Dollarama Inc. (TSX:DOL) certainly has a very impressive history. It all started in 1992 with a small store in an obscure and quaint little town named Matane in Quebec. Today, this value retailer has over 1,200 locations, with Dollarama stores popping up from coast to coast, offering shoppers with a big assortment of products at low prices.
Since Dollarama’s IPO in September of 2009, the company’s stock has reflected the great success that this retailer has had.
Revenues have soared from $1 billion in 2009 to $3.5 billion in 2018, and this $15 billion retailer has seen its share price rise tenfold to its current $45.58 share price.
Growth expectations reset
The retail landscape is an ever-changing one, with recent history showing us just how fluid this industry actually is. Online shopping has totally changed the retail world, and it is not finished evolving.
Shopify is empowering small and medium-sized entrepreneurs and easy home delivery, making everyone’s lives easier. Well, everyone except traditional bricks and mortar retailers, that is.
In the retail landscape, Dollarama certainly has its niche. The dollar store value proposition has been a clear winner. But “Dollar”ama’s prices are rising, and this is something that may not bode well for the company’s competitive positioning.
If escalating costs and therefore Dollarama’s prices rise high enough, Dollarama will start to compete more squarely with the likes of WalMart, which would change things for Dollarama for the worse.
The store count is currently at 1,225, and the company still expects that by 2027 they will have 1,400 to 1,700 stores across Canada, for an up to 38% increase in store count.
Same-store sales growth has already been reset, with the company expecting fiscal 2020 same-store-sales growth of 3% to 4% (down from growth rates of more than 8% in prior years). I question whether this slowdown in sales growth will impact Dollarama’s store growth.
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Valuation is now more attractive
Not too long ago, Dollarama was trading at a price-to-earnings multiples of 35-plus times, and while this valuation was partly supported by very strong same-store sales growth numbers, it was still too high, causing me to recommend passing on the stock until valuations came to more fairly valued levels.
We have seen that in recent quarters, same-store sales growth trends have moderated, and with this, expectations priced into the stock have been reset. With this, the stock price plummeted to 52-week lows.
With the stock now trading at 24 times this year’s expected earnings, we can see that valuations are now more reasonable. And with the latest quarter showing that traffic is recovering after a difficult period earlier this year, the stock is climbing higher again (up 44% year-to-date).
But looking longer-term, the concern here is that price hikes may have reduced the value proposition of Dollarama, and that this will erode traffic trends and the company’s strong competitive positioning at a time when shoppers may be growing weary in general.
To be clear, I believe that shoppers will eventually feel the burden of massive debt loads, and that this will impact even Dollarama (although to a lesser extent).
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. Shopify is a recommendation of Stock Advisor Canada.