One of the top-performing stocks on the TSX has been Dollarama (TSX:DOL). The popular discount retailer has returned a stellar 1,648% since its IPO back in 2009. Comparatively, the S&P 500 and TSX have returned 449% and 170%, respectively, in this period.
While Dollarama stock’s historical gains have been impressive, let’s see if it should be part of your equity portfolio today.
Dollarama continues to focus on expansion
As of May 2 this year, Dollarama had 1,368 stores in Canada. This included 12 net new stores opened in the first quarter of fiscal 2022 ended in April. We can see that the company continues to expand its network, which is a key driver of revenue growth. It also closed a small number of stores primarily in enclosed shopping malls due to COVID-19.
A typical Dollarama store has average square feet of 10,336, where it offers a range of consumable products, merchandise, and seasonal items at a low cost. These stores are company operate, which allows them to provide consumers with a consistent shopping experience.
Several of its stores are located in high-traffic areas across mid-sized cities and towns that attract foot traffic. It also has an online store to provide customers an opportunity to buy products in bulk or shop for ones that may not be available in store.
Dollarama aims to grow sales, operating income, and earnings per share by expanding its store network in Canada. It operates in Latin America, as it has a 50.1% equity stake in Dollarcity, a value retailer with headquarters in Panama. At the end of March 2021, Dollarcity had 279 stores with 156 locations in Columbia, 54 in El Salvador, and 69 in Guatemala.
Recent financials and valuation
In the first quarter of fiscal 2022, Dollarama reported revenue of $954.2 million, which was 13% higher compared to the year-ago period. Comparable store sales were up 5.8%, while its gross margin stood at 42.3%. Dollarama reported an EBITDA of $248.2 million, which was 16% higher compared to the year-ago period, indicating a margin of 26%. Operating income rose 18.1% to $176.8 million, while diluted net earnings per share were up 32% to $0.37 per share.
Analysts tracking the stock expect Dollarama sales to increase sales by 8.4% to $4.36 billion in fiscal 2022 and by 8% to $4.71 billion in 2023. Comparatively, its adjusted earnings are expected to increase at an annual rate of 16% in the next five years.
Given Dollarama’s market cap of $17.4 billion, the stock is trading at a forward price-to-sales multiple of four and a price-to-earnings multiple of 26.7, which is reasonable looking at growth estimates.
Dollarama is fairly recession-proof and is a company that has strong fundamentals. It ended Q1 with a total debt of $3.33 billion but also generated $839 million in operating cash flow in the last four quarters. Further, it pays investors a dividend of $0.20 per share each year, indicating a yield of just 0.35%. However, Dollarama’s payout ratio is less than 10%, providing it with enough room to increase payouts going forward.
