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

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.

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

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