Is Dollarama Stock a Buy After its Third-Quarter Earnings?

Given its healthy growth prospects and solid third-quarter performance, Dollarama would be an excellent long-term bet.

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Last week, Dollarama (TSX:DOL) reported an excellent third-quarter performance for the fiscal year 2024, which ended on October 29. Its revenue aligned with analysts’ expectations, while its diluted earnings per share (EPS) exceeded expectations. Besides, the company’s management raised its same-store sales guidance for fiscal 2024. Despite its solid performance, the company has lost over 6% of its stock value since reporting its earnings.

The discount retailer had delivered around 70% returns in the last two years amid its strong performances. The surge in its stock price has increased its valuation, making investors uncomfortable. The improving macro environment has shifted investors’ focus towards cyclical stocks, leading to a pullback in the company’s stock price. So, let’s assess whether Dollarama is a buy at these levels by looking at its third-quarter performance and growth prospects.

Dollarama’s third-quarter performance

Dollarama posted a revenue of $1.48 billion in the third quarter, representing a 14.6% increase from the previous year’s quarter. Same-store sales growth of 11.1% amid higher sales across its product categories and net addition of 79 stores over the last four quarters have driven the company’s top line. A 10.4% increase in the number of transactions and 0.6% growth in its average transaction size drove its same-store sales.

The company’s gross margin expanded from 43.3% in the previous year’s quarter to 45.4% amid a decline in its inbound shipping and logistics expenses. However, its general, administrative, and store operating expenses rose 40 basis points to 14.5% of its total revenue due to increased labour expenses and higher other operating costs due to timing. Also, its interest expenses rose due to higher debt levels and increased average borrowing rates.

Meanwhile, its net earnings grew 29.5% to $261.1 million. Along with top-line growth and expansion of gross margins, the increased contribution from Dollarcity, where Dollarama owns a 50.1% stake, contributed to its net income growth. Further, its adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) stood at $478.8 million, a 24% increase from the previous year.

Now, let’s look at its growth prospects.

Dollarama’s growth prospects

Dollarama has adopted a capital-efficient, growth-oriented business model with a superior direct-sourcing platform to drive growth. Its quick sales ramp-up with an average payback period of around two years for a new store has resulted in low capital intensity and high return on investment.

Over the last 10 years, its average store additions stood at 68 stores per year. Meanwhile, the company’s management expects to continue its store expansion by increasing its store count to 2,000 by 2031. It is also strengthening its direct-sourcing capabilities, allowing it to eliminate intermediatory expenses and enhance its bargaining power. Further, the company is optimizing logistics, promoting efficiency initiatives, and growing its digital presence to support growth. Considering all these factors, I believe the company’s growth prospects look healthy.

Investors’ takeaway

With the improvement in the macro environment, investors are shifting towards growth stocks, thus leading to a selloff in Dollarama, a defensive stock. Amid the recent selloff, the company valuation has declined to attractive levels, with its next 12-month price-to-earnings multiple at 25.1. Further, the company has also raised its dividend 12 times since 2011, with its forward yield at 0.31%. So, despite the near-term volatility, I believe long-term investors should utilize the recent correction to accumulate the stock to earn superior returns in the long term.

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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