Dollarama Inc. (TO:DOL) is a holding Company headquartered in Quebec, Canada, that operates discount retailers, AKA dollar stores. The stock is up 22% so far this year and earlier this week it broke through the $100 mark for the first time ever on strong earnings report.
The company earned a respectable $0.68 per share. To put that into perspective, this number is 28% higher than its earnings from the same quarter last year. The high growth rate of this dollar chain business is why investors have pushed up its P/E ratio to 30 times. But not only is the bottom line growing, Dollarama’s revenue is also expanding thanks to the opening of 66 new stores over the past year. Today, it has approximately 1040 stores in operation. Its stores have an average area of about 10,000 square feet, and offer a range of consumer products, basic health and beauty care products, pet food, drinks, snacks, general merchandise, seasonal items, and nationally branded products.
Dollarama has a history of growing profits and the financial side of the business is looking stronger than ever. It’s a prime example of a stock that has broken into new highs, supported by good volume, which is a positive sign for its investors. It’s hard to say how well the stock will perform in the short run from here, but if you plan to hold it for 7 years or longer, then now may not be a bad time to accumulate a small position. The stock at the moment appears to be fully valued, but as long as it can maintain its current pace of growth then its current share price would be justified for long term investors. If you already own it then it’s easy to just hold onto it for now. But if your investment time horizon is 5 years or less and you don’t yet own any DOL, then waiting for a 10% to 15% pull back in the stock price might be wise before jumping into this stock.
Stock analysts have an overall “outperform” rating on Dollarama. TD Securities have recently upgraded shares of Dollarama from a hold rating to a buy rating in a report issued on Wednesday morning. TD Securities currently has C$115.00 price target on the stock, which is $10 per share higher from their previous price target of C$105.00
Dollarara has a smart management team that knows exactly what they are doing in the market. The brand has completely dominated the discount retail niche and there are still opportunities. One of their current goals is to expand outside of Canada. Hopefully it will work out for them. But expanding into a new country will not be easy. When Target Corporation (NYSE:TGT) tried to break into the Canadian market a few years ago it was a total failure. Before long Target had to pull out and close down all its Canadian stores. Having consistent execution is very important and I think Dollarama can do a better job than Target of expanding its brand into a foreign country.
Making money in the stock market is all about knowing which companies to look for. The economy has not been performing well in North America over the last 5 years or so. As consumers become more thrifty with their purchasing habits, dollar stores like $DOL should continue to benefit from the trend. Market cycles are inevitable. Recessions tend to happen once every 6 to 8 years in the United States. It’s been 8 years since the last great recession. Holding a defensive position such as Dollarama may not be a bad choice as it tends to be recession resistant.