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Good times ahead for Dollarama: RBC

Tags: Dollarama, Retail
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If only Dollarama’s (DOL-T) share price was as cheap as the products in its stores. That’s the message from analysts at RBC Capital Markets, as they expect the company to continue to post double-digit earnings growth and outperform its peers in the retail space.

In a recent note to clients, the analysts raised their 12-month price target to $63 per share from $58, in the run-up to the company’s first-quarter earnings report due on June 13.

“In our view, no other Canadian retailer offers similar consistent growth and security in the current challenging retail environment,” Irene Nattel says.

Nattel expects the discount retailer to post 15- to 20-percent earnings per share (EPS) growth over the next two years, driven by new stores, stronger same-stores sales numbers and higher margins.

As for a potential consumer pullback in the face of an economic slowdown, Nattel says it should be business as usual for Dollarama.

“We also believe that Dollarama’s extreme value positioning as a retailer reduces its exposure to near-term macroeconomic concerns,” she says.

Income investors also have something to look forward to, as the company’s growing pile of cash could be returned either through dividends or share buybacks.

“With forecasted annual free cash flow (excluding dividend) in the range of $165 to 205 million over our forecast horizon, Dollarama has approximately $200 million in net debt and a dividend that consumes approximately $33 million per year at current payout levels. Consequently, Dollarama has significant leeway to raise the dividend and initiate a share buyback if it so chooses,” she says.

Nattel says the annual dividend could increase from the current 44 cents per share to 55 cents by 2014.

Nattel’s “outperform” rating and higher price target comes after the company’s blew past analyst expectations when it reported fourth-quarter earnings.

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.

If Canadian households look to repair their balance sheets in the face of growing economic uncertainty and trade down to discount retailers, Dollarama has a firm lead on its rivals. It currently has more than 700 stores across the country -- four times more than its closest competitor and it has more stores than the next five largest competitors combined.

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