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.
Speaking of growth stocks....
Motley Fool Canada's market-beating team has just released a new FREE report that gives our three recommendations for the Next Gen Revolution.
Click on the link below for our stock recommendations that we believe could battle Netflix for entertainment dominance.
Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.