Dollarama (TSX:DOL) and Walmart (NYSE:WMT) are two well-known discount retailers that make affordable goods available to Canadians. The former is a homegrown dollar store, while the latter is an American retail giant with a large presence in Canada.
Many economists think that we’re heading into a recession, and discount retailers like DOL and WMT tend to thrive during recessions. When times are tough, people look for cheaper alternatives to goods they’re already buying, and discount retailers have such items in spades.
Most likely, if a recession were to hit, both Walmart and Dollarama would do better than the average stock. An investor could likely do well owning both of them. However, that doesn’t tell us which of the two stocks would be the better buy in the event of a recession. In this article, I will look at four factors to help determine which, Dollarama or Walmart, is the better buy.
Prices
Both Walmart and Dollarama are known for cheap prices, so it makes sense to compare them on this criterion. When consumers feel the pinch, they want the lowest prices possible, so if we’re looking at WMT and DOL as ‘recession-resistant’ picks, we should see which between the two of them has the better prices.
To make a long story short, Dollarama does. The blog MTLBlog looked at the two stores side by side and found that Dollarama had cheaper prices than Walmart in almost every category they looked at. In some cases, DOL’s offerings were half the price of WMT’s. I wasn’t surprised when I read the article because it lines up with my own experiences with Dollarama: in some categories, the prices are just unbelievably cheap.
With that said, DOL won’t necessarily gain at Walmart’s expense just because its prices are lower. Walmart has a much bigger selection than Dollarama does, so it will likely have the cheapest prices in Canada in categories DOL doesn’t serve.
Growth
Having looked at the price factor – the main “operational” similarity and strength for Walmart and Dollarama–we can now look at their growth. This factor favours Dollarama as well. Over the last 10 years, DOL has grown its revenue by 10.5%, earnings by 13.9%, and free cash flow by 15.5% per year. Terrific growth rates all around. Walmart’s growth was much worse: revenue grew at just 2.7% per year and earnings actually declined. So, DOL beats WMT on long-term growth.
Valuation
Finally, we can look at how DOL and WMT are valued. At today’s prices, Dollarama trades at:
- 29.8 times earnings
- 4.7 times sales
- 32 times operating cash flow
- 543 times book value
Walmart trades at:
- 21.8 times earnings
- 0.6 times sales
- 4.8 times book value
- 12.7 times cash flow
So, Walmart is the cheaper stock.
Taking everything into account, though, I think Dollarama is probably the better buy. My conviction on this call is not extremely high, but the fact that Walmart’s business has been shrinking over a full 10-year period is concerning. Dollarama is definitely expensive, but it’s also a thriving, growing business. I’d slightly favour it over Walmart.
