At the mid-point of fiscal 2020, Dollarama (TSX:DOL) is proving to be a very resilient Canadian stock amidst a tough economic backdrop. Before the open on Thursday, the discount retailer released second quarter results. Earnings of $0.45 per share missed by a penny while revenue of $946.4 million beat by $7.2 million. This represented growth of 7% and 9% respectively.
Comparable sales, a key industry metric, rose 4.7% up outpacing the 2.6% it achieved in the second quarter of 2018.
Shortly after the end of the quarter, the company announced it closed on its 50.1% acquisition of Dollar City at a purchase price of approximately $US 90 million. Dollar City operates 192 stores across South America.
Along with earnings, the company also raised its comparable sales outlook for the remainder of the year. Dollarama is now expecting same store sales growth of 4% at the mid-range, up from 3.5% previously.
On the flip side, it warned that gross margins would most likely come in at the low end of guidance (43.25% to 43.75%). There was also commentary about how the current U.S. and China trade war is impacting operations.
Trade wars impacting Chinese factories
Management is finding it difficult finding new products as Chinese factories are in a holding pattern. As per CEO Neil Rossy its Chinese partners are not “creating new modes (or) putting money into R&D”. The challenges aren’t expected to impact costs – for now. It simply means, that the company will have a more difficult time sourcing new products.
Overall, it doesn’t foresee a big impact unless the situation lasts for more than a year. At that point, it could start to pose a big challenge and it would be one facing the entire Canadian retail landscape.
Dollarama has had a strong year. Its stock price is up by 48.26% in 2019 after a very tough 2018. Although volume spiked, Dollarama’s stock closed the day relatively flat as investors are still digesting the quarterly results.
Dollarama still trading at a premium
From a valuation perspective, Dollarama isn’t cheap. High single-digit earnings growth isn’t enough to justify its current price of 28.49 times earnings. It is priced as a double-digit growth stock, for which it hasn’t been in a couple of years.
That being said, the recent Dollarcity acquisition is expected to be accretive to earnings and the company wants to grow its network of stores to 1,700 locations by 2027. This is equal to an average growth rate of 4.5% annually.
Combined, the expectation should spur 12% annual earnings growth over the next five years according to analysts estimates. Given recent performance, I am skeptical that the company can achieve these numbers. This is still a show-me stock, although it is proving to be a strong defensive option moving forward.