Is It Too Late to Buy Dollarama Stock?

Dollarama stock (TSX:DOL) is up a whopping 48% in the last year, but growth is slowing for this great low-cost retailer.

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Dollarama (TSX:DOL) has left its double-digit days behind it. The low-cost retailer climbed past the three-digit mark earlier this year and has continued to fly past all-time highs. But with earnings around the corner, the question becomes whether this can continue. So, is it too late to buy Dollarama stock?

Value

First off, let’s look at whether Dollarama stock offers the value it once did. Dollarama is currently trading at 27.5 times forward earnings, which is a fair amount higher than its five-year average. This elevated valuation indicates that the market has already priced in much of the expected growth and positive performance. 

Analysts note that there is a low likelihood of further valuation expansion from current levels and expect the shares to be range-bound in the short term. Several analysts also highlighted that Dollarama stock is trading at a significant premium over its historical averages. 

For instance, it’s trading at a 13% premium over its historical average, making it expensive compared to its past performance to say the least.

Growth is decelerating

Beyond its value today, the company could also experience slowing growth in the future. Dollarama stock’s guidance for Fiscal 2025 projects comparable store sales growth of 3.5% to 4.5%, a significant slowdown from the double-digit growth seen in the past two years. 

This deceleration is a natural progression after exceptional growth periods, but it suggests that the rapid expansion phase might be tapering off. This could limit upside potential for new investors.

Furthermore, the reported decline in average transaction size for the fourth quarter, despite an increase in the number of transactions, indicates a potential shift in consumer behaviour towards purchasing lower-priced items. This could impact revenue growth if the trend continues.

The market

Then there’s the market itself and the overall sentiment we’re experiencing right now. Analysts warned of potential sector rotation. This is where investors might move their funds from defensive growth stocks like Dollarama stock to more cyclical names. Especially if economic conditions improve or interest rates start to decline. 

This could result in a contraction of Dollarama stock’s valuation multiples. And as said, with many analysts adjusting their price targets to levels that suggest limited upside, there is a consensus that Dollarama stock appears fully valued.

Bottom line

So, despite Dollarama stock’s impressive performance over the past year, reflected in a 48% climb to all-time highs, several factors suggest that it may be too late for new investors to buy into Dollarama stock.

Certainly, Dollarama stock has demonstrated strong financial and operational performance, leading to significant stock price appreciation. However, the current high valuation, expected slowing growth, and risks of sector rotation indicate that the potential for substantial future gains is limited. 

Therefore, for investors looking to buy in now, it might be too late to achieve significant returns on Dollarama stock given the current market conditions and future growth projections. But as always, do your own research and consider whether Dollarama stock could still be right for your own risk tolerance and portfolio.

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 Amy Legate-Wolfe 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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