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Dollarama Inc (TSE: DOL)

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Presentation on theme: "Dollarama Inc (TSE: DOL)"— Presentation transcript:

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

2 Company Overview Company Overview Investment Thesis Macro Outlook
Company Description Target Market 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% 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 Company Management Made up of Dollarama International Inc. (Canada) and Dollarama L.P. (Québec) All Stores are corporate managed Larry Rossy: founded Dollarama in Chair of the Board of directors CEO since 2004 Michael Ross: CFO Neil Rossy: Chief Merchandising Officer 8.1% of stock ownership Based in Montreal, Quebec, Dollarama Inc. is a 6.5 billion market capitalization dollar store operator that provides general merchandise for everyday use. Financials In , 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 Model As of Feburay 3, 2013, 785 stores in 10 provinces. During , 86 net new stores opened. Revenue Sources: retail and real estate lease Operating Segment : Retails Market Share: 60%. Company Management Larry Rossy, Chairman and CEO since 2004. Stock Performance – 343% increase in 5 years See Appendix XX for full details Company Overview Investment Thesis Macro Outlook Industry Outlook Risks/Catalysis Valuation

3 Key Financials/Stock Performance
Company Overview Business Strategy Key Financials/Stock Performance 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 Metric Name Fiscal Year 12-13 Revenue Gross Profit 694.84 EBITD 315.89 Net Income 220.99 Gross margin 37.38% EBITD margin 16.99% Earnings per share $3.36 P/E ratio 25.73 Return on average equity 24.2 Company Overview Investment Thesis Macro Outlook Industry Outlook Risks/Catalysis Valuation

4 Investment Thesis Company Overview Investment Thesis Macro Outlook
Market Leader with High Growth Potential 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 Favorable Macro and Industry Prospects 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 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 Company Overview Investment Thesis Macro Outlook Industry Outlook Risks/Catalysis Valuation

5 Macro Outlook Company Overview Investment Thesis Macro Outlook
Industry Outlook Risks/Catalysis Valuation

6 Canadian Retail Industry
Industry Outlook Canadian Retail Industry 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). Industry Trend Dollarama Growth Steadily Recovering, increasing investment on geographical location, IT Double Digit Growth rate, market penetration in ON and BC, expansion to AB & BC Marketing expenditure Increasing marketing initiatives and its online presence Srong brand name, successful brand name and easy accessibility->no significant advertising expenditure Competitors Americanization-expansion of Walmart and Target Conveninent Location, urban shoppers, "convenience store model" Price Low price, $1 Fixed Strategy to Multi pricing strategy Value oriented, multi price points, industry leader Product Sourcing Indirect sourcing Direct Sourcing (52% oversea and 48% North America) Cost Control Optimize supply chain to reduce SG&A costs Improving distribution channel and warehouse expansion Retail Owner Institute, KPMG 2013 Industry Outlook Survey and Dollarama Inc. Company Overview Investment Thesis Macro Outlook Industry Outlook Risks/Catalysis Valuation

7 Catalysts & Risks Company Overview Investment Thesis Macro Outlook
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. 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 Company Overview Investment Thesis Macro Outlook Industry Outlook Risks/Catalysis Valuation

8 Valuation I Comparables
Market Cap Enterprise Value EV/EBITDA P/E Consumers (CAN$ in B) 2013 2014 E 2015 E P/FCF Dvd Yld Big Lots Inc. 1,72 1,98 5,24 x 6,29 x 5,68 x 10,22 x 13,26 x 11,84 x 12,80 x 0,00% Dollar General Corp. 19,14 21,90 10,71 x 10,50 x 9,46 x 18,70 x 18,61 x 16,13 x 30,54 x Dollar Tree Inc. 11,37 11,88 10,34 x 9,12 x 8,12 x 19,97 x 17,22 x 15,01 x 25,00 x Dollarama Inc. 5,98 6,27 15,71 x 15,80 x 13,40 x 25,20 x 24,78 x 19,98 x 29,96 x 0,63% Family Dollar Stores 7,60 8,17 9,02 x 9,37 x 8,59 x 17,79 x 19,47 x 17,52 x 1,47% Five Below 2,12 2,13 32,03 x 29,34 x 21,75 x 78,51 x 59,21 x 44,08 x Pricesmart Inc. 2,98 17,11 x 17,32 x 15,93 x 34,39 x 31,21 x 27,54 x 107,09 x 6,10% Median 9,93 x 9,23 x 19,10 x 16,90 x 25,88 x Mean 34,75 41,19 12,67 x 12,20 x 10,62 x 25,76 x 23,14 x 19,63 x 34,85 x 1,97% 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. Dollarama has generally higher margins, revenue per store, and generally stronger credit status than elsewhere Company Overview Investment Thesis Macro Outlook Industry Outlook Risks/Catalysis Valuation

