Dollarama: A Possibility Of Record Profits In 2020

Dec. 31, 2020 11:06 PM ETDollarama Inc. (DLMAF)1 Comment1 Like
Sherif Samy profile picture
Sherif Samy
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Summary

  • Dollarama has launched a mobile app which will help increase its online presence.  Currently, the company doesn't do any advertising or flyer ads.
  • Ontario is going into a province wide lockdown in late December 2020 to mid-January 2021. This will help Dollarama's position, as it is allowed to remain open.
  • The 50.1% acquisition of Dollar City is now complete. This presents a good avenue for international expansion.

Dollarama Logo

Dollarama (DLMAF) is the largest dollar store retail chain in Canada. Based out of Montreal, it currently has 1,333 stores across the country. In its Q3-2020 reporting, the company posted higher profits in the last 9 months than the 9 months in 2019 (pre-COVID-19). The company currently has a lot of momentum, and I foresee Dollarama ending its current fiscal year with record profits.

Dollarama and its Competitive Advantage

As parts of Ontario and Quebec had to shut down again because of rising COVID-19 cases, Dollarama stores with street access were allowed to remain open. These stores make up over 68% of the company's total stores across the country.

Also, in late December 2020, Ontario will be entering a province-wide lockdown, and non-essential businesses must remain closed. Since Dollarama is an essential service with most of its stores in Ontario, this should lead to another short-term bump in foot traffic and a slight improvement in profitability.

Since Dollarama was allowed to continue operating while the rest of the economy had to shut down, the company saw a surge in profits:

(Source: Q3-2021)

It is by the far largest dollar store chain in Canada. The next four largest competitors make up less than half of Dollarama's total store network. What this means is the company has been able to use its size to negotiate special deals and carve out an edge over its competition:

  • In mid-2019, Dollarama signed an exclusive partnership with Bell to sell Lucky and Virgin Mobile SIM cards.
  • In early 2019, it was the only Canadian dollar store operator to launch an online store to serve businesses and individuals who want to buy in larger quantities.
  • This year, Dollarama quietly launched a mobile app (and it appears to be the only dollar store chain to do so). The app allows customers to make digital purchases and scan for product availability.
  • As Dollarama continues to look for efficiencies in its operations, one plan is to introduce self-checkouts, which will speed up queues.

Expansion Continues

Dollarama has opened 42 new stores this year and is on track to open 60-65 stores by the end of the year. (Management has a goal to reach 1,700 stores.) As I may have mentioned in prior articles, to expand during the pandemic and in a recession shows how resilient and successful the company's business model has been.

On September 10, 2020, Dollarama completed the purchase of its 50.1% equity interest in Dollarcity. At the time of acquisition, Dollar City is priced at a 5x EBITDA multiple, giving it a value of $185.6 million USD, or $243.7 million CDN:

(Source: Company Financials)

A 5x EBITDA multiple is a good return to earn.

There are plans in place to expand into Peru in the near future. The target growth is to have 600 stores by 2029 (more than doubling the current Dollarcity store network in 9 years):

(Source: Dollarama Financials and Averagesalarysurvey.com)

Given the EBITDA numbers reported by Dollarcity, the expansion into Latin America is going to boost Dollarama's bottom line.

F Score Balance Sheet

The F Score where it measures Dollarama's financial strength continues to show the company is well-positioned financially. Dollarama consistently shows a score of 6 and 7 (out of 9):

(Source: Dollarama Financials)

The company has substantially increased its cash holdings (almost 5x the amount in Q1), and its current ratio has improved from the prior quarter:

In analyzing Dollarama's sales figures, sales growth was 12.3% and same-store sales grew by 7.1%. Shoppers on average were making more purchases per visit and buying more of Dollarama's higher-priced items. Total sales growth had increased by more than 20% since Q1-2020 (from $844,798 in Q1-2020 to $1,064,201 in Q3-2020).

This has helped improve the EPS from $1.23 for the 39 weeks ending in 2019 to $1.26 in 2020. Given how the trends are moving and how Ontario will be under a lockdown, I do foresee Dollarama ending the current fiscal year on a high note.

Rising Costs Could Hurt the Business

Dollarama's gross margins are in the low to mid-40%'s range. These numbers are healthy, but they can be easily eroded if there is an increase in freight fees and taxes. The cost of doing business had already increased because of purchasing sanitizing, cleaning supplies and erecting barrier walls for its cashiers.

The strengthening Canadian dollar has helped offset some of the cost increase, but a Canadian dollar reversal could easily make foreign purchases expensive for the company.

Bullish Position

Overall, management does a good job in managing the company's risk. It does a great job in adapting to consumer tastes by offering seasonal products and switching out weaker-performing items. In the provinces of Quebec and Ontario, where Dollarama is an essential business, it's allowed to stay open while most other businesses are forced to close.

One important theme that stands out for Dollarama is its ability to adapt. The company created a mobile app to market its products and the ability to make digital payments (thereby helping to lower direct human contact).

Eventually, Canada will hit a saturation point where there are too many dollar stores in the country. There are about 1,333 stores in Canada, and Dollarama wants to grow to 1,700. If the company builds about 65 stores a year, it will hit its goal of 1,700 stores in 5 years. By that time, Dollarama will need to find new markets for growth. That new market appears to be Latin America, where it has a partnership to expand operations with new stores in Peru. The gradual rise in the company's stock price in the last several years is a clear sign that management has a good handle on its business.

I'm bullish on Dollarama.

This article was written by

Sherif Samy profile picture
1.28K Followers
I studied Economics and Accounting at Wilfrid Laurier University, and I have earned designations in Certified Management Accounting (CMA CPA) and Certified Alternative Investment Analysts (CAIA).  I typically look for companies with above average dividend yields, under valued companies, or struggling companies with turn around potential.
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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.

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