June 13, 2012 / 11:54 AM / in 5 years

Dollarama beats earnings estimates, eyes pricier items

TORONTO (Reuters) - Canada’s largest dollar-store chain, Dollarama Inc (DOL.TO), reported a bigger-than-expected quarterly profit on Wednesday on strong sales of more expensive items and announced a stock repurchase plan, sending its shares nearly 7 percent higher.

Dollarama, which currently sells items at prices of up to C$2, also said it will start introducing non-grocery items priced at C$2.50 and C$3 from August as it seeks to diversify its merchandise.

In its fiscal first quarter ended April 29, Dollarama generated 51 percent of its sales from products priced higher than C$1, compared with 44 percent in the corresponding quarter last year.

“Dollarama I think is very well positioned. It’s the most visible growth story in the consumer products universe,” said Derek Dley, an analyst at Canaccord Genuity in Vancouver.

Dollarama, which went public in 2009, said most of its merchandise will continue to be priced at C$1 or less.

Dollarama has more than 720 locations across Canada. It added 17 stores during its first quarter, and expects to add between 50 and 60 stores in total this year, tapping into demand from cost-conscious consumers in uncertain economic times.

“I think Canadian consumers ... as they are visiting more and more dollar stores - uncluttered, well-lit locations averaging anything from 6,000 to 10,000 square feet - are finding this commercial proposal interesting,” said chief operating officer Stephane Gonthier.

Gonthier said he was not concerned about discount retail giant Wal-Mart’s (WMT.N) move to introduce lower priced items that compete with dollar-store goods.

“We don’t believe that we’re in direct competition with large mass retailers, Wal-Mart being one of them,” he said.

Dollarama’s stock has risen about 90 percent in the past year, versus an 11 percent slide in the Toronto Stock Exchange’s benchmark index, and its market capitalization now tops C$4.2 billion ($4.1 billion).

Its shares ended up 6.6 percent at C$60.61 on the Toronto exchange on Wednesday, following analyst upgrades.

“The stock is expensive, and it trades at a high multiple, but I think it’s deserving of that multiple given the growth profile,” said Dley, who has a “buy” rating on the shares.

RBC Capital Markets raised its price target on the stock to C$67 from C$63, calling Dollarama its “favorite Canadian retailer.”

Dollarama’s net income rose to C$42.58 million ($41.37 million), or 56 Canadian cents a share, in its first quarter from C$30.42 million, or 40 Canadian cents, a year earlier.

Analysts, on average, had expected the company to earn 50 Canadian cents a share, according to Thomson Reuters I/B/E/S.

Overall sales rose nearly 15 percent to C$398 million - partly due to milder weather this year - while sales at established stores, a key measure for retailers, rose 8.1 percent, versus a rise of 3.4 percent a year earlier.

Gross profit margin climbed to 36.3 percent from 35.7 percent in the year-before quarter.

The retailer outlined plans to buy back up to 2.58 million shares, or 3.5 percent of its outstanding shares to boost its share price further. The buyback program is set to start on Friday and remain in effect for a year.

($1=$1.03 Canadian)

Reporting By Claire Sibonney; Editing by Peter Galloway and Janet Guttsman

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