Equity Research Consumer Discretionary

Dollarama Inc. (DOL‐T)

Strong Top Line and Margin Growth Merits A Higher Valuation

Stock Rating: Buy Investment Summary

12‐Month Price Target: C$113.49 ■ Solid Revenue Growth Driven by Consistent Store Openings: DOL currently has 1,069 locations and it has provided guidance to expand its footprint to 1,400 stores. We expect Current Price DOL to reach its store count target by end of FY2022 assuming an average of 65 stores (02/16/2017): C$102.08 opening per annum. This should continue to support its robust revenue growth (CAGR of 13.3% FY11 – FY16). We are projecting DOL to grow its sales by 10.4% CAGR into FY2022 Implied Return: 11.2% and maintain a SSSG of 5.0% into FY2019 (and 4.5%/4.0% after).

■ Best‐In‐Class Operational Performance Remains Intact: DOL’s roll‐out of debit payment system, coupled with the gradual introduction of higher price‐point items have been largely favored by consumers as shown in its resilient average basket size growth. DOL’s operational strategy has proved to bode well for the business and this is reflected Trading Data in its continued improvement in Gross Margin (from 37.5% in FY12 to 39.0% in FY16) and Market Cap (Mil): C$11,854 Operating Margin (from 16% in FY12 to 21% in FY16). Enterprise Value (Mil): C$13,041 Shares O/S (Mil): 116.4 ■ Strong Financials Continue to Support Shareholder Return: In addition to its resilient 52‐week High: C$104.94 revenue growth and operational performance, DOL has been able to generate consistent 52‐week Low: C$74.38 EBITDA (CAGR of 24% FY11 – FY16, and 22% EBITDA margin for FY2016), which allows the Fiscal Year End: January firm to produce robust free cash flows and distribute most/all of them to shareholders Current Quarter: Q4 2017 through share repurchases and dividends. Dividend Yield: 0.39%

■ Our $113.49 target price is based on a FY2018 EV / EBITDA multiple of 17.5x and a FY2018 P/E multiple of 25.0x, vs. median peer company multiples of 9.7x and 16.0x, EPS FY2016A FY2017E FY2018E respectively. Given DOL’s superior performance in EBITDA growth and margins, we Q1: 0.50 0.68 0.81 Q2: 0.74 0.88 1.06 believe that the company continues to warrant premium multiples relative to its Q3: 0.78 0.92 1.12 competitors. In addition to our estimated FY2018 multiples, a DCF analysis with our long‐ Q4: 0.99 1.06 1.31 term FCF projections, a discount rate of 6.1%, and a Terminal FCF growth rate of 2.5%

produces an implied share price that falls in the range of $104.30 to $120.46. DOL Share Price ■ The Bottom Line: In our view, DOL remains a compelling long‐term investment 110.0 underpinned by its dominant footprint in Canada, strong organic growth achieved 100.0 through operational excellence, and sound fundamentals. However, given the 90.0 heightened expectation from DOL’s operational excellence and its ability to deliver 80.0 shareholder return historically, we do not rule out a temporary pullback in share price

70.0 (refer to Q3 FY2016 earnings) should Q4 FY17 earnings come in less than / marginally

60.0 beating the street consensus. 11‐Feb‐16 11‐May‐16 11‐Aug‐16 11‐Nov‐16 11‐Feb‐17

Financial and Valuation metrics FY2016A FY2017E FY2018E Company Description: Revenue ($Mil): 2,650.3 2,961.0 3,311.3 is the largest dollar store chain in Canada, EBITDA ($Mil): 597.5 675.4 763.4 operating more than 1,050 locations averaging 8,500 EV/EBITDA ($Mil): 21.8x 19.3x 17.1x selling square feet in every province in Canada. The Lease‐adjusted Debt ($Mil) 1,851.2 1,948.4 2,050.8 company sells a mix of general merchandise, seasonal EBITDAR ($Mil) 752.5 846.0 951.0 goods and consumables. Its product is typically Lease‐adjusted Debt/EBITDAR 2.5x 2.3x 2.2x offered at prices less than $4. P/E: 34.0x 28.8x 24.1x

EPS ($): 3.00 3.54 4.31

Henry Ye, [email protected]

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Solid Revenue Growth Driven by Consistent Store Openings

DOL currently operates 1,069 locations in every province in Canada, representing over 50% of the industry’s market share. Management has been able to execute well on strategically opening ~75 new stores/year on average and deliver a 5-year top-line CAGR of 13.3% since 2011. DOL has provided guidance to expand its footprint to 1,400 stores and we expect DOL to reach its store count target by end of FY2022, assuming an average of 65 new stores will be added per annum (~5% annual footprint growth). This would represent a 5-year top-and bottom-line CAGR of 10.4% and 11.5% going into FY2022, respectively. In addition, while DOL will likely remain focused on expanding its footprint in ON and QC, we expect the firm to penetrate further into Western Canada over time (i.e.: AB & BC) underpinned by the region’s robust spending power (AB & BC represent over 1/3 of Canada’s GDP; Appendix 4). These factors, in our view, should continue to support strong sales growth and steady SSSG.

