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Dollarama: Be Patient

Mar. 05, 2018 11:10 AM ETDollarama Inc. (DLMAF), DOL:CA5 Comments
Kelly Stewart profile picture
Kelly Stewart


  • Dollarama is a wonderful company that has managed a successful IPO, high brand recognition, and the introduction of multiple pricing points.
  • Earnings growth is nearly perfectly correlated with revenue. It has also reduced its shares outstanding while paying a small dividend.
  • Since one of the largest expenses for companies is paying salaries, Dollarama's ability to leverage its fixed costs is another good sign for shareholders.
  • There is one caveat: the stock. It's expensive. With a forward P/E of 28.81, Dollarama has a price-implied one-year earnings growth rate expectation of nearly 20%. I think that's optimistic.
  • I suggest investors pay no more than about $115-125, based on recent EPS growth and a P/E multiplier that is more in line with historical averages. Patience is a virtue.

I don't often get excited by narratives. I'll openly confess to a bearish bias--a personally high hurdle rate before I get too excited about a stock. Yet, as a Canadian, I can't deny that I really do love Dollarama (OTC:DLMAF), the leading operator of dollar stores here. I love its product selection, occasionally finding the same brands I might have bought at a store like Shoppers Drug Mart on Dollarama shelves for a quarter of the price.

Whenever I walk into Dollarama, I know exactly what season it is, what major holiday is coming up. I was in Dollarama last week--clearly, Easter is coming!

While liking a company's brand and products alone isn't a reason to buy a company, its strong same-store sales growth, its revenue growth that near-perfectly translates into earnings growth, its ability to leverage its major expenses like salaries, and its sustained share reduction efforts, I think there are many reasons to give it a second look.

An HBR case study on Dollarama describes it well:

The firm performed extraordinarily well after a leveraged buyout in 2004, and recently executed a highly successful IPO. The company sources its goods primarily from Asia. It has strong brand recognition and competitive advantages in operations, purchasing, and merchandising. In the face of margin pressures, Dollarama recently took the risky decision to move from the single one dollar price point to multiple price points.

While the company looks strong, it may come with one caveat: the stock. At a P/E of ~34, it is, in my opinion, a little expensive. Sometimes, of course, things are expensive for a reason; so I'll examine whether or not it is justified by unpacking its built-in price-implied one-year earnings growth expectation near the end of the article.

First, let's get into the fundamentals.

Earnings Growth

This article was written by

Kelly Stewart profile picture
Check out my tipranks: https://www.tipranks.com/bloggers/kelly-stewartContrarian. Former CEO of a small publishing company. I've been researching stocks for several years now, and my philosophy is geared towards the preservation of capital as the most important goal of investing.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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