Dollarama Stock: Huge Value or About to Bomb?

With Dollarama outperforming the broader equity markets this year, let’s assess whether the uptrend could continue.

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The global equity markets have turned volatile over the last few weeks. The recent comments by the Federal Chairman, Jerome Powell, indicated that the Central Bank would continue its monetary tightening initiatives amid sticky inflation. Besides, the escalating Israel-Palestine conflict has also contributed to the volatility in the equity markets. Amid the uncertain outlook, the Canadian benchmark index, the S&P/TSX Composite Index, has declined by 6.6% since the beginning of September.

Despite the volatility, Dollarama (TSX:DOL) has returned 9.6% during the period, outperforming the broader equity markets. Meanwhile, the company is trading over 21.5% higher for this year. Given the recent surge, let’s assess whether the uptrend could continue or if it is time to exit the stock. First, let’s look at its performance in the recently reported second quarter.

Dollarama’s solid second-quarter performance

Last month, Dollarama reported its second-quarter earnings for fiscal 2024, which ended on July 30. Its revenue grew by 19.6% amid same-store sales growth of 15.5% and a net addition of 81 stores over the previous four quarters. A 12.9% increase in transactions and 2.3% growth in average transaction value drove its same-store sales. The company’s broad product offerings at attractive price points resonated with customers, driving its same-store sales in this inflationary environment.

Meanwhile, the company’s net earnings came in at $245.8 million, an increase of 27% from the previous year’s quarter. Along with topline growth, the expansion of gross margins and increased contributions from Dollarcity, where the company holds a 50.1% stake, drove its net income. However, increased selling, and general and administrative expenses, and higher interest costs offer some of the increases. Besides, the company generated an EBITDA (earnings before interest, tax, depreciation, and amortization) of $457.2 million or 31.4% of sales. It’s an improvement from 30.4% in the previous year’s quarter. Now, let’s look at its growth prospects.

Dollarama’s growth prospects

Given the challenging macroeconomic environment, Dollarama’s management is hopeful that the demand for its product offerings could be sustained, given its compelling value offerings across product categories. So, the management has raised its 2023 same-store sales growth guidance from 5-6% to 10-11%.

Further, the company is focusing on strengthening its direct sourcing capabilities, which could lower its intermediary expenses while increasing its bargaining power. The retailer is also working on expanding its digital footprint and enhancing customers’ experience by optimizing its queue line and checkout process. These initiatives could continue to drive its same-store sales growth in the coming years.

Besides, Dollarama is continuing its store expansion initiative and expects to add 60–70 stores yearly to increase its store count to 2,000 by the end of 2031. Also, Dollarcity expects to increase its store count to 850 by the end of 2029. These growth initiatives could continue to drive the company’s financials in the coming years.

Investors’ takeaway

Amid the recent surge in its stock price, Dollarama trades 27 times its projected earnings and 4.5 times its projected sales for the next four quarters, which looks expensive. However, given the discount retailer’s high-growth prospects and consistent financial growth, investors are willing to pay a premium for the stock. Furthermore, it has rewarded its shareholders by consistently raising its dividends since going public in 2011, while its forward yield stands at 0.3%. Considering all these factors, I believe Dollarama would be an excellent buy despite the volatile environment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Rajiv Nanjapla has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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