Ever since the start of 2022, as many stocks have been struggling in the current economic environment and several companies have been losing value, Dollarama (TSX:DOL) has been one of the best-performing investments on the TSX.
However, while many investors may be aware of Dollarama’s impressive performance over the last 15 months, up over 30% vs. the TSX, which has lost more than 4%, Dollarama has actually been one of the best Canadian stocks for years now.
In fact, over the last decade, the stock has earned investors a total return of 707%, which is an incredible compounded annual growth rate of 23.2%.
So, it’s understandable if many investors are wondering whether Dollarama still has growth potential from here and if it’s even worth an investment after gaining so much value and now trading with a market cap of more than $23 billion.
Is the discount retailer’s growth sustainable?
With inflation impacting many Canadians over the last year, Dollarama has been one of the few companies across Canada seeing a net benefit. Consumers are constantly looking for ways to limit the impacts of price increases on their budgets, and shopping at discount retailers like Dollarama is the easiest way to do so.
Not only has it seen impressive growth over the last year, with sales up more than 16%, its fastest year-over-year growth ever, it continues to have attractive growth potential in the near term while the economic environment remains so uncertain.
In Dollarama’s guidance for its fiscal 2024 this year, it estimates that it will see same-store sales growth of 5-6% in addition to opening 60-70 new stores, which would bring its total store count to over 1,500.
Therefore, considering the potential it has in the short term, while many other companies are looking to cut costs, as they see their margins decline, it’s clear that Dollarama is one of the most attractive stocks to buy now.
However, as long-term investors know, the best strategy is to buy stocks for the long run and not just their short-run potential. So, even with this impressive growth potential over the next year, it still begs the question of whether Dollarama is a stock that you can buy now and plan to hold for years.
Is Dollarama stock a good buy today?
When you look at Dollarama’s valuation, it’s clear that the stock is priced at a premium. That doesn’t mean it’s not worth an investment. The highest-quality stocks often do trade at higher prices. However, it does mean investors need to be confident in Dollarama’s ability to continue executing at a high level, so it can continue to expand its business and earn investors an attractive return for years to come.
Today, the stock is trading at a forward price-to-earnings ratio of 25.9 times. That’s higher than its five-year average of 24.8 times but below its peak over the last year of more than 30 times.
Considering, though, that it’s only slightly above its five-year average, while Dollarama can look like it’s priced high, it’s certainly reasonable to buy the stock today, especially in this environment.
In fact, analysts expect the stock can grow its earnings by roughly 14% in each of the next two years to roughly $3.60 a share by fiscal 2025. So, with the stock trading at roughly $82 today, it’s only trading at 22.7 times its expected fiscal 2025 earnings.
Furthermore, as we’ve seen after past environments where the economy struggled, and Dollarama saw a short-term benefit, it can continue to grow its sales and earnings, even after the economy has recovered.
Not to mention, Dollarama also has tonnes of growth potential due to its investment in Dollarcity, a chain of discount retailers across Latin America.
Therefore, although some investors may want to wait for a pullback and buy Dollarama stock when it offers a bit more of a discount, you could certainly still buy the stock today and have confidence in owning it for years to come.
