The Canadian equity markets are upbeat this month, with the S&P/TSX Composite Index rising 6.3%. The U.S. Bureau of Labor Statistics has announced that the CPI (consumer price index) increased 3.2% in October from the previous year, lower than the 3.7% last month. The signs of inflation cooling down and the Federal Reserve’s decision to maintain its benchmark interest rate unchanged have increased investors’ confidence, driving the index higher.
However, Dollarama (TSX:DOL) has underperformed the broader equity markets this month, with its stock price increasing just 3.1%. However, year to date, the company trades 23.5% higher. Now, let’s assess whether Dollarama would be a buy at these levels by looking at its previous performance and growth prospects.
Dollarama’s solid performance
Supported by its compelling value offerings, a wide range of everyday products, and extensive store network, Dollarama has been delivering consistent performance since going public in 2009. Over the last 12 years, the company has grown its revenue and adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) at a CAGR (compound annual growth rate) of 11.2% and 17.4%, respectively. Also, its adjusted EBITDA margin has improved from 16.5% in fiscal 2011 to 30.1% in fiscal 2023.
Meanwhile, the discount retailer’s financial uptrend has also continued in this fiscal year (fiscal 2024). In the first two quarters, the company’s revenue and adjusted EBITDA have grown by 20.1% and 23%, respectively. The same-store sales growth of 16.3% and net addition of 81 stores over the previous four quarters have driven the company’s financials. Also, its operating margin has increased by 120 basis points to 23.4%. Besides, the company also strengthened its financial position by improving its adjusted net debt-to-EBITDA ratio from 2.7 to 2.4. Now, let’s look at its growth prospects.
Dollarama’s growth prospects
Dollarama’s growth prospects look healthy. Although inflation shows signs of easing, Federal Reserve officials project inflation will not reach its guidance of 2% until 2026. So, given the inflationary environment, Dollarama’s competing value offerings continue to drive footfalls. Besides, the company is building its direct sourcing and buying capabilities, which could eliminate intermediary expenses and increase its bargaining power. Further, the company is also focusing on improving its logistics efficiency, thus allowing it to offer greater value to its customers.
Meanwhile, Dollarama also continues to expand its store network by opening 60–70 stores every year to reach 2,000 stores by 2031. Further, the company’s subsidiary, Dollarcity, has planned to add 392 stores over the next five years. The expansion could increase its earnings contribution towards Dollarama, which owns a 50.1% stake in Dollarcity. Considering all these factors, I believe the uptrend in Dollarama’s financials will continue.
Valuation and dividends
Dollarama has been raising its dividends consistently since 2011. It currently pays a quarterly dividend of $0.0708/share, with its forward yield at 0.3%. Although the company’s dividend yield is on the lower side, the investors could benefit from consistent dividend growth.
Amid the solid returns of over 23.5% this year, the company trades at an NTM (next 12 months) price-to-earnings multiple of 27.4. Despite its expensive valuation, I am bullish on Dollarama, given its solid performance over the last 12 years and excellent growth prospects.
