Dollarama midterm final
Secondly, a Canadian bank has done an external analysis on the purchasing structure of Dollarama and on the LBO. Internal Analysis Restructuring Strategies There are various profit maximizing strategies that Bain Capital can implement once Dollarama is acquired. We will discuss the possibility of introducing a multi price point strategy, increased payment options, stronger inventory management, and increasing consumables. Multi Price Point Strategy In order for Dollarama to continue growing in today’s economy, it would need o increase its prices to offset inflation.Dollarama can introduce higher quality items such as electronics at a higher price point (2S to 3$). Because Of their size, Dollarama can take advantage of economies of scale and still acquire these items at a discount from China and make a profit. Our strategy, is to introduce the 2$ price point for the first two years.
We assume that only 10% off the projected sales will come from this 2$ mark. We will only introduce one more price point to test out this strategy and make some additional revenue. In years 3 to 5, a 3$ price point will be introduced in ddition to the 1 and 2 dollar items.This addition will come later on to cover the expenses of the payment machines that will be further discussed in the next section. We expect 5% of sales to come from the 3$ items, 15% to come from the 2$ items, and 80% from the 1 $ items. Taking the sum of the expected same store growth rate for 2005 as well as the pro-rated growth rate for the new stores, we have calculated a growth rate of 7.
49%. Since 36% (18/49) Of the expected new stores opened up, we multiplied that with the new store growth rate of 14% and then added it to the same store growth ate of 2. 0%. Please refer to Appendix 1-3 for more details.
Dollarama will still be considered a value store since it will be selling items at a considerably cheaper price in its categories. For example, paying 2$ for toothpaste or 3$ for headphones or battery charger is still very much in the value sector of the respective category. Increased Payment Options The second strategy that we suggest Bain Capital doing once they acquire Dollarama is to introduce a debit/credit card machine. As Sharon Louis noticed in her report, debit card transactions are normally 2. times higher han cash transactions. This will facilitate the realization of the increased sales percentages at the various price points in the previous price point strategy and will encourage customers to buy Dollarama products. The addition of a debit/credit card machine will incur some implementation expenses however, they will be covered in the raised price of 2$ and 3$.
Since the machine takes 2-3 years to rollout, assuming the worst, we will introduce the new payment options at the start of the third year, as well as our higher 3$ price point strategy.Increasing Consumables One strategy is to increase the amount of consumables in the store. This Strategy may work with U. S consumers; however, Canadians are more “want- focused” and are willing to spend more on certain items than Americans.
We do not suggest going with this strategy as we are looking to maximize profits for the next five years and by increasing consumables, profit margins may drop since we are dealing with a different demographic than the U. S.For example, adding frozen food baskets to Dollarama’s inventory is not a great strategy even though it may have worked for certain value stores in the U. S. The reason is, as noted before and by Louis herself in her report, the demographic is different, and the image of value stores differs.
Stronger Inventory management Lastly, Dollarama can implement a better inventory system just as making sure each item has a SKLJ. However, since our main f0CUS is to increase profit, we are looking to reduce costs as much as possible by cutting back. This would incur too much expense for a five-year plan.Effects on the Financial Statements By introducing a multi price point strategy as well as a new payment option, our financial statements will show some changes for the better.
Firstly, our sales for 2005 will be projected at $697,010,600 rather than the original forecasted $633,646,000 because of our 2$ price point. As mentioned earlier, our growth rate is based on the fact that Dollarama only opened up 18 out of the planned 49 stores. Our cost of sales is assumed to be 70% of sales based on 2002 and 2003. As shown in Appendix 1 to 3, Dollarama’s net earnings increased by 32. 1% with this new strategy.
If this strategy had not been implemented, Dollarama’s net earnings would be $50,736,530 compared to A partial debt schedule is included in the Appendix 4 to describe ow we arrived at the projected interest expense and amortization of deferred financing costs. The amortization of deferred financing cost of that was projected for 2005 is calculated using Term Loan A’s amortized premium of 1,884,067 as well as other deferred financing costs. The interest expense was calculated by adding together the interest expense for Term Loan A, B, and Senior Loan.Furthermore, we have made several assumptions based on the information given: capital expenditures grows by yearly due to new stores being opened and additional inventory requirements, rent expense grows by 18%, and the number of stores to open n 2005 will be 18, 25 in 2006, and then 18 every year after. The store increased is consistent with the percentage quoted in Louis’ report.
18 new stores excepted by 2005 instead of the project 49. is 36% of 49. Dollarama then assumes 50 stores straight lined after 2006.
Therefore 36% of 50 stores happen to be also 18; hence we straight line 18 stores after 2006.Dollarama’s balance sheet will show some changes as well since they are planning on expanding. Therefore, the balance sheet will include more PP; merchandise inventories, accounts payable and accrued expenses, as well as ore long-term debt.
By looking at our projected income statement, we can conclude that introducing a multi price point strategy as well as a debit/credit machine will help maximize profit. External Analysis Now that we have seen what strategies can be done once Dollarama is acquired, we have to discuss terms and structure of the acquisition.This part of the report is written with the help of Sharon Louis’s team as we take an overview look at a value obtained via a leveraged buyout model. We start by setting up the basis for our valuation. We will first determine the enterprise alue or EV/EBITDA multiple of Dollarama. Since Dollarama is not publicly traded, we will infer this from existing industry and public companies. With the data obtain (exhibit 5 from the case), we conclude that comparing Dollarama to any Canadian retailers is basically comparing apples to oranges. Dollarama and Canadian retail industry do not share similarities.
We next look at the IJS discount retailer Wal-Mart. Again this is not a comparable company. We now look at the last provided segment in the exhibit provided by Sharon Louis’s report, which are the US value retailers. As most of the ompanies listed share similarities with Dollarama, neither one is exactly the same in terms of perception and target market, but this is due to the different demographic from the US and Canada. The ideas behind these stores however are similar enough. We therefore take the average EV/EBITDA multiple for our enterprise value.The calculated multiple is therefore 10. 4 as can be seen in the appendix 5.
The enterprise value calculated is therefore 10. 4 times the latest 2004-year end EBITDA that gives $956,384,000 (Canadian). This number can also be viewed in Appendix 5. Next we etermine the first year free cash flow for the LBO: Net income: 44819 + Amortization (6371) + Capital expenditure (121 34) +1- Change in Net working capital (assumed to be O since cannot be computed) = $63324 All above numbers are in thousands and may be seen in our projected income statement in the appendix.
The majorities of the numbers computed for the LBO analysis is taken from our projected income statement as well. (Refer to appendix 1-3 and appendix 5) We also assume that in terms of debt, Bain Capital will use the entire 810 millions debt available from the beginning. This ives us less sensitivity as to debt management. Therefore we are assuming the senior debt will be fully drawn in our projections. However it will be fully drawn only partially after the first year is complete. This explains why the interest expense on the senior loan is Sl ,287,067 on the first year-end and not like the rest of the years. Refer to partial debt schedule in appendix 4 and LBO analysis in appendix 5).
We have therefore laid out the set up for the LBO, we know our debt structure, the debt payments can be inferred from our interest payment and can be seen in appendix 5. We have the inferred enterprise value of $956,384,000, which falls within the boundaries of Sharon Louis’s report of being between and $1 We now turn to the LBO assumptions: The exit date is end of 2009, with an exit multiple same as the EV/EBITDA multiple of 10. 4. Assuming anything higher is being over aggressive.