DOLLARAMA: pushing on to 1,700 stores!

Dollarama, (“DOL”) on the TSX, is a straight forward and highly profitable business. As per their name, Dollarama’s business is operating a chain of some ~1,100 dollar stores across Canada.

Public since 2009, this Quebec based retailer has approximately doubled their stores from 564 to 1,095, per 2017 fiscal year end. The company has given public guidance that they want to get to 1,700 Canadian stores within 8 to 10 years, and that the Canadian market is large enough to support this number of units.

Most impressive is their payback for each additional store, which according to them is about 2 years. Further, per the above graph, since 2009, they have managed to grow operating cash flow per average store from about C$200K to close to C$500K.

In terms of business risk, Dollarama should be able to effectively navigate some of their core exposures like currency risk and wage inflation by increasing prices over time. Dollarama should be able to increase prices faster than inflation, largely due to the inelastic demand for their low priced products. A quick example here should help:

If a mom needs balloons for her daughters birthday party, (1) she is very likely to go to Dollarama and (2) she isn’t really going to care if she pays $3.00 or $3.25 for the balloons…

There of course is a upper limit to this rule, but the point is clear.

A very expensive company, due to the quality of the business, Dollarama currently sits at a market cap of $17B. At this price, in our opinion, this growth to 1,700 outlets is fully priced in, so Dollarama will likely need to find additional sources of growth to justify higher enterprise values. Some of this is likely to come from same store sales growth as Dollarama introduces higher priced products.

Nonetheless, with a 2 year payback per new outlet, a fast growing dividend, substantial cash flow and a well established operating moat, Dollarama is one to hold for the long term. A good strategy with Dollarama is to dollar-cost average in, taking advantage of pullbacks. But once you own it, hold it, as this one is likely to pay shareholders for many years to come.

Cheers from LongTrend