Dollarama update September 23, 2015

Dollarama is updated and remains rated Weak Buy.

I have said repeatedly that Dollarama is one of Canada’s very best managed companies.

It’s profitability