Should You Buy, Sell, or Hold Dollarama Inc. Following its Strong Q4 Report?

Dollarama Inc. (TSX:DOL) released fourth-quarter earnings results on March 25, and its stock has responded by rising over 2%. Should you buy into the rally?

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Dollarama Inc. (TSX:DOL), the largest owner and operator of dollar stores in Canada, announced fourth-quarter earnings results for fiscal 2015 on the morning of March 25 and its stock has responded by rising over 2%. Let’s take a thorough look at the quarterly results to determine if we should consider buying in to this rally or if we should wait for it to subside.

Breaking down the fourth-quarter results

Here’s a summary of Dollarama’s fourth-quarter earnings results compared to what analysts had anticipated and its results in the same period a year ago.

Metric Reported Expected Year-Ago
Earnings Per Share $0.76 $0.70 $0.59
Revenue $669.09 million $680.42 million $582.29 million

Source: Financial Times

Dollarama’s diluted earnings per share increased 28.8% and its revenue increased 14.9% compared to the fourth quarter of fiscal 2014. These very strong results can be attributed to three primary factors.

First, the company added 81 new stores from the year-ago period, and its existing locations experienced a significant increase in customer traffic, with comparable-store sales increasing an impressive 8.5%.

Second, total costs of sales and selling, general, and administrative expenses increased just 14.2% and 16.6% respectively from the year-ago period, showing that Dollarama was able to keep its expenses under control.

Third, the weighted average number of common shares outstanding during the fourth quarter was approximately 131.89 million, a decrease of 6.8% from the year-ago period.

Here’s a quick breakdown of eight other notable statistics from the report compared to the year-ago period:

  1. Gross profit increased 16.1% to $259.33 million
  2. Gross margin expanded 40 basis points to 38.8%
  3. Earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 15.8% to $151.27 million
  4. EBITDA margin expanded 20 basis points to 22.6%
  5. Operating profit increased 19.8% to $140.9 million
  6. Operating margin expanded 90 basis points to 21.1%
  7. Opened 27 net new stores during the quarter, bringing its total store count to 955
  8. Net debt increased 59.4% to $528.64 million

Dollarama also announced a 12.5% increase to its quarterly dividend to $0.09 per share, and the first increased payment will come on May 7 to shareholders of record at the close of business on April 29.

Is Dollarama the top retail stock to buy today?

Even after the post-earnings pop in Dollarama’s stock, I think it represents an intriguing long-term investment opportunity. I think this because the stock still trades at attractive valuations, including 30.9 times fiscal 2015’s earnings per share of $2.21 and just 26.5 times fiscal 2016’s estimated earnings per share of $2.57, both of which are inexpensive compared to its long-term growth potential.

With all of the information provided above in mind, I think Dollarama represents one of the best long-term investment opportunities in the market today. Foolish investors should take a closer look and consider beginning to scale in to long-term positions.

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.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

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