SSSG by Basket and Traffic (%) and Sales (C$mil)

Same Store Avg Transaction Growth (Traffic): 15.0% 800.0 Same Store Avg Transaction Size Growth (Basket): 700.0 Sales (RHS) 10.0% 600.0 8.5% 7.9% 7.9% 6.9% 6.6% 500.0 5.9% 6.4% 5.1% 6.2% 4.8% 5.7% 5.0% 3.7% 1.1% 4.2% 400.0 3.3% 300.0

0.0% 200.0

100.0

-5.0% - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 Source: Company reports

Best-In-Class Operational Performance Remains Intact

DOL’s roll-out of debit payment system, coupled with the gradual introduction of higher price-point items have been largely favored by consumers as shown in its resilient average transaction size growth. Since the introduction of debit payment in Q3 FY2009, transactions via this manner have grown from 30% to close to 50%, and the average transaction size for debit card sales has been consistently over 2x than cash sales. To capitalize on the higher transaction size from the debit payment channel, DOL introduced the multiple price-point strategy which provides flexibility to DOL’s merchandising options, protection from higher input costs, and hedge against inflation. In addition, DOL is about 11 months into its credit card pilot program in BC, we believe a national implementation will roll out sometime in Q1 FY2018. The addition of this alternative will likely be favored by younger customers, albeit it is still early to attest the potential top-and bottom-line impact for FY2018 and onwards.

Sales % by Payment Method 80.0% 70.0% Q3 FY2013: Debit Cash $2.50/$3.00 price 70.0% points introduced 60.0% Q1 FY2010: 51.3% $1.25/$1.50/$2.00 50.0% price points introduced 48.7% 40.0% Q1/Q2 FY2017: $$3.50/$4.00 price 30.0% points introduced 30.0% 20.0% FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Q1 2017 Q2 2017 Q3 2017

Source: Company reports

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In addition, DOL’s operational strategy has proved to bode well for the business and this is reflected in the continued improvement in its Gross Margin (from 37.5% in FY12 to 39.0% in FY16) and Operating Margin (from 16% in FY12 to 21% in FY16). Looking ahead, we remain convinced that DOL could sustain a gross margin rate of 38 – 39% and deliver operating margins in the range of 20 to 22%.

Strong Financials Continue to Support Shareholder Return In addition to its resilient revenue growth and operational performance, DOL has been able to generate consistent EBITDA (CAGR of 24% FY11 – FY16, and 22% EBITDA margin for FY2016), which allows the firm to produce robust free cash flows and distribute most/all of them to shareholders through share repurchases and dividends. In fact,

DOL’s free cash flow has grown from $120 mil in FY2012 to over $360 mil in FY2016, and management has gone above and beyond to return over 100% of the firm’s FCF since FY2013 through debt financing. We believe the management will gradually normalize its aggressive approach in share purchases while maintaining its pace in raising its dividend/share by $0.04 per annum.

FCF & Shareholder Return

700.0 200.0% 180.0% 600.0 160.0% 500.0 140.0% 400.0 120.0% 100.0% 300.0 80.0% 200.0 60.0% 40.0% 100.0 20.0% - 0.0% FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017E FY 2018E Free Cash Flow Dividend Share Repurchases Dividends + Shares Repo as a % of FCF (RHS)

Source: Company reports

Further, the combination of improved EBITDA margins and reduction of capital structure via buyback has resulted in higher return from DOL’s invested capital than its peers (31% vs. peer average of 14%). Considering the mild competition in Canada (closest competitor, , only owns ~20% as many as DOL’s retail locations) and future store growth prospect, we believe DOL is well positioned to gain a higher market share (+55% currently) and maintain a similar level for its return metrics moving forward. As a result, we remain comfortable towards DOL’s premium valuation as it is justified by its operational performance and financials.

ROIC (%)

35.0% 31.3% 30.0% 26.8% 25.0%

20.0% 17.1% Peer Median: 15.0% 13.4% 14.1% 15.0% 8.0% 10.0% 6.5% 5.0% 0.0% Dollar Dollar Tree , Inc. Canadian Target Corp. Dollarama General Inc. Inc. Tire Corp. Inc. Corp.

Source: Company reports

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Valuation Summary Our target price is based on a combination of: • Public Comparable Analysis: It is based on an FY 18 EV / EBITDA, P/E, and EV / Revenue multiple of 17.5x (vs. peer median of 9.7x), 25.0x (vs. peer median of 16.0x), and 4.0x (vs. peer median of 1.1x), respectively. These higher-than-industry-median multiples reflect the belief we have towards DOL’s ability to continue growing its business at a similar pace as its historical trend while upholding its operational excellence, which in turn generates robust FCF. • Discounted Cash Flow Analysis: Our base case analysis, with a Discount Rate of 6.1% based on WACC for the comparable public companies (Appendix 3) and a Terminal FCF Growth Rate of 2.5%, produced an implied share price ranging from $115.53 - $120.46.

Dollarama Inc. - Range of Implied Share Prices

Price Target: $113.49 Trading Comparables:

FY2018 EV / Revenue Method:

FY2018 EV / EBITDA Method:

FY2018 P/E Method:

Discounted Cash Flow Analysis:

Terminal EBITDA Multiple Method:

Terminal P/E Multiple Method:

5.1% - 7.1% Discount Rate, 1.5% - 3.5% Terminal Growth Rate:

$- $50.00 $100.00 $150.00 $200.00 $250.00 $300.00

Public Comparable Analysis Six Comparable companies are selected to construct the public comparable analysis. Comparable companies derived revenue from various sources (Eg: general merchandise, furniture, automotive, and so forth); we select the peer group based on similarities in the industries (i.e.: discount stores and/or general merchants) and geographies (i.e.: North America) these companies operate in, in addition to their market capitalization levels (i.e.: $2Bil - $37Bil). DOL is trading at the high end of the range of its comparable companies, based on TTM and Forward-looking multiples. However, its current valuation, in our view, is justified by its above-average sales growth, margins, and FCF generation. As a result, for FY2018, we assign an EV / EBITDA multiple of 17.5x, a P/E multiple of 25.0x, and an EV / Revenue multiple of 4.0x, to derive our aforementioned price target. Metrics and Multiples: All of our comparable companies generate revenue and are cash flow-positive, albeit the fact that they are in different stages of revenue/profit generation. Hence, we decide to place less weight (40%) overall on Revenue, EBITDA, and P/E multiples, compared to DCF analysis (60%).

