Dollarama Inc. (TSX:DOL) Compares Favourably to Its U.S. Counterparts

Dollarama Inc. (TSX:DOL) has taken it on the chin is down 23% since the beginning of September. Here’s why it’s a good deal compared to its U.S. peers.

| More on:
office buildings

Image source: Getty Images

In my last article about Dollarama (TSX:DOL), I suggested that despite its level of debt, the company would be smart to repurchase its shares anywhere below $40.

That was November 9. Since then, DOL stock has lost another 15%, dropping into the low $30s, its worst level since June 2016.

The Dollarama bloom has indeed gone off the rose.

Before investors give up on the discount retailer, one might consider Dollarama in context to its U.S. peers such as Dollar Tree and Dollar General. If there’s a case to be made that Dollarama’s the best of the trio — based on valuation, growth potential, management team, business model, etc. — it should be made.

Dollarama’s prospects in 2019

Heading into 2019, Dollarama expects to finish the fourth quarter having opened between 60-70 net new stores, a gross margin for the year of at least 38.5%, same-store sales growth of 2.5%-3.5% for the fiscal year, and an EBITDA margin of at least 23.5%.

On the Dollar City front, its South American partnership continues to hum right along, growing by 43 stores in 2018 through the end of September, to 150 locations with 61 in Colombia, 42 in El Salvador, and 47 in Guatemala.

As part of its agreement with Dollar City’s owners, Dollarama has the option of buying 50.1% of the South American discounter starting in 2020, something Fool contributor Nelson Smith recently alluded to.

“Growth potential in Central and South America is massive, and Dollar City is doing the right thing by expanding into markets with higher per capita incomes,” Smith wrote December 16. “There are approximately 100 million people in Colombia, Peru, and Ecuador. It’s a prize that could easily one day rival Canadian operations.”

You better believe it. I’ve long held that the option to buy control of Dollar City is virtually ignored by North American investors who are not up to speed on the potential of Latin America.

Do Dollar Tree or Dollar General have this type of opportunity available to them? Not that I know of.

The prospects of its peers

Dollar Tree’s business has a good part and a bad one. The Dollar Tree banner is doing just fine. In Q3 2018, it had same-store sales growth of 2.3%. However, its Family Dollar chain, which it paid $9.1 billion for in July 2015, had a same-store sales contraction of 0.4% in the quarter.

As a result, the same-store sales overall increased by just 1% in the quarter compared to 3.1% for Dollarama. Up 1.4% through the first nine months of the year, it’s unlikely that Dollar Tree is going to be able to match Dollarama’s same-store sales growth for the year.

Onto Dollar General.

It fared much better in the third quarter, with same-store sales growth of 2.8%. Through the first nine months of the year, it had same-store sales growth of 2.9%, 20 basis points higher than Dollarama. However, in fiscal 2018, Dollar General expects same-store sales growth to be no more than 2.8%, less than the high-end of Dollarama’s outlook of 3.5% growth for the year.

And of course, neither of these discounters have a South American connection.

It all comes down to valuation

Based on the potential of South America combined with the fact Dollarama’s same-store sales growth is higher than both of its peers, suggests that it still deserves a slightly higher multiple than either Dollar Tree or Dollar General.

According to Morningstar, Dollarama’s got a forward P/E of 14.6. That compares to 14.7 for Dollar Tree and 15.7 for Dollar General. On that basis, Dollarama appears undervalued.

Metrics like price-to-sales, however, suggest it’s not nearly as undervalued compared to its peers, as one might think.

At the end of the day, I believe that its option to buy majority control of Dollar City tips the scale in its favour. In 2019, I expect institutional buyers will look upon Dollarama more favourably than its U.S. peers.

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 Will Ashworth has no position in any stocks mentioned.

More on Investing

stock analysis

Buy the Dip: 2 Stocks to Buy Today and Hold for the Next 5 Years

These Canadian stocks are trading at discounted valuations, providing an opportunity for buying the dip.

Read more »

bulb idea thinking

Safety in Size? 2 of the Bluest Blue-Chip Stocks I’d Buy Now

TC Energy (TSX:TRP) and another cash cow have huge dividend yields for safe investors.

Read more »

A cannabis plant grows.
Cannabis Stocks

Can Aurora Cannabis Stock Recover in 2024?

Aurora Cannabis stock is down 99% from all-time highs but remains a high-risk bet, despite its cheap valuation.

Read more »

Question marks in a pile
Dividend Stocks

Where Will Brookfield Infrastructure Partners Stock Be in 5 Years?

Brookfield Infrastructure Partners (TSX:BIP.UN) kicked off 2024 with a bang. Where will it be in five years?

Read more »

TFSA and coins

TFSA Investors: 3 Incredible Stocks for 2024

Are you looking for stocks to buy and hold for years for your TFSA? These three stocks could deliver exceptional…

Read more »

A person looks at data on a screen
Stocks for Beginners

3 Warren Buffett Stocks to Hold Forever

Warren Buffett sold some shares in Apple (NASDAQ:AAPL), and the market had questions.

Read more »

Dividend Stocks

Golden Years Gain: Your CPP Benefits at Age 70

CPP users delaying pension payments until 70 will receive substantial monthly income streams in the golden years.

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Dividend Stocks

3 Dividend Stocks You Can Safely Hold for Decades

Top TSX dividend stocks are on sale.

Read more »