Dollarama (TSX:DOL) Stock Is Ready for a Monster 2020

Dollarama Inc (TSX:DOL) is one of the greatest Canadian growth stories in history. After a recent acquisition, the company now has another decade or more of rapid growth ahead.

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A close up image of Canadian $20 Dollar bills

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Dollarama Inc (TSX:DOL) stock is simply a winner. Since 2009, shares are up nearly 1,500%. The S&P/TSX Composite Index, meanwhile, grew by just 45%. The run hasn’t always been smooth, however.

Late last year, shares fell 39% after investors worried that the days of high-growth were over. At the time, I called the market “wrong,” highlighting that investors and analysts alike were missing “hidden growth opportunities” that would ultimately force shares to rebound.

Since that time, shares have popped by nearly 40%, but if you pay attention, you’ll see that there’s much more upside to go.

Management rocks

When it comes to solid management teams, however, Dollarama takes the cake. Over the past 15 years, company executives have led an extremely profitable expansion of the business. In 2004, the company had 344 stores across six provinces.

Today, it operates more than 1,200 stores spanning every major metropolitan area in Canada, not to mention hundreds of smaller geographies with limited competition.

Many companies stumble when trying to achieve this level of rapid growth, but not Dollarama. Not only has store count increased dramatically, but profitability has improved considerably as well.

Over the past 12 months, Dollarama generated $1.1 billion in EBITDA off just $3.6 billion in sales. Compare that to any other retailer, especially traditional department stores, and you’ll get a sense of how special this business really is.

The company’s direct-sourcing model provides a durable competitive advantage that’s difficult to replicate.

Today, it acquires roughly half of its merchandise directly from manufacturers spanning nearly 30 countries. This strategy increases bargaining power, mitigates inflation and currency risk, giving Dollarama a permanent cost and pricing advantage.

2020 is a new game

Late last year, Dollarama stock shed 40% in value as the market reassessed its growth prospects. Over the last 10 years, earnings grew by an astounding 38% per year. But over the previous five years, that rate slowed to just 11.2%.

In 2018, net income increased by just 3.5%. It seemed that the glory days were over, but in March, I warned investors not to buy into this bearish thesis.

That’s because in 2013, Dollarama acquired the option to buy a 50.1% interest in Dollar City. Dollar City is essentially a clone of Dollarama, but with a big difference: it’s located in fast-growing Latin America.

In 2014, Dollar City had just 25 storefronts. Today, it has nearly 200. By 2029, it will be targeting at least 600 locations. The growth plan mirrors Dollarama’s rise, and there are plenty of reasons to believe Dollar City will execute on that plan.

“The market may have forgotten about this potential growth driver,” I argued earlier this year, “but you shouldn’t.” In July, Dollarama executed its option to take a majority stake. “With this transaction, which is expected to be immediately accretive to our earnings, Dollarama is establishing a compelling second growth platform, in complement to our Canadian growth strategy,” said Dollarama CEO Neil Rossy.

In a single stroke, Dollarama just extended its growth runway by a decade or more. Over the next five years, analysts believe that profits will grow by 11.2% annually, but the company has the opportunity to outpace expectations if its Dollar City acquisition tracks as expected.

Trading at 27 times trailing earnings, the stock isn’t cheap, but its price is more than fair for a gold standard management team with a newfound growth platform. Don’t be surprised to see 2020 growth rates surprise the market.

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.

Ryan Vanzo has no position in any stocks mentioned.

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