2 Company Overview Company Overview Investment Thesis Macro Outlook Company DescriptionTarget MarketBased in Montreal Quebéc. Provide general merchandise for every day use.Market capitalization: $6.5 billionCanada’s biggest dollar store operator: 870 stores in 10 provinces by Feb. 28, 2014.Market share: 60%Those living close to the storeValue and convenience seeker looking to fulfill various level of basic needs.One-stop shoppers to stock up household itemsImpulse buyersCompany ManagementMade up of Dollarama International Inc. (Canada) and Dollarama L.P. (Québec)All Stores are corporate managedLarry Rossy: founded Dollarama in Chair of the Board of directors CEO since 2004Michael Ross: CFONeil Rossy: Chief Merchandising Officer8.1% of stock ownershipBased in Montreal, Quebec, Dollarama Inc. is a 6.5 billion market capitalization dollar store operator that provides general merchandise for everyday use.FinancialsIn , revenue was 1.85 B and EBITA is 356 M.Dec 5th, 2013, 3rd quarter earning release for year reported an revenue of $522.9 M( 14.2% increase from last year) and EBITA of $99.8 M (19.4% increase).Business ModelAs of Feburay 3, 2013, 785 stores in 10 provinces. During , 86 net new stores opened.Revenue Sources: retail and real estate leaseOperating Segment : RetailsMarket Share: 60%.Company ManagementLarry Rossy, Chairman and CEO since 2004.Stock Performance – 343% increase in 5 years See Appendix XX for full detailsCompany OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation
3 Key Financials/Stock Performance Company OverviewBusiness StrategyKey Financials/Stock PerformanceCompelling value proposition on a wide variety of everyday merchandise to a broad base of customersGrowth in sales, net earnings, and cash flowsMulti-price point strategy: $1, $1.25, $1.50, $2, and $3Merchandise mix based on retail valueMetric NameFiscal Year 12-13RevenueGross Profit694.84EBITD315.89Net Income220.99Gross margin37.38%EBITD margin16.99%Earnings per share$3.36P/E ratio25.73Return on average equity24.2Company OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation
4 Investment Thesis Company Overview Investment Thesis Macro Outlook Market Leader with High Growth PotentialBiggest dollar store operator in the Canadian marketMarket development opportunities within ON and QC: predicted 34 new stores opening in 2014 in each regionOpportunity 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 storesManagement plans to build, expand and upgrade warehouse system and distribution networksThese strategic moves allow Dollarama to maintain an edge against its competitorsFavorable Macro and Industry ProspectsCanadian economy, particularly the retail industry is recovering from 2008 economic meltdownDec. 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 experienceThe industry is highly differentiated compared to American dollar store chainsThe retail industry will do well in 2013 because of improving economy and consumer confidenceValuationStock price is undervalued: DCP analysis suggests an implied share price of $98.66, stock is currently trading at $86.35 as of February 28, 2014High potential for growth and expansion in the future, explaining the fact the premium at which it is tradingHigh liquidity and healthy financial viability with low exposure to bankruptcyStrong margins suggest efficient business operationsCompany OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation
5 Macro Outlook Company Overview Investment Thesis Macro Outlook Industry OutlookRisks/CatalysisValuation
6 Canadian Retail Industry Industry OutlookCanadian Retail IndustryCanadian Retail industry still vital for Canadian economy after the global recessionTotal Sales: $457.4 BSales in Miscellaneous Stores: $10.7 B (2011)Value Retail industry: an established growing niche marketCanadian consumers are value-oriented (PwC)Dollar store industry has high growth potential compared to other players in the value retail industry (Appendix I).Industry TrendDollaramaGrowthSteadily Recovering, increasing investment on geographical location, ITDouble Digit Growth rate, market penetration in ON and BC, expansion to AB & BCMarketing expenditureIncreasing marketing initiatives and its online presenceSrong brand name, successful brand name and easy accessibility->no significant advertising expenditureCompetitorsAmericanization-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 leaderProduct SourcingIndirect sourcingDirect Sourcing (52% oversea and 48% North America)Cost ControlOptimize supply chain to reduce SG&A costsImproving distribution channel and warehouse expansionRetail Owner Institute, KPMG 2013 Industry Outlook Survey and Dollarama Inc.Company OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation
