OB Report
May 2019
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Finding Value in Canada's Best Dollar Store

tchang_microBy Trevor Chang, BBA Equity Analyst
DOLSome of my fondest memories as a child are of going to the dollar store. It was the only place my measly allowance would go very far. To my childhood self, dollar stores were the best and they are still adored by many Canadians today. When I think of dollar stores now, the largest Canadian brand comes to mind: Dollarama.


Despite its favourable image among value shoppers, Dollarama shareholders probably felt very differently about the company in 2018. Shares began the year trading at roughly $50. The company was heralded as one of Canada’s greatest businesses and investors were optimistic. However, things quickly took a turn for the worse. The company reported a series of disappointing financial results. Same-store sales growth, which measures sales growth in stores open for at least one year, slowed to a rate not seen since the 2009 recession. Moreover, negative headlines about the company’s prospects began to circulate, causing investors to worry. To add insult to injury, a short-seller (someone who profits from a drop in the stock) came out with a negative report on the company, causing investors to outright panic and dump their shares. Coinciding with skittish investor sentiment and generally weak equity markets, Dollarama’s share price bottomed near $30 towards the end of 2018, down 40% from where it started the year. Did the value of the business deteriorate that much, or was this a case of investors overreacting?

After studying Dollarama carefully, we concluded that investors were indeed too pessimistic on the company’s outlook. We subsequently recommended the stock in late 2018 and added it to our Odlum Brown Model Portfolio* in March of this year.

Dollarama is different than the average dollar store because it sources goods directly from manufacturers and sells merchandise at fixed-price points, up to a maximum of $4.00. Dollarama does not change prices week to week the way other retailers do. Instead, it offers a consistently low price every day, thus maintaining its reputation as the lowest-cost retailer. Canadians respond favourably to this approach, which is why Dollarama has over 1,200 stores across the country and continues to grow. While the company’s long-term target is 1,700 stores, we think the ultimate number could be far greater.

Beyond Dollarama’s national ambitions, management is also exploring exciting opportunities in Latin America. The company has the option in February 2020 to purchase a majority stake in a Latin American chain called Dollar City, which closely resembles the look and feel of Dollarama. The opportunity to create shareholder value is significant, given that Latin America’s population is considerably greater than Canada’s. In addition, Dollarama still has several levers it can pull to increase sales and profits. The company can introduce higher price points, allowing it to sell an even greater assortment of goods. Dollarama also recently launched an online platform to sell products in bulk, which is beginning to see repeat customers. This is an encouraging sign that its offerings are resonating well with consumers.

Just as Dollarama caters to the value-conscious shopper, the stock is well suited for value-focused investors. When weighing the company’s fundamentals and prospects with its valuation, we are definitely getting a bargain!



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* The Odlum Brown Model Portfolio is an all-equity portfolio that was established by the Odlum Brown Equity Research Department on December 15, 1994, with a hypothetical investment of $250,000. It showcases how we believe individual security recommendations may be used within the context of a client portfolio. The Model also provides a basis with which to measure the quality of our advice and the effectiveness of our disciplined investment strategy. Trades are made using the closing price on the day a change is announced. Performance figures do not include any allowance for fees. Past performance is not indicative of future performance.

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