Dollarama Inc. Announces a 3-for-1 Stock Split, a 9% Dividend Increase, and Booming Sales

Are Dollarama Inc. (TSX:DOL) shares overvalued, despite the strong results?

| More on:

In a retail world where we are seeing companies filing for bankruptcy and struggling to generate revenue growth, let alone profitability, Dollarama Inc. (TSX:DOL) stands out all the more, given its impressive run of same-store sales growth and profitability.

The Canadian retail landscape today has seen the once untouchable Sears Canada fail Toys “R” Us, with 85 stores in Canada, file for bankruptcy protection, so it can “restructure its outstanding debt” and get back on a path toward long-term growth, as Amazon.com, Inc. has changed the playing field drastically.

But Dollarama just keeps going strong, with a fine-tuned strategy and business model that capitalizes on a consumer that is demanding lower price points for everyday items. Dollarama does this to perfection, with merchandising skills that have brought down costs and driven up efficiency.

The latest quarter saw more margin increases, a 5.5% same-store-sales growth rate, and a continued expansion of its store base in the last year, with 65 new stores added (+6%).

EBITDA margins continue to expand, coming in at 27.1% in the quarter compared to 26.5% last year, which is far above its peer group, and EPS increased 17% to $1.45.

The company’s strong free cash flow generation and return on invested capital came through again in fiscal 2018. Operating cash flow was $611 million compared to $509 million last year, and free cash flow was $498 million.

So, yes, Dollarama deserves a premium multiple due to its superior performance on a number of metrics.

But at what point are we overpaying?  And how long can it keep up this growth rate?

I have been admittedly skeptical about the company due to a couple of factors — mostly the stock’s valuation. Trading at 34 times fiscal 2018 earnings, this is no cheap stock.

I was also skeptical because of the fact that the company has had to institute price increases in order to protect its profitability, so I concluded that this trend would prove to be bad for its competitive positioning.

But I have clearly been wrong. Investors are willing to pay up for strong performance, and consumers just can’t seem to get enough of Dollarama.

The stock has a five-year return of 393% but is only marginally higher year to date.

So, Dollarama is clearly in the sweet spot, thriving in this retail environment where consumers are looking for inexpensive choices, and benefiting from its ability to keep costs down as it sources its products from China, thereby offering value for the consumers while still generating strong returns for the company.

But at the end of the day, as a value investor, I still view the risk/reward proposition on the shares as unattractive, so I will remain on the sidelines.

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Karen Thomas has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. The Motley Fool owns shares of Amazon.

More on Dividend Stocks

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »

how to save money
Dividend Stocks

Got $1,000? The 3 Best Canadian Stocks to Buy Right Now

If you're looking for some cash flow from your $1,000 investment, these are the ideal investments to make.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

A Dividend Giant I’d Buy Over BCE Stock Right Now

Don't get sucked in by BCE's 10% dividend -- the stock is a total yield trap. Buy this instead.

Read more »

Retirees sip their morning coffee outside.
Dividend Stocks

Consider Sienna Senior Living for a Stable Monthly Income

Buying this Canadian dividend stock could help you build a dependable monthly income portfolio for the long term.

Read more »

Female raising hands enjoying vacation, standing on background of blue cloudless sky.
Dividend Stocks

Best Beginner-Friendly Stocks to Buy Now in Canada

These top TSX stocks have delivered attractive long-term returns.

Read more »