Buying Canada’s retail stocks isn’t a bad idea in 2020, especially when the consumer economy is going strong and a potential threat to growth is subsiding. Among North American retail stocks, Canada’s discount retailer, Dollarama (TSX:DOL) is well positioned to benefit from the strength of the local economy.
Canadian retail sales rose the most in eight months in November, according to media reports today, giving a strong signal that household consumption will continue to support the Canadian economy as interest rates remain low.
On the trade front, Canada and the U.S. have finalized the restructured NAFTA deal, which is waiting for a parliamentary approval in Canada. In another positive development, both U.S. and China have signed off on a phase-one trade deal, averting a global trade war that could have hurt consumer sentiment and made imports from China more expensive for North American retailers.
Besides these macro factors, another factor that makes Dollarama stock attractive is that its management is succeeding in the company’s turnaround strategy, and there is more value to be unlocked once the company’s expansion plans are completed. Investors who’d bought this stock on my recommendation in late 2018 have seen their holdings going up 54% during that period.
Higher store traffic
In recent quarters, higher store traffic and customers buying more items have bolstered Dollarama sales, as the company spends on expanding its stores as well as its online business for bulk ordering. It is also adding new items, such as household goods and food products, to boost sales.
These efforts helped increase sales at Dollarama stores that have been open for at least 13 months, growing 5.3% in the third quarter ended Nov. 3 — well ahead of the estimated rise of 3.84%. Dollarama, which is targeting to open 60-70 new stores in the fiscal year, rolled out 21 outlets in the third quarter. 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 is 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. But, in my view, some slippages in margin is understandable and could not be taken as a negative sign when growth is intact.
Bottom line
Dollarama is a top retail stock from Canada that investors could stash in their long-term portfolios. 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 last summer. Even after a 50% rally since last summer, I see its stock gaining more in 2020.
