Why Dollarama (TSX:DOL) Stock Is My Top Retail Pick for 2020

Dollarama Inc. (TSX:DOL) is emerging as a top retail stock to buy in 2020. Find out why.

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Having some exposure to North America’s retail sector isn’t a bad idea in 2020, especially when the consumer economy is going strong and a potential threat to growth are subsiding.

According to media reports, President Donald Trump signed off on a phase-one trade deal with China, averting a global trade war that could have hurt consumer sentiment and made imports from China more expensive for many retailers.

If this trade deal between the world’s largest economies firmed up, then we have another strong year ahead of us for retailers, such as Dollarama (TSX:DOL), Target, and Wal-Mart. All three retailers have had a great year, and I believe conditions are becoming favourable for them to outperform in 2020 as well.

Among these three retailers, my top pick for 2020 is the Canada-based Dollarama. The reason I’m quite bullish on this stock’s future prospects is that its management is firmly in control of the company’s turnaround strategy, and there is more value to be unlocked once the company’s expansion plans are completed. 

Investors who bought this stock on my recommendation in late 2018, have seen their holdings going up 40% during that period.

Strong store traffic 

In the latest quarterly numbers released last week, its comparable store sales grew a strong 5.3% in the third quarter ended Nov. 3, beating analysts’ estimate of 3.84%. After producing a string of strong quarterly performances in 2019, Dollarama is positioning itself for future growth by investing heavily in expanding its stores as well as on its online business for bulk orders. 

Dollarama now expects full-year comparable sales to grow in the range of 4-4.5% compared with the prior range of 3.5-4.5%.

While pursuing this growth, the discount retailer has kept price rises to a minimum to better fight competition from Canadian and U.S. retailers. According to CEO Neil Ross, Dollarama has been expanding its product offering where possible and updating selection all the time. It offers more than 4,000 year-round products and more than 700 seasonal ones.

Some pressure on margins has been one potential area of concern for some analysts, as the retailer holds off price increases and spends more on expansion. In the third quarter, margins fell to 43.7% from 44.3%, while expenses rose about 18%, primarily because of new store openings. The retailer, targeting 60-70 new stores in the fiscal year, rolled out 21 outlets in the third quarter. But, in view, some slippages in margin is understandable and could not be taken as a negative sign when growth is intact.

Bottom line

For investors who want to hold a top retail stock in their portfolio for 2020, Dollarama is certainly a stock to buy. Its consumer proposition has been one of the most powerful, and its business model is one of the most financially productive.

This position has been further strengthened after the chain bought a 50.1% stake in rapidly growing Latin American value retailer Dollarcity this summer. Even after a 50% rally this year, its stock has more room to go.

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 Haris Anwar doesn't own shares of the companies mentioned in this article.

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