The Motley Fool

Worried About a Recession? This Retail Stock’s Got Your Back

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The dreaded “R” word keeps propping up in every financial conversation people have. There seems to be a general agreement that the economy is going to slow down sooner or later. If a recession actually does hit the economy, what are safe havens that investors can park their monies in?

You can buy shares of a company that’s the best in its sector like The North West Company Inc because people in rural North America still need to shop, or you can choose a utility company like Emera because North Americans and Caribbean residents still need their electricity.

You could also opt for Canada’s biggest discount retailer, Dollarama (TSX:DOL). If there’s a recession, people will go hunting for discounts and Dollarama, with its 18% market share in Canada is perfectly poised to reap the benefits.

The numbers for Dollarama

Dollarama’s 1,250 store locations are spread across metropolitan areas, mid-sized cities and small towns in Canada, and offer a broad assortment of consumable products, general merchandise, and seasonal items both in-store and online.

The company also owns a 50.1% interest in Dollarcity, a growing Latin American value retailer with 192 stores in Colombia, El Salvador and Guatemala.

The second quarter numbers for Dollarama have been good. Sales increased by 9.0% to $946.4 million, compared to $868.5 million in the corresponding period last year. Net earnings increased to $143.2 million compared to $140.3 million, and the company approved a quarterly dividend of $0.044 per share.

Dollarama’s balance sheet gives good comfort as well. It has a significant amount of debt at $1.87 billion, but its interest coverage ratio of 15.2 can tide over its payments.

The company has a market cap of over $14 billion, which means it can raise money easily if the need arises. Over the last three years, Dollarama’s cash flows have equalled almost 60% of its earnings before interest and taxes.

The verdict

These numbers will hold, if not rise during a recession. People cut costs wherever they can during a downturn, and Dollarama has some of the lowest-priced products in Canada across various product lines.

None of its products are priced higher than $4. Its regular customers will definitely continue to shop here and it will get a booster shot of customers who want to save, well, a dollar here and a dollar there.

Shares of the discount retailer are already up over 40% this year (DOL currently trades at $44.5 at writing) and analysts expect it to rise further. Nine out of 15 analysts advise a “buy” on the stock, two advise a “strong buy” and four advise a hold. They have an average target of $51 with a low estimate of  $45 and a high estimate of $60.

I’ve stated before that the company’s forward price to earnings multiple is high at 21, especially after considering its five-year estimated annual earnings growth of 11.8% and a shockingly low dividend yield at 0.39%.

But if the economy does go south, customers will make a beeline outside Dollarama stores. It would do you well to hold some stock when that happens.

Investors can look to buy this stock at significant price dips, as it remains a solid long-term buy.

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 Aditya Raghunath has no position in any of the stocks mentioned.

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