OB Report
May 2019
Page 1   |  Page 2  |  Page 3  |  Page 4  | Printable PDF (2.22 MB)


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!

Please read our Odlum Brown Limited Disclaimer and Disclosure - It is important!

* 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.

Odlum Brown Limited is an independent, full-service investment firm focused on providing professional investment advice and objective research. We respect your right to be informed of relationships with the issuers or strategies referred to in this report which might reasonably be expected to indicate potential conflicts of interest with respect to the securities or any investment strategies discussed or recommended in this report. We do not act as a market maker in any securities and do not provide investment banking or advisory services to, or hold positions in, the issuers covered by our research. Analysts and their associates may, from time to time, hold securities of issuers discussed or recommended in this report because they personally have the conviction to follow their own research, but we have implemented internal policies that impose restrictions on when and how an Analyst may buy or sell securities they cover and any such interest will be disclosed in our report in accordance with regulatory policy. Our Analysts receive no direct compensation based on revenue from investment banking services. We describe our research policies in greater detail, including a description of our rating system and how we disseminate our research here.

This report has been prepared by Odlum Brown Limited and is intended only for persons resident and located in all the provinces and territories of Canada, where Odlum Brown Limited's services and products may lawfully be offered for sale, and therein only to clients of Odlum Brown Limited. This report is not intended for distribution to, or use by, any person or entity in any jurisdiction or country including the United States, where such distribution or use would be contrary to law or regulation or which would subject Odlum Brown Limited to any registration requirement within such jurisdiction or country. As no regard has been made as to the specific investment objectives, financial situation, and other particular circumstances of any person who may receive this report, clients should seek the advice of a registered investment advisor and other professional advisors, as applicable, regarding the appropriateness of investing in any securities or any investment strategies discussed or recommended in this report.

This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information's accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice.

Please note that, as at the date of this report, the Research Analyst responsible for the recommendations herein, associates of such Analyst and/or other individuals directly involved in the preparation of this report hold securities of some of the issuer(s) referred to directly or through derivatives.

No part of this publication may be reproduced without the express written consent of Odlum Brown Limited. Odlum Brown Limited is a Member-Canadian Investor Protection Fund.