Better Long-Term Buy: Dollarama Stock or Canadian Tire?

Both of these Canadian stocks have proven to be solid long-term buys, but which is better for the average investor?

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published November 14, 2024 3:30 pm EST

When it comes to choosing between Dollarama (TSX: DOL) and Canadian Tire (TSX: CTC.A), two of Canada’s most recognized retailers, both companies offer compelling investment opportunities. Yet each caters to different types of investors. Let’s dive into their recent earnings, historical performance, future outlook, valuation metrics, and dividend potential to uncover which one might be a better buy right now.

Man looks stunned about something — Source: Getty Images

Dollarama stock

Dollarama stock recently posted strong results for the second quarter of fiscal year 2025. The company reported a 7.4% increase in net sales, reaching $1.56 billion. This impressive growth was fuelled by an increased store count and a 4.7% rise in comparable store sales. A metric that’s critical in retail to gauge organic growth. Dollarama’s net earnings climbed 16.3% year over year, landing at $285.9 million. The earnings per share (EPS) also rose by 18.6% to C$1.02. Furthermore, its gross margin improved to 45.2%, up from 43.9% in the same quarter of the prior year. This shows robust control over operating costs and strong profitability for a discount retailer.

Dollarama stock’s consistent expansion is a key part of its appeal. The company has opened new stores across Canada, and its target of reaching 2,000 stores by 2031 is ambitious yet attainable. Dollarama’s product mix, consisting of affordable essentials and seasonal goods, resonates well with consumers, especially in economic downturns when shoppers look for value.

Looking forward, Dollarama stock’s expansion ambitions and increasing presence in Latin America through its Dollarcity partnership are noteworthy. With this international presence, Dollarama is positioning itself as more than just a Canadian brand. The company expects comparable store sales growth of 3.5% to 4.5% for fiscal year 2025, with gross margins between 44% and 45%.

Additionally, Dollarama currently trades with a trailing price-to-earnings (P/E) ratio of 38.70 and a forward P/E of 28.17, which reflects investor optimism about its future growth. Its price-to-sales ratio is 6.91, which is on the high side, indicative of the market’s confidence in Dollarama’s expansion trajectory and growth potential.

Canadian Tire

Canadian Tire, on the other hand, reported its third-quarter 2024 results with a 1.5% year-over-year decline in consolidated comparable sales. However, EPS jumped to $3.59, a marked recovery from a prior loss, showcasing improved profitability. Canadian Tire stock also announced an increase in its annual dividend for the 15th consecutive year and a plan to repurchase up to $200 million in shares in 2025, demonstrating shareholder commitment.

Canadian Tire, with its broad product categories, has a diversified business model that includes automotive, sporting goods, and home essentials. This diversification has helped it remain resilient despite fluctuations in consumer demand for certain segments. While Canadian Tire’s comparable sales dipped this quarter, its SportChek and automotive segments saw steady demand, offsetting weaker sales in areas like apparel.

Canadian Tire’s valuation metrics reveal a more conservative profile. It has a trailing P/E of 13.16 and a forward P/E of 11.15, making it a relatively low-cost option in comparison to Dollarama. Its price-to-sales ratio is just 0.52, and the price-to-book ratio stands at 1.48, showing Canadian Tire as potentially undervalued given its profitability and long-term positioning.

Bottom line

The choice between Dollarama and Canadian Tire depends largely on individual investment goals. Dollarama presents an appealing case for growth-oriented investors, particularly with its steady store expansion and strong brand appeal during uncertain economic times. Its valuation is higher, but so is its growth potential.

Canadian Tire, however, is the better choice for dividend-focused investors. With a stable revenue base, diversified product offerings, and a generous dividend yield, it suits those looking for steady income and lower volatility. Dollarama’s expansion story makes it a growth play, while Canadian Tire’s solid dividend and diversification make it a classic income-generating investment. Both stocks have strong potential, but the “better buy” ultimately hinges on whether growth or income aligns with your portfolio goals.