Last week, Dollarama (TSX:DOL) reported its third-quarter earnings for fiscal 2025. For the quarter, the company posted revenue and diluted EPS (earnings per share) growth of 5.7% and 6.5%, respectively. Its same-store sales grew 3.3%, a decline from 4.7% in the previous quarter. Weaker same-store sales and an expensive valuation appear to have made investors nervous, leading to a selloff. The company has lost 5.4% of its stock price since reporting its third-quarter earnings.
Let’s assess its third-quarter performance and future growth prospects to determine whether investors should utilize the pullback to accumulate the stock to earn superior returns.
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Dollarama’s third-quarter performance
Dollarama has posted revenue of $1.6 billion, representing a 5.7% increase from the previous year. The net addition of 60 stores over the last four quarters and positive same-store sales of 3.3% drove its topline. A 5.1% increase in transactions overcame a 1.7% decline in average transaction size to drive its same-store sales. Strong demand for consumables offset the softer demand for seasonal items, boosting its same-store sales.
The discount retailer’s gross margins contracted 70 basis points to 44.7% amid higher sales of lower-margin consumable products and increased logistics expenses. However, its SG&A (selling, general, and administrative) expenses as a percentage of total revenue fell from 14.5% to 14.3% amid the favourable impact of scaling. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew 6.5% to $509.7 million, while its adjusted EBITDA margin expanded from 32.4% to 32.6%.
Moreover, the contribution from Dollarcity, where Dollarama owns 60.1%, to Dollarama’s net income increased from $18 million to $27.1 million with an increased stake. Supported by the increased contribution from Dollarcity, Dollarama has posted a diluted EPS of $0.98, representing 6.5% year-over-year growth. Now, let’s look at its growth prospects.
Dollarama’s growth prospects
Amid positive customer response to its value offerings and a reevaluation of its market potential in Canada, Dollarama has increased its store expansion plan from 2,000 stores to 2,200 by 2034. Also, the company has planned to build a logistics hub in Western Canada, which could support its future growth and improve operating efficiency. Apart from $46.7 million in land acquisition expenses, the company plans to invest around $450 million to construct its Western hub facility in Calgary, Alberta. The company expects to incur capital expenditures for the facility over the next three years and hopes to commission the project by the end of 2027.
Given its capital-efficient business model, quick sales ramp-up, and lower payback period of two years, these expansions could boost its top and bottom lines.
Moreover, Dollarama’s subsidiary, Dollarcity, expanded its footprint by opening 18 stores in the third quarter, thus raising its store count to 588. Meanwhile, it has a solid development pipeline and hopes to increase its store count to 1,050 by the end of fiscal 2031. Besides, Dollarama owns an option to increase its stake in Dollarcity by 9.9% by the end of 2027. So, Dollarama’s growth prospects look healthy.
Investors’ takeaway
Despite the recent pullback, Dollarama trades at over 47% higher this year, outperforming the broader equity markets. Also, its valuation looks expensive, with its NTM (next 12 months) price-to-earnings multiple at 32.1. However, given its healthy growth prospects and solid underlying business, investors are ready to pay a premium, justifying its higher valuation. So, considering its growth prospects and impressive underlying business, I believe the pullback offers an excellent buying opportunity for long-term investors.
