BUSINESS

Dollarama Q2 Profit Jumps As Discount Retailer Plans 70 New Stores

09/12/2012 07:55 EDT | Updated 11/12/2012 05:12 EST
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MONTREAL - Dollarama Inc. is expanding faster than initially planned this year by increasing the number of new store openings this year to take advantage of a mall construction boom in Canada.

The discount retailer said it expects to open 65 to 70 net new stores for the fiscal year ending Jan. 31, 2013, up from a earlier guidance for 55 to 60 stores. Dollarama opened 52 net new locations last year.

"It seems we're getting more opportunities, there's more construction in Canada, more big boxes being built across Canada, particularly in Western Canada, but even in Ontario," CEO Larry Rossy said Wednesday during a conference call to discuss second-quarter results.

However, Rossy couldn't say if the company would maintain the pace of adding new stores beyond the current year.

The retailer has 735 locations across Canada, up 8.1 per cent from 680 stores a year ago. It added 14 net new stores in the quarter.

Dollar Tree Canada is growing its operations in Canada after purchasing 86 stores from Vancouver-based Dollar Giant last year.

Dollarama grew its profits in the second quarter and beat analyst expectations for the 12th consecutive quarter as shoppers bought more items priced above $1 and the addition of 55 stores since last year helped drive sales.

The Montreal-based company earned $49.8 million or 66 cents per share for the 13 weeks ended July 29, up from $37.6 million or 50 cents per share in the comparable period last year.

Analysts had forecast 64 cents per share in profits in the quarter.

Dollarama's (TSX:DOL) revenue was up 13.8 per cent, rising to $441 million from $387.5 million.

Analyst Derek Dley of Canaccord Genuity increased his target share price to $70 from $68 after the company delivered what he called "impressive sales growth."

"Dollarama offers investors the most visible growth pipeline in our consumer products universe...the company's value focus has clearly resonated with consumers in a relatively cautious consumer spending environment," he added.

The retailer originally sold products for a dollar each but now offers items of up to $3 — a move that has helped boost its revenue and margins. Last July's addition of items prices at $2.50 and $3 didn't have any significant impact on the quarter's results.

A majority of its products continue to be priced at $1 or less, but that number is shrinking as more selection from China is offered at the higher price points.

Dollarama won't disclose how many items are offered at higher prices but said most of the top priced items are currently special deals rather than year-round products.

Comparable-store sales grew 7.3 per cent from the second quarter of last year's fiscal 2012, representing a 4.5 per cent increase in the average transaction size and a 2.7 per cent growth in the number of transaction.

Fifty-six per cent of its sales were for products priced higher than $1, up from 48 per cent a year ago. Debit cards were used for 39 per cent of sales, compared to 36 per cent in the previous fiscal year.

Profit margins improved to 36.9 per cent of sales, up from 36.7 per cent.

Tal Woolley of RBC Capital Markets said Dollarama's operating numbers continued to impress, driven by better-than-expected sales.

"We anticipate that the results delivered today in a tough overall quarter for retailers, combined with the debt reduction and free cash flow accumulation, will continue to build investor enthusiasm for Dollarama shares," he wrote in a research note.

Dollarama shares lost 85 cents at $58.45 in afternoon trading on the Toronto Stock Exchange.

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