Dollarama’s Q3 2024 Profits Climb 5.6% but Margins Slip Amid Rising Costs

Dollarama Inc. (TSX: DOL) delivered a mixed but steady performance in its fiscal third quarter ending October 27, 2024, posting a 5.7% increase in sales to $1.56 billion, compared to $1.48 billion in the same period last year. However, this growth marked a noticeable deceleration from the robust 14.6% sales growth recorded in Q3 of fiscal 2024, highlighting the challenge of sustaining momentum amid cautious consumer spending.

Comparable store sales rose by 3.3%, driven by a significant 5.1% increase in the number of transactions, but this was partially offset by a 1.7% decline in the average transaction size. The comparable store sales figure also came in lower than the previous quarter’s 4.5% growth and fell far short of the remarkable 11.1% growth achieved in Q3 2024.

Gross margins slipped to 44.7%, down from 45.4% a year ago and a marginal decline from 44.8% in the prior quarter. The erosion in margins was primarily attributed to increased sales of lower-margin consumables and escalating logistics costs, exacerbated by inflationary pressures in transportation and warehousing.

Operating income for the quarter came in at $407.5 million, up 5.4% from $386.7 million in the same period last year. However, the operating margin dipped slightly to 26.1% from 26.2% in Q3 2024, reflecting incremental cost pressures. EBITDA increased by 6.5% to $509.7 million, with the EBITDA margin improving marginally to 32.6% from 32.4% a year earlier. While these figures demonstrate solid operational efficiency, they reflect slower growth compared to the prior quarter’s 7.4% EBITDA increase.

Net earnings grew by 5.6% to $275.8 million, compared to $261.1 million in Q3 2024. Diluted earnings per share climbed by 6.5% to $0.98, slightly above consensus estimates but signaling a slowdown compared to the 7.2% growth in EPS reported in the prior quarter.

Dollarama’s ongoing share repurchase program bolstered per-share earnings, with the company buying back 1.36 million shares for $186.2 million during the quarter.

One bright spot in the financial report was the contribution from Dollarcity, Dollarama’s Latin American joint venture. Dollarcity’s performance significantly outpaced last year’s results, contributing $27.1 million in earnings, a 50.6% increase from the $18.0 million recorded in Q3 2024.

Inventory levels increased to $947.9 million from $916.8 million at the start of the year, indicating robust stockpiling to meet holiday season demand but also raising concerns about the potential for excess inventory should seasonal product sales remain weak. The company’s cash position sits at $283.0 million, down from $313.9 million in January 2024.

Dollarama’s announcement to raise its long-term Canadian store target to 2,200 locations by 2034 from the previously planned 2,000 stores by 2031 reflects its confidence in sustained demand for its value-focused offerings. Yet, this goal comes with risks. The slowdown in comparable store sales growth may signal a maturing domestic market, while the increasing cost of capital and logistical challenges, including plans to invest $450 million in a new Western Canada logistics hub slated for completion by 2027.

The company’s cautious full-year guidance, including comparable store sales growth of 3.5% to 4.5% and a gross margin range of 44.0% to 45.0%, underscores the challenges ahead and suggests limited upside in the near term.

Dollarama last traded at $148.17 on the TSX.

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Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.