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Dollarama a bright spot in struggling retail sector

Tags: Dollarama, Retail

While retailers and grocers across Canada face shrinking margins and cash-strapped consumers, Dollarama (DOL-T) is blowing past Street expectations with swelling margins and strong profits.

Wednesday was no exception for the discount retailer. It posted a 160 basis point (a basis point is 0.01 percentage point) increase from last year on its gross margins to 39.8 percent. It also reported a 15-percent increase in revenue from the same quarter last year to $469 million.

And it trumped analysts' profit forecasts, reporting earnings per share of 84 cents, compared to expectations for 68 cents and 51 percent higher than the 56 cents it earned last year.

Same stores sales, which measures sales at stores open at least year and is a key metric for retailers, grew by 7.9 percent -- again, beating analyst expectations.

The company also announced an increase in its quarterly dividend to 11 cents per share from 9 cents per share.

Investors bought into Dollarama after the announcement. Shares in the company ended nearly 7 percent higher on Wednesday, with the stock up more than 70 percent in the last 12 months.

Analysts remain bullish on the stock, with eight having a "buy" recommendation, four giving it a "hold" rating and only one "sell" recommendation. The average target price among analysts covering the stock is $50.35.

The discount retailer also continues to be one of the top growth stories among Canadian retailers. The company added another 52 stores in the last year and expects to launch at least another 50 this year, but could ratchet that number up to 60.

"We continue to believe that Dollarama offers the most visible growth profile in our coverage universe, given its network expansion opportunities, industry-leading profitability metrics, healthy free cash flow generation, and conservative balance sheet," Canaccord Genuity analyst Derek Dley said in a note to clients. "While we acknowledge the current valuation metrics may appear lofty, we believe this is justified given the company's robust growth profile and ability to outperform in a cautious consumer spending environment."

"Dollarama remains our preferred growth retailer."

But as most retailers struggle to grow with Canadian households staring at bulging balance sheets and a weak labour market, analysts say Dollarama continues to distance itself from the pack.

"[The retailing landscape] is not pretty, as pretty as it is for Dollarama and as much as they are benefiting from the current environment," Kenric Tyghe, consumer analyst at Raymond James, tells BNN. "For the grocers it's a struggle, as it's highly promotional and they are fighting for every cent on every dollar and looking at the general merchandisers it's equally been a challenging time."

"That being said it's forced them to be increasingly competitive and increasingly smart in their promotional activity, hence more analytics, more data and more insight into the consumer."

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