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Globe Investor Dollarama profit jumps 32% as sales increase, margins improve

Shoppers at the Dollarama store on Spadina Avenue in Toronto on June 13, 2012.

Deborah Baic/The Globe and Mail

Dollarama Inc. continued to grow its profits in the second quarter as shoppers bought more items priced above $1 and the addition of 55 stores since last year helped to drive up the discount retailer's sales.

The Montreal-based company earned $49.8-million during the quarter, up 32 per cent from the comparable period last year.

The profit amounted to 66 cents per diluted share in the 13 weeks ended July 29, up from $37.6-million or 50 cents per share in the comparable period last year. It included a one-cent per share gain from a lower tax rate.

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Analysts had forecast 64 cents per share in profits in the quarter.

Dollarama's revenue was up 13.8 per cent, rising to $441-million from $387.5-million for the corresponding period last year.

"We are very pleased with our second quarter financial and operating results," Larry Rossy, Dollarama's chairman and chief executive officer, said in a statement.

"Our strong comparable store sales are a good indicator that our customers appreciate our great merchandise value and our diverse product offerings."

Dollarama originally sold products for a dollar each but now offers items of up to $3 – a move that has helped boost its revenue and margins.

The retailer has also grown by expanding the number of stores in its network, which now total 735 locations across Canada, up 8.1 per cent from 680 stores a year ago. It added 14 net new stores in the quarter.

Comparable-store sales grew 7.3 per cent from the second quarter of last year's fiscal 2012, representing a 4.5 per cent increase in the average transaction size and a 2.7 per cent growth in the number of transaction.

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Fifty-six per cent of its sales were for products priced higher than $1, up from 48 per cent a year ago. Debit cards were used for 39 per cent of sales, compared to 36 per cent in the previous fiscal year.

Profit margins improved to 36.9 per cent of sales, up from 36.7 per cent.

Net financing costs decreased to $2.6-million from $5.7-million a year ago because of lower interest rates and lower debt levels. Net debt was $173.5-million, down from $204.7-million a year earlier.

Tal Woolley of RBC Capital Markets said Dollarama's operating numbers continued to impress, driven by better-than-expected sales.

"We anticipate that the results delivered today in a tough overall quarter for retailers, combined with the debt reduction and free cash flow accumulation, will continue to build investor enthusiasm for Dollarama shares," he wrote in a research note.

Mr. Woolley added that increases in transaction counts should assuage many investors about the long-term sustainability of same-store sales gains, particularly given the potential for a more full roll-out of higher-price point goods.

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