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

Canadian stocks are rising
Dividend Stocks

Looking for Big Passive Income? 2 Easy REITs to Consider

H&R REIT (TSX:HR.UN) and SmartCentres REIT (TSX:SRU.UN) could help fund your retirement.

Read more »

Family relationship with bond and care
Dividend Stocks

CPP Pension: 1 Move to Increase Your Payouts by $6,877 Per Year

Canadian retirees can consider boosting their CPP payouts by delaying the benefit and investing in blue-chip dividend stocks.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

This 8.6% Dividend Stock Pays Cash Every Month

Diversified Royalty is a high-dividend stock that offers a tasty yield in 2024. Is the TSX dividend stock a buy…

Read more »

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

3 Safe Canadian Dividend Stocks to Buy and Hold Forever

Here are three of the safest Canadian dividend stocks you can buy now and hold as long as you want.

Read more »

edit Taxes CRA
Dividend Stocks

Master Your Taxes: Get More Back from the CRA This Year

Mastering your taxes by knowing old and new tax deductions can lighten your tax burden in 2024.

Read more »

question marks written reminders tickets
Dividend Stocks

What’s the CPP Contribution Amount for 2024?

The second phase of CPP enhancement has begun. Know how much CPP contribution your employer will deduct from your 2024…

Read more »

Payday ringed on a calendar
Dividend Stocks

Buy 1,026 Shares of This Quality Dividend Stock for $100 in Monthly Passive Income

High-dividend TSX stocks such as Slate Grocery can help you generate stable passive income in 2024.

Read more »

top TSX stocks to buy
Dividend Stocks

How to Build a Bulletproof Monthly Passive-Income Portfolio With Just $7,000 in 2024

These monthly passive-income investments can turn your TFSA into a powerhouse passive-income producer -- all with just $7,000.

Read more »