09/11/2013 08:01 EDT | Updated 11/11/2013 05:12 EST

Dollarama shares hit record on Q2 results, forecast of more store openings

MONTREAL - Dollarama expects to continue expanding its Canadian discount chain by adding about 120 new stores over the next 18 months as it focuses particularly on adding locations in Ontario and Western Canada.

The Montreal-based retailer said Wednesday it expected to add 85 net new stores this fiscal year, including about 43 opened in the first half of the year. The rest would open in fiscal 2015.

Chief executive Larry Rossy said he continues to be surprised by the large number of stores the company has been able to add to its network.

"I would say that we're good for 70 to 80 stores next year, but usually I'm more surprised on the positive side than on the negative side," Rossy said during a conference call to discuss second-quarter results.

Dollarama beat analyst expectations as an acceleration of new store openings helped its second-quarter profit to surge 20 per cent to $59.8 million despite slightly lower margins caused by its expansion drive.

The discount retailer, which has 828 stores focused on items sold for between $1 and $3 apiece, earned 82 cents per share for the period ended Aug. 4, up from 66 cents per diluted share a year ago. Sales increased 16 per cent to $511.3 million.

Estimates compiled by Thomson Reuters called for $503.7 million of revenue and 79 cents per share of net income, or 78 cents per share on an adjusted basis.

Dollarama's (TSX:DOL) shares hit a record high of $79.76 in intraday trading on the Toronto Stock Exchange, and were still up $5.20, or seven per cent, at $79.30 in afternoon trading.

The company opened 22 net new stores in the quarter, raising its total over the last year to 93.The acceleration in store openings reduced gross margins by about 0.2 per cent in the quarter to 36.6 per cent, but the company predicted the impact will decrease over the next two quarters.

"All of our stores are being opened in high-quality retail locations across Canada with most of the new stores located in Ontario and Western Canada, which are markets that continue to be underpenetrated with dollar stores," Rossy told analysts.

During the quarter, Dollarama acquired the leases of seven locations of The Bargain Shop following the rival's filing for creditor protection. Dollarama stores should open in six to 12 months. It is also in the process of opening five locations previously occupied by the Everything for $1 chain.

Rossy was skeptical about U.S. rival Dollar Tree's predictions about opening 800 to 1,000 new stores, saying the Canadian market is not comparable to the United States.

Dollarama expects the opening of Target stores will drive more traffic to its stores than did Zeller's, but the early results about the impact of Target have not met industry expectations.

"It's going to take time. Is that a surprise: Yes it's probably a surprise to the industry," he told analysts.

Meanwhile, Rossy said he was "very satisfied" with the quarterly results. Comparable-store sales increased by 6.2 per cent, including a 4.6 per cent increase in transaction size and a 1.6 per cent increase in traffic. About 62 per cent of sales came from items priced higher than $1, compared with 56 per cent last year and 58 per cent in the prior quarter.

Derek Dley of Canaccord Genuity said he expects continued cost-reduction efforts will improve earnings results even further for the remainder of the year.

"In our view, Dollarama remains the most visible and robust growth story in our consumer products universe and, given the healthy square footage growth, strong free cash flow generation (and) industry leading profitability, . . . we believe a premium multiple is warranted," he wrote in a report about his top pick for 2013.