4 Reasons Why Dollarama Will Continue to Expand Rapidly

Canada’s largest “dollar” retailer shows momentum on several fronts.

| More on:
The Motley Fool

If you were to ask management of Canadian discount retailer Dollarama (TSE: DOL) how the company has achieved annual sales of $1.9 billion and a market capitalization of $5.3 billion, they might well respond with a version of the following and a straight face: one dollar at a time.

Dollarama is having a stellar year: annual revenue increased in the low double digits from the prior year, quarterly net profit growth has clocked in at more than 10% for the last several quarters running, and the company’s stock has soared 26.2% so far this year. Much of this success can be traced to the company’s aggressive store opening schedule. In the trailing 12 months ended May 5th of this year, total store count grew more than 12%, from 721 stores to 806 locations. The following four factors should enable Dollarama to continue to expand at this pace for the foreseeable future.

Plenty of room to grow: just look at the U.S.

In Dollarama’s most recent annual report, management estimates that dollar store penetration per capita among the top five Canadian dollar stores is less than half that of the U.S. In the States, there’s a dollar store for every 14,000 people, while in Canada the ratio is one dollar store for every 29,000 people. Management believes there is room for both the industry and Dollarama to expand in Canada. This may be so for a very long time, as at least one U.S. retailer, Family Dollar, apparently believes that the dollar store landscape will absorb an even higher density: it’s going to triple its store count in the U.S., from 7,800 to over 23,000, in the coming years.

An impressively short payback period

Because Dollarama’s stores boast a relatively small average footprint of under 10,000 square feet, and require a modest capital investment of only $1.4 million, the payback period on a new store is approximately two years — a fairly quick return. Such a short payback period means that the company can continue to aggressively launch new locations, as it does not have to wait several years in each geographical region to see if its investments are panning out.

Relatively little debt on the books

One benefit of enjoying a quick payback period is the free cash flow generated by stores in a short period of time. This cash flow has enabled Dollarama to expand without over-leveraging its balance sheet. As of its last fiscal quarter, the company had only $264 million of long-term debt on its books, carrying a fairly lean debt-to-equity ratio of 27.2%. Being conservative with debt thus far will enable Dollarama to use a bit more leverage to increase the pace of store openings if it chooses in the upcoming fiscal years.

Multiple price points

In 2009, Dollarama extended past the literal “dollar” price per item, and last year, in July, the company introduced price points for various items up to $3.00. This flexibility of pricing increases the potential range of merchandise offered, and customers have responded positively. Items priced above $1 now make up more than 50% of company sales. “Higher ticket” items should positively impact gross margin as well going forward.

One risk to be aware of

Dollarama’s greatest risk in expansion might be the Canadian economy’s eventual return to growth. Once disposable income increases, will consumers still throng to the familiar green dollar symbol? As Wal-Mart redoubles its effort to attract Canadian consumers, and Shoppers Drug Mart (TSE: SC) boosts its shelf items due to its merger with Loblaw (TSE: L), and as newcomers such as Target fight for their share of the average Canadian’s wallet, consumers may decide to trade up to better known, branded products. It will be interesting to see what type of strategy Dollarama employs to keep its customers in a rising economy — after all, it can only discount its goods so much further.

Three U.S. stocks every Canadian should own

As we saw above, Dollarama has taken some business cues from American dollar stores. While Canada has its own share of great companies, it makes sense to diversify your portfolio, and our neighbors to the south offer some compelling opportunities. That’s why The Motley Fool has put together a Special FREE Report, “3 U.S. Stocks Every Canadian Should Own.” The funny thing is, these stocks might as well be Canadian … because you use them every day. Just click here to receive your copy at no charge!

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Asit Sharma doesn’t own shares of any companies mentioned.  The Motley Fool doesn’t own shares in any of the companies mentioned.     

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Target. Stand out from the crowd
Dividend Stocks

RRSP Pension: 2 Dividend Stocks to Buy on the Latest Dip

These high-yield TSX stocks look cheap right now for RRSP investors.

Read more »

bulb idea thinking

The Smartest TSX ETF to Buy With $1,000 Right Now

Forget the TSX 60 or the TSX Composite. I prefer the TSX Dividend Aristocrats.

Read more »

Canada Day fireworks over two Adirondack chairs on the wooden dock in Ontario, Canada

CPP Benefits Not Enough? This Top Dividend Stock Can Help Fund Your Retirement

Canadian retirees can look to supplement their CPP payout with quality dividend stocks such as Headwater Exploration.

Read more »

grow dividends
Stocks for Beginners

Why Cargojet Stock Is Surging Past 52-Week Highs

Cargojet (TSX:CJT) stock surged by 17% after a new deal was announced, with upgrades coming in as well for the…

Read more »

protect, safe, trust

It’s Time to Defend Your Wealth: 3 Top Stocks to Help Keep What’s Yours

For those looking to defend your wealth against what appear to be robust oncoming macro headwinds should consider these stocks.

Read more »

Retirees sip their morning coffee outside.
Dividend Stocks

Safe and Sound Stocks for Canadians: My Top 5 Choices

Five safe stocks to buy on a market pullback.

Read more »

Financial technology concept.

Couche-Tard Stock: Today Is a Huge Buying Opportunity

Alimentation Couche-Tard (TSX:ATD) stock looks like a steal after its latest unwarranted plunge into a correction again.

Read more »

A stock price graph showing growth over time
Metals and Mining Stocks

Why Cameco Stock Soared 23% This Year

Cameco stock continues to ride high on strong supply/demand fundamentals and growing momentum in the nuclear industry.

Read more »