Comparing 3 Dollar Store Chains: Why Dollarama (TSX:DOL) Earns Last Place

Will Dollarama Inc. (TSX:DOL) be able to continue to outpace its U.S. peers Dollar Tree, Inc. (NASDAQ:DLTR) and Dollar General Corporation (NYSE:DG)?

| More on:
edit Businessman using calculator next to laptop

Image source: Getty Images.

Canadian dollar store chain Dollarama Inc. (TSX:DOL) certainly has performed extremely well for investors over the past decade. Shares of the dollar store chain have increased nearly ten-fold since the company’s launch on the TSX less than 10 years ago.

While shares of the company are down year to date by approximately 20%, expectations are that the company may return to former glory once concerns laid out in Dollarama’s most recent earnings report play out.

The majority of the outsized performance Dollarama has garnered in recent years can be attributed to the company’s monopoly-like presence in most Canadian cities. Smaller competitors do exist in most markets, but for the most part, Dollarama has expanded strategically and quickly to control urban centres and areas that other dollar store chains may not have been able to penetrate due to high operating costs and barriers to entry.

In this article, I’m going to compare Dollarama with two U.S. peers Dollar Tree, Inc. (NASDAQ:DLTR) and Dollar General Corporation (NYSE:DG) to provide perspective on where Dollarama is outpacing its peers, and where it may experience headwinds in the long term.

From the perspective of an investor concerned about margins and the health of Dollarama’s underlying businesses, the Canadian company earns full marks for outperforming its U.S. peers. Dollarama’s net margin and operating margin (15.9% and 22.3%, respectively) outpace Dollar Tree (7.6%, 8.6%) and Dollar General (7.1%, 8.5%) substantially.

I would attribute this significant margin differential to higher average prices at Dollarama combined with lower labour costs on average than its U.S. peers, supported by a monopoly-style hold on the dollar store environment in Canada and less competition overall in Canada.

This margin advantage certainly translates into a valuation multiple premium for Dollarama, a premium that’s been reduced recently due to the recent slide in Dollarama’s share price, but one which remains substantial. Investors will be required to pay in excess of 22-times earnings for Dollarama shares compared to an average of less than 15 times earnings for either Dollar Tree or Dollar General, a 50% premium.

Questioning whether such a premium is warranted must be viewed from the lens of how the landscape is expected to change for Dollarama in the medium to long term. Increased operating costs due to minimum wage hikes and rents in the company’s prime locales will certainly provide headwinds.

I believe these headwinds will be compounded by an unwillingness of Dollarama’s management team to raise prices which, while good for the consumer, will likely erode the margin advantage Dollarama holds today compared to its U.S. peers.

It appears Dollarama may feel the pain of lower long-run margins, such as those held by its much larger U.S. peers over time. Expansion into less profitable markets, activities aimed at keeping competition low (i.e., high-priced acquisitions), and rising operating costs are all headwinds the company is beginning to feel more than ever.

Given its current valuation premium compared with its North American peers, Dollarama is a company I would avoid, and would thus encourage investors looking for growth to look elsewhere.

Stay Foolish, my friends.

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 Chris MacDonald has no position in any stocks mentioned in this article.

More on Dividend Stocks

Close up shot of senior couple holding hand. Loving couple sitting together and holding hands. Focus on hands.
Dividend Stocks

Here’s the Average CPP Benefit at Age 70 in 2024

Canadian retirees can supplement their CPP payout by investing in blue-chip dividend stocks such as Enbridge.

Read more »

Gas pipelines
Dividend Stocks

Is Enbridge the Best Dividend Stock for You?

Enbridge now offer a dividend yield of 8%.

Read more »

STACKED COINS DEPICTING MONEY GROWTH
Dividend Stocks

How Long Would It Take to Turn $20,000 Into $100,000 With TSX Dividend Stocks?

Here's how a historical investment in TSX dividend stocks would have fared.

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

Passive Income: How Much Should You Invest to Earn $100 Every Month

Want to earn an extra $100 per month in investment passive income? Here's how much cash you would need to…

Read more »

Canadian Dollars
Dividend Stocks

Buy 1,430 Shares of This Super Dividend Stock for $1,000/Year in Passive Income

Here's how to generate $1,000 in annual passive income with Dream Industrial REIT (TSX:DIR.UN) stock.

Read more »

A worker gives a business presentation.
Dividend Stocks

Ranking Inflation Rates in Canada: How Does Your City Stack Up?

Inflation rates stoked higher for some cities, but dropped for others. So let's look at how your city stacked up,…

Read more »

Doctor talking to a patient in the corridor of a hospital.
Dividend Stocks

Inflation Is Up (Again): What Investors Need to Know

Inflation ticked higher in Canada this month, but core inflation was lower. Here's how investors can take advantage during this…

Read more »

Happy family father of mother and child daughter launch a kite on nature at sunset
Dividend Stocks

Want to Make $10,000 in Passive Income This Year? Invest $103,000 in These 3 Ultra-High-Yield Dividend Stocks

Can you earn $10,000 in passive income in 2024? You can by investing $103,000 in these ultra-high-yielding stocks.

Read more »