Yesterday, the Bank of Canada slashed its benchmark interest rates by 0.25% to 4.5%. The Governor of the Central Bank, Richard Tiffany Macklem, stated that the bank is confident that the ingredients are in place to bring inflation down to its targeted 2% in the second half of 2025. The central bank cut Canada’s 2024 economic growth forecast from 1.5% to 1.2%, as households were spending more to service their debts than on discretionary items.
Despite the rate cuts, a dovish outlook by the central bank and weaker manufacturing numbers and home sales in the United States weighed on the Canadian equity markets, with the S&P/TSX Composite Index falling 0.76% yesterday. Amid the volatile outlook, investors should strengthen their portfolios with defensive stocks. Meanwhile, let’s assess which among Dollarama (TSX:DOL) and Alimentation Couche-Tard (TSX:ATD) would be a better retail stock to buy now.
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Dollarama
Dollarama is a discount retailer with 1,569 stores spread across Canada. Given its direct sourcing methods and efficient logistics, the company is able to offer its products at attractive prices. So, the company enjoys healthy same-store sales irrespective of the macro environment. The company has expanded its footprint from 652 stores in fiscal 2011 to 1,569 as of April 28.
The expansion and healthy same-store sales have driven its revenue and net income at an annualized rate of 11.5% and 18%, respectively, for the last 13 years. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) margin has expanded from 16.5% to 32%. Supported by these solid financials, the company has delivered above 810% returns in the last 10 years at an annualized rate of 24.7%.
Further, Dollarama is expanding its store count by opening 60-70 new stores annually to increase its store count to 2,000 by fiscal 2031. Given its quick sales ramp-up, lower payback period, and capital-efficient business model, these expansions could boost both its top and bottom lines. The company recently raised its stake in Dollarcity, which operates retail stores in South America, from 50.1% to 60.1%. Further, Dollarcity has planned to add more than 500 stores over the next six years to increase its store count to 1,050 in fiscal 2031. So, Dollarcity’s contribution to Dollarama could grow in the coming years.
Alimentation Couche-Tard
Alimentation Couche-Tard operates around 16,700 convenience stores across 31 countries. The convenience store operator has expanded its footprint through organic growth and strategic acquisitions, driving its financials. Over the last 10 years, its revenue and adjusted earnings per share (EPS) have grown at a CAGR (compound annual growth rate) of 6.2% and 15.2%, respectively. Supported by these healthy financials, the company has returned 495% over the last 10 years at an annualized rate of 19.5%.
Moreover, the United States retail market is fragmented, with 60% of the stores run by single-store operators. Given its expertise in closing and integrating acquired companies and a healthy balance sheet, ATD is well-equipped to expand its footprint in the United States. The company is rolling out loyalty programs and promotions to improve its same-store sales. Further, it is progressing with its “10 For The Win,” a five-year strategy that could raise its adjusted EBITDA to $10 billion by 2028. So, its growth prospects look healthy.
Investors’ takeaway
ATD has underperformed the broader equity markets this year, with returns of 6.7% due to weak same-store sales and a decline in net earnings in the recently reported fourth-quarter earnings of fiscal 2024.
Amid the underperformance, it trades at 19.7 times analysts’ projected earnings for the next four quarters compared to Dollarama’s 31.8. However, I am more bullish on Dollarama due to its ability to deliver healthy same-store sales even during a challenging macro environment.