Discounted Cash Flow Analysis We utilize the DCF methodology over a 5-year period to value DOL and we are forecasting a sales CAGR of 10.4% going into FY2022 while anticipating DOL to incrementally improve its EBITDA and operating margins. In addition, we assume a gradual increase in CapEx to incorporate DOL’s continued effort in reaching its 1,400 store target. Further, we use a baseline WACC of 6.1% based on comparable companies and their capital structure, and we assign a Terminal EBITDA and P/E multiple of 15.0x and 24.5x, along with a baseline Terminal FCF growth rate of 2.5%. A 27.2% effective tax rate is used, which is in line with historical levels.

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Comparable Companies Analysis - Dollarama Inc. (in US$ millions, except for Canadian Companies)

Operating Statistics (in $ millions) Operating Statistics Revenue EBITDA EBIT Net Income EBITDA Margin Company Name Ticker LTM FY2018 FY2019 LTM FY2018 FY2019 LTM FY2018 FY2019 LTM FY2018 FY2019 LTM FY2018 FY2019 NORTH AMERICAN DOLLAR STORES: Corp. DG 21,264 21,958 23,198 2,367 2,432 2,527 1,995 2,048 2,128 1,213 1,242 1,274 11.1% 11.1% 10.9% Dollar Tree Inc. DLTR 20,449 20,703 21,903 2,243 2,334 2,627 1,586 1,677 1,954 803 894 1,067 11.0% 11.3% 12.0% Five Below Inc. FIVE 939 1,000 1,209 128 141 173 102 114 140 64 71 88 13.6% 14.1% 14.3%

NORTH AMERICAN GENERAL MERCHANTS: Big Lots, Inc. BIG $ 5,205 $ 5,210 $ 5,281 $ 377 $ 391 $ 406 $ 258 $ 267 $ 283 $ 157 $ 165 $ 172 7.2% 7.5% 7.7% Canadian Tire Corp. CTC.T 12,420 12,647 13,311 1,540 1,573 1,638 1,090 1,110 1,164 648 685 710 12.4% 12.4% 12.3% Target Corp. TGT 70,431 69,548 70,469 8,009 7,350 7,375 5,761 5,072 5,019 3,346 2,966 2,917 11.4% 10.6% 10.5%

Maximum $ 70,431 $ 69,548 $ 70,469 $ 8,009 $ 7,350 $ 7,375 $ 5,761 $ 5,072 $ 5,019 $ 3,346 $ 2,966 $ 2,917 13.6% 14.1% 14.3% 75th Percentile 21,060 21,644 22,874 2,336 2,408 2,602 1,893 1,955 2,085 1,111 1,155 1,222 12.1% 12.1% 12.2% Median $ 16,435 $ 16,675 $ 17,607 $ 1,892 $ 1,954 $ 2,083 $ 1,338 $ 1,394 $ 1,559 $ 726 $ 790 $ 889 11.3% 11.2% 11.4% 25th Percentile 7,009 7,069 7,289 668 687 714 466 478 503 280 295 307 11.0% 10.7% 10.6% Minimum 939 1,000 1,209 128 141 173 102 114 140 64 71 88 7.2% 7.5% 7.7%

Dollarama Inc. DOL-T $ 2,875 $ 3,311 $ 3,679 $ 667 $ 763 $ 849 $ 612 $ 709 $ 793 $ 424 $ 492 $ 551 23.2% 23.1% 23.1% Valuations Statistics Capitalization Enterprise Value / Enterprise Value / Return Equity Enterprise Revenue EBITDA P/E Multiple Net Debt / ROE ROIC Ticker Value Value LTM FY2018 FY2019 LTM FY2018 FY2019 LTM FY2018 FY2019 EBITDA NORTH AMERICAN DOLLAR STORES: Dollar General Corp. DG 21,214 24,189 1.1 x 1.1 x 1.0 x 10.2 x 9.9 x 9.6 x 17.5 x 17.1 x 16.7 x 1.3 x 22.7% 15.0% Dollar Tree Inc. DLTR 18,418 24,894 1.2 x 1.2 x 1.1 x 11.1 x 10.7 x 9.5 x 22.9 x 20.6 x 17.3 x 2.9 x 17.5% 6.5% Five Below Inc. FIVE 2,201 2,137 2.3 x 2.1 x 1.8 x 16.7 x 15.2 x 12.4 x 34.4 x 31.0 x 25.0 x 0.0 x 26.8% 26.8%

NORTH AMERICAN GENERAL MERCHANTS: Big Lots, Inc. BIG $ 2,368 $ 2,671 0.5 x 0.5 x 0.5 x 7.1 x 6.8 x 6.6 x 15.1 x 14.4 x 13.8 x 0.8 x 26.6% 17.1% Canadian Tire Corp. CTC.T 10,252 14,750 1.2 x 1.2 x 1.1 x 9.6 x 9.4 x 9.0 x 15.8 x 15.0 x 14.4 x 2.9 x 13.4% 8.0% Target Corp. TGT 36,880 48,470 0.7 x 0.7 x 0.7 x 6.1 x 6.6 x 6.6 x 11.0 x 12.4 x 12.6 x 1.4 x 27.5% 13.4%

