Dollarama, the largest operator of dollar stores in Canada, is planning to raise about $300 million in an initial public offering. Some discount brokers (RBC Direct Investing is one) are currently asking investors to place an expression of interest in the IPO. The shares are expected to be priced between $16 and $18.

Dollarama has 585 stores across Canada, mostly in Ontario and Quebec and sells knick-knacks priced between $1 and $2. According to the prospectus, the company sold $1.16 billion worth of goods in the 12-month period ending in August 2009, earned a profit of $137 million and reported same-store sales increased 6% compared to year-ago period. It is not clear from the prospectus how much of the company is on offer but news reports indicate that it is 25 to 30 percent, valuing Dollarama at $1 to $1.2 billion.

Unlike most other IPOs (It’s Probably Overpriced), at least at first glance, Dollarama appears to be reasonably priced. Also, there doesn’t seem to be much buzz about the IPO. Recall that Tim Hortons went IPO amidst much fanfare at $27 (if you were lucky enough to get shares at that price) and three years later, the stock is languishing around $30. The current majority owner of Dollarama is Bain Capital, which purchased an 80% stake in 2004 for $1 billion from the company’s founders. A recent Globe and Mail report suggested that Bain Capital is selling a portion of its stake for liquidity purposes:

“Bain wants to move ahead of the Dollar General IPO, while capitalizing on that buzz with investors,” said another investment banker familiar with the fund’s plan, but not working on the IPO. He added that the fund will not initially get private equity’s traditional 15-per-cent-plus expected annual returns on its Dollarama investment, but said: “Bain isn’t really cashing in. They are getting liquidity, but still plan to ride with the company, as they did with Shoppers.”

This article has 21 comments

  1. Well, at least there are more IPOs lately. Someone was recently saying that a bull market in dollar stores might signify the top of a bear market more generally. Watching Larry Berman on BNN today, though, it doesn’t look like we’ve seen the top of the current rally, however. I like your acronym!:)

  2. Why would such fans of passive indexing waste time even considering such a venture as this – surely, the outcome of all investments is random….isn’t it?

  3. They should price the IPO at $1 per share 🙂

  4. Canadian Capitalist

    @MoneyEnergy: As Dollarama is just the 3rd IPO this year, I don’t think we are in any sort of bull market yet. Also, when Bain purchased a stake in Dollarama back in 2004, they valued it as $1.25 billion. The IPO will value Dollarama at roughly the same price. Hardly much of a gain so far.

    @Rob: It’s just grist for the mill — I need something to write about, right? 🙂

    @Michael: The trouble is it will be difficult to attract institutional investors with a low stock price. It would be interesting to see their ticker symbol, though. DLR, perhaps? or BUC? The possibilities are endless…

  5. Seems to me there area plethora of competitors in this business. What makes Dollarama stand out above the rest to make their longevity more certain? Their prospectus may well reflect the (hopefully) short-term consumer belt-tightening we have just experienced due to the economic situation of the past year.

    DAvid

  6. Certainly not a sexy IPO by any stretch. I have noticed that dollar stores seem to have taken up the niche market of selling silly little things that larger department stores aren’t willing to carry any more.

    Seems over priced, also ironic that a ‘dollar’ store is selling their shares at over a dollar 🙂

  7. If it’s not going to pay me a dividend to wait, i’m not interested. It could be a good growth play, but IPO’s dont always sell at a bargain; I would make sure the numbers are crunched and the decision is well thought out before getting a position.
    Cheers

  8. dollar stores are thriving along with tiger direct and walmart, i would buy some shares if it came on market. going forward, there will be a lot of poor people, when taxes start to go up from the stimulus fiasco…dollars stores then skyrocket. Bring on the IPO

  9. Coming from a family with a thrify father, I can tell you I have been to just about every dollar store known to mankind. Dollarama has decent *cheaper* products, and always has a steady stream of customers. 585 stores is nothing to turn your nose up at. I don’t know what exactly is included in the evaluation @ 1.25 billion, but with 585 stores that works out to just over 2.1 million per store. It maybe a little high, but I can tell you that my old man says “Dollarama” not ‘Dollar store’. Many failed retail businesses will tell you that’s hard to get people to do.

