Dollarama Inc.: Time to Buy?

Dollarama Inc. (TSX:DOL) is hitting new highs. Can the rally continue?

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Dollarama Inc. (TSX:DOL) is up 25% in 2016 and just broke through the $100 mark for the first time.

Let’s take a look at the discount retailer to see if it deserves to be in your portfolio.

Earnings

Dollarama’s most recent quarterly earnings came in at a healthy $83.2 million, or $0.68 per share, up 28.4% compared with the same period last year.

Sales rose 13.2% to $641 million, driven by the addition of 66 new stores over the past 12 months. As of May 31, Dollarama had 1,038 retail outlets.

Comparable store sales were also strong. The average transaction size was up 3.7% year over year, and the company saw a 2.8% rise in the number of transactions.

Gross margins came in at 37%–a 1% improvement over last year.

Growth

Dollarama continues to expand its reach across Canada. The company plans to accelerate the pace of its new store openings and expects to open 60-70 net new locations by fiscal year end, which would be the end of January 2017.

Dividend

Dollarama pays a quarterly dividend of $0.10 per share. The yield is only 0.4%, but the company has a strong history of dividend growth.

In fact, the payout has more than doubled in the past five years.

Risks

The stock took a hit late last year as investors worried that the weak Canadian dollar would drive up costs and hit margins.

This remains a concern, but management has done a good job of hedging its currency risks, and consumers continue to flood into the stores despite the rise in prices.

Dollarama now offers goods ranging up to $3.00. The ability of the company to raise prices and increase margins is impressive, but one has to wonder where the limit lies.

At some point shoppers could decide to stop absorbing the price hikes, so investors will have to watch the quarterly results for signs of weakening sales, especially if the company is forced to push prices up to $3.50 or $4.00 on the more expensive items.

Should you buy the stock?

Analysts are getting bullish on Dollarama again. TD Securities just upgraded the stock to a buy on the expectation of strong earnings growth in the coming years.

The shares are now trading at 31 times trailing earnings, so new investors have to believe TD is correct to pay this much for the stock.

Dollarama is performing well and remains a solid pick for investors who want a name that provides some protection in difficult economic times, but I would keep the position small at the current price.

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 Andrew Walker has no position in any stocks mentioned.

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