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Inside the Market’s roundup of some of today’s key analyst actions

Industrial Alliance Securities analyst Neil Linsdell expects Dollarama Inc. (DOL-T) to report a “solid” start to fiscal 2019 when it releases its first-quarter financial results on June 7.

In a research note released Friday, Mr. Linsdell upgraded his rating for the discount retailer to “buy” from “hold” in the wake of a 3.9-per-cent drop in share price since his last note reviewing of the stock on March 29, noting his unchanged $163 target price now represents a target return of 9.2 per cent. The average target on the Street is $165.88, according to Bloomberg data.

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“Continuation of profitability improvements, the rollout of higher price points, and our estimate of the potential for dollar stores in Canada further supports our long-term thesis,” he said.

For the quarter, Mr. Lindsell is projection revenue of $781.7-million, a rise of 10.9 per cent from $704.9-million in the same period a year ago and ahead of the consensus estimate on the Street of $777. He expects the company to benefit from both continued organic sales growth, stemming from higher price point items and the acceptance of credit cards, as well as a rise in the total number of stores.

He’s estimating earnings before interest, taxes, depreciation and amortization (EBITDA) of $177.4-million, versus $155.8-million in fiscal 2018 and a consensus of $171.7-million. His earnings per share estimate is 99 cents, up from 82 cents a year ago and five cents higher than the Street.

“Dollarama is a Canadian success story and remains a solid retail operator,” said Mr. Linsdell. “In turn, the company has become a stock market darling with record high valuation multiples. Dollarama’s ability to provide customers value at low price points is subject to a number of factors, including merchandise costs, F/X fluctuations, tariffs on imported goods, labour costs, rent, fuel/transportation costs, and inflation. There remains significant market potential for dollar stores in Canada (approximately 3,000 stores), supporting management’s outlook for 1,700 locations by calendar 2027. Strong acceptance of items at the $3.50 and $4.00 price points also suggests substantial opportunities to manage pricing and therefore margins, while increasing basket size and revenue growth. Strength in the Canadian dollar, versus last year, should also provide additional flexibility in maintaining margins as direct overseas sourcing currently represents 55 per cent of purchases, and helps to offset increasing wage costs in Ontario.”

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Given its position as the second-largest player in the “relatively concentrated” Canadian grocery industry and possessing a “solid” balance sheet, Empire Company Ltd. (EMP.A-T) should be able to provide management with the opportunity to execute on his priority of reducing costs by $500-million by fiscal 2020, according to Desjardins Securities analyst Keith Howlett.

However, Mr. Howlett feels the company “will do well” to achieve $350-million in reductions, through $250-million in reduced savings internally and $100-million stemming from vendor relationship.

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“Almost one year into its turnaround plan, named Project Sunrise, results are improving off trough levels and in line with management’s plan,” he said. “The balance sheet is in solid shape. The next 12 months are a critical period as the smaller, centralized, national management team takes the reins and determines how it will re-establish profitability in western Canada”

Believing the parent company of the Sobeys supermarket chain is “re-establishing its bearings” for a “long journey ahead,” Mr. Howlett initiated coverage of the stock with a “hold” rating.

“Empire management has stabilized sales and gross margin rate, reduced capital spending and tightened expense control,” he said. “A three-year major cost reduction plan is in place. The litmus test will be the yet-to-be-unveiled plan for the consumer proposition in western Canada (largest region), where the company is unprofitable. Cost reductions are expected to drive improved near-term results, but top line growth will be required beyond FY20. The current share price does not leave sufficient upside, given the level of risk.”

Mr. Howlett believes the company’s new management team, led by chief executive officer Michael Medline, will likely achieve its internal cost-cutting targets in both fiscal 2018 and 2019. However, he is projecting the company will miss reducing its cost of goods sold by its target of more than $250-million in 2020.

“Our view is that management has a realistic and well-sequenced plan to lower Empire’s cost base and strengthen its ability to compete in western Canada as well as across Canada,” he said. “While management believes it will exceed $500-million in cost savings, our view is that there is considerable uncertainty with respect to the amount of savings that will be realized in FY20 from phase three.”

He added: “There is no quick fix, in our view, to the consumer-facing issues in western Canada. The best outcome is that industry conditions remain stable and give Empire time to determine how to rebuild its relationships with consumers. While this primarily will require intellectual capital and operational execution, capital spending will also be involved. Empire has the financial resources but must improve how it utilizes them.”

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Mr. Howlett set a $27 target for Empire shares, which falls below the average on the Street of $28.05.

“We do not foresee any alternative catalyst for the share price such as a takeover by a competitor, a new entrant or private equity,” he said. “We also note that recent transaction multiples, excluding that of Amazon’s takeover of Whole Foods, do not support a higher multiple. It also seems unlikely that the Competition Bureau would permit the merger of Empire and Metro, for example, without significant divestitures in Quebec.”

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BRP Inc.’s (DOO-T) “impressive” first-quarter 2019 results were a “strong start with lots of gas in the tank for the rest of the year,” said Desjardins Securities analyst Benoit Poirier.

Shares of the recreational vehicle manufacturer jumped 5.8 per cent on Thursday after it reported revenue for the quarter of $1.137-billion, a jump of 16 per cent year over year and ahead of the forecasts of both Mr. Poirier ($1.1-billion) and the Street ($1.017-billion). Normally fully diluted earnings per share of 53 cents also exceeded expectations (38 cents and 28 cents, respectively).

