Long Position - Dollarama

Company Overview

Dollarama Inc. is Canada’s leading discount retailer, operating over 1,500 stores nationwide. The company specializes in low-cost, high-turnover consumer goods across household essentials, food, personal care, and seasonal categories. Dollarama’s business model is built on scale, cost efficiency, and rapid inventory turnover, allowing it to offer consistently low prices while maintaining strong margins.

Key Growth Drivers

• Store Network Expansion: Long-term target of 2,000+ stores by 2031
• Private Label Mix: Higher-margin proprietary products enhance profitability
• Scalable, Low-Cost Sourcing: Global procurement mitigates inflationary pressures
• Consumer Trade-Down: Structural shift toward value retail strengthens market share

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Investment Rationale

Recession-Resistant Business Model

During economic downturns, consumers increasingly trade down to discount retailers. Dollarama has historically outperformed during recessions, including 2008 and 2020, benefiting from increased foot traffic and higher basket sizes as consumers prioritize affordability.

Inflation and Cost-of-Living Tailwinds

Elevated inflation and rising household expenses have made traditional retailers less attractive. Dollarama benefits directly from price-sensitive consumer behavior, with sustained increases in traffic and average transaction value.

Strong Same-Store Sales and Margin Profile

Same-store sales grew 15.5% year-over-year in Q3 2023, reflecting robust demand. Gross margin remained strong at 43.1%, demonstrating Dollarama’s pricing power, operational discipline, and effective cost management.

Aggressive Expansion Strategy

Dollarama continues to expand aggressively, opening approximately 70–80 new stores annually. Its long-term plan to exceed 2,000 stores by 2031 supports durable revenue growth and national dominance.

Strong Cash Flow and Shareholder Returns

The company generates substantial free cash flow, enabling consistent share buybacks and dividend growth. Return on equity of approximately 60.3% highlights Dollarama’s efficiency in generating shareholder value.

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Valuation Comparison

Dollarama trades at an attractive valuation relative to U.S. discount retail peers, despite delivering superior same-store sales growth.

Peer Comparison

• Dollarama (DOL)

  • Market Cap ($B): 26.4
  • EV/EBITDA: 14.7x
  • P/E Ratio: 21.3x
  • Same-Store Sales Growth: 15.5%

• Dollar Tree (DLTR)

  • Market Cap ($B): 33.1
  • EV/EBITDA: 16.8x
  • P/E Ratio: 24.1x
  • Same-Store Sales Growth: 5.4%

• Five Below (FIVE)

  • Market Cap ($B): 12.7
  • EV/EBITDA: 19.2x
  • P/E Ratio: 27.8x
  • Same-Store Sales Growth: 4.5%

• Walmart (WMT)

  • Market Cap ($B): 428.6
  • EV/EBITDA: 12.9x
  • P/E Ratio: 25.3x
  • Same-Store Sales Growth: 4.9%

Key Takeaways:

• Same-store sales growth materially exceeds peers
• EV/EBITDA multiple is attractive given margin strength
• P/E multiple is justified by expansion runway and defensive positioning

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Revenue Stability in a Weak Economy

Dollarama’s revenue remains resilient even during economic slowdowns, making it one of the strongest defensive names in Canadian retail.

Drivers of Stability

• Consumer Trade-Down: Rising cost pressures push shoppers toward discount formats
• Essential Product Mix: Focus on necessities ensures stable demand
• Low Cyclicality: Discount retail historically outperforms in recessions
• Efficient Supply Chain: Low-cost sourcing preserves margins

Dollarama is structurally insulated from consumer weakness as affordability becomes a priority.

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Risks and Catalysts

Key Risks

• Competitive Pressure: Increased competition from Walmart, Costco, and other discounters
• Supply Chain Disruptions: Transportation costs or supplier constraints could pressure margins
• Economic Recovery: Faster-than-expected recovery could lead some consumers to trade back up

Potential Catalysts

• Persistently High Inflation: Sustains trade-down behavior
• Accelerated Store Openings: Faster expansion boosts revenue growth
• Share Buybacks and Dividend Growth: Strong cash flow supports shareholder returns

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Conclusion

Dollarama represents a best-in-class defensive retail investment. Its ability to benefit from inflation-driven consumer trade-down, combined with strong same-store sales growth, margin resilience, and a long runway for store expansion, makes it a compelling long opportunity in 2024. The company’s valuation remains attractive relative to peers, while its business model offers both downside protection and durable growth.