A few months later, in 2010, we became shareholders in the company despite the company having a P/E of 18x and having some debt on its balance sheet. This was an act of faith based on Mr. Rossy. EPS rose from $0.82 in 2010 to $2.96 in 2015 (estimated), which represents a 29% annual growth rate. The company's stock rose from $12 to $80 (an annual return of 46%). Dollarama is one of our best investments since the inception of this portfolio 22 1⁄2 years ago. All partners at Giverny Capital owe a debt of gratitude to Larry Rossy.
The preceding quote is from Giverny Capital - a Montreal based investment manager with an impressive track record. Their 2015 letter to shareholders once again highlighted some winners, including Dollarama, along with a podium of errors (it is worth a read).
The comments are worthwhile. In conjunction with Dollarama's (OTC:DLMAF) Fiscal 2016 results, the company announced that the current Chief Merchandising Officer and Larry's son, Neil, will be taking over as CEO at the discount retailer. Larry, however, will remain extremely involved in his role as real estate and buying wizard.
That said, results continued an impressive run for Dollarama. Sales increased nearly 15%, including same-store sales of 7.9%, and earnings-per-share increased 31%. Here are my takeaways from the conference call:
- $3.50 and $4 price points will be introduced gradually in the second half of Fiscal 2017. While procuring these products has taken time, buyers have been relatively successful finding good value. Weaker economic conditions and lower prices in China are also helping the value/ price equation.
- Most analysts are basing their 5%+ same-store sales forecasts on the successful introduction of these higher price points. If, along with a potential credit card rollout, these initiatives prove successful, basket likely increases and Dollarama continues a history of industry-leading same-store sales growth.
- More emphasis on quality (as well as value). While the company reiterated the price gap between themselves and competitors is not narrowing, the move to higher price points will come with a commensurate increase in quality.
"It is not so much that we can offer 500 toothpicks but it is more if we offer 200 very good toothpicks that the customer will be happy with. I think that is what counts at the end. It is a culture that we are trying to in still in everyone and again it is not quantity but quality that counts and maybe that is part of the reason." - Larry Rossy
- Technology initiatives: With the introduction of wi-fi into stores, the use of more data for decision making and the introduction of tap-and-go payment (among other initiatives), technology continues to play a major role at Dollarama. Some initiatives are low hanging fruit but they continue to make a difference and improve their industry leading SG&A percentage.
Note: DLTR operating margin depressed due to Family Dollar acquisition; previously 12%
Despite having much lower sales, it is a far more efficient business than any of its dollar store peers. This is truly a lean, mean operating machine.
- Traffic +4.2%: The company is really emphasizing quick check-outs. Favourable weather helped traffic but all their little initiatives to improve the shopping experience seems to be driving industry-leading sales.
"I think basically what we have been doing over the years as its coming to fruition, where all was working on every aspect of the business and when you are always doing that I guess one day these type of results will happen." - Larry Rossy
The traffic number may also confirm that customers have accepted recent price increases (due to falling CAD) and that the value proposition remains attractive.
- No regional sales disparities: Would you believe the company saw no slowdown in Alberta or Saskatchewan? Yes Dollarama is a value-based retailer but it is amazing they are the only retailer not reporting an oil-related slowdown (if you can think of one, let me know).
"I have always maintained that our stores are not driven by poor economic conditions. I think we service well during poor economic conditions and good economic conditions." - Larry Rossy
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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