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Dollarama shares show long-term potential for capital gains

Ron Walter writes about Dollarama's potential
Bizworld by Ron Walter

To some observers, the Dollarama chain of stores can’t be much of a money maker — how can you make money selling stuff for a $1 or less?

Management at Dollarama has excelled at making money selling items for $1 or less. Gross profit margins have often exceeded 35 or 40 per cent.

New stores and increased sales at existing stores keep margins up there.

The secret is the right source of supply and the right mix of merchandise — branded and private label — and cost control.

Some analysts believe Dollarama’s growing profit days are over, based on the number of stores and the competition. More important, they don’t see how Dollarama can make money with inflation starting to chew away at profit margins.

Started in 1992 with a new emphasis on leasing more stores in 2004, Dollarama became a publicly traded company with an initial public offering of shares in 2009. 

After two splits one share issued at $17.50 in 2009 is worth $289 today — an astounding return of 1,654 per cent.

Store count has grown from 874 in 2005 to 1,225 in February. And the company sees room in the market for 1,700 outlets in Canada by 2027.

The naysayers on Dollarama’s potential ignore indications the chain’s plans to slowly move out of $1 or less items into slightly higher-priced items. That move alone can grow revenues and profits significantly.

For some time, Dollarama has been the supplier of merchandise to the Latin American Dollar City chain. Dollar City merely pays a handling fee with Dollarama, getting a benefit on volume discount  purchases by adding Dollar City’s $1 billion plus sales.

The company has taken such an interest in Dollar City that it bought 50.1 per cent of the company this year.

The Latin American chain with169 stores in Colombia, Guatemala and El Salvador has plans for 600. No doubt Dollarama’s cash flow will help fuel that growth.

Continued growth potential for Dollarama can come from selling items priced over $1, more stores in Canada and in Latin America.

Currently valued at $15.8 billion Dollarama shares trade at a high 23.8 times annual earnings. On the basis of cash flow, the shares trade at a rather high 24 times annual cash flow.

Some traders will justify the high premium valuation on the company’s awesome track record.

Perhaps they are right, but today’s stock market has turned extremely volatile. The frequent price gyrations stem from two factors: uncertainty caused by trade war Tweets and the fact that the bull market run in North American stock markets is long in the tooth and ready for a major pullback.

Investors saw how Dollarama shares sank last fall in the market correction. Shares plunged from $43 to just over $30.

At a current $49.25 shares have recovered a cool 55 per cent. Any downturn could see a flurry of share sales to protect gains.

Investors can pay the premium and hope, or they can wait for a market correction to get a better price and hold for the long-term.

CAUTION: Remember when investing, consult your adviser and do your homework before buying any security. Bizworld does not recommend investments.

Ron Walter can be reached at

The views and opinions expressed in this article are those of the author, and do not necessarily reflect the position of this publication.

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