Dollarama: This Dollar Store Hikes Its Dividend And Share Buyback Program

Summary

• Dollarama is Canada's best-known dollar store.
• The company generated in excess of C$500M in free cash flow, and that includes the growth capex related to opening 65 new stores.
• Dollarama's 10-year plan calls for a 50% increase in the amount of stores, with a payback period of two years per new store.
• More cash will be flowing to the shareholders this year, in the form of dividends and share buybacks.
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Photo by Kevin Brine/iStock Editorial via Getty Images

Introduction

Dollarama (OTC:DLMAF) is Canada’s leading dollar store. Although the company had to deal with temporary store closures, its financial performance in FY 2021 (which ended in January) was very satisfying as the cash flows remained strong. This allowed Dollarama to hike the dividend and to restart its share buyback program.

Data by YCharts

Dollarama’s most liquid listing is in Toronto where it’s trading with DOL as its ticker symbol. The average daily volume in Toronto is approximately 700,000 shares.

A very satisfying result in 2020

Although Dollarama reported on its FY 2021 results, the fact that eleven of the months in FY2021 were in the calendar year 2020 means that Dollarama encountered pretty much the entire impact of the COVID-19 pandemic in its FY2021.

And Dollarama did very well. The total revenue in FY2021 actually increased by 6.3% thanks to a combination of opening a total of 65 net new stores while the existing stores posted a 3.2% comparable store sales increase (although the latter excludes the impact of stores that have been temporarily closed).

Source: annual results

The combination of same-store sales growth and an increased network of Dollarama stores caused the revenue to increase to C$4.03B, that’s an increase of just over C$250M. The COGS increased by C$130M which also is approximately 6% and this means the gross profit margins remained pretty stable. The G&A and store operating expenses increased by almost 20% YoY though, and the company hasn’t really provided an explanation. It’s likely some of the cost increase was related to additional cleaning protocols in the stores, but it is something I’ll have to keep an eye on. Considering Dollarama opened 65 new stores in FY2021 and a similar amount of 66 stores in FY2020, I don’t think the store opening expenses were a major factor in the cost escalation.

Due to those higher G&A expenses, Dollarama’s operating income decreased by 1%, but a lower interest bill and a slightly lower average tax rate helped the bottom line to keep the net income virtually unchanged at just over C$564M. Thanks to the reduced share count compared to FY 2020, the EPS increased to C$1.82 per share.

The operating cash flows published by Dollarama also show a very strong performance. The company reported an operating cash flow of almost C$834M which is about 2% higher compared to FY2020. The total capex was approximately C$168M (slightly higher than the C$141M in FY2020) and after also making the C$164M in lease payments, the total net free cash flow on an adjusted basis was approximately C$502M.

Source: financial results FY 2020

With a net share count of just over 310M shares as of January 31^st, the net free cash flow per share in FY2021 was roughly C$1.62. Keep in mind this includes the expansion capex as Dollarama spent C$332M on capex and lease payments in FY2021 compared to less than C$270M in depreciation and amortization expenses.

The balance sheet is strong and paves the way for a higher dividend and share buybacks

The set of strong results has allowed Dollarama to hike its quarterly dividend by 7% and from this year on, the quarterly dividend will increase to C$0.0503 per share. This still represents a dividend yield of less than 0.4% based on the current share price which means most of the cash is being retained on the balance sheet.

Not to invest in additional growth (remember, the C$502M of free cash flow generated in FY2021 already includes the investments in additional growth and new stores), but to strengthen the balance sheet. The expansion of Dollarama will continue at roughly the same pace, and the company has now confirmed it’s further upgrading its target from 1,700 stores by 2027 to 2,000 stores by 2031. The company currently has 1,356 stores, so adding 350 stores by 2027 and 644 stores by 2031 means the current rate of opening stores (60-65 per year) is sufficient to meet the targets. Additionally, it looks like there won’t be much cannibalism: Despite this push for expansion, Dollarama still expects its new stores to have a payback period of just two years.

Source: press release

Considering the pace of opening new stores will remain stable, the C$500M free cash flow including growth capex could be integrally used for shareholder rewards. The increased dividend will cost the company just over C$60M per year, but Dollarama has now also released an update on its normal course issuer bid as the company has received approval to buy back up to 15.55M shares (5% of the share count). The share buyback was kicked off in Q4 FY2021 as Dollarama already repurchased 1.62M shares for a total of C$87M and the buyback pace will likely accelerate from here on, as long as the debt ratio remains within the 2.75-3 times EBITDA limits.

Investment thesis

I have been trying to establish a long position in Dollarama the past few months since the previous article and I have been writing some out of the money put options. Unfortunately, it looks like those options will expire worthless and I still won’t have a position in Dollarama. I will however likely continue to deploy this strategy as I also have no intention to chase the stock.

I’m very pleased with the performance of Dollarama in FY2021 and it’s now pretty clear the company’s operating cash flow is strong enough to generate half a billion dollars in free cash flow, even after the investment in new stores at a rate of 60-70 per year. Dollarama is a well-run company, and I’ll continue to try to establish a long position.

Analyst’s 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.

I have written a few put options on Dollarama, but they will likely expire out of the money.