There are several reasons to get excited about Dollarama (TSX:DOL) stock. The discount retailer has been on a roll this year, gaining 30% so far. The outperformance is quite noteworthy, especially when broader markets have continued to trade weak almost throughout the year.
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Why is DOL stock outperforming in 2022?
DOL stock has seen some profit booking at its record-high levels, bringing it nearly 8% down since last month. However, the subsequent weakness creates a worthwhile opportunity for investors. Moreover, Dollarama will report its fiscal third-quarter earnings next month. So, we might see some action ahead of its results, as the stock trades at relatively lower levels.
Dollarama has been resilient this year, despite sticky inflation and rapidly rising interest rates. Such macroeconomic challenges weigh on profit margins and negatively affect corporate earnings growth. However, in the case of Dollarama, its revenues in the last nine months grew by 13% versus its long-term average of 7%. Moreover, its net margins have largely been impervious at almost 15%. Its comparable store sales increased 10.3% in the same period compared to a 0.1% increase last year.
Such a top-notch financial performance in challenging times highlights Dollarama’s massive business strength. Its broad range of merchandise, sourced from countries like China, gives it a key competitive advantage over its peers. Direct sourcing from low-cost vendors and long-term relationships with them have fared well for its business over the years.
Plus, it operates in more than 1,400 locations in Canada. Dollarama introduced a new price point of up to $5 in March. Note that the value retailer is not immune to inflationary pressures, but the additional price point will likely help absorb some of the burdens.
Dollarama: An all-weather stock
Consumers turn all the more cautious about value amid inflationary times, where Dollarama stands tall. As a result, it has played well in almost all business cycles in the past. It has returned 60% in the last five years, beating peer retailers comfortably. So, even if a recession hits, DOL will likely be the place where investors can take safe shelter. Its earnings growth will likely remain stable, even if the macro picture deteriorates.
Notably, Dollarama has rightly realized the fundamental advantage of its extensive footprint. As a result, it has focused on operating at multiple locations and has consistently grown the store count.
The management intends to open 600 more stores in the coming decade. Canada is yet a relatively less penetrated retail market for retail versus the United States. So, Dollarama will likely reap the benefits of its rising presence and growing retail market in Canada.
Conclusion
DOL stock has been trading close to its record levels for the last few months. It is currently trading 31 times its earnings and does not look cheap from a valuation standpoint. However, considering its financial strength and worrying macro outlook, DOL stock could continue to trade strong. It has proved its vigour this year, when markets struggled to find a direction. Dollarama is one of the few stocks that can play well in bull as well as in bear markets.
