Dollarama – Historically better than the TSX

Dollarama is a holding company that operates through a chain of subsidiary dollar stores in Canada. It is a major player in the Canadian value retail industry.

Dollarama owns and operates 1,356 stores across ten provinces in Canada. The company has a presence in metropolitan areas, mid-sized cities, as well as small towns, and nearly all stores are located in high-traffic areas such as shopping centers. 

Dollarama offers general merchandise (43% of the product offering in FY2020), consumer products (41%), and seasonal items (16%) to its customers. The company offers a variety of goods ranging from household wares, food, beverages, snacks, and pet food to hardware, garden tools, and other general merchandise.

Dollarama operates through an extensive network of warehouses, distribution centers, and stores to reach out to its customers. In addition to operating its own store network, Dollarama is the primary product supplier to Dollar City, in El Salvador, Guatemala, and Colombia.

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Revenue Growth & Market Exposure

Starting out with 44 stores back in 1992, Dollarama has today become a popular household name and shopping destination for Canadians with more than 1,300 stores nationally. As Canada’s leading value retailer, Dollarama offers products at different price points ranging from $1-$4, which provides its customers with a wide product selection and value while enhancing their overall shopping experience. 

Dollarama is expanding its geographical as well as digital presence. It launched its online store (www.dollarama.com), offering some of its most popular consumable and general merchandise for sale. The company is targeting to grow sales by opening new stores each year. It is also expanding its distribution center area to provide the necessary infrastructure to support the long-term growth of its store network. 

Dollarama’s supplier base is well diversified and it sources merchandise majorly from North America (44% of total retail volume) and 25 different countries (56%). Over the years, Dollarama has built a network of trusted suppliers that meet its quality standards. As a result, the company has been able to maintain a level of consistency across the price range, merchandise mix, product offerings, and store layout which drives customer loyalty and repeat traffic. Compelling value, a strong brand reputation, and quality products have resulted in sticky customer relationships over the years.

The company witnessed a sales growth of more than 6% in FY2021 and a strong sales momentum returning in FY2022. Dollarama saw an increase in demand for household and cleaning products, hygiene and health as well as food products. The company opened 65 new stores in the last year. Dollarama’s in-store traffic and sales were negatively impacted at the fag end of the year-end quarter due to the temporary ban on the sale of non-essential items in Quebec, where approximately 30% of its stores are located.

Though the company’s Q4 earnings were adversely impacted by lower comparable store sales due to restrictions and higher COVID–19 related costs, it benefitted from higher margins, lower financing costs, and a higher equity stake in Dollarcity’s net earnings.

Dividends

Dollarama is a Canadian Dividend Aristocrat and has announced successive increases to its dividend since 2011. The company last approved a 14%+ increase in its dividend payout. Dollarama has a modest 0.35% yield and a very low payout ratio of 11%. A very low payout ratio further indicates enough room for future dividend hikes. The company has compounded its dividend growth at an impressive rate of more than 9% CAGR over the last five years. It also targets an active resumption of share buybacks in FY2022.

Dollarama’s business strategy of adopting a fixed price point retail concept, pursuing store network expansion, and sourcing merchandise directly from overseas suppliers have contributed towards  Dollarama becoming a key Canadian value retailer. The company’s huge spending on expansion and increased focus on customer satisfaction should help in earnings growth. As one of the largest bargain shops in Canada, Dollarama is also focusing on slowing down its pace of price hikes to further increase customer footfall.

Dollarama’s deal with Dollarcity will help in expanding its geographical footprint in growing economies across Central America and in Colombia. Dollarama’s more than 50% share of Dollarcity’s net earnings should continue to strengthen its bottom-line growth. At the end of the year, Dollarcity had 264 stores with 145 locations in Colombia, 52 in El Salvador, and 67 in Guatemala, and it has a long-term growth objective of 600 stores by 2029. 

Value and convenient locations are Dollarama’s strong competitive advantages. Dollarama is favorably positioned to benefit from the growing value retail industry in Canada which is a growing segment of the overall Canadian retail industry. The company is targeting to increase its store footprint to 2,000 Canadian locations by 2031 compared to the earlier target of 1,700 stores in Canada by 2027.

Dollarama is expecting to open 60-70 new stores and is anticipating total capital expenditures of $160-$170 million in FY2022. The Canadian dollar store industry remains relatively underpenetrated when compared to the US Dollar store, which grants ample opportunity for future growth.

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Competition

Since Dollarama operates in the value retail industry, it faces intensive competition with respect to price, store location, merchandise quality, and customer service. The company competes with other dollar stores as well as discount and convenience stores in Canada. Some of the multi-outlet dollar store chains include Dollar Tree Canada, Dollar Store With More, Great Canadian Dollar Store, and Buck or Two Plus!.

Competition is fierce as a result of a lack of significant economic barriers for other companies to open dollar stores. In addition, the company also faces competition from e-commerce websites and online shops selling merchandise and goods. 

Bottom Line

The ongoing COVID-19 pandemic continued to impact Dollarama’s sales and consumer shopping patterns but the stock has remained resilient in volatile times. A broad assortment of general merchandise, consumables, and seasonal items; a large network of conveniently located stores, and a dominant market share in Canada’s discount space are key enablers for Dollarama.

Digital sales and market expansion are near-term opportunities for Dollarama to cash upon. Value retail is a growing segment of the Canadian retail industry and given its large national footprint, Dollarama is well-positioned to benefit from this trend.

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DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.