Dollarama (TSX:DOL) has a deservedly strong standing in the minds of most investors. Clearly, this is because of the retailer’s exceptional performance over the years, both financially and operationally. But the economic environment is becoming increasingly challenging. What will this mean for Dollarama’s stock price, which is trading at all-time highs, in 2023?
Retailing is cyclical
As we know, the retailing business is highly cyclical. This means that its fortunes rise and fall along with the economy and the consumer. Yet Dollarama has found a way around this typical cyclicality — at least partially.
You see, Dollarama sells a wide variety of products at price points of anywhere between $1 or less and $5. At these price points, we can see how shoppers would continue to visit the store, even in difficult times. Moreover, a large portion of what Dollarama sells are consumables. These are day-to-day living products that get used up pretty quickly and that have to continuously be replaced, such as tissues and food.
Clearly, we can see how Dollarama is one of the least cyclical retailers, offering essential products at value prices. But this is where the good news ends. Because even though Dollarama is less cyclical than other retailers, it’s still a retailer. This means that it’s still vulnerable to economic shocks. Even Dollarama shoppers will spend less when things are rough and money is short.
Labour costs are rising significantly, hitting Dollarama’s margins
And the economic shocks don’t end there. For example, one shock that we’ve been dealing with for about a year now is inflation. Commodity price inflation and general cost inflation has been hitting everyone hard.
Unfortunately, Dollarama is no exception. In fact, wage pressures and labour cost increases are expected to hit the company hard in 2023. Management is forecasting that selling, general, and administrative (SG&A) expenses, which includes labour cost, will be 14.7-15.2% of sales in fiscal 2024. This compares to SG&A being 14.2% of sales in the first quarter of fiscal 2023, representing up to a full percentage point increase.
Closely tied to rising labour costs is the general inflationary pressure that consumers are seeing everywhere. This has resulted in rising interest rates, which have the added negative effect of reducing consumers’ purchasing power.
Dollarama’s expansion plans
Despite these pressures, Dollarama continues to move forward on its expansion plans. I mean, fiscal 2023 was strong. As the pandemic costs and closures faded into the background, shoppers came back to Dollarama with a vengeance. Same-store sales increased 12% in fiscal 2023 and 15.9% in the fourth quarter. This highlights once again that Dollarama is a go-to destination for many Canadians.
Management has gotten the message and, in accordance with its long-term plans, continues to geographically expand. Currently, there are 1,482 Dollarama stores, with a solid pipeline of locations to continue to add more. Management remains on target to have 2,000 Dollarama stores by 2031. Simply put, the Canadian shoppers have spoken. Dollarama’s value proposition has a clear and growing place here.
Motley Fool: The bottom line
Along with Dollarama’s strong year, the company announced a 10% dividend increase and more share repurchases — all in the goal of creating shareholder value. Dollarama’s stock price is currently at all-time highs and at expensive valuations. Given the headwinds coming its way, I think investors should be cautious when considering Dollarama stock at this time.
