In response to a direct “buy or not” question from a member of his Inner Circle, Pat McKeough takes a close look at Dollarama as it stands in 2019. A successful growth stock, Dollarama has seen exponential gains since it first began trading publicly. The company has expanded beyond Canada to Central America and its sales and profits continue to rise across Canada. It recently raised its dividend, but it also trades at a high multiple to its forecasted earnings.
Q: Pat: What do you think of Dollarama? Thanks.
A: Dollarama Inc., $37.87, symbol DOL on Toronto (Shares outstanding: 327.7 million; Market cap: $11.9 billion; www.dollarama.com), is Canada’s leading dollar-store operator, with 1,225 locations across the country.
On June 19, 2018, the company split its shares on a 3-for-1 basis.
Overall revenue rose from $2.33 billion in 2015 (fiscal years end February 3) to $2.65 billion for 2016 and to $2.96 billion for 2017. Revenue in fiscal 2018 was up 10.2% to $3.27 billion while sales in fiscal 2019 increased a further 8.6% to $3.55 billion.
Earnings rose from $0.74 a share (or $348.5 million) in 2015 to $1.01 ($388.6 million) for 2016. Earnings increased again in 2017, by 15.7% to $445.6 million, although per-share earnings jumped 23.7%, to $1.25, on fewer shares outstanding. Fiscal 2018 saw earnings rise 16.6%, to $519.4 million, while per-share earnings rose 22.9% to $1.54, on fewer shares outstanding. In fiscal 2019, earnings gained 5.7%, to $548.9 million, while per-share earnings rose 9.7% to $1.69, again, on fewer shares outstanding.
In the latest quarter, ended February 3, 2019, revenue increased 13.0%, to $1.06 billion from $938.1 million a year earlier. Same-store sales rose 2.6%. The company earned $172.0 million, up 5.6% from $162.8 million. Per-share earnings rose 10.2%, to $0.54 from $0.49, on fewer shares outstanding.
On February 3, 2019, Dollarama held cash of $50.4 million, or $0.15 a share. Its long-term debt of $1.9 billion is a low 17.1% of its market cap.
The company introduced items priced at more than $1.00 in 2009 and has gradually rolled out many non-grocery products priced as high as $4.00. In the latest quarter, 70.6% of its sales came from goods selling for more than $1.25; that’s up from 67.7% a year earlier.
By 2027, Dollarama aims to have 1,700 stores across Canada (about 43% more than today’s number). Among the additions are 60 to 70 new locations planned for 2019. To support that growth, the company will, by the end of this year, increase the size of its warehouse in Montreal by 50%, to 500,000 square feet.
To better meet customer expectations, last year Dollarama began accepting credit card payments at all of its stores, through Visa, MasterCard and American Express. It believes the sales growth from credit card payments will offset the higher fees it pays on those transactions.
In January 2019, the company officially opened its online store. The countrywide launch followed a successful, five-week pilot program in Quebec, which started in mid-December.
The online portal lets customers—both individuals and businesses—order approximately 1,000 products in bulk. Product categories include cleaning supplies, clothing, electronics, food, hardware, health and beauty products, home, kitchen, office, party, pets and toys. Online product pricing is the same as in-store, although products must be purchased by the case rather than individually or in select quantities. Shipping fees apply to all online orders.
With the May 2019 payment, Dollarama will raise its quarterly dividend by 10.0%, to $0.044 a share from $0.04 (adjusted for the 3-for-1 split). The shares currently yield 0.5%. The company also continues to aggressively buy back its stock. Dollarama repurchased 13.8 million shares over the year for $533.1 million.
The stock is down over 28% from a year earlier, mostly on fears about growing online competition; it now trades at 20.0 times Dollarama’s 2019 forecast earnings of $1.89 a share. Meanwhile, the company has a strong position in a competitive, but growing niche. It also continues to report rising sales and profits, and to open new stores.
Bonus: This ETF bets against a leading U.S. dollar store and other bricks-and-mortar retailers.
PROSHARES DECLINE OF THE RETAIL STORE ETF $34(New York symbol EMTY; TSINetwork ETF Rating: Aggressive; Market cap: $24 million)is designed to move in the opposite direction of its underlying index—specifically, the Solactive-ProShares Bricks and Mortar Retail Store Index.
That means the ETF’s investors profit as share prices for 56 U.S. retail companies decline. They include American Eagle, Best Buy, Big Lots Inc., Costco Wholesale, Dollar Tree and Gap. Each generates at least 50% of its revenue from in-store retail sales.
To meet its objective, the ETF holds inverse positions in all 56 companies. The fund was launched on November 16, 2017, and has just $24 million in assets. That provides limited liquidity, while the ETF’s active management approach makes for a relatively high MER of 0.89%.
The fund launched at a time when a growing number of bricks-and-mortar retailers struggled to maintain or grow their market share against Amazon and other online sellers.
High-profile bankruptcies and financial problems at Toys ‘R’ Us, The Limited, RadioShack and Payless ShoeSource were also in the news. That supported the case for “betting” against bricks-and-mortar retailers.
Does the high p/e of Dollarama concern you?
This article was initially published in 2012 and is regularly updated.
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