9 Ratio Analysis & Comparison
Financial Ratios Operating Ratios Operating Metrics CR D/A ROA ROE NPM GM EBITDM Big Lots Inc. 1,73 9,76% 10,44% 22,41% 3,28% 39,21% 7,50% Dollar General Corp 1,54 26,74% 9,50% 19,72% 5,95% 31,74% 12,37% Dollar Tree Inc 2,18 9,86% 24,38% 41,12% 8,38% 35,87% 14,82% Dollarama Inc 3,04 18,07% 15,45% 24,20% 11,89% 37,38% 19,18% Family Dollar Stores 1,72 13,92% 12,53% 30,63% 4,27% 34,26% 8,97% Five Below 1,89 18,19% 12,35% 4,78% 35,78% 11,28% Pricesmart Inc 1,37 8,84% 10,79% 18,33% 3,66% 16,10% 6,63% Mean 1,92 15,05% 13,63% 26,07% 6,03% 32,91% 11,54% Median 23,31% Commentary 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. Company Overview Investment Thesis Macro Outlook Industry Outlook Risks/Catalysis Valuation

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 Yield 0,63% 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 Commentary Analysts Price Target 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. 12-Month Price Target Mean $94.9 High $100.0 Low $85.0 Target vs. Current 99.9% # of Analysts 14 Company Overview Investment Thesis Macro Outlook Industry Outlook Risks/Catalysis Valuation

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 outlook Leader in a unique niche market with continuing prospects for solid growth (opening new stores and distribution expansion) BUY Target Price : $98.67 per share Entrance Price: Current Market Price Exit Price: $98.67 Company Overview Investment Thesis Macro Outlook Industry Outlook Risks/Catalysis Valuation

12 Thank you! Questions?

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 Appendix III: DCF Assumptions
Cost of Equity Beta 0,16 Risk Premium 8,27% RFR 2,83% 4,15% WACC Assumptions ($) % Debt $522,20 35,92% Equity $931,49 64,08% Total Capital $1 453,69 100,00% Cost of Debt 7,5% Tax Rate 30% WACC 5,36% Terminal Value EBITDA Multiple 15,80 x Growth Rate 25% Thousands 2013 2014 2015 2016 2017 Multiple NOPAT 220,99 276,23 345,29 431,61 539,51 8525,17 Add: D&A 209,51 261,88 327,35 409,19 511,49 Less: CapEx 52,96 66,20 82,75 103,43 129,29 Less: Change WK 272,41 340,51 425,63 532,04 665,05 Unlevered FCF 105,13 131,41 164,26 205,33 256,66 Discount Period 0,00 1,00 2,00 3,00 4,00 Discount Factor 94,92% 90,09% 85,51% 81,17% Discounted FCF 124,73 147,99 175,58 208,32 6919,50 Add: Terminal Value Total Discounted FCF

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
13 44 63 27 19 326 239 3 27 27

18 Appendix VI: New Store payback
Low capital investment to open stores Rapid sales increases after opening Consistent sales volumes and low ongoing operating costs 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.

19 Appendix VII: Top Ten Newest Store
Date Opened Mall Address City Prov. 01 March 2014 Place Rosemere 55 Blvd. Bouthillier Rosemere QC 685 Danforth Ave Toronto ON 25 February 2014 Valley Centre Mall st Street Whitecourt AB 24 February 2014 Centennial Plaza th Street St-Paul 18 February 2014 410 Main Street East Kingsville 15 February 2014 County Fair Plaza 1020 Dawson Road Thunder Bay 13 February 2014 Galeries Lac St-Jean 1055 Avenue du Pont Alma Transcanada Mall nd Street NE Calgary 11 February 2014 5999 Southridge Ave. Prince George BC 1770 Main Street Penticton

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