Shares of Canada’s retail giant Dollarama (TSX:DOL) has outperformed the broader markets in 2020. The stock first fell to a 52-week low of $34.7 in March 2020 driven by the pandemic-led sell-off. It has since made a strong comeback and has gained 40% to currently trade at $49.05.
This suggests Dollarama stock is up 10% year-to-date compared to the 2% loss for the iShares S&P/TSX 60 Index ETF. So, is Dollarama good amid the ongoing uncertainty?
A top recession-proof stock
Last week, Ontario’s finance minister Rod Philips claimed that the province has entered a recession due to the COVID-19 pandemic. This might soon be true for other Canadian provinces, given the country’s high unemployment rates and sluggish consumer spending.
However, Dollarama is a low cost retailer with a huge domestic presence and is largely recession-proof. Low cost retail stores attract a higher footfall during an economic recession as consumers look to reduce spending as well as due to lower disposable incomes.
Dollarama is one of the top-performing companies on the TSX ever since its IPO in October 2009. Dollarama stock has returned 1,400% since its IPO compared to the broader market returns of 51%.
It is a Canada-based value retailer with a vast assortment of consumable products, general merchandise, and seasonal products. It has over 1,300 locations in Canada and provides a range of value products with fixed price points of up to $4.
Dollarama also owns a 50.1% interest in Dollarcity, a high-growth Latin American value retailer. Dollarcity has 232 stores in Colombia, Guatemala, and El Salvador.
In the first quarter of fiscal 2021, Dollarama’s sales grew 2% despite the pandemic. It reported net earnings of $86.1 million or $0.28 per share. The company’s EBITDA fell 5.8% to $213.7 million while operating income fell 11.2% to $149.7 million and accounted for 17.7% of sales, down from 20.4% of sales in the prior-year period.
As of May 2020, the company’s 1,197 stores were open and 104 were temporarily closed. A significant portion of these stores is located in malls primarily in Quebec.
A look at valuation and target price
Dollarama stock is valued at a market cap of $15.23 billion. Given its estimated sales of $3.92 billion in fiscal 2021, the stock is trading at a forward price to sales multiple of 3.9. While sales growth is forecast at 3.6% year-over-year in 2020, it is expected to accelerate to 8.8% to $4.27 billion in fiscal 2022.
Dollarama stock has a forward price to earnings multiple of 28.4. While earnings might fall by 1.1% in 2021 it is expected to rise by 27.7% in 2022. While Dollarama stock is not cheap it is also not too expensive and every major dip should be viewed as a buying opportunity.
The company’s ability to increase sales and earnings consistently, coupled with its focus on expansion and operational efficiency makes it a top bet in the upcoming decade. Dollarama’s defensive bet and low beta indicate investors will not be impacted by market swings.
