Danger: This Incredibly Popular Canadian Stock Could Plunge 40%

Dollarama Inc. (TSX:DOL) is under attack by a short seller who claims the stock could fall another 40%. Here’s why I think it can and will.

| More on:

I’ve been urging investors to throw in the towel on Dollarama (TSX:DOL) for well over a year now. It’s a classic case of a growth stock transforming into a value stock. The last quarter, which saw slower same-store sales growth (SSSG) numbers along with a sharp SSSG guidance downgrade, was evidence of the insidious transformation that’s likely far from over.

This isn’t a one-off SSSG slowdown. Rather, I think it’s the start of a trend that’ll probably lead to further losses for investors who’ve decided that they’re going to stick around in the hopes of a turnaround.

In prior pieces, I’ve emphasized that both increased competition in the discount retail scene and poor decisions made by management would cause the stock to suffer a nasty correction over the near term. I’d noted Miniso as an up-and-coming competitor that Dollarama was unprepared to deal with due to management’s reluctance to invest in improving its sub-par in-store experience.

The Canadian discount store scene is about to get crowded

As competition picks up in the Canadian discount retail space, it’s no longer just about small up-and-comers like Miniso that Dollarama will need to worry about. Amazon.com has a growing selection of low-cost goods that shoppers can “add on” to their original purchases.

Discount stores like Dollarama which were once thought of as Amazon-proof may not be as insulated as many investors may have thought a few years back. Dollarama’s moat was its ability to command low prices, but with Amazon breathing down its neck with low-cost “add-on” items, Dollarama’s margins will stand to be pressured, and its moat could easily erode because, as we all know, Amazon plays hardball when it comes to price undercutting.

Over the next few years, I wouldn’t at all be surprised to see Amazon try to steal lunch away from all the discount retailers. Amazon is going to make it easier for shoppers to bundle their add-on items together, and as its logistics capabilities continue to improve, we’re likely going to see Amazon’s minimum order fall well below the $35 mark, where it currently stands today.

Who knows? In five years from now, drone deliveries may make it economical for Amazon to deliver low-cost items individually without any additional “add-ons.”

Foolish takeaway

Short-sellers at Spruce Point Capital Management called the company a “broken growth story,” slapped a “strong sell” on the stock, and claimed it could be in for 40% in further downside.

I think they’re right on the money and would encourage investors to cut their losses, as Dollarama could realistically hit the low $20 levels by year end. When you consider the number of headwinds that are still present today, I wouldn’t advise touching shares with a barge pole, even though they may seem like a bargain after the recent flop.

Stay hungry. Stay Foolish.

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 Joey Frenette has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. The Motley Fool owns shares of Amazon.

More on Investing

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

Top Canadian Renewable Energy Stocks to Buy Now

Here are two top renewable energy stocks long-term investors can put in their portfolios and forget about for a decade…

Read more »

ETF stands for Exchange Traded Fund
Investing

Here’s the Average TFSA Balance at Age 54 in Canada

Here are two ways to optimize your TFSA for either growth or income via ETFs.

Read more »

oil and gas pipeline
Energy Stocks

Where Will Enbridge Stock Be in 3 Years?

After 29 straight years of increasing its dividend and a current yield of 6%, here's why Enbridge is one of…

Read more »

An investor uses a tablet
Tech Stocks

Canadian Tech Stocks to Buy Now for Future Gains

Not all tech stocks are created equal. In fact, these three are valuable options every investor should consider.

Read more »

calculate and analyze stock
Dividend Stocks

This 5.5% Dividend Stock Pays Cash Every Single Month!

This REIT may offer monthly dividends, but don't forget about the potential returns in the growth industry its involved with.

Read more »

concept of real estate evaluation
Stocks for Beginners

2 No-Brainer Real Estate Stocks to Buy Right Now for Less Than $1,000

These two real estate sector-focused stocks have the potential to deliver strong returns on your investments in the coming years.

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold for 2025?

Enbridge stock just hit a multi-year high.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

How to Use Your TFSA to Earn up to $6,000 Per Year in Tax-Free Passive Income

A high return doesn't mean you have to make a high investment -- or a risky one -- especially with…

Read more »