BUSINESS
04/11/2012 09:59 EDT | Updated 06/11/2012 05:12 EDT

Dollarama to add up to 60 stores as it ramps up competition with Dollar Tree

MONTREAL - Dollarama Inc. aims to add up to 60 new stores this year, primarily in Ontario and Western Canada, in the face of growing competition from U.S. discount rival Dollar Tree.

The Montreal-based company, which reported record fourth-quarter profits that soared past analyst expectations Wednesday, operates 704 stores across the country after opening 52 new stores in the last fiscal year.

Dollar Tree Canada operates 99 stores primarily in the west and Ontario after purchasing 86 stores from Vancouver-based Dollar Giant last year. It plans to add about 25 stores this year.

Dollarama (TSX:DOL) has good presence in most parts of the country but is underweighted in Western Canada, where the population is 30.7 per cent of the country.

Dollarama has 123 stores in the region, representing 17.5 per cent of its network. It also has 282 stores in Ontario, 69 in the Maritimes and 230 in Quebec.

"We now have more people on the ground in Ontario and Western Canada and we have strengthened our business relationship with many of our major landlords," Dollarama CEO Larry Rossy said Wednesday during a conference call.

The chain has historically responded well to competition, he said, adding that Dollar Tree's expansion plans have yet to impact its sales and profits.

"Has it affected us to this point or had any type of impact? I would say not (but) I can't predict where we're going in the future," he told analysts.

Dollarama's shares surged Wednesday after the Montreal-based chain crushed analyst expectations by producing record fourth-quarter profits and announcing a boost in its quarterly dividend.

On the Toronto Stock Exchange, the company's shares shot up six per cent, or $3.23, to $51.59 in afternoon trading.

Its dividend will increase 22 per cent to 11 cents per share from nine cents, payable May 4 to shareholders of record at the close of business Apr. 25.

Rossy said the dividend increase, which came earlier than analysts had expected, reflected the company's confidence in its ability to reward shareholders while also pursuing continued growth.

Dollarama said net profit in the three months ended Jan. 29 was $63.6 million or 84 cents per diluted share.

That was up 51 per cent from the $42 million or 56 cents per share it earned a year earlier.

Dollarama's sales jumped 14.7 per cent to $468.7 million, mainly due to the addition of new stores, as well as comparable store sales growth of 7.9 per cent, up from 5.3 per cent in the same 2011 quarter.

It was also aided by Halloween having fallen this year in the fiscal fourth quarter.

The results beat estimates compiled by Thomson Reuters. On a net income basis, the consensus had been for net income of 68 cents per share, or 69 cents on an adjusted basis, on $458.95 million in revenue.

Comparable store sales growth for the fourth quarter consisted of a 3.8 per cent increase in average transaction size combined with a four per cent increase in the number of transactions.

The growth in transaction size reversed a declining trend for the previous three quarters .It benefited from a strong holiday season and favourable weather conditions.

About half of Dollarama's sales of everyday consumer products, general merchandise and seasonal items in the fourth quarter were from items costing between $1.25 and $2, up from 42 per cent last year.

Rossy said he expects that ratio to stabilize but could grow a little higher.

Full-year diluted net earnings increased to $173.5 million, or $2.30 per share, from $116.8 million or $1.55 per share a year earlier.

Sales increased 12.9 per cent to $1.6 billion from $1.42 billion, mainly driven by new store openings as well as a 5.4 per cent increase in comparable store sales.

Chief operating officer Stephane Gonthier said the addition of price scanners along with efficiency projects at its warehouse and distribution centres should generate cost savings over the next few years.

Irene Nattel of RBC Capital Markets said the "strong beat" reflects Dollarama's "ongoing solid fundamental story."

"Combined with ongoing balance sheet deleveraging, Dollarama should deliver above-average earnings growth versus other Canadian retailing peers regardless of macro backdrop," she wrote in a report.

Despite the dividend increase, the chain should still retain an estimated $170 million to $200 million in free cash flow in fiscal 2013-14, Nattel added.