Dollarama Inc. (TSX:DOL) has been a huge winner over the last five years with a nearly 300% return during the span. The company has a boring, easy to understand business model with ambitious expansion plans. Dollarama is arguably one of Canada’s best retailers. It appears to be well protected from the rise of e-commerce giants. Shares deserve to trade at a premium, but is a 31.52 price-to-earnings multiple overdoing it?
Dollarama had an impressive fiscal Q1 2018 which saw sales increase 10% year over year. The company opened 13 new stores and added credit card compatibility to all of its stores, which I believe is a must-have for this day and age.
The company has a healthy relationship with its suppliers, so it can get goods directly at an extremely low cost. The value is passed on to the customers since prices are kept reasonably low below the $4 price cap. You can buy some great items of decent quality without breaking the bank. Frugal consumers know this, and that’s why there’s a huge amount of loyalty to the Dollarama brand.
Going forward, Dollarama is expected to continue to open new locations across Canada as the dollar store market is still very fragmented, and the general public can’t seem to get enough of Dollarama’s low-cost goods. The company operates over 1,000 Canadian stores right now, but it has the ability to support over 1,400 stores — a target the company hopes to reach sometime over the next few years.
The management team has reportedly been interested in expanding to Latin America with the Central American chain Dollar City, which will act as its supplier and advisor. Dollarama has the option to buy a majority stake of Dollar City in 2020 if it chooses to. Until then, the management team will be waiting to see how Dollar City fairs in Colombia. According to analysts, the decision to expand in Latin America will depend on Dollar City’s Colombian performance.
What about valuation?
The stock currently trades at a 31.52 price-to-earnings multiple, a 4.7 price-to-sales multiple, and a 26.1 price-to-cash flow multiple, all of which are considerably higher than the company’s five-year historical average multiples of 27, 3.4, and 24.9, respectively.
Dollarama has great growth prospects and the ability to perform well in recessions, but I don’t think it makes sense to buy north of the $120 levels. If you already own shares, I’d recommend holding and waiting for a better entry point before adding to your stake.
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