Missed the Dollarama rally? It might not matter

Globe and Mail

16 hours ago

Let's say that you missed out on buying shares in Dollarama Inc. DOL-T, only to watch the price rise 61 per cent over the past year, 320 per cent over the past five years and, oh dear, 660 per cent over the past 10 years.
Forgiving yourself for missing out on this spectacular Canadian growth story is easy. What's far more difficult: Ignoring how high it's climbed and buying the stock today.
That might sound crazy at first glance, especially if you have a bias – as I do – toward cheap, beaten-up stocks with compelling turnaround stories.
Dollarama is anything but beaten-up, and this observation extends well beyond the share price.
Its Canadian footprint has increased by 69 per cent over the past decade to 1,638 stores. It has successfully expanded its product mix to include items priced as high as $5, up from a high of $3.
Over this 10-year period, quarterly sales – based on financial results released this week – have nearly tripled, to more than $1.5-billion. Net earnings have more than quadrupled.
The share price has occasionally reflected some hesitation from investors because of competitive pressures, disappointing sales growth and market saturation. In one of the biggest recent swoons, the stock fell more than 40 per cent during a particularly bleak stretch in 2018.
Today, though, there appears to be little weighing on the stock – including tariffs and economic clouds – given that it touched a record intraday high on Wednesday and trades at over 40 times estimated earnings.
'Valuation is at all-time highs, reflecting Dollarama's standing as a paragon of both quality and growth,' Mark Petrie, an analyst at CIBC Capital Markets, said in a note.
Anyone hoping to score a quick gain on the stock from its current level would need the confidence of Ethan Hunt, the hero in the Mission: Impossible film series, to believe that there are still some factors that the market is ignoring or that the valuation deserves to be higher than Nvidia Corp., which is most definitely not a discount retailer.
Others who have been sitting on the sidelines and may be filled with regret over Dollarama's stunning ascent – and can handle some bumps – might want to try on this argument: For a company that has shown no signs of exhaustion, perhaps it doesn't matter when you buy the stock.
For one thing, profits are still rising at an impressive clip.
Last year, earnings per share increased by 16.9 per cent, year-over-year. CIBC expects profits will rise 11.8 per cent this year and 11.4 per cent next year.
But keep in mind that Dollarama executives have a habit of overdelivering. In its most recent quarter, the company reported a profit of 98 cents per share, beating analysts' expectations by a wide 14 cents, according to S&P Global Market Intelligence.
What's more, Dollarama is continuing to generate strong sales growth as it finds steady opportunities for opening new locations in Canada, where consumers gravitate to its well-organized stores and consistent range of products.
It opened 22 stores in the first quarter, with dozens more coming during the rest of the year, suggesting that market saturation on its home turf is still a ways off.
Sales rose 8.2 per cent in the fiscal first quarter, also slightly higher than expectations.
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International expansion adds a new opportunity for growth. Dollarama owns a 60.1-per-cent stake in Latin American discount retailer Dollarcity, with locations in Colombia, Guatemala, El Salvador, Peru and, starting next month, Mexico.
Though the target back in 2019 was to have 600 Dollarcity stores within 10 years, the current store count already stands at 644. The new target: 1,050 stores by 2031, which doesn't include Mexico.
Dollarama is also gearing up for an expansion into Australia with a deal to acquire The Reject Shop Ltd., which operates a network of more than 390 stores that can benefit from Dollarama's know-how.
'We question what catalyst will emerge to cause Dollarama to falter. The value proposition seems as healthy as ever, and we see risk of earnings misses as very low,' John Zamparo, an analyst at Bank of Nova Scotia, said in a note.
Yeah, just about everyone agrees that the stock isn't cheap on a valuation basis. Its stellar gains are going to make some investors nervous about a rally that could fade the minute they join it.
But Dollarama has cruised through economic downturns, soaring inflation and trade wars (so far), rewarding risk-takers who focused on the future rather than dwelling on the past they may have missed.