27,54 x107,09 x6,10% Median7,608,1710,34 x9,93 x9,23 x 19,10 x18,61 x16,90 x25,88 x0,63% Mean34,7541,1912,67 x12,20 x10,62 x 25,76 x23,14 x19,63 x34,85 x1,97% Company OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation

9 Ratio Analysis & Comparison Ratio Analysis Financial Ratios Operating Ratios Operating Metrics CRD/AROAROE NPMGMEBITDM Big Lots Inc. 1,739,76%10,44%22,41%3,28%39,21%7,50% Dollar General Corp 1,5426,74%9,50%19,72%5,95%31,74%12,37% Dollar Tree Inc 2,189,86%24,38%41,12%8,38%35,87%14,82% Dollarama Inc 3,0418,07% 15,45%24,20% 11,89%37,38%19,18% Family Dollar Stores 1,7213,92%12,53%30,63%4,27%34,26%8,97% Five Below 1,8918,19%12,35%4,78%35,78%11,28% Pricesmart Inc 1,378,84%10,79%18,33%3,66%16,10%6,63% Mean1,9215,05%13,63%26,07%6,03%32,91%11,54% Median1,7313,92%12,35%23,31%4,78%35,78%11,28% All of the margins for DOL are above the industry average, and are the highest among industry competitors, indicating real growth potential for DOL as well as above-average operating efficiency. ROA and ROE are near average and slightly above industry median; an above-average industry performer in returns. Current ratio is extremely strong, indicating financial liquidity, and that there is no immediate threat of bankruptcy. Debt ratio is slightly higher than industry mean and median, as DOL started to become more leveraged for future expansions. Commentary Company OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation

10 Valuation II: Discounted Cash Flow Share Price Calculation Target Price($Thousands) Enterprise Value $7 680,56 Less: Debt $(522,20) Add: Cash $52,57 Equity Value $7 210,93 Shares Outstanding $73,09 Implied Share Price $98,66 Current Price $86,35 Dividend Yield0,63% Sensitivity Analysis Growth Rate EV/EBIDTA 20%23%25%28%30% 14,80 x $78,37 $85,31 $92,67 $100,47 $108,75 15,30 x $80,92 $88,07 $95,66 $103,72 $112,25 15,80 x $83,46 $90,83 $98,67 $106,96 $115,75 16,30 x $86,01 $93,60 $101,65 $110,20 $119,26 16,80 x $88,55 $96,36 $104,65 $113,44 $122,76 Assumptions: yearly growth rate of 25%, and an EV/EBITDA ratio of 15.80x: Target price of $98.67 (exit price) In line with analysts’ estimates Sensitivity Analysis: Prices of DOL is more sensitive to changes in growth rate than changes in EV/EBITDA Necessary to maintain its growth rate Current price of DOL: $86.35 (entrance price) Company is still intrinsically undervalued given the large future growth potential Refer to Appendix 3 for details on DCF assumptions. CommentaryAnalysts Price Target 12-Month Price Target Mean$94.9 High$100.0 Low$85.0 Target vs. Current99.9% # of Analysts14 Company OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation

11 Investment Highlights Company OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation Revenue $1.8B, ROE 24.2% with solid management team and a strong dividend yield of 0.63% Advantageous macro and micro outlook Leader in a unique niche market with continuing prospects for solid growth (opening new stores and distribution expansion) Target Price : $98.67 per share Entrance Price: Current Market Price Exit Price: $98.67 BUY


13 Appendix I- Competitive Advantages of Dollar-Store Industry Low fixed price point Convenient location and store size Broad offerings of everyday branded or unbranded merchandise Small or individual size product quantity No-frills, self- service environment

14 Appendix II: Stock Performance

15 Assumptions Cost of Equity Beta0,16 Risk Premium8,27% RFR 2,83% Cost of Equity4,15% WACC Assumptions($)% Debt $522,2035,92% Equity $931,4964,08% Total Capital $1 453,69100,00% Cost of Debt7,5% Cost of Equity4,15% Tax Rate30% WACC5,36% Terminal Value EBITDA Multiple15,80 x Growth Rate25% ThousandsTerminal Value 20132014201520162017Multiple NOPAT220,99276,23345,29431,61539,518525,17 Add: D&A209,51261,88327,35409,19511,49 Less: CapEx52,9666,2082,75103,43129,29 Less: Change WK 272,41 340,51425,63532,04665,05 Unlevered FCF105,13131,41164,26205,33256,66 Discount Period0,001,002,003,004,00 Discount Factor100,00%94,92%90,09%85,51%81,17% Discounted FCF105,13124,73147,99175,58208,326919,50 Add: Terminal Value 6919,50 Total Discounted FCF105,13124,73147,99175,58208,326919,50 Appendix III: DCF Assumptions

16 Appendix IV: Location Selection Criteria The level of retail activity and traffic patterns The presence or absence of competitors The population and demographics of the area Total rent and occupancy cost per square foot The location of existing Dollarma stores Note: Nearly all of the sotres are located in high-traffic areas such as strip malls and shipping centers. Dollarama open stores in various locations, including metropolitan areas, mid-sized cities and small towns.

17 Appendix V: Store Presence 63 44 27 13 326 239 19 27 3

18 Appendix VI: New Store payback Initial Investment: $0.7 million ($0.5 million for capital expenditures and $0.2 million for invetory) Sales: $2.5 million within the first two years of operation  average payback period two years. Low capital investment to open stores Rapid sales increases after opening Consistent sales volumes and low ongoing operating costs

19 Appendix VII: Top Ten Newest Store Date OpenedMallAddressCityProv. 01 March 2014Place Rosemere55 Blvd. BouthillierRosemereQC 01 March 2014 685 Danforth AveTorontoON 25 February 2014Valley Centre Mall4802 51st StreetWhitecourtAB 24 February 2014Centennial Plaza4802 39th StreetSt-PaulAB 18 February 2014 410 Main Street EastKingsvilleON 15 February 2014County Fair Plaza1020 Dawson RoadThunder BayON 13 February 2014Galeries Lac St-Jean1055 Avenue du PontAlmaQC 13 February 2014Transcanada Mall 156-1440 52nd Street NE CalgaryAB 11 February 2014 5999 Southridge Ave.Prince GeorgeBC 11 February 2014 1770 Main StreetPentictonBC

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