Is Dollarama a Good Investment for 2020?

With growing uncertainty over the market, investors continue to seek out defensive investments. Could Dollarama (TSX:DOL) be what your portfolio is missing?

| More on:
Handwriting text writing Are You Ready For Tomorrow question. Concept meaning Preparation to the future Motivation Stand blackboard with white words behind blurry blue paper lobs woody floor.

Image source: Getty Images

I hate to be the one to say it, but we’re now in the final months of 2019. Patio and BBQ season is wrapping up, the kids are back in school, and retail stores everywhere are packed with Halloween candy and yes, even some Christmas fare.

That also means that now is the perfect time to look at your portfolio with a view toward 2020 investments.

Meet the king of Canadian retail

Dollarama (TSX:DOL) is a leader in the Canadian retail sector. The dollar store operator has a network of over 1,250 stores with a presence in every province. Dollarama prices items across several fixed price points, currently ranging from $1.00 to $4.00.

Many of the products that Dollarama offers are bundled together across those fixed price points, which in turn provides a greater sense of value and appeal to shoppers. As a result, shoppers entering a Dollarama store for one item often leave with a cart full of goods.

Dollarama operates in a unique segment of the market that has thus far largely escaped the mobile commerce onslaught plaguing other brick-and-mortar retailers. Part of the reason for that can be attributed to the small, inexpensive nature of Dollarama’s goods, which larger retailers still can’t ship individually for a profit.

Dollarama, on the other hand, has started to branch out online, offering selective items for sale in bulk.

Dollarama is also growing force internationally

Few people may realize this, but Dollarama has a growing presence outside Canada. Dollarama signed a multi-year agreement several years ago with Latin American-based Dollar City.

Under the terms of that agreement, Dollarama was to provide product and merchandising expertise to the chain with the option to purchase the chain outright.

That agreement came to a close earlier this year when Dollarama purchased a controlling interest in Dollar City. Today Dollar City operates 169 stores across El Salvador, Columbia, and Guatemala.

Investors can expect revenues (as well as the upfront payment for the 50.1% share of the company) to appear in the third-quarter financial results later this year.

Strong results 

In recent quarters, Dollarama’s once-incredible growth has slowed. While part of that can be attributed to steep competition from other low-priced retailers, there are few investors who believed that Dollarama’s double-digit growth could persist indefinitely.

That said, Dollarama’s recently announced results for the third quarter aren’t exactly bad. The company reported a 9% increase in sales to $946.4 million, while comparable-store sales witnessed an uptick of 4.7% over the same period last year.

EBITDA came in at $281.6 million, or 28.6% of sales, reflecting a 3.5% increase over the same period last year. Net earnings for the quarter came in at $0.45 per diluted share, reflecting a 7.1% increase over the same quarter last year.

Should Dollarama be in your 2020 portfolio?

There are two key reasons why I think Dollarama is a great holding moving into 2020 and beyond.

First, there’s the dollar-store business model itself. Dollar stores perform best when the market begins to slow. This is due to consumers flocking toward lower-cost retailers to save money.

With many pundits now seeing a slowdown hitting the market within the next year, a defensive investment like Dollarama could be the perfect addition to any portfolio.

Second, there’s Dollarama’s international presence, which shouldn’t be understated. Under the guidance of Dollarama, Dollar City has flourished in the past few years, entering both the Columbian and Guatemalan markets.

There is a strong demand for low-cost retailers in those markets, which are currently underserved. If Dollarama continues to expand its presence there, the results could prove lucrative for investors over the longer-term, thus offsetting any perceived slowdown in the more saturated Canadian market.

In my opinion, Dollarama remains an excellent long-term investment option for nearly any portfolio.

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 Demetris Afxentiou has no position in any of the stocks mentioned.

More on Investing

money cash dividends
Stocks for Beginners

Where to Invest $10,000 in April 2024

If you've already created a diversified portfolio and are looking for more options from a windfall, here is where I…

Read more »

data analyze research
Investing

The Ultimate TSX Stock to Buy With $1,000 Right Now

Brookfield Asset Management (TSX:BAM) is one of the best Canadian stocks to buy for those looking to put capital to…

Read more »

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »