One of the top-performing TSX stocks in the past decade is Dollarama (TSX:DOL). Valued at a market cap of $25.6 billion, Dollarama stock has returned 650% to shareholders since July 2013 after adjusting for dividends. Comparatively, the TSX index has gained just 135% in the last 10 years.
As past returns don’t matter much to current investors, let’s see if you should buy DOL stock at its current valuation.
The bull case for Dollarama stock
Among the most popular value retailers in Canada, Dollarama offers a variety of products at low fixed price points. It aims to grow sales, operating income, net income, cash flows, and earnings per share by expanding the network of retail stores across Canada.
The company ended fiscal Q1 of 2024 with 1,507 stores in Canada with an average size of 10,469 square feet. It opened 21 net new stores in Q1 (ended in April), allowing Dollarama to increase sales by 20.7% year over year to $1.3 billion.
Dollarama primarily sells merchandise in individual or multiple units at select, fixed price points up to $5. Further, each store is company-operated, allowing it to provide a consistent shopping experience which, in turn, results in higher engagement rates over time.
Moreover, Dollarama stores are generally located in high-traffic areas leading to consistent footfalls. The value retailer has successfully positioned itself as a discount retailer. By offering attractive price points, it is able to generate demand across market cycles, making it almost immune to recessions.
Dollarama also has a 50.1% equity interest in Dollarcity, which is a Panama-based Latin American value retailer. Dollarcity offers consumable and general merchandise products in markets such as El Salvador, Colombia, Peru, and Guatemala. As of March 2023, Dollarcity had close to 450 stores across 267 locations in Latin America.
What next for Dollarama’s stock price?
Despite a challenging macro-environment, Dollarama’s comparable store sales in Q1 grew 17.1% while adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) surged 22.1% to $366.3 million.
Dollarama emphasized, “The year-over-year increase in comparable store sales is primarily attributable to strong demand across our product categories, namely consumables, seasonal items, and general merchandise.”
Additionally, Dollarama showcased its pricing power amid an inflationary environment as its gross margins remained flat at 42.2%, and selling costs as a percentage of sales was also unchanged at 15.1%. However, the company increased capital expenditures by more than 50% to $47 million, which suggests it continues to focus on expansion.
Dollarama’s new stores reached annual sales of $2.6 million within the first two years of operation, achieving an average capital payback period of two years. In Q1, 81% of the company’s sales originated from products priced at over $1.25, up from 76% in the year-ago period.
Priced at 28 times forward earnings, Dollarama stock is forecast to expand the bottom line at an annual rate of 18.6% in the next five years.
Dollarama reported free cash flow of $235 million in Q1, up from $128 million in the year-ago quarter. This allowed the retail giant to increase quarterly dividends by 40% in the last 12 months to $0.071 per share. In the last eight years, these payouts have risen by 12% annually.
Dollarama stock remains a top TSX stock given its reasonable valuation, widening cash flows, and rising dividend payout.
