Dollarama (TSX:DOL) stock has continued to do well amid the challenging macro environment. The past few years of inflation and consumer-facing headwinds have helped create a climate where the discount retailer can thrive. Indeed, Dollarama isn’t just your run-of-the-mill dollar store; it’s actually one of the more reliable places to shop if you’re looking to save a few bucks.
Indeed, discount retailers aren’t always offering the best deals. However, Dollarama actually is able to offer a high magnitude of price certainty and value relative to competitors. Indeed, you can be sure you’re getting the best (or at least close to the best) price for any given good at the local Dollarama. When you’re living on a tight budget, Dollarama stores can be the place to shop.
Even as inflation falls further and the economy gets going again, don’t expect Canadians to shy away from a bargain. As long as Dollarama continues offering merchandise at competitive prices, I expect the foot traffic will keep flowing in. Indeed, the company seems poised to thrive in all sorts of economic climates.
Though Dollarama may be a preferred discount retailer to shop relative to some of its U.S.-based or private rivals in Canada, investors should be mindful of the valuation. The stock is not cheap after recently eclipsing new all-time highs of around $100 per share. Of course, the environment is one reason to slap a premium on the stock. The other is the firm’s expansion-driven growth profile is another reason to reach for shares.
Dollarama stock: What about valuation?
At 32.25 times trailing price-to-earnings (P/E), though, I’m inclined to wait for a short-term pullback before initiating a new position. Of course, DOL stock deserves a bit of a defensive growth premium. But how much is too much?
Though I don’t view shares as absurdly expensive, I’d much rather wait for shares to fall back to the $90 range. At 25-30 times trailing P/E, Dollarama stock seems to be in the right spot. For now, I view Dollarama as a tad on the overvalued side. However, I acknowledge the right cards may fall in place as we head into 2024 and what could be an economic recession.
Dollar Tree (NASDAQ:DLTR) trades at a more palatable 23.9 times trailing P/E. Though I view Dollarama as the better discount retailer, I think the hefty multiple could leave it on the receiving end of a correction should 2024 prove less rocky than many expect.
Additionally, Dollar Tree has been taking steps to improve, leaving more room for potential multiple expansion. Either way, the discount retail scene, as a whole, doesn’t look all too rich with value. If the economic coasts clear next year, Dollarama may find it harder to continue the pace of recent gains.
The Foolish bottom line on DOL stock
Dollarama is a great company whose national expansion plan should bolster long-term growth. That said, the price of admission is too steep for me at or around $100 per share. Should a pullback be in the cards, I’d reconsider the name. Until then, it’s going on my watchlist!
