Last week, Statistics Canada reported that Canada’s inflation in June declined to 2.8%, the lowest in 27 months. It was also lower than analysts’ expectation of 3%. Amid signs of inflation cooling down, the S&P/TSX Composite Index has risen by 5.6% from last month’s lows. However, the fight against inflation is far from over, as food prices rose 9% in June, representing a 20% increase over the previous two years.
So, analysts expect the federal reserves to be more cautious in easing their conservative monetary policies. The prolonged high-interest rate environment and sticky inflation could hurt global growth. In this uncertain environment, let’s assess whether Dollarama (TSX:DOL), a defensive stock with a growth tilt, would be an ideal buy to strengthen your portfolio. First, let’s look at its performance in the recently reported first-quarter earnings of fiscal 2024, which ended on April 30.
Dollarama’s first-quarter earnings
Dollarama posted revenue of $1.3 billion during the first quarter, representing a 20.7% increase from its previous year’s quarter. Same-store sales growth of 17.1% and net addition of 76 stores drove the company’s top line. Consumers responded positively to the company’s compelling value proposition and affordable product mix, with a 15.5% increase in its total transactions compared to the previous year’s quarters. The company also witnessed a 1.4% increase in its average transaction size.
Amid the topline growth, the company’s net income grew by 23.6% to $179.9 million. The company also benefitted from the increased contribution from Dollarcity’s net earnings, of which the company holds a 50.1% stake. Besides, the company generated an EBITDA (earnings before interest, tax, depreciation, and amortization) of $366.3 million, representing a 22.1% increase compared to its previous year’s quarter. Its adjusted EBITDA margin also improved from 28% to 28.3%, which is encouraging.
Now, let’s look at its growth prospects.
Dollarama’s growth prospects
Dollarama focuses on strengthening its direct sourcing capabilities to reduce intermediary expenses and increase its bargaining power, thus allowing it to offer its products at attractive prices. Besides, the company is enhancing customer experience by growing its digital footprint and optimizing its queue line and check-out process.
Additionally, the company is looking at adding 60–70 new stores every year, thus achieving its target of 2,000 stores by the end of 2031. Meanwhile, Dollarcity has plans to increase its store count to 850 by the end of 2029 from its current 448 stores. These growth initiatives could boost the company’s financials in the coming quarters.
Dividend and valuation
Dollarama has been rewarding its shareholders through share repurchases and dividends. Since fiscal 2013, the company has repurchased shares worth $5.7 billion while paying over $500 million in dividends. Currently, the company pays a quarterly dividend of $0.0708/share, with its yield at 0.3%.
Supported by its solid financials and store expansion, Dollarama has delivered impressive returns of over 740% in the last 10 years at a CAGR (compound annual growth rate) of 23.7%. This year, the company is up around 12%, outperforming the broader equity markets. With the increase in its stock price, the company trades at an NTM (next 12 months) price-to-earnings multiple of 27.1, which is on the higher side.
Despite its expensive valuation, I am bullish on Dollarama due to the defensive nature of its business, excellent track record, and healthy growth prospects.