7 Catalysts & Risks Company Overview Investment Thesis Macro Outlook A) General Economic ImprovementPositive indicators for the consumers industryIncreasing wages and earningsDecent aggregate growthLow unemployment ratesStable housing priceFed’s tapering: a sign of the government’s confidence in the economy, and its recovery.B) Strong Company Operating & Financial PerformancesComparable store sales increased by 6.5 in FY 2013Sales growth by 19.9% to $561.9MNormalized EBITDA grew by 20.7% to $120.9MNormalized 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 ComeDOL 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.A) High Household DebtAverage Canadian consumers personal debt excluding mortgage increased by 0.83% QoQ, and 2.19% YoY to a level of R$27,355Total debt to disposable income stand at 163%, primary driven by mortgagesHowever, comparatively slower growth in debt level at 3.90% YoY, slowest pace since 1995, which is favorable for the consumers industryB) Fluctuating Foreign Exchange RateMajority of supply sourced from foreign countries using USD, while sales are made in CADAppreciation of foreign currency against CAD will hurt the profit margin of DOLGiven that DOL is a value retailer, margin is extremely important for itC) DistributionHigh inventory turnover rate exposes DOL to the possibility of depleted inventoryGoods are transported from suppliers to 4 warehouses, distribution centers, and then to stores through various means of transportation, such as sea, train, truck, and etc.Delay or interruption of services could negatively affect business and financial resultsCompany OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation
8 Valuation I Comparables Market CapEnterprise ValueEV/EBITDAP/EConsumers(CAN$ in B)20132014 E2015 EP/FCFDvd YldBig Lots Inc.1,721,985,24 x6,29 x5,68 x10,22 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 xDollar Tree Inc.11,3711,8810,34 x9,12 x8,12 x19,97 x17,22 x15,01 x25,00 xDollarama Inc.5,986,2715,71 x15,80 x13,40 x25,20 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 xPricesmart Inc.2,9817,11 x17,32 x15,93 x34,39 x31,21 x27,54 x107,09 x6,10%Median9,93 x9,23 x19,10 x16,90 x25,88 xMean34,7541,1912,67 x12,20 x10,62 x25,76 x23,14 x19,63 x34,85 x1,97%CommentaryDOL 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.Dollarama has generally higher margins, revenue per store, and generally stronger credit status than elsewhereCompany OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation
9 Ratio Analysis & Comparison Financial RatiosOperating RatiosOperating MetricsCRD/AROAROENPMGMEBITDMBig Lots Inc.1,739,76%10,44%22,41%3,28%39,21%7,50%Dollar General Corp1,5426,74%9,50%19,72%5,95%31,74%12,37%Dollar Tree Inc2,189,86%24,38%41,12%8,38%35,87%14,82%Dollarama Inc3,0418,07%15,45%24,20%11,89%37,38%19,18%Family Dollar Stores1,7213,92%12,53%30,63%4,27%34,26%8,97%Five Below1,8918,19%12,35%4,78%35,78%11,28%Pricesmart Inc1,378,84%10,79%18,33%3,66%16,10%6,63%Mean1,9215,05%13,63%26,07%6,03%32,91%11,54%Median23,31%CommentaryAll 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.Company OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation
10 Valuation II: Discounted Cash Flow Share Price CalculationTarget Price($Thousands)Enterprise Value$7 680,56Less: Debt$(522,20)Add: Cash$52,57Equity Value$7 210,93Shares Outstanding$73,09Implied Share Price$98,66Current Price$86,35Dividend Yield0,63%Sensitivity AnalysisGrowth RateEV/EBIDTA20%23%25%28%30%14,80 x$78,37$85,31$92,67$100,47$108,7515,30 x$80,92$88,07$95,66$103,72$112,2515,80 x$83,46$90,83$98,67$106,96$115,7516,30 x$86,01$93,60$101,65$110,20$119,2616,80 x$88,55$96,36$104,65$113,44$122,76CommentaryAnalysts Price TargetAssumptions: yearly growth rate of 25%, and an EV/EBITDA ratio of 15.80x:Target price of $98.67 (exit price)In line with analysts’ estimatesSensitivity Analysis:Prices of DOL is more sensitive to changes in growth rate than changes in EV/EBITDANecessary to maintain its growth rateCurrent price of DOL: $86.35 (entrance price)Company is still intrinsically undervalued given the large future growth potentialRefer to Appendix 3 for details on DCF assumptions.12-Month Price TargetMean$94.9High$100.0Low$85.0Target vs. Current99.9%# of Analysts14Company OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation
11 Investment Highlights Revenue $1.8B, ROE 24.2% with solid management team and a strong dividend yield of 0.63%Advantageous macro and micro outlookLeader in a unique niche market with continuing prospects for solid growth (opening new stores and distribution expansion)BUYTarget Price : $98.67 per shareEntrance Price: Current Market PriceExit Price: $98.67Company OverviewInvestment ThesisMacro OutlookIndustry OutlookRisks/CatalysisValuation
13 Appendix I- Competitive Advantages of Dollar-Store Industry Low fixed price pointConvenient location and store sizeBroad offerings of everyday branded or unbranded merchandiseSmall or individual size product quantityNo-frills, self-service environment
16 Appendix IV: Location Selection Criteria The level of retail activity and traffic patternsThe presence or absence of competitorsThe population and demographics of the areaTotal rent and occupancy cost per square footThe location of existing Dollarma storesNote: 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 134463271932623932727
18 Appendix VI: New Store payback Low capital investment to open storesRapid sales increases after openingConsistent sales volumes and low ongoing operating costsInitial 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.
19 Appendix VII: Top Ten Newest Store Date OpenedMallAddressCityProv.01 March 2014Place Rosemere55 Blvd. BouthillierRosemereQC685 Danforth AveTorontoON25 February 2014Valley Centre Mallst StreetWhitecourtAB24 February 2014Centennial Plazath StreetSt-Paul18 February 2014410 Main Street EastKingsville15 February 2014County Fair Plaza1020 Dawson RoadThunder Bay13 February 2014Galeries Lac St-Jean1055 Avenue du PontAlmaTranscanada Mallnd Street NECalgary11 February 20145999 Southridge Ave.Prince GeorgeBC1770 Main StreetPenticton