The company also raised its full-year EPS guidance to a range of $2.82–$2.94 from $2.70–$2.82 based on “strong” retail sales.

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“Management highlighted that the strong retail performance delivered across all product lines in North America was achieved despite a late spring in the Midwest and East Coast regions,” said Mr. Poirier. “While a late spring delayed sales of PWC [personal watercraft] in the quarter, it had a positive impact on snowmobiles. We believe this demonstrates the strength of BRP’s portfolio of complementary products.”

Based on the results, Mr. Poirier raised his 2019 fully diluted EPS estimate to $2.93 from $2.72 with his 2020 projection jumping to $3.34 from $3.08.

“For FY19, we expect revenue and normalized EBITDA to increase 8 per cent and 13 per cent, respectively,” he said. “We believe our estimates are conservative given the introduction of several products that should continue to fuel gains in market share and translate into higher utilization rates and margins in the long term. In addition, we also increased our valuation multiples to account for BRP’s (1) pristine balance sheet, (2) unmatched retail sales momentum, (3) proven track record of market share gains through innovation, and (4) solid management team.”

Maintaining a “buy” rating for BRP shares, he increased his target to $68 from $58. The average is $60.

“Overall, we maintain our positive stance on BRP due to its strong momentum and solid market fundamentals,” said Mr. Poirier. “We believe the company’s robust balance sheet gives it enough flexibility ($500-million) to look at cash-deployment opportunities to create further shareholder value, such as M&A, organic growth or share buybacks.”

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Lululemon Athletica Inc. (LULU-Q) “easily” topped very high first-quarter expectations, according to Credit Suisse analyst Michael Binetti, prompting him to increase both his financial estimates and target price for its stock.

On Thursday after market close, the Vancouver-based athletic apparel maker reported earnings per share of 55 U.S. cents for the quarter, exceeding the Street’s 45 U.S. cent expectation.

Mr. Binetti called its same-store sales growth beat “astonishing” with the company reported 19-per-cent growth versus the 12.3-per-cent expectation.

Gross margin expansion of 2.7 per cent was “outsized,” according to the analyst. The Street had expected a 1-per-cent rise.

“Along with a strong innovation pipeline, strong new customer acquisition (up 28 per cent in 1Q) and top-line momentum continuing into 2Q-to-date, we have increased confidence in sources of upside to LULU’s high single-digit SSS guide for ’18 despite tougher compares through year,” said Mr. Binetti, who raised his 2018 EPS estimate to US$3.25 from US$3.12..

“Further, ongoing sources of margin upside should continue to support positive Street revisions and a consistent beat and raise path from here.”

Maintaining an “outperform” rating for its stock, Mr. Binetti hiked his target to US$125 from US$105. The average is currently US$109.33.

Elsewhere, Canaccord Genuity’s Camilo Lyon called it a “near flawless” quarter but warned “now things get tougher.” He raised his target to US$97 from US$85 with a “hold” rating (unchanged).

Mr. Lyon said: “While both stores (up 6 per cent) and e-commerce (up 60 per cent) benefitted from very easy comparisons, the growth in both channels is remarkable as a strong product assortment coupled with investments in its website, mobile capabilities, and digital marketing are all coming together to drive traffic and conversion. Product category performance was strong across the board, with +DD comps in core women’s and men’s as well as bras and accessories. Importantly, LULU appears to have a full product pipeline with a number of new innovations in/coming to market (e.g. Out of Mind Short liner in men’s, City Sweat franchise in men’s, new styles in Enlite bra, zone compression collection for both women and men). Furthermore, expanding omni-channel capabilities (e.g. BOPIS in 2H) and a burgeoning customer database should help maintain the tailwinds in the business today. LULU also continues to see product margin expansion opportunities (albeit on a much smaller scale) in its supply chain processes (e.g. reducing lead times, capturing cost efficiencies in distribution). All that said, we point out that despite an exceptionally strong 19-per-cent comp, the company only managed to lever total occupancy by 120 basis points and SGA by 130 bps, underscoring the high fixed cost nature of the business and the many investments made into it. This raises two questions: what happens when comps normalizes in the mid-to-high single digit range, and what will LULU do to maintain this pace of growth past 2020 to support the valuation? Given its strong cash generation, category expansion or potential acquisitions must become part of the discussion. Overall, we give management much deserved credit for the sustained outperformance, and while there are many positives, we believe current valuation multiples limit the upside potential.”

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In other analyst actions:

Eight Capital analyst Stephen Gordon Theriault upgraded Bank of Montreal (BMO-T, BMO-N) to “buy” from “neutral” and increased his target to $119 from $109. The average target on the Street is $110.43.

Mr. Theriault downgraded Canadian Imperial Bank of Commerce (CM-T, CM-N) to “neutral” from “buy” with a target of $128, falling from $140 and below the consensus of $129.94.

Scotia Capital analyst Vladislav Vlad upgraded Horizon North Logistics Inc. (HNL-T) to “sector outperform” from “sector underperform” with a target of $4, up from $2.50. The average is $3.13.

Mr. Vlad also upgraded Black Diamond Group Ltd. (BDI-T) to “sector perform” from “sector underperform” and hiked his target to $4.25 from $2.50. The average is $3.16.

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