Canadian discount retailer Dollarama (TSX:DOL) yet again delivered a handsome set of numbers last month. While many consumer companies see a decline in top lines and margins, Dollarama has defied the inflation woes and kept its growth streak intact.
Dollarama again proves its vigour
DOL stock has gained 15% in the last 12 months, while Canadian stocks at large have dropped 6%. It’s not just the short-term outperformance, but DOL has already proved its supremacy in previous bear markets.
Dollarama reported total sales of $1.47 billion for the fiscal fourth quarter that ended on January 29, 2023. This was a decent 20% growth year over year. Its comparable store sales growth came in at 16% compared to the same period last year. Comparable store sales growth shows year-over-year sales growth at stores that have been operating for at least 13 months.
Dollarama’s comparable store sales growth was higher in the last reported quarter versus its long-term average. The increase came due to higher transaction value. The company introduced an additional price point of $5 last year in order to fight inflation. And this worked well, as the average order value increased and helped the company’s top line. However, according to the management guidance, comparable store sales growth will mean revert back to 5.5% in the fiscal year 2024.
Strong financial and operational growth
Dollarama’s stores are a primary growth engine for the company. The count has been heading consistently higher for years, fuelling the company’s financial growth. It operated 1,486 stores at the end of January 2023. That’s almost three times the store count of its four largest pure-play competitors combined. Almost 80% of Canadian households fall within a 10 km range of a Dollarama store. Such a large geographical presence offers convenience and supports premium margins.
Dollarama management has rightly recognized its key competitive advantage. As a result, it does not try too many new things but rather focuses its energy on opening new stores. It aims to open 65 net new stores per year and reach a 2,000-store count by 2031.
We have seen a strong positive correlation between its store count and financial growth, facilitating higher shareholder value. So, it will likely continue to see superior financial growth and investor returns in the long term.
Dollarama’s return on capital ratio averaged around 25% in the last five years, indicating a strong operating performance. It also indicates the amount of money it makes over the total cost it pays for its debt and equity.
Dollarama’s sourcing and effective cost management have also been the key to its consistent growth. Private label brands are the bread-and-butter for the company, making up 68% of its total product mix. It’s low-cost suppliers and efficient supply chain have driven industry-leading operating margins of around 24%. Such high margins are very rare in the retail industry. But Dollarama has consistently achieved that feat.
Investor takeaways
In the last fiscal year, Dollarama bought back 8.9 million shares of its own stock. Apart from a small dividend, buyback is Dollarama’s preferred way of distributing excess cash to its shareholders. It has been regularly buying back its own shares and has bought back almost 40% of its total outstanding since June 2012.
Dollarama’s unique value proposition stands particularly strong in this inflationary environment. DOL stock is a rare combination of decent growth and a less-volatile, defensive investment. If broader markets again go for a toss amid an impending recession, Dollarama will be in the limelight and will likely keep outperforming.
