Dollarama again increasing pace of new store openings on real estate competition

MONTREAL – Dollarama is continuing to increase the pace of new store openings as competition for good locations prompts the discount retailer to act quickly.

The Montreal-based chain expects to open 75 new stores next year, after accelerating its forecasted openings to between 75 and 85 stores this fiscal year.

At the higher level, Dollarama will have boosted its store count by nearly 64 per cent from last year, when it added 52 new locations.

“We’re all aware of the competitive environment for real estate in Canada and if you fall asleep for a couple of years you’re going to be shut out,” CEO Larry Rossy said Thursday during a conference call.

Dollarama is mindful that some store additions will cannibalize sales from existing locations as up to half the new stores are in Ontario, where most of its outlets are located.

“But we do feel comfortable in spite of that, it’s well worth the investments in those locations,” he told analysts.

In urban centres, 10 to 15 per cent of new stores are smaller, sometime basement locations rather than the 10,000 square foot traditional suburban format.

Dollarama (TSX:DOL) said its net profits in the three months ended Oct. 28 jumped 23 per cent to $51.5 million, or 68 cents per diluted share.

That was up from $41.8 million or 55 cents in the comparable year-earlier period.

Revenues soared 14.4 per cent to just under $458 million from $400.3 million and included a 6.6 per cent increase in same-store sales at locations open at least a year. Average transaction sized increased by 4.9 per cent and it had a 1.6 per cent increase in average transactions.

The number of stores in operation rose to 761 from 690 in the year-earlier period, with 26 new stores added in the quarter.

Normalized net earnings, or those adjusted for non-recurring charges net of tax impacts, were $53.7 million or 71 cents per diluted share, up 29.1 per cent from $41.8 million or 55 cents a year ago.

Dollarama had been expected to earn 70 cents per share in adjusted net earnings on $458 million in revenues in the third quarter, according to analysts polled by Thomson Reuters.

The discount retailer originally sold products for a dollar but has since added more expensive items priced at up to $3 to help boost the bottom line.

Those items above $1 represented 57 per cent of sales, up from 49 per cent last year.

“We continue to generate strong gross profits while delivering great value to our customers,” he said.

While the chain has added higher price items, Rossy said very few Christmas items are at the top prices and the company’s objective is not to load the stores with these more expensive products.

“We’re not aggressively trying to convert our stores into $3 stores here …The objective remains giving value and if I had an alternative I’d give more value at $1 and $1.25 than I would at $2.50 and $3.”

The strong results prompted Derek Dley of Canaccord Genuity to increase his target price for Dollarama shares nearly three per cent to $72 as he estimates that 2.5 cents per share is added for each 10 new stores.

“We continue to believe Dollarama deserves a premium valuation given its position in an underpenetrated market, industry-leading profitability metrics, robust free cash flow generation and commitment to return cash to shareholders,” he wrote in a report.

Dollarama recently appointed the chief executive officer of auto parts distributor Uni-Select Inc. (TSX:UNS) as an independent director of the company, replacing Matthew Levin.

On the Toronto Stock Exchange, Dollarama shares lost $1.31, or two per cent, to $61.29 in afternoon trading.