Maximum $ 36,880 $ 48,470 2.3 x 2.1 x 1.8 x 16.7 x 15.2 x 12.4 x 34.4 x 31.0 x 25.0 x 2.9 x 27.5% 26.8% 75th Percentile 20,515 24,718 1.2 x 1.2 x 1.1 x 10.9 x 10.5 x 9.5 x 21.6 x 19.7 x 17.1 x 2.5 x 26.8% 16.5% Median $ 14,335 $ 19,470 1.2 x 1.1 x 1.1 x 9.9 x 9.7 x 9.2 x 16.7 x 16.0 x 15.5 x 1.4 x 24.6% 14.2% 25th Percentile 4,339 5,691 0.8 x 0.8 x 0.8 x 7.7 x 7.5 x 7.2 x 15.3 x 14.5 x 13.9 x 0.9 x 18.8% 9.4% Minimum 2,201 2,137 0.5 x 0.5 x 0.5 x 6.1 x 6.6 x 6.6 x 11.0 x 12.4 x 12.6 x 0.0 x 13.4% 6.5%

Dollarama Inc. DOL-T $ 11,854 $ 13,041 4.5 x 3.9 x 3.5 x 19.6 x 17.1 x 15.4 x 27.9 x 24.1 x 21.5 x 1.8 x 103.0% 31.3% Source: Company reports, Morningstar, Thomson Reuters, Author estimates

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Discounted Cash Flow (DCF) Analysis Discounted Cash Flow Analysis - Dollarama Inc. (in CAD$ millions) 0.00 1.00 2.00 3.00 4.00 5.00 Historical Projected Units FY 2014 FY 2015 FY 2016 FY 2017E FY 2018E FY 2019E FY 2020E FY 2021E FY 2022E Sales $ Millions 2,065 2,331 2,650 2,961 3,311 3,679 4,049 4,443 4,846 Sales Growth % % 12.9% 13.7% 11.7% 11.8% 11.1% 10.1% 9.7% 9.1%

EBITDA $ Millions 402 461 597 675 763 849 938 1,029 1,123 EBITDA Margin % % 19.5% 19.8% 22.5% 22.8% 23.1% 23.1% 23.2% 23.2% 23.2% EBITDA Growth % % 14.5% 29.6% 13.0% 13.0% 11.2% 10.5% 9.7% 9.1%

Operating income (EBIT) $ Millions 355 423 549 615 709 793 877 964 1,052 Operating Income Margin % % 17.2% 18.1% 20.7% 20.8% 21.4% 21.6% 21.7% 21.7% 21.7% Operating Income Growth % % 19.2% 30.0% 11.9% 15.3% 11.9% 10.6% 9.9% 9.2%

Less: Taxes $ Millions - 96 - 113 - 149 - 167 - 193 - 216 - 239 - 262 - 286

NOPAT $ Millions 259 310 401 448 516 577 639 702 766

Plus: Depreciation & amortization $ Millions 48 38 48 61 55 56 61 66 71 Change in Working Capital $ Millions 80 97 107 - 55 - 22 - 36 - 42 - 35 - 40 Less: CapEx $ Millions - 107 - 85 - 94 - 166 - 111 - 122 - 133 - 144 - 155

FCFF $ Millions 279 361 461 288 438 475 525 588 642

Discount Factor # 1.00 0.94 0.89 0.84 0.79 0.74 NPV of FCFF $ Millions 288 412 422 439 464 476

Enterprise Value - EBITDA Multiple Method: Enterprise Value - Perpetuity Growth Method:

Baseline Terminal EBITDA Multiple: 15.0 x Baseline Terminal FCF Growth Rate: 2.50% Terminal EBITDA: 1,151 Terminal FCFF: 658 Baseline Terminal Value: 17,261 Baseline Terminal Value: 18,063 Implied Terminal FCF Growth Rate: 2.3% Implied Terminal EBITDA Multiple: 16.1 x

PV of Terminal Value: 12,813 PV of Terminal Value: 13,409 Sum of PV of Free Cash Flows: 2,350 Sum of PV of Free Cash Flows: 2,350 Implied Enterprise Value: 15,163 Implied Enterprise Value: 15,758

% of Implied EV from Terminal Value: 84.5% % of Implied EV from Terminal Value: 85.1%

Plus: Cash & Cash-Equivalents 70 Plus: Cash & Cash-Equivalents: 70 Less: Short & Long-Term Debt - 1,275 Less: Short & Long-Term Debt - 1,275 Less: Noncontrolling Interests - Less: Noncontrolling Interests - Implied Equity Value: 13,958 Implied Equity Value: 14,554

Diluted Shares Outstanding: 120.8 Diluted Shares Outstanding: 120.8

Implied Share Price: 115.53 Implied Share Price: 120.46 Premium / (Discount) to Current Share Price: 13.2% Premium / (Discount) to Current Share Price: 18.0%

Equity Value - P/E Multiple Method: Assumptions for DCF:

Baseline Terminal P/E Multiple: 24.5 x Discount Rate (WACC): 6.14% Terminal EPS: 7.53 Cost of Equity: 9.46% Cost of Debt (pre-tax): 2.88% Baseline Terminal Value: 185 Long-term tax rate: 27.20%

Implied Share Value: 117.45 Perpetual Growth of Firm Cash Flows 2.50% Premium / (Discount) to Current Share Price: 15.1% Perpetual Growth of Equity Cash Flows 2.50% Source: Company Reports, Bloomberg, Author estimates

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Appendices Appendix 1: Operational & Valuation Metrics

Operational & Valuation Metrics - Dollarama Inc.

