Is Dollarama Inc. (TSX:DOL) Stock Really Recession-Proof?

Dollarama Inc. (TSX:DOL) stock has many recession-proof qualities, but this retailer will likely see more downside as a result of slowing traffic, sales, and margins.

| More on:

It is a common belief that Dollarama (TSX:DOL) stock is recession-proof.

And there are good reasons for this belief, as this retailer offers consumers low-priced everyday products that have resulted in a very strong sales growth trajectory for the company.

And this, along with excellent company-specific execution, has resulted in massive gains in Dollarama’s stock price over the last five years, rising an impressive 122%.

But more recently, Dollarama stock is now down almost 40% year to date, as earnings expectations have come down, reflecting a slowing environment, and as the stock’s lofty multiples have also come down.

Going forward, here are the three main reasons I think Dollarama stock will not prove to be as recession-proof as investors are hoping.

Lower traffic

Rising interest rates will drive discretionary consumer spending lower, which will affect all retailers.

And while Dollarama sells many “necessities,” it also sells many “want” items that will fall prey to this trend.

We have seen this in recent same-store sales growth of 2.6% in the second quarter and 3.1% in the third quarter, which are not numbers that signify strong growth.

Pricing increases a thing of the past

Furthermore, in the last few years Dollarama has gradually increased its price point on certain products, and while this had been a success, the company is now seeing pressure on traffic and the number of transactions and so has made the decision to minimize price increases, which will continue to hit margins.

Estimates still too high

Estimates for Dollarama have been slowly coming down, and the stock is certainly trading at much more attractive multiples at this point since the stock price has come down so much.

But earnings have been coming in slightly below expectations in the last couple of quarters, and it seems that future earnings estimates may still be too high given this new environment.

Although estimates are being adjusted downward, I think the downward momentum will be stronger and harder, so it will take time for the full adjustments to be made to bring them more in line with reality.

Final thoughts

At a time of rising interest rates and a consumer at risk, a retailer is not the best stock to be invested in, especially one whose estimates are still at risk.

So, while Dollarama will be more recession-proof than many other Canadian retailers, I think the stock will languish here until expectations come more in line with reality and until there is a catalyst.

I think the stock price is still pricing in faster growth than the company will achieve, and it is therefore still trading at multiples that are too high.

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 Karen Thomas has no position in any of the stocks mentioned.

More on Investing

Caution, careful
Stocks for Beginners

Don’t Get Taxed by Surprise: The TFSA’s Dirty Little Secret

Did you know that you can be taxed in a Tax-Free Savings Account (TFSA)? It’s not common knowledge, but it’s …

Read more »

Question marks in a pile
Stocks for Beginners

New Investors: Do You Need Bonds in Your Investment Portfolio?

The traditional investment portfolio would have a bond and equity component. Do you really need bonds in your investment portfolio? …

Read more »

Top view of people having party, gathering, celebrating together
Investing

Plant-Based Foods Growth: Why I’m Buying This TSX Stock on the Dip

SunOpta (TSX:SOY) is a Minneapolis-based company that manufactures and sells plant-based and fruit-based food and beverage products to a variety …

Read more »

Coronavirus written newspaper close up shot to the text.
Tech Stocks

The 2 Best Tech Stocks to Buy Today for Low-Risk Investors

Overvalued tech stocks are undergoing a major correction after inflating on the back of high liquidity from fiscal stimulus packages. …

Read more »

crypto blockchain
Cryptocurrency

How Cheap Can Crypto Mining Stocks Get Before They Are Worth a Buy?

Over the last two years, during the significant rallies in the crypto industry, some of the biggest gainers and best …

Read more »

Aircraft wing plane
Coronavirus

Air Canada (TSX:AC): Is $22/Share Cheap or Expensive?

The TSX Composite Index corrected 2.3% since December 30, 2021, as tech stocks saw a huge selloff over the anticipation …

Read more »

exchange traded funds
Energy Stocks

3 Sector-Specific ETFs to Consider

Exposure to a specific sector doesn’t make sense from a diversification perspective, but it is often a good way to …

Read more »

silver metal
Metals and Mining Stocks

1 Reeling Silver Stock to Consider Today

Aya Gold & Silver (TSX:AYA) is a Montreal-based company that is engaged in the acquisition, exploration, evaluation, and development of …

Read more »