Dollarama (TSX: DOL) is one of Canada’s best-performing retail stocks. Over the last 10 years, it has appreciated 669% in price, while delivering a 695% total return. For a ubiquitous company that everybody already knows about, it’s been a great showing.
With that being said, a company having done well in the past does not mean that it will do well in the future. History is full of examples of companies that were once great but declined, such as General Electric, Sears and BlackBerry. Those buying DOL stock now will want to know whether the company has a durable competitive advantage or just got lucky in the past. In this article, I will attempt to answer that question and predict where Dollarama will be as a business one year from now.
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Same-store sales growth
One metric that investors rely on heavily to determine the health of a retailer is same-store sales. This metric is very valuable because it indicates how much the company is growing without assuming the cost of opening new locations. Essentially, it’s a measure of the company’s “mind share.”
In recent years, Dollarama’s same-store sales have been excellent. For example, in the most recent quarter, DOL’s same-store sales increased 4.9%. “Same-store sales” is a much more stringent metric than total revenue; it almost never goes into the double digits. Dollarma’s 4.9% third-quarter same-store sales growth was far above average — more above average than it looked to the uninitiated.
Profitability
When it comes to profitability, Dollarama delivers a truly fantastic showing–far better than that of the industry it is part of. In the trailing 12-month period, it boasted the following:
- A 45% gross margin
- A 19% net income margin
- A 15.6% free cash flow (FCF) margin
- A 95% return on equity (ROE)
- A 16.4% return on assets
All of these metrics are extremely high for a retailer. Normally, retailers operate on razor-thin margins and try to earn their profits by way of massive volume. This approach can actually work: Costco has always operated on thin margins, and it has been one of the best-performing stocks of the last 30 years. The fact that Dollarama has a 19% profit margin is very impressive: retailers don’t normally have such chunky margins.
Valuation
Last but not least, we get to valuation. As we’ve seen, Dollarama is a dominant Canadian dollar store that is growing quickly while being ultra-profitable. It’s a pretty compelling package. The only question left is whether it’s worth the price of admission.
At today’s price, Dollarama trades at the following:
- 45 times earnings
- 8.4 times sales
- 38 times book
- 33 times cash flow
It’s here that the Dollarama story becomes considerably less interesting. Yes, this company is quite good, but unfortunately, investors have priced much of that goodness into DOL stock. It’s not a bargain.
Foolish takeaway
Dollarama will almost certainly be stronger 12 months from now than it is today. The company is highly profitable, growing its same-store sales, and investing much of its profits into itself. It should succeed. But that doesn’t mean its stock is a buy. For my money, DOL stock trades at excessive multiples. I’m not going to invest in it at this time.