Units FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017E FY 2018E FY 2019E Sales $ Millions 1,602.8 1,858.8 2,064.7 2,330.8 2,650.3 2,961.0 3,311.3 3,678.9 YoY % Change % 12.9% 16.0% 11.1% 12.9% 13.7% 11.7% 11.8% 11.1%

# of Stores # Stores 704 785 874 955 1,030 1,095 1,160 1,225 Sales per Average Store $ Millions 2.36 2.50 2.49 2.55 2.67 2.79 2.94 3.09 Average Selling Square Feet sqft 5,927,152 6,633,800 7,368,082 8,046,878 8,704,221 9,285,162 9,854,465 10,458,674 Sales Per Square Foot $ Millions 270.4 280.2 280.2 289.7 304.5 318.9 336.0 351.8

Same Store Sales Growth (SSSG): % 5.4% 6.5% 3.8% 5.7% 7.3% 5.5% 5.0% 5.0%

Gross profit $ Millions 600.3 694.8 765.6 859.5 1,033.3 1,143.0 1,276.9 1,414.0 Gross Margin % % 37.5% 37.4% 37.1% 36.9% 39.0% 38.6% 38.6% 38.4%

EBITDA $ Millions 295.2 355.2 402.4 460.9 597.5 675.4 763.4 848.7 EBITDA Margin % % 18.4% 19.1% 19.5% 19.8% 22.5% 22.8% 23.1% 23.1%

Operating income (EBIT) $ Millions 261.9 315.9 354.5 422.6 549.4 614.5 708.7 793.1 Operating Income Margin % % 16.3% 17.0% 17.2% 18.1% 20.7% 20.8% 21.4% 21.6%

Net Income $ Millions 173.5 221.0 250.1 295.4 385.1 426.6 491.8 550.6 Net Margin % % 10.8% 11.9% 12.1% 12.7% 14.5% 14.4% 14.9% 15.0%

CapEx $ Millions - 53.0 - 75.0 - 107.4 - 84.9 - 94.4 - 166.0 - 111.0 - 122.0

Free Cash Flow $ Millions 120.1 181.3 212.1 281.8 366.0 329.2 458.5 494.1 Shares outstanding - diluted Millions 151.1 150.4 144.1 134.0 128.4 120.8 115.0 110.1 Free Cash Flow per share $ as Stated 0.79 1.21 1.47 2.10 2.85 2.72 3.99 4.49

Dividend per share $ as Stated 0.14 0.21 0.28 0.32 0.36 0.40 0.44 0.48

Shareholders' Equity $ Millions 894.9 931.5 864.2 740.5 466.9 276.6 215.0 263.7 Total long-term debt $ Millions 258.4 262.1 395.4 560.6 920.8 925.0 925.0 925.0 Debt / Equity % 28.9% 28.1% 45.8% 75.7% 197.2% 334.4% 430.2% 350.8% Operating lease $ Millions 95.4 114.0 126.2 140.2 155.1 170.6 187.6 206.4 Lease-adjusted Debt $ Millions 830.7 946.0 1,152.9 1,401.9 1,851.2 1,948.4 2,050.8 2,163.3 EBITDAR $ Millions 390.6 469.2 528.7 601.1 752.5 846.0 951.0 1,055.1 Lease-adjusted Debt / EBITDAR 0.0 x 2.1 x 2.0 x 2.2 x 2.3 x 2.5 x 2.3 x 2.2 x 2.1 x

ROIC % 16.1% 19.2% 20.5% 23.8% 28.9% 37.3% 45.3% 48.6% Source: Company Reports, Author estimates

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Appendix 2: Same-Store Sales Growth & ROIC

SSSG (%)

20.0% Target Corp Big Lots Inc

Dollar General Corp Dollar Tree Inc

15.0% Dollarama Inc Five Below Inc

Canadian Tire Corp

10.0%

5.0%

0.0%

-5.0%

-10.0% 2008 2009 2010 2011 2012 2013 2014 2015

Source: Company Reports, Bloomberg

ROIC (%) Target Corp Big Lots Inc Dollar General Corp Dollar Tree Inc Dollarama Inc Five Below Inc 35.0% Canadian Tire Corp

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0% 2008 2009 2010 2011 2012 2013 2014 2015

Source: Company Reports, Bloomberg

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Appendix 3: Valuation Supporting Details

WACC WACC Analysis - Dollarama Inc. (in US$ millions, Except for Canadian Companies, Per Share, and Per Unit Data)

Discount Rate Calculations - Assumptions Risk-Free Rate: 2.42% Equity Risk Premium: 9.30% Pre-Tax Cost of Debt: 2.88% Cost of Preferred Stock: –

Comparable Companies - Unlevered Beta Calculation Levered Preferred Equity Unlevered Weighted average cost of capital (WACC): It is Name Ticker Beta Debt % Debt Stock % Preferred Value % Equity Tax Rate Beta derived to be 6.1%, with the following assumptions: Dollar General Corp. DG 0.79 $ 2,969.2 35.6% $ - – $ 5,361.9 64.4% 35.0% 0.58 Risk-free rate: 10-Year U.S. Govt Bonds Yield as of Dollar Tree Inc. DLTR 0.61 7,214.0 58.8% - – 5,047.7 41.2% 35.0% 0.32 Five Below Inc. FIVE 1.02 - – - – 278.2 100.0% 35.0% 1.02 2017-02-10; we decided to use treasury yield as most Big Lots, Inc. BIG 0.85 362.9 40.0% - – 545.1 60.0% 35.0% 0.59 of our comparables operate in U.S. Canadian Tire Corp. CTC.T 0.70 4,170.0 46.5% - – 4,795.5 53.5% 35.0% 0.45 Target Corp. TGT 0.56 12,826.0 53.7% - – 11,069.0 46.3% 35.0% 0.32 Equity risk premium: U.S. stock market return is roughly in the middle of 3-11% historically, implying a Median: 0.75 $ 3,569.6 43.2% $ - – $ 4,921.6 56.8% 35.0% 0.51 long-term stock market return of 9-10%. (source: Bloomberg) Dollarama Inc. DOL-T 0.26 $ 1,274.6 86% $ - 0% $ 200.4 13.6% 38.0% 0.05 Cost of Debt: TTM Net financing cost (int. exp) / LT Dollarama Inc. - Levered Beta & WACC Calculation Debt outstanding Unlevered Preferred Equity Levered Ticker Beta Debt % Debt Stock % Preferred Value % Equity Tax Rate Beta Optimal Capital Structure: Based on Median of "Optimal" Capital Structure: DOL-T 0.51 43.2% – 56.8% 38.0% 0.76 comps' capital structures; this is deemed to be more appropriate than DOL's current capital structure (over Cost of Equity Based on Comparables and "Optimal" Capital Structure: 9.46% levered) WACC, "Optimal" Capital Structure: 6.14%

