Companies witness pressure on their profit margins amid inflationary environments. That’s because many of them cannot pass on the burden of higher costs to their customers. So, the earnings decline many times results in value erosion.
However, at the same time, there are some names that do have the pricing power and can effectively pass on the higher cost load to their customers. These two consumer stocks have such a competitive advantage that makes them stand tall in the rising costs environment.
DOL stock or NWC: Which one is a better buy?
Dollarama (TSX:DOL) and North West Company (TSX:NWC) have shown resilience to broad market woes since late 2021. In the last 12 months, DOL stock has soared 15%, while NWC stock has gained 11%. In comparison, the TSX Composite Index lost 3% in the same period.
Dollarama is a $24 billion discount retailer that sells household items, general merchandise, and consumables. It has a significant presence all over Canada, and its larger footprint is a key competitive advantage. North West is a much smaller $1.9 billion retailer that sells groceries in remote communities in Canada. It has a presence in northern Canada, Alaska, and the Caribbean.
Not just in the short term, DOL has outperformed in the long term as well. It has returned 700% in the last decade against NWC’s 170% return, including dividends.
Why Dollarama stands tall
Dollarama is a defensive stock with a growth tilt. It has played well in almost all bear market cycles in the past. Plus, its superior earnings growth and margin stability call for a premium valuation.
Dollarama’s store count is three times higher than its four pure-play competitors combined. It sources a large chunk of private-label brands from low-cost vendors that offer value to customers and facilitate higher margins. As a result, its operating margins consistently came in above 20% in the last five years. That’s way higher than its North American peer dollar-store operators.
Dollarama’s average return on capital (ROC) ratio of about 25% also indicates its handsome profitability and efficient use of capital. Its free cash flows have grown by 12% compounded annually in the last five years — quite an exceptional performance for a saturated retail industry.
Dollarama aims to open 65-70 net new stores annually through 2031. Its financial growth has been directly proportional to the store count. So, we might continue to see value creation from DOL in the long term.
A boring but value-creating business
North West Company caters to rural communities and serves food, financial services, and general merchandise. It has seen its operating margins average around 8-10%, mainly due to its product mix. Low margins and small markets have kept big competitors at bay.
North West Company is a stable name and a classic defensive bet. Its slow-moving stock could be a huge win in uncertain markets. It yields a decent 4%, way higher than DOL’s 0.3%.
If we compare valuations, DOL stock is trading 30 times its earnings, almost double that of NWC. That indicates investor expectations of higher growth from DOL. Though NWC looks discounted, it highlights the stock’s relative stability and more defensive nature of the stock.
Investor takeaway
So, if you are looking for a combination of growth plus stability, Dollarama seems an apt bet. But if you are more conservative and looking for a passive income, NWC should be your choice.
