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(Jason Scott)
(Jason Scott)

Vox

Dollarama: Just a penny ante stock? Add to ...

Fabrice Taylor is a chartered financial analyst

Running a dollar store in an inflationary world is no fun in the long term, for obvious reasons.

But the people at Dollarama aren't worried about that any more. They and their new shareholders have two things going for them in that regard.

First, they didn't name their store A Buck or Less, or some such paralyzing thing.

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Second, they had a heck of a light-bulb moment this year - let's sell stuff that costs more than a dollar! The name still works and so do the numbers: Same-store sales growth, which prior to this brainstorm ran about 3 per cent a year, more than doubled.

You can learn this and other bullish nuggets in Dollarama's prospectus, filed last month. The initial public offering was last week and today the company's equity is valued at about $1.5-billion.

Dollarama is a pretty good business, and not because it sells cheap stuff during a recession. It appears to be well run and seems to occupy a nice niche as the biggest dollar store operator in the country.

But is it really worth that much? That's arguable, and ironically the prospectus itself helps make the case.

Here are the good points: The chain was founded in 1992 by Lawrence Rossy. The store count has climbed by 16 per cent a year since then. Since 2002, revenue has grown by the same and earnings (before interest, taxes, depreciation and amortization - in this case the best measure) are up a little more than that at 18 per cent.

Dollarama is dominant in its class, much bigger than its rivals. It's even more dominant in Quebec, where it's based, and in Ontario.

The prospectus tries hard to make a case for lots more growth, and this is where, in my mind anyway, it gets a little harder to make a case for the stock.

First, we are told that there's room for more stores because on a per capita basis, there are more stores in the United States. That seems fair enough. But the statistics used leave a little to be desired.

In the U.S., we're told, there are 15,500 people per dollar store. In Canada, it's 32,000. Sounds great but the U.S. number comes from using the top five chains by number of stores while the Canadian one comes from the top six chains as the denominator. The statistic is pretty useless unless you use the total number of dollar stores.

Fortunately, there's another metric: In Quebec, there's a Dollarama for every 37,000 people, while in the rest of Canada there's not nearly as many stores per capita. Hence, room for growth - room for at least 900 Dollarama stores. There are only 585 now.

Again, there are flies in this ointment: First, Quebeckers are different. They drink Pepsi, we drink Coke, for example.

But even leaving that soft argument aside, there's more competition in western Canada, too. Dollarama can't just breeze into markets where it has relatively few stores if there are competitors doing business there.

Let's forget that though and concentrate on 900 stores. Right now, by my calculations, operating profit per store is running at roughly $240,000. Operating profit is before interest payments and taxes - it's not net earnings.

Because the company is aggressively opening new stores, that number is probably a little low since the company opens 30 to 40 new stores a year, and the new ones aren't fully contributing to profits because they just recently started operating.

If you assume a quarter-million a store, and use 900, you get operating profits of about $240-million. Remember that this is before taxes and interest. What is that worth? At 10 times, and trying to be generous to account for that new-store phenomenon, let's call it $2.4-billion in total value.

The market capitalization today is about $1.4-billion and there was, at the latest balance sheet date, about $700-million in net debt and amounts owing to shareholders.

This is back-of-the-envelope stuff, of course. But it's enough to ask: While this is a good company, what's the upside on the shares?

I'd watch profitability very closely - it appears to be declining, although the cost of increasing the store count definitely clouds the issue. I'd also watch that balance sheet. There's a lot of debt and of the $1.3-billion in listed assets, $850-million are goodwill and intangible assets. That doesn't leave a lot of wiggle room.

****

Dollarama's balance sheet

12 mos. to

Fiscal year ended

(in $ millions)

2-Aug-09

1-Feb-09

3-Feb-08

4-Feb-07

Sales

$1,164.7

$1,089.0

$972.4

$887.8

COS

$766.5

$717.1

$640.9

$588.5

Gross profit

$398.2

$371.9

$331.5

$299.3

General, sales and store operating expenses

$240.2

$221.6

$188.4

$156.5

Amortization

$23.8

$21.8

$18.4

$13.5

Total operating expenses

$264.0

$243.4

$206.8

$170.0

Operating profit

$134.2

$128.5

$124.7

$129.3

Source: company reports

 

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