Target Price Valuation

Target Price Valuation - Dollarama Inc. Valuation Methodology Share Price Weighting Discounted Cash Flow Analysis: 60.00% Enterprise Value Perpetual Growth Method $ 120.46 30.00% Terminal P/E Multiple Method: $ 117.45 15.00% Terminal EBITDA Multiple Method: $ 115.53 15.00% Trading Comparables Analysis: 40.00% FY2018 P/E Method: $ 107.86 15.00% FY2018 EV / EBITDA Method: $ 105.29 15.00% FY2018 EV / Revenue Method: $ 104.30 10.00%

Weighted Target Price $ 113.49 100.00%

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Scenario Analysis

Base Case Our $113.49 price target is underpinned by the assumption that DOL will achieve 1)a SSSG of 5.0% going into FY2019 (4.5% for FY20/21, 4.0% for FY22), 2)continue to expand its footprint at an average of 65 stores per annum in our projected period (FY2022E), and 3)maintain its operational excellence (Eg: GM/OM/FCF). In addition, we assume 17.5x EBITDA and 25x P/E for FY2018 as discussed earlier.

Bull Case Under our bull case, we assume 1)DOL’s will achieve a SSSG of 6.0% heading into FY2019 (which translates into a ~200bp increase in total annual sales growth), 2)expand its EBITDA & P/E multiple to 18.5x and 27.0x for FY2018, and 3)the terminal growth forecast is lifted to 3% (from 2.5% base case). These factors combined generate our bull price target of $129.87. Note that 1) is based in our view that DOL will gain further market share going forward by accelerating its expansion into regions such as BC/AB, while 2) & 3) are reflected in our belief that DOL will continue to improve its operational metrics and FCF generation.

Bear Case By 1)lowering our SSSG by 100bp from our base case (which translates into a ~200bp reduction in total annual sales growth), 2)contracting our EBITDA and P/E multiple to 15.0x and 20.0x for FY2018, and 3)reducing our terminal growth forecast to 2% (from 2.5% base case), we arrive at a price target of $95.14 under our bear case.

Sensitivity Analysis

Public Comparable Analysis Discounted Cash Flow Analysis

Forecasted FY2018 EBITDA Target Multiple Terminal EBITDA Multiple Method 105.29 15.5 x 16.5 x 17.5 x 18.5 x 19.5 x 115.53 13.0 x 14.0 x 15.0 x 16.0 x 17.0 x 687 81.72 87.69 93.67 99.64 105.62 5.1% 106.35 113.77 121.18 128.59 136.00 Discount EBITDA 725 86.86 93.17 99.48 105.79 112.09 5.6% 103.84 111.08 118.32 125.55 132.79 Rate FY2018 763 92.01 98.65 $105.29 111.93 118.57 6.1% 101.39 108.46 $115.53 122.60 129.67 (WACC) 802 97.15 104.13 111.10 118.07 125.04 6.6% 99.01 105.92 112.82 119.73 126.63 840 102.30 109.60 116.91 124.21 131.52 7.1% 96.70 103.44 110.19 116.93 123.68

Forecasted FY2018 P/E Target Multiple Terminal P/E Multiple Method 107.86 23.0 x 24.0 x 25.0 x 26.0 x 27.0 x 117.45 22.5 x 23.5 x 24.5 x 25.5 x 26.5 x 3.31 76.24 79.55 82.86 86.18 89.49 6.53 93.54 97.70 101.86 106.01 110.17 EPS 3.81 87.74 91.55 95.36 99.18 102.99 7.03 100.70 105.18 109.65 114.13 118.60 EPS FY2018 4.31 99.24 103.55 $107.86 112.18 116.49 7.53 107.86 112.66 $117.45 122.24 127.04 4.81 110.74 115.55 120.36 125.18 129.99 8.03 115.02 120.13 125.25 130.36 135.47 5.31 122.24 127.55 132.86 138.18 143.49 8.53 122.18 127.61 133.04 138.47 143.90

Forecasted FY2018 Revenue Target Multiple Terminal Perpetuity Growth Method 104.30 3.0 x 3.5 x 4.0 x 4.5 x 5.0 x 120.46 1.5% 2.0% 2.5% 3.0% 3.5% 2,980 66.86 79.82 92.78 105.74 118.70 5.1% 125.21 144.21 170.42 208.86 270.74 Discount Revenue 3,146 71.18 84.86 98.54 112.22 125.90 5.6% 108.66 122.81 141.45 167.16 204.88 Rate FY2018 3,311 75.50 89.90 $104.30 118.70 133.10 6.1% 95.69 106.58 $120.46 138.76 163.99 (WACC) 3,477 79.82 94.94 110.06 125.18 140.30 6.6% 85.25 93.86 104.55 118.17 136.12 3,642 84.14 99.98 115.82 131.66 147.50 7.1% 76.67 83.62 92.07 102.56 115.92

