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With the reporting of its third-quarter financial results, investors were once again disappointed by Dollarama (TSX:DOL). This company that was once a darling of the market, trading at sky-high valuations and reporting unbeatable growth that made it stand apart from its peers, continues to give investors reasons to be cautious.
Retailers are infamously cyclical, even defensive ones like Dollarama, and as the company has continued to introduce higher price points, it becomes even more so. As this happens, it risks changing its competitive landscape, meaning that companies like Wal-Mart eventually become a serious threat to its business. The beauty of active investing is that we respond to our concerns by directing our money to better opportunities. Please continue reading to find out why I think Dollarama is not the best stock for investors.
Strong same-store sales growth, but expect this to slow
In recent years, Dollarama has introduced different price points, and at this point, the retailer is selling products at price points as high as $4. As a strategy, this has helped the company increase its same-store sales at a time when traffic was falling. As was pointed out by the CEO in the company’s latest conference call, however, we should not expect more price points to be introduced. This means that same-store sales growth could be in for a weaker ride in the next few years.
Offsetting this trend, we are seeing a recovery in traffic. In the latest quarter, traffic increased 2.4%. This was the most since the first quarter of fiscal 2017 and better than many retailers, proving out the value of the Dollarama offering for consumers. Despite this offsetting trend, we have more issues coming to light that suggest caution. The company is telegraphing to investors the fact that shipping costs are rising. While this may prove to be transient and short term in nature, the fact is that in 2020 and the next few years, things will not be as easy as investors may be expecting.
Dollarama stock is a success story, but will 2020 be its plateau?
Since Dollarama’s IPO in September of 2009, the company’s stock has reflected the great success that this retailer has had. Revenues have soared from $1 billion in 2009 to $3.5 billion in 2019, and this $15 billion retailer has seen its share price rise 10-fold to its current approximate $45 share price.
The store count is currently at 1,225, and the company still expects that by 2027 it will have 1,400-1,700 stores across Canada for an up to 38% increase in store count. Same-store sales growth has already been reset lower, with the company expecting fiscal 2020 same-store-sales growth of 4-4.5% (down from growth rates of more than 8% in prior years). I question whether this slowdown in sales growth will impact Dollarama’s long-term store growth plans.
The stock still trades at a premium valuation, and although this premium is far lower than what it was in the past, I am uncomfortable with a retailer trading at multiples of north of 25 times earnings when expectations are being missed and new headwinds are forming, as is the case for Dollarama.
Foolish bottom line
At this time, investors looking for good money-making ideas should focus their attention away from the retailers in general. With the consumer economy looking to be in its final stages, a consumer that is maxed out, and so many other places to invest, I would look elsewhere. Dollarama has a phenomenal history, I just see too many obstacles coming its way, as I’ve tried to outline in this article.
