Better Buy: Dollarama Stock vs. Dollar Tree

Dollarama (TSX:DOL) and its peer Dollar Tree (NASDAQ:DLTR) are great discount retailers to buy as inflation lingers.

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In this piece, we’ll have a battle of the dollar stores. Undoubtedly, inflation’s impact has put discount retailers in a rather good spot. However, not all firms within the space have made the most of the opportunity.

Indeed, when consumers are seeking next-level value and some of the lowest prices for any good available on the market, Canadian growth sensation Dollarama (TSX:DOL) and its peer Dollar Tree (NASDAQ:DLTR) are often one of the first places to check out. Indeed, it’s not just inflation that makes the following names intriguing to watch; it’s their opportunity to retain customers as inflation returns to normal and rates begin to fall.

The big question is whether the consumer will spend more disposable income at dollar stores or if they’ll take all their business to a fancier, pricier retailer. Indeed, Dollarama and Dollar Tree have to play things right if they want consumers to fill their baskets more when times get better.

In any case, let’s check out the two discount store juggernauts to see which one is better equipped to ride out the climate ahead. Whether the rate cuts are plentiful or few and far between, the following seem worth watching for value investors seeking relative stability in a market that could face considerable volatility.

Dollarama

Dollarama is the Canadian king of the discount retail scene, with numerous goods at incredibly low price points. Though pricier items go for closer to $5 than $1, shoppers are still getting some of the best prices for any given product category. It’s not just Dollarama’s ability to offer a wide range of goods at affordable prices that makes it such a winner.

Management has done a spectacular job of driving operating efficiencies. Indeed, most Dollarama locations are staffed with just the right amount of people. With minimal marketing spend, the firm can pass the savings to consumers who walk through its doors. Even if inflation backs down and economic growth surges again, I just don’t see Dollarama taking a big hit to the chin.

Even when times are good, saving money can leave consumers with a strong sense of satisfaction. With a multi-year expansion plan underway, I see earnings continuing to rise at a good (and steady) pace, regardless of what’s on shelves in today’s economy. Even at close to new highs, DOL stock looks like a deal itself at 34.4 times trailing price-to-earnings (P/E).

Dollar Tree

Dollar Tree is in a tough spot, with shares now down around 37% from their 2022 highs. Undoubtedly, the firm seeks to sell or even spin off its Family Dollar business. With a rough first quarter of earnings behind it, DLTR itself looks like a great value for investors who want more of a turnaround play than a predictable growth play that’s firing on all cylinders. While I do like Dollarama more, I can’t say I’m willing to pay the higher price of admission, especially with shares at new highs.

Indeed, Dollar Tree faces challenges, and store remodels will cost quite a bit. In any case, investors who want a U.S.-focused discount retail play shouldn’t bet against Dollar Tree, especially as it tries to lift itself off the canvas in the second half of 2024.

Between Dollarama and Dollar Tree, I’d have to give the slight edge to Dollar Tree, at least at these valuations. At 16.1 times forward P/E, DLTR is the cheaper stock with more room to run if it can right its past wrongs.

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 Joey Frenette 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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