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Appendix 4: DOL Store Count and GDP by Province

100 to 500

DOL Store Count by Province 50 to 100

1 to 50 500 Non-Presence

400

300

200

100

0 AB BC MB NB NL NS ON PE QC SK FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Source: Company reports Source: Company reports, Author estimates

Canada's GDP % by Province

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% AB BC MB NB NL NS ON PE QC SK

FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Source: Stats. Canada (note that FY2016 should be interpreted as calendar year 2015; same logic applies to previous years)

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Appendix 5: Pro-forma Financial Statements (CAD$ in Millions Except Per Share and Per Unit Data) Income Statement

(CAD$ in Millions Except Per Share and Per Unit Data) Historical Projected Income Statement: FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017E FY 2018E FY 2019E Sales $ 1,602.8 $ 1,858.8 $ 2,064.7 $ 2,330.8 $ 2,650.3 $ 2,961.0 $ 3,311.3 $ 3,678.9 Cost of sales 1,002.5 1,164.0 1,299.1 1,471.3 1,617.1 1,818.0 2,034.3 2,264.9

Gross profit 600.3 694.8 765.6 859.5 1,033.3 1,143.0 1,276.9 1,414.0

General, administrative & store operating expenses 305.1 339.7 363.2 398.7 435.8 467.6 513.6 565.3 Depreciation & amortization 33.3 39.3 47.9 38.3 48.1 60.9 54.6 55.6

Operating income (EBIT) 261.9 315.9 354.5 422.6 549.4 614.5 708.7 793.1

Net financing costs 16.6 10.8 11.7 20.0 21.4 28.8 33.1 36.8

Earnings before income taxes (EBT) 245.3 305.1 342.8 402.6 528.0 585.7 675.6 756.3

Provision for income taxes 71.9 84.1 92.7 107.2 142.8 159.1 183.8 205.7

Net Income 173.5 221.0 250.1 295.4 385.1 426.6 491.8 550.6

Weighted average number of common shares outstanding - basic 147.4 147.3 143.7 133.3 127.3 119.2 114.0 108.9 Weighted average number of common shares outstanding - diluted 151.1 150.4 144.1 134.0 128.4 120.8 115.0 110.1

Earnings per share (EPS) - Basic $ 1.18 $ 1.50 $ 1.74 $ 2.22 $ 3.03 $ 3.58 $ 4.32 $ 5.06 Earnings per share (EPS) - Diluted $ 1.15 $ 1.47 $ 1.74 $ 2.21 $ 3.00 $ 3.54 $ 4.31 $ 5.05

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Cash Flow Statement

(CAD$ in Millions Except Per Share and Per Unit Data) Historical Projected Cash Flow Statement: FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017E FY 2018E FY 2019E Operating Activities: Net earnings for the year $ 173.5 $ 221.0 $ 250.1 $ 295.4 $ 385.1 $ 426.6 $ 491.8 $ 550.6 Depreciation of property & equipment 33.5 39.5 47.9 38.3 48.1 60.9 54.6 55.6 Amortization of intangible assets 1.1 1.0 ------Amortization of debt issue costs 2.3 1.1 0.6 1.1 1.3 1.5 - - Interest accrual long-term debt - - 3.0 0.8 - 3.1 - - Amortization of deferred leasing costs 0.3 0.3 0.5 0.6 0.6 0.5 0.5 0.5 Amortization of deferred tenant allowances - 2.4 - 2.9 - 3.5 - 4.3 - 4.9 - 4.8 - 4.7 - 4.7 Amortization of unfavourable lease rights - 1.2 - 1.3 ------Excess of receipts/(disbursements) over amount recognized on derivative financial instruments 3.5 1.3 6.3 - 0.1 21.3 - 22.5 - - Deferred lease inducements 3.3 5.3 3.8 4.1 4.8 5.5 6.0 6.6 Deferred tenant allowances 4.0 6.8 6.1 9.1 11.3 12.1 14.2 16.7 Share-based compensation 0.8 1.6 4.1 5.4 6.1 6.9 7.9 8.9 Net financing costs on long-term debt - - - 0.8 - 0.3 2.9 - - Repayment of finance lease - 0.7 - 0.7 ------Deemed interest on repayment of long-term debt - 1.4 - 0.2 ------Deferred income taxes 8.7 6.9 4.5 13.5 4.1 14.9 17.3 12.3 Loss (gain) on disposal of assets - 0.7 1.0 0.7 0.6 0.4 - - Other adjustments - 0.0 - - - - 25.3 - 7.2 - 6.5 Cash generated from operating activities before changes in operating assets & liabilities: 225.2 280.5 324.2 364.6 478.1 533.5 580.3 640.0

Changes in non-cash working capital components: - 52.1 - 24.2 80.0 97.5 107.1 - 54.9 - 21.9 - 35.9 Net cash generated from operating activities 173.1 256.3 308.4 355.9 449.2 478.6 558.5 604.1

Investing Activities: Additions to property & equipment - 53.0 - 75.0 - 96.3 - 74.1 - 83.2 - 149.4 - 100.0 - 110.0 Additions to intangible assets - - - 11.1 - 10.8 - 11.2 - 16.6 - 11.0 - 12.0 Proceeds on disposal of property & equipment 0.3 0.3 0.6 0.7 0.7 0.1 - - Deferred leasing costs - - 2.8 ------Net cash generated from (used by) investing activities - 52.7 - 77.5 - 106.8 - 84.2 - 93.8 - 166.0 - 111.0 - 122.0

Financing Activities: Proceeds from long-term debt - revolving loan/FRN - 264.4 400.0 150.0 124.8 525.0 - - Repayment of long-term debt - term loan - 90.5 - 274.8 - 264.4 - - - - 274.8 - Proceeds from exercised options ------Proceeds from long-term debt ------Net proceeds from credit facility - - - 15.0 235.0 - 250.0 400.0 - Proceeds from bank indebtedness - - 166.0 - - - - - Repayment of bank indebtedness - - - 166.0 - - - - - Payment of debt issue costs - 0.1 - 0.8 - 2.8 - 0.9 - 1.0 - 2.3 - - Repayment of finance lease - - - 1.0 - 0.9 - 1.0 - 0.7 - - Issuance of common shares 0.5 1.6 1.4 1.1 2.7 4.7 - - Dividends paid - 13.3 - 31.0 - 38.4 - 41.8 - 45.1 - 47.1 - 50.3 - 52.4 Repurchase & cancellation of shares - - 155.9 - 277.4 - 425.4 - 651.9 - 550.0 - 500.0 - 450.0 Net cash generated from (used by) financing activities - 103.3 - 196.5 - 182.6 - 302.9 - 336.5 - 320.4 - 425.1 - 502.4

Increase (decrease) in cash & cash equivalents 17.1 - 17.7 18.9 - 31.3 19.0 - 7.8 22.4 - 20.3

Cash & cash equivalents, beginning of year 53.1 70.3 52.6 71.5 40.2 59.2 51.4 73.7

Cash & cash equivalents, end of year $ 70.3 $ 52.6 $ 71.5 $ 40.2 $ 59.2 $ 51.4 $ 73.7 $ 53.4

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Balance Sheet

(CAD$ in Millions Except Per Share and Per Unit Data) Historical Projected Balance Sheet: FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017E FY 2018E FY 2019E Assets Current Assets: Cash & cash equivalents $ 70.3 $ 52.6 $ 71.5 $ 40.2 $ 59.2 $ 51.4 $ 73.7 $ 53.4 Accounts receivable 1.8 5.8 6.0 10.0 11.1 11.2 13.6 14.8 Deposits & prepaid expenses 4.4 5.8 5.4 5.2 8.9 7.5 8.5 10.0 Merchandise inventories 315.9 338.4 364.7 408.9 470.2 514.8 577.7 647.7 Derivative financial instruments 4.0 3.7 11.5 84.0 67.5 67.5 67.5 67.5 Total Current Assets: 396.4 406.2 459.0 548.3 616.9 652.4 740.9 793.4

Non-Current Assets: Property & equipment, cost 319.9 378.8 448.6 520.0 595.2 744.6 844.6 954.6 Less: accumulated depreciation 146.9 171.1 198.0 229.3 263.0 329.0 378.0 427.2 Property & equipment, net 173.1 207.7 250.6 290.6 332.2 415.6 466.6 527.4 Intangible assets 110.5 112.0 129.4 134.1 136.9 144.7 150.1 155.7 Goodwill 727.8 727.8 727.8 727.8 727.8 727.8 727.8 727.8 Total Non-Current Assets: 1,011.4 1,047.5 1,107.8 1,152.5 1,196.9 1,288.1 1,344.5 1,410.9

Total Assets: $ 1,407.7 $ 1,453.7 $ 1,566.8 $ 1,700.8 $ 1,813.9 $ 1,940.5 $ 2,085.4 $ 2,204.3

Liabilities and Shareholders' Equity Current Liabilities: Accounts payable & accrued liabilities 101.3 101.3 128.9 175.7 166.2 196.3 233.5 261.6 Dividend payable 6.6 8.1 9.8 10.5 11.1 12.0 12.3 12.9 Income taxes payable 20.6 23.6 22.1 25.4 45.6 37.9 45.0 53.7 Derivative financial instruments 0.2 0.2 - - - 7.0 7.0 7.0 Current portion of finance lease obligations - 0.6 1.0 - 0.6 - - - Current portion of long-term debt 14.0 - 3.0 3.8 3.5 278.9 403.2 400.5 Total Current Liabilities: 142.8 133.8 164.8 215.5 227.0 532.0 701.0 735.7

Non-Current Liabilities: Long-term debt 258.4 262.1 395.4 560.6 920.8 925.0 925.0 925.0 Finance lease obligations - - 1.5 1.6 - - - - Deferred rent & tenant inducements - - 51.6 60.5 71.6 85.7 105.9 129.1 Deferred income taxes 73.8 81.0 89.3 122.2 127.6 121.2 138.5 150.8 Other liabilities 37.9 45.3 ------Total Long-Term Liabilities: 370.0 388.4 537.8 744.9 1,120.0 1,131.9 1,169.4 1,204.9

Shareholders' Equity: Share capital 525.0 517.3 493.6 462.7 439.3 413.2 400.8 388.8 Contributed surplus 15.7 8.2 10.9 15.3 20.1 26.4 35.7 48.2 Retained earnings 352.3 403.3 346.5 196.1 - 62.4 - 232.9 - 291.3 - 243.1 Accumulated other comprehensive income (loss) 2.0 2.8 13.2 66.3 69.8 69.8 69.8 69.8 Total Shareholders' Equity: 894.9 931.5 864.2 740.5 466.9 276.6 215.0 263.7

Total Liabilities and Equity: $ 1,407.7 $ 1,453.7 $ 1,566.8 $ 1,700.8 $ 1,813.9 $ 1,940.5 $ 2,085.4 $ 2,204.3

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