DLMAF Dollarama

Sector financial performance:

This company, primarily a discount retailer selling consumables, seasonal items, and home products and apparels, has been grouped into discount stores sector in retail industry.

It seems that demand for products and service of companies in this sector has been very strong as indicated by growth the same store sales (average 3-4% annual growth rate) in the past several years, which can be attributable more on increasing transaction size (mark-o) than increasing transaction counts. Growth has also come from expansion of reach of stores. It seems that traffic was able to quickly catch up in newly opened stores. The lower pricing items seem to have been less impacted by unfavourable retail industry climate, as characterized by slowing down traffic in the stores, than higher pricing items. It seems that the traffic may be slowing in 2018 as indicated by smaller increase or decrease in transactions and thus the smaller comparable sales growth in 2018 compared with 2017.

As a result of lower merchandise costs and rising mark-on, we have seen about 150 basis points increase in gross margin from the typical companies (around 34% in 2018). The typical operating margin is now at about 13% (with a large range of 8-23%) with a SG&A as percentage of sales of about 21%. The average operating margin seems to go down slightly in 2018 probably due to lese mark on resulted from pressure of slowing traffic.

The typical average stock Price/cash flow ratio is: 25(interest/EBI ratio of 15%) and stock price/sales ratio is about 2.0.

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Company performance:

It seems that the demand for products/service of this company in the past several years has been strong as indicated by the continuing increase in transaction size during the same period of time. However, comparable sales grow slowly in 2018 compared with prior years.

The first half of 2018 compared with the same period of 2017

Same store sales increased 2.6% for 1Q and 2.6% for 2Q.

The 2017 compared with 2016

Same store sales increased 5.2% due to increase of 5.2% in transaction size. Traffic has no increase.

2016 compared with 2015

Same store sales increased 5.8% due to increase of 5.5% in transaction size. Traffic has no changes.

Its gross margin has been up to around 40% since 2014 due to higher products margin and leveraging of expenses as a result of increased sales. However, due to the decrease of about 200 basis points in SG&A as percentage of sales (around 17%) as a result of decreased labor costs, its operating margin went up to about 23% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 30 (CAD$42). We think that its stock is being relatively slightly overvalued compared with its peers considering the possible slowing down of comparable sales.