Shares of Dollarama (TSX:DOL) have been on an absolute tear since its IPO (initial public offering) in October 2009. In the last 14 years, the TSX stock has returned 2,800% to shareholders, as the company currently trades at a market cap of $25 billion. Comparatively, its counterpart south of the border, Dollar Tree (NASDAQ:DLTR) has returned “just” 625% since October 2009.
Let’s see if Dollarama stock remains a compelling buy in September 2023 at its current valuation.
The bull case for Dollarama stock
Dollarama is arguably the most discount retailer in Canada. Despite its massive size and a sluggish macro environment, Dollarama increased sales by 20.7% year over year to $1.29 billion in the fiscal first quarter (Q1) of 2024 (ended in July).
Comparable store sales were up 17.1% year over year compared to the 7.3% growth experienced in the prior year period. Its EBITDA (earnings before interest, tax, depreciation, and amortization) also rose by 22.1% to $366.3 million, accounting for 28.3% of sales. Comparatively, net earnings per share were up 28.6% at $0.63 in Q1.
Dollarama attributed higher comparable store sales to an uptick in transaction volumes and transaction sizes, indicating it remains a preferred destination among Canadian shoppers. Due to its wide economic moat and lower-priced products, Dollarama maintained its gross margins while operating expenses grew at a slower pace compared to revenue.
Dollarama opened 21 net new stores in the quarter, significantly higher than the 10 stores it opened in the prior-year period. The company opened its 1,500th store in Q1 and aims to end 2031 with 2,000 retail stores, which suggests its growth story is intact.
Additionally, Dollarama has a 50.1% stake in Dollarcity, a discount retailer in Latin America. In Q1, Dollaracity opened eight net new stores. It ended the March quarter with 448 stores, which includes 267 locations in Colombia, 91 in Guatemala, 66 in El Salvador, and 24 in Peru.
In fiscal Q1, Dollarcity contributed $13.1 million to Dollarama’s earnings, up from $8.3 million in the last year’s quarter.
Dollarama is a recession-resistant stock and generates cash flows across business cycles. Its predictable earnings allow the company to pay shareholders an annual dividend of $0.28 per share, indicating a yield of 0.32%. These payouts have more than doubled in the last eight years.
Is Dollarama stock undervalued?
Analysts tracking Dollarama stock expect adjusted earnings to surge from $2.76 per share in fiscal 2023 to $3.19 per share in fiscal 2024. Priced at 28 times forward earnings, the TSX stock is reasonably priced, given analysts expect earnings to increase by 17% annually in the next five years.
While Dollarama continues to expand profit margins, Dollar Tree is wrestling with an inflationary environment. Wall Street forecasts the U.S.-based discount retailer to report adjusted earnings of US$5.97 per share in 2023, compared to earnings of US$7.21 in 2022. So, Dollar Tree trades at a lower price-to-earnings multiple of 20 times.
Bay Street analysts remain bullish on Dollarama stock. Out of the 15 analysts covering Dollarama, 11 recommend a buy, and four recommend a “hold.” The average price target for Dollarama stock is $91, which is 5% above price target estimates.