  10. I’ve only ever gone to a dollar store once to pick up paper plates and plastic cups. I think I overpaid for those items as the plates might as well have been just bond paper and the cups disintegrated in your hand. I immediately stopped shopping at dollar stores in general and wondered who would ever buy that junk? The answer apparently seems to be – a lot of people.

    Still I’m not convinced on their stock as I’m not sold on their “product” so to speak.

    And I’m not sure we can believe what any of the private equity guys are saying if the transactions don’t show up on any publicly accessible books. I’m sure they’re making a killing on the deal, but it’s bad PR to say so, so they’re keeping a low profile on this…

  11. Do you know if Dollarama will be included in TSX Composite Index?

    A boring, but important question.

  12. It would be worthwhile to compare Dollarama with NorthWest Company, which runs Giant Tiger in parts of Canada. NWC has a real track record – it’s the oldest company in Canada, dating back to the fur trade days.

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  16. @ James – valuing the entity using a net asset valuation wouldn’t be appropriate in this case as the company appears to lease its stores (check out note 3 of the Feb 2009 financial statements – no land and building!) . Generally companies are valued based on expected future cash flow, unless they are in a distressed position.

    If they were in a distressed position, there are lots of fishy things on the balance sheet. Total assets is $1.36 billion, liabilities $1.26 billion (net assets of only $100 million). Goodwill of $707m (generally valuable only in the continual operating of the company); intangible assets such as “brand name” of over $100 million. There would not even be enough cash left over for debtholders. However, this is irrelevant if we assume that there is little risk the company will not operate prospectively.

    If this company is valued at 1.25 billion by the IPO, my initial reaction would be that it would be a poor valuation. While the company is generating lots of operating cash flow ($116 million in 2009) the amount required to continually invest and grow the company (and pay off debt) is quite high. Net cash flow for 2009 was only $40 million! That’s less than 4% return on cash flow. Even when you incorporate a growth rate, it still doesn’t look attractive. As with many retail-type investments, it’s simply hard to get your money back due to competitiveness & constant updating of fixed assets.

    This IPO smells like an opportunity for the original investor, who will still own a majority ownership, to get out down the road depending on what happens with the economy (and other current investments / opportunities). They’re clearly creating options for themselves, at the very least.

    Another quick comment: the CFO just left. I believe I read in a news report that he was retiring. Whether this was actually the case or not, a CFO leaving can increase the risk associated with an investment.

  17. @John D: Thanks for the analysis. The low book value and cash flow scared me away from this IPO. It kind of reminds me of a private equity (or leveraged buyout), where the company is saddled with a lot of debt to take cash out of the company. The debt to equity in this case is too high for my liking.

    I prefer small growth stocks to have little to no debt on the balance sheet and a nice cash position. They aren’t all that hard to find. Besides that, retail is generally an ugly business, the barriers to entry are too low. Dollarama is one of the better operators in their space, but it is a crowded market at the low end.

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  19. Matt S (Vancouver)

    Spent 1min looking over 10k @ sec.gov.
    IMO, too much debt relative to earnings and corporate structure too complex for whatever reasons.
    http://www.sec.gov/Archives/edgar/data/1363456/000119312509081781/d10k.htm
    I’m looking at balance sheet for Dollarama Group L.P. on page 43, the long term debt on the balance sheet for Dollarama Group Holdings L.P is even worse.

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  21. Got in at $29. To be honest I’m laughing at all of you guys. None of you have even been inside a Dollarama. Peter Lynch would laugh at you. Anyhow, look at their revenues, their profits, their inventory turnover ratio, then finally look at how they’ve been axing their debts at great rates.

    This company has been around long before the bear market as well.

    This company is not like a dollar store at all, its inventory is extremely well taken care off. Those chocolates at 69cents are great for getting people in the door. And its no longer selling inferior products at a discount like regular dollar stores. Its starting to sell brand names at dollar store prices. Furthermore, if you guys did any real homework, you’d realize that Dollarama doesn’t go through a third party to get it’s products. It has a similar system to Wal-Mart at lower prices. This company is constantly improving.

    Sorry, but I agree with none of you except James; his father has good intuition.