About Dollarama
Dollarama Inc. is a Canadian dollar store retail chain headquartered in Montreal. Since 2009, it has been Canada's largest retailer of items for four dollars or less. Dollarama has over 1200 stores and has a presence in every province of Canada; Ontario has the most stores.
Past Performance
For the past decade, Dollarama has been one of the best performing stocks on the TSX. Since 2009, they doubled the number of stores and gradually increased prices from $1 to $4 on some of the items, and their stock price increased tenfold. Investors were so excited about the growth that they were willing to pay a high multiple for the stock. How high? Up to 40 x P/E ratio. But sometimes, a high P/E ratio is not the problem. The problem is when the stock price outperforms earnings growth. That’s why it’s important to pay attention at P/E-to-growth ratio (PEG). In Dollarama’s case, the PEG ratio was too high.
Expensive growth multiple
I believe the stock had an expensive multiple to begin with. When you have a Canadian retailer with over 1,000 stores, how much growth can you expect from it? Not to mention, when prices of some items were increased to $4, consumers started to back off. A price increase from $1 to $2.25 worked very well, but not beyond that.
Domestic growth concerns
I believe with 1,200 locations in Canada, Dollarama’s store growth is pretty much capped. There are 46 Dollarama locations within 10 km radius from where I live. That’s a lot of stores.
What can we learn from Dollarama stock plunge?
When investing in growth stock:
From growth stock to value stock
It’s very possible that Dollarama stock will transition from growth stock to a value stock. In that case the P/E multiples will decline from 25/30 to 15/20. So anybody who wants to invest in Dollarama as a value play, look for prices between $25 and $32 per share.
Your Thoughts
Let me know what you think of Dollarama and its downtrend. Do you think it’s a buying opportunity? Do you think they will be able to grow internationally?
Expensive growth multiple
I believe the stock had an expensive multiple to begin with. When you have a Canadian retailer with over 1,000 stores, how much growth can you expect from it? Not to mention, when prices of some items were increased to $4, consumers started to back off. A price increase from $1 to $2.25 worked very well, but not beyond that.
Domestic growth concerns
I believe with 1,200 locations in Canada, Dollarama’s store growth is pretty much capped. There are 46 Dollarama locations within 10 km radius from where I live. That’s a lot of stores.
What can we learn from Dollarama stock plunge?
When investing in growth stock:
- Don’t mind the past growth, think of the future, is more growth physically possible
- Calculate the PEG ratio (PEG below 1 = undervalued, PEG above 1 = overvalued)
- Every business has different type of customers, study their behavior
- Know the competitors
- Compare the growth of similar businesses in other countries
From growth stock to value stock
It’s very possible that Dollarama stock will transition from growth stock to a value stock. In that case the P/E multiples will decline from 25/30 to 15/20. So anybody who wants to invest in Dollarama as a value play, look for prices between $25 and $32 per share.
Your Thoughts
Let me know what you think of Dollarama and its downtrend. Do you think it’s a buying opportunity? Do you think they will be able to grow internationally?
March 28, 2019 - earnings report is out. They missed profit margins by 1 penny, no biggy, but their same-store-sale figure was up by 2.6%. I'm not sure how the market will react, but the growth story is over for Dollarama. I doubt they will continue to grow at 8%. They also reported that fewer customers shopped at its stores. No surprise here. People are looking for bargains elsewhere.
ReplyDeleteWhy? It's not an income stock. This is a terrible investment for income investors.
ReplyDeleteIt was an income stock when the stock was much lower. Now the yield is .5% because the stock is up tenfold in the last 10 years. I wouldn't mind holding a low yield ten bagger, but for now the growth has slowed down.
DeleteWell again to each their own. My point is for income investors it's also about growing that income over time. DOL is not a DG income stock. I like income stocks that steadily and slowly raise that dividend over time.
DeleteYeah, you certainly don't buy Dollarama for income as there's almost no income. A regular TFSA savings account will pay you double of what Dollarama pays. I wrote this post because Dollarama is getting a lot of media attention due to its big drop in value. Just wanted to make sure my readers don't fall for recommendations of buying the stock. They hit the plateau.
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ReplyDelete