4 Reasons Why Dollarama Inc. Could Continue to Outperform the Market

Dollarama Inc.’s (TSX:DOL) stock could continue to outperform the overall market going forward for four primary reasons. Should you buy now?

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Dollarama Inc. (TSX:DOL), the largest owner and operator of dollar stores in Canada, has widely outperformed the overall market in 2015, rising over 47% as the TSX Composite Index has fallen over 5%, and I think it could continue to do so for the next several years. Let’s take a look at four of the primary reasons why this could happen and why you should consider making it a core holding today.

1. Its strong financial results could support a continued rally

On September 10, Dollarama announced very strong earnings results for its three and six-month periods ending on August 2, 2015, and its stock has responded by rising over 9% in the trading sessions since. Here’s a summary of 10 of the most notable statistics from the first half of fiscal 2016 compared with the first half of fiscal 2015:

  1. Net income increased 31.2% to $160.25 million
  2. Earnings per diluted share increased 36.7% to $1.23
  3. Revenue increased 13.6% to $1.22 billion
  4. Comparable-store sales increased 7.4%
  5. Gross profit increased 18.3% to $454.37 million
  6. Gross margin expanded 150 basis points to 37.3%
  7. Earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 29.8% to $252.78 million
  8. EBITDA margin expanded 260 basis points to 20.7%
  9. Operating profit increased 30.1% to $229.85 million
  10. Operating margin expanded 240 basis points to 18.9%

2. Its stock trades at inexpensive forward valuations

At current levels, Dollarama’s stock trades at 31 times fiscal 2016’s estimated earnings per share of $2.83 and 27.1 times fiscal 2017’s estimated earnings per share of $3.23, both of which are inexpensive given its current growth rate, the latter of which is inexpensive compared with the industry average price-to-earnings multiple of 29.1.

I think the company’s stock could consistently trade at a fair multiple of at least 32, which would place its shares upwards of $90.50 by the conclusion of fiscal 2016 and upwards of $103.25 by the conclusion of fiscal 2017, representing upside of more than 3% and 17%, respectively, from today’s levels.

3. It has ample room for expansion

At the conclusion of the first half of fiscal 2016, Dollarama reported a total store count of 989, an increase of 72 from the end of the year-ago period. I think the company could add at least 100 net new stores per year over the next five to 10 years, bringing its total store count to over 1,500 by 2020, and I think it could do this without ever running into issues related to market densification.

4. It has increased its dividend for four consecutive years

Dollarama pays a quarterly dividend of $0.09 per share, or $0.36 per share annually, which gives its stock a 0.4% yield at current levels. A 0.4% yield is far from impressive, but it is very important to note that the company has increased its dividend for four consecutive years, and its strong operational performance and low payout ratio could allow this streak to continue for another four years at least.

Is now the time for you to buy shares of Dollarama?

I think Dollarama could continue to outperform the overall market going forward. Its very strong earnings results in the first half of fiscal 2016 could support a continued rally, its stock trades at inexpensive valuations given its current growth rate, it has ample room for expansion, and it is a dividend-growth play, which will amplify the potential returns for investors going forward. All Foolish investors should strongly consider making it a core holding today.

Should you invest $1,000 in Algonquin Power and Utilities right now?

Before you buy stock in Algonquin Power and Utilities, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Algonquin Power and Utilities wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

a person looks out a window into a cityscape
Metals and Mining Stocks

Why I’d Consider This Canadian Stock for My TFSA as Tariffs Reshape Markets

Cameco (TSX:CCO) stock could fortify your TFSA against tariff war headwinds, and provide growth opportunities during recessions

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Top Energy Stocks to Invest in for 2025

Energy stocks are a solid choice for investors, but these could be the best option in 2025.

Read more »

cloud computing
Tech Stocks

How I’d Allocate $1,000 in Tech Stocks in Today’s Market

Investing regularly in undervalued tech stocks such as RingCentral should help you derive outsized gains in 2025 and beyond.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

The 1 Canadian Stock I’d Buy and Hold Forever in a TFSA

This Canadian stock is a strong option for any TFSA, and here's why.

Read more »

Asset Management
Stocks for Beginners

Got $3,000? How I’d Distribute it Among 3 Growth Stocks for Decade-Long Appreciation 

The market crashed after Trump's tariffs became effective on April 2. You can still make money in this market with…

Read more »

grow money, wealth build
Stocks for Beginners

How I’d Allocate $20,000 in Growth Stocks in Today’s Market

Here’s how I’d split a $20K investment between two Canadian growth stocks with big potential in the years ahead.

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

Invest $25,000 in These Dividend Stocks for $1,267 in Annual Passive Income

Dividend stocks are strong options, but these two could be some of the best long-term options.

Read more »

Stethoscope with dollar shaped cord
Investing

2 Healthcare Stocks I’d Buy With $20,000 Whenever They Dip in Price

Well Health stock is just one of two healthcare stocks to buy, as they offer defensive and economically insensitive earnings…

Read more »