One of Canada’s retail giants, Dollarama (TSX:DOL) is one of Canada’s leading growth stocks. Unfortunately for investors Dollarama stock has not fared well over the last year or so. There are multiple reasoning’s for this which I will explain further on in this article, but I really wanted to dive deep into what makes this discount retailer so profitable.
This piece is going to go in depth on both the Dollarama stock in terms of fundamentals, and Dollarama as a company. In particular, if you’re a prospective shareholder, you’re going to find this article extremely helpful.
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What exactly does Dollarama do?
The name probably gives it away, but Dollarama is a Canadian retailer that specializes in the operation of dollar stores. Salim Rossy opened the first Dollarama in 1992, but the business dates back to the early 1990’s in which Salim Rossy ran a retail store called S.Rossy Inc. Over time, the stores diversified and eventually in 1992 Larry Rossy transformed a S.Rossy store into a Dollarama. They haven’t looked back since.
The company has grown rapidly over the past few years, which has made it one of Canada’s strongest (and potentially overvalued) growth stocks. With over 1000 stores in operation, Dollarama focuses on expanding their brand not only in large scale metropolises, but small towns as well.
I live in a town of 13 000 people and we have a Dollarama. The company isn’t scared to move into areas with smaller populations because their business model is structured in a way that their target customers are anyone and everyone.
The bulk of the company’s business comes from Ontario, which is not surprising considering the bulk of the Canadian population resides in the province.
What makes Dollarama’s business model so profitable?
Whenever a company is able to turn pocket change sale amounts into a billion dollar enterprise, you’ve got to take a second look as an investor.
The company’s business model simply works because they are cheap. Dollarama doesn’t sell $800 TVs. They don’t sell $300 vacuums. The company sells Toothpaste for a buck. They sell paper plates for parties, they sell junk food.
They sell items that are going to leave the shelves regardless of economic conditions.
This is an absolutely crucial concept if you are a prospective investor. Many Canadian retailers suffer during times of economic uncertainty. People can’t afford electronics, nor can they afford new furniture. When times are tight, people look to pinch pennies. And Dollarama allows consumers to do so.
The company is able to sell items for dirt cheap, at some pretty significant profit margins. With a gross margin in 2018 around 40%, the company is turning pocket change into bills.
A consumer looking to head out to shop for groceries may head to a store like Wal-Mart or Sobeys, but a consumer looking for run of the mill household items is going to head to Dollarama if there is one in their area. Why?
Because they’re cheaper.
Why Dollarama stock was hit hard in 2018
Dollarama has taken a lot of heat lately, mainly due to the fact that Dollarama’s stock valuation was sky high. The problem you run into with a growth stock of this caliber, especially considering it’s valuation at the time, is when an earnings report misses the mark by even a sliver, the stock tends to plummet.
2018 was an incredibly hard year for Dollarama. Not because results were bad, but simply because their exponential growth has inevitably slowed down. I mean most investors with any sort of experience would know that this was bound to happen.
On the books over the last 3 quarters Dollarama has either met or missed earnings estimates by a penny. However, with the stock trading at ridiculous levels, even these minuscule misses are enough to send the stock down into oblivion. The stock has lost over 35% of it’s value over the last 3 quarters, and the mood has generally soured on the once highly sought after company.
Why investors should be lining up to buy Dollarama stock
After watching a overall bloodbath in terms of share price over the last 9 months, it’s a completely reasonable thought for investors to stay as far away from the company as possible.
But, reasonable isn’t always right.
The only thing the freefall in Dollarama stock price has done has brought the company’s share price from ridiculous to reasonable. Dollarama’s earnings and sales projections may not be a lucrative as they once were, but it is still a strong company in terms of growth. And although they are currently struggling, Dollarama has a 5+ year history of increasing both earnings and sales.
This is one of the key components I look at when evaluating growth companies. Analysts can say whatever they want in terms of earnings and sales estimates, but what I want to see is the companies actual ability to increase them on a consistent basis. This is why Dollarama’s stock was featured on some of our best stocks to buy in the Country.
Investors looking for a long term growth stock should be taking a second and even third look at Dollarama stock. They aren’t going anywhere anytime soon. And although the company is facing some competition from their American counterpart Dollar Tree, they still have a stranglehold on the industry in terms of market share.
Dollarama’s move into the eCommerce world
One thing I really like to see from a growth company struggling with, well…. growth, is adaptation. Dollarama has done exactly that. The company recently launched it’s online store, but it’s really not tailored for the customer you may think.
Dollarama hasn’t stated as much, but it is fairly obvious their online stores are suited for commercial businesses. If you check the store out, you’ll see that products such as cleaning supplies are sold in bulk cases. I mean I don’t know about you, but when I go to buy toilet cleaner, I’m not looking to buy a box of 16.
But who is looking for bulk discounts to save some cash? People who use a lot of this stuff. Restaurants, gas stations, cleaning companies, even commercial property management firms.
I really expect Dollarama to deliver strong results with their online stores. Large scale companies looking to cut margins on small level expenses could easily turn to the discount retailer to provide them with what they need.
If Dollarama’s online stores provide solid sales in 2019, we could see the stock surge back to mid 2018 levels. And at that point, you’re going to wish you got in at the reasonable price it is now.
I want to know what you think of Dollarama. Comment below on how you think the company will perform in 2019.