Dollarama Inc (TSX: DOL) stock hasn’t been a winner in 2020 so far. Starting the year at $45.05, it was down to $39.46 as of this writing–a 12.41% decline. Last week, however, DOL broke out, rising 3.5% when practically everything else was in a freefall.
It was an unexpected move to say the least. Dollarama, previously a fast-growing company, has seen revenue growth decelerate. While the company’s same-store sales growth has been solid, coming in at 5.3% in the most recent quarter, it hasn’t been enough to compensate for the chain having saturated the domestic market.
Now, with global economic growth set to slow, the company could be set for an epic comeback.
Here’s why:
Discount retailers thrive in recessions
It’s a well-known phenomenon that discount retail stores tend to thrive during recessions. In the late 2000s recession, Dollar Tree saw its shares soar 200% while markets as a whole tanked. Similarly, Wal-Mart–a discount retailer–saw strong earnings growth during the worst period of the recession.
It all comes down to the tendency of consumers to penny pinch when recessions are in full swing. Faced with job loss and reduced income, they look for ways to cut down on their budgets.
One of the easiest ways to do that is to shop at dollar stores and discount retail outlets. These stores offer many food items for lower prices than can be found at grocery stores, which makes them attractive places to shop when times are tough.
Dollarama could stage massive recovery
As the leading dollar store in Canada, Dollarama could stage a comeback if coronavirus-driven market woes turn into a full-fledged recession. Dollarama has an 18% share of the discount retail market in Canada–a broad category that includes both dollar stores and big box stores like Wal-Mart.
If we narrow it to dollar stores specifically, Dollarama’s market share is much higher, as its nearest competitor, Dollar Tree, has only 2.2% of the market.
Amid a recessionary environment, Dollarama stands to benefit massively from customers downsizing. The store has some of the lowest prices in the country on items like soda, kitchen supplies and stationery, and even carries some brand name food items at lower prices than you’ll find in grocery stores.
While not all Dollarama items are of the best quality, some are identical to goods that sell for two times higher or more at grocery stores. This is exactly the kind of retailer that stands to benefit in a recession.
Foolish takeaway
Thus far, the ongoing coronavirus panic is the most obvious culprit for the market decline we’re seeing. And while that in itself probably won’t send people fleeing to Dollarama, there’s a real possibility that the virus will hit companies in the pocketbooks, leading to layoffs and a recession.
Goldman Sachs recently revised its corporate earnings growth forecast from 7% to 0% for the first quarter. If that materializes and spills over to a broader North American recession, Dollarama will fare better than the average company.
