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Dollarama Inc. and Hudson’s Bay Co. Are Going in Different Directions

The past two years have been agonizing for many retailers in North America. Innovative technologies and shifts in consumer behaviour have crippled much of the industry, resulting in bankruptcies and store closures across the continent.

Why is a company like Dollarama Inc. (TSX:DOL) thriving, while Hudson’s Bay Co. (TSX:HBC) now faces daunting questions from shareholders about its long-term viability?

Dollarama is a Montreal-based retail chain and Canada’s largest retailer for items of $4 or less for almost a decade now. The share price has increased 25% so far in 2017, but it has dipped from its all-time high of $132.34. It closed at $122.38 at the end of trading on Wednesday, down 0.50%. Dollarama pays a $0.11 dividend per share and currently sits at a P/E ratio of $31.61.

The company followed up an outstanding 2016 with very strong results in Q1 2017. Sales increased 10% to $705 million, operating income grew 15.7%, and net earnings per share saw a 20.6% rise from $0.68 to $0.82.

Dollarama’s boom is part of a broader trend in the success of dollar stores — or low-priced retail, to be exact. After all, Dollarama’s guarantee is that items are $4 or less. In the latter half of the previous decade, conventional wisdom was that these companies catered to only a low-income consumer demographic. Although this consumer base is still prevalent, dollar stores are now frequented by affluent shoppers as well.

The success of U.S. retailer Dollar Tree demonstrates that the business model is broadly trending upward. A generation of frugal consumers in the wake of the 2008-2009 Financial Crisis should generate long-term success for these companies.

The story for Hudson’s Bay has been quite different. In early June, the company announced that it had to cut 2,000 jobs and reported a first-quarter loss of $221 million. Hudson’s Bay has been caught on the wrong side of innovations that have waged war on brick-and-mortar stores and forced companies to undergo transformations to meet the new reality.

Influential shareholders for the company have suggested that leveraging some of its valuable properties and flipping the model into a real estate one is a viable path forward. The suggestions for such a dramatic reorientation illustrates the dire need for Hudson’s Bay to find its footing and provide proof of its long-term stability to investors.

Hudson’s Bay stock is down 18% in 2017 and 33% over the past year. As of Wednesday’s close, it is valued at $10.71. Investors should keep the company on their radars, however. In possession of tangible assets other retailers simply do not have, the company can still find a way to turn 2017 positive if it chooses to heed the advice of its bolder shareholders.

Investors looking for a conventional pick and a company that has consistently boasted better-than-expected results can look to Dollarama for a strong add to their portfolios. For the investor willing to take a gamble, Hudson’s Bay offers a share price that has been battered in 2017 but holds potential for positive valuations depending on what direction board members take.

Should Dollarama be on your buy list? It's on ours...

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Fool contributor Ambrose O'Callaghan has no position in any stocks mentioned.

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