Dollarama (TSX:DOL) and Canadian Tire (TSX:CTC.A) are both Canadian retail stocks, but the former has created much greater wealth for long-term investors. Dollarama stock has outperformed Canadian Tire stock in the last 1, 3, 5, and 10 years. The graph below displays their 10-year total returns.
DOL and CTC.A Total Return Level data by YCharts
It seems to be a no-brainer for investors to accumulate shares of Dollarama. The only detractor may be Dollarama’s stock valuation, which appears to be at its apex. In other words, it appears to have little upside and no margin of safety in the near term.
A comparison of the two Canadian retailers gives some insights as to why Dollarama has been a winner.
Dollarama’s business vs. Canadian Tire
Dollarama is a value retailer operating in Canada with little competition. Its competitors are typically mom and pop shops. On price points up to $5, it offers a broad variety of consumable products, general merchandise, and seasonal items at its physical locations as well as online. Currently, it has about 1,525 locations across Canada found in cities and towns.
The company also has a controlling interest in Dollarcity, a growing value retailer in Latin American with 458 locations across El Salvador, Guatemala, Colombia, and Peru that have price points up to US$4.
Unlike Dollarama whose business remains resilient even in recessions, Canadian Tire is more sensitive to the ups and downs of the economic cycle. That’s because Canadian Tire has a good portion of durable goods with lower consumer demand during gloomy economic times.
Recent results
Dollarama last reported its fiscal 2024 second quarter results on September 13. Comparable store sales growth was strong at 15.5%. Growth of 23.8% in EBITDA, a cash flow proxy, was also incredible. Its trailing-12-month (TTM) operating margin is 23.1%. In a relatively high inflationary environment, Dollarama improved its comparable store sales fiscal 2024 guidance to 10-11% from 5-6% – again, suggesting a durably strong business.
For the fiscal year to date, Dollarama’s sales growth was 20%. Ultimately, the earnings per share growth was 28% for the period with the help of share buybacks. Notably, Dollarama will be reporting its third quarter fiscal 2024 results on December 13.
Canadian Tire last reported its third quarter results on November 9. Comparable sales declined 1.6% with the press release noting that consumers continued to shift to essentials. All tallied, year over year its year-to-date normalized diluted earnings per share fell 26% to $7. Its TTM operating margin is 9.8%.
Interestingly, despite the marked difference in their business behaviour, both are Canadian Dividend Aristocrats.
Dividends
Dollarama pays a small dividend yield of less than 0.3% at writing. However, like Canadian Tire, it has increased its dividend for about 12 consecutive years. DOL’s 10-year dividend growth rate is about 12%, while Canadian Tire’s is about 17%.
Dividends play a bigger role in Canadian Tire’s returns, which makes sense. Because the retailer’s results have been more volatile, the market demands a higher dividend yield from the stock. The dividend stock currently offers a dividend yield of close to 5%.
Investor takeaway
Although Dollarama is a pricey stock trading at about 30 times earnings, it is hard to bet against it given its solid market position and track record of outperformance. Cautious investors can aim to buy on any dips.
Canadian Tire could be a better investment over the next few years if investors are able to time their trades. For example, from the March 2020 pandemic market crash bottom, the stock more than doubled by May 2021. At $140 and change per share, it trades at about 10.7 times earnings.
