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Is Dollarama Inc (TSX:DOL) Still a Buy After Sales-Growth Disappointment?

The past few weeks have been hard on Dollarama (TSX:DOL), which has fallen 28% since last month. September 12, when shares slid 17%, was the stock’s biggest one-day decline this year. Sluggish sales growth has been cited as the main culprit for the decline, which began shortly after the company’s September 7th earnings report. Although sales did grow — from $131 million a year ago to $141 million last quarter — the growth rate was lacklustre compared to past years.

The big question for Dollarama investors is whether the company can start growing at a steady clip again. To answer that question, we need to understand why Dollarama’s sales growth is stalling.

Why is sales growth stalling?

Dollarama is by far the biggest dollar store in Canada. While this gives the company an enviable market position, it poses problems for growth. A retailer that has become dominant enough in a given market may reach the point of saturation. This means that there is no more room for additional stores, and therefore the only option left for sales growth is increasing same-store sales.

There’s evidence that Dollarama may have already saturated the Canadian dollar store market. According to Statista, Dollarama has an 18% share of discount retail in Canada, while its closest competitor Dollar Tree has a 2.2% share.

Now, 18% might not sound like market saturation at first glance. But remember that discount retail includes not only dollar stores, but also wholesalers and big-box stores like Wal-Mart. If we narrow down the scope of discount retail to just dollar stores, then Dollarama’s market share rises much higher.

Could it recover?

To answer the question of whether Dollarama can kick its sales into high gear again, we need to look at its options for expanding. Given the company’s dominant position among Canadian dollar stores, it seems unlikely that more Canadian locations will bring back double-digit sales growth.

The company then has a few options left.

One is to increase same-store sales. Dollarama could possibly do this by adding more products at price points above its current maximum. This could work, but it could also harm the company’s brand by taking it outside true dollar store territory.

Another possibility is to move into the U.S. Theoretically, this isn’t impossible, but the U.S. is already a highly competitive market with two clear market leaders: Dollar Tree and Dollar General.

A third possibility is that Dollarama could increase its sales by tapping into markets outside North America. In fact, it looks as though Dollarama is doing just that. In 2013, it was announced that Dollarama was working on supply deals with the Latin American company Dollar City, which serves customers in Central America and Colombia. The Dollar City chain has been expanding rapidly in recent years, adding new locations in a number of countries. Assuming that this growth continues, it may bode well for Dollarama’s chances to renew its growth as a supplier to foreign dollar stores.

But for now, it seems Dollarama’s glory days of lightning-fast growth are behind it.

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Fool contributor Andrew Button has no position in any of the stocks mentioned.

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