Dollarama sees room to grow, will start accepting credit cards

Dollarama will start accepting credit cards across all of its stores this year, the retailer said last week, as it posted stronger-than-expected results that sent its stock surging.

The Montreal-based company also raised its estimate of how many of its stores Canada can support within a decade to 1,700 from 1,400. It had 1,095 stores as of Jan. 29.

"This provides us with a comfortable runway for continued organic growth in Canada, consistent with the current store format, real estate quality and capital payback period," Dollarama CEO Neil Rossy said Friday.

The company said it's time to stop insisting customers pay either by cash or debit card -- the latter of which doesn't usually charge merchants the same processing fees as credit card transactions.

Rossy said Dollarama would begin to accept Visa, MasterCard and American Express in all of its Canadian locations by the end of its second quarter, which ends mid-summer.

Chief financial officer Michael Ross added that pilot tests showed sales growth would offset the cost of allowing credit cards, but added it would take a year to know whether it could do better than break even.

Ross also said it's too early to predict what would happen to Dollarama's margins as the store count approaches 1,700 locations, but insisted it would adjust to ensure each location pays for itself within two to three years after opening.

For the 2017-18 financial year, Dollarama expects to add 60 to 70 stores to its network -- similar to the 65 added in 2016-17

But, a revised outlook for 2017-18 on Thursday included slightly higher ranges for its margins compared with estimates issued in December.

The retailer earned $146.1 million for the quarter ended Jan. 29, up from $124.8 million a year earlier.

Sales for what was the company's fourth quarter improved to $854.5 million compared with $766.5 million in the same quarter a year ago.

By Thursday afternoon Dollarama's stock was up almost 10% at $109.43.

RBC retailing analyst Irene Nattel wrote that "in our view DOL remains the leading retailer in our universe of coverage, and we maintain a constructive view on the stock.''

But Nattel added the risks facing Dollarama included the potential for "increased competition, minimum wage rate increases, a sustained decline in the Canadian dollar, and sustained product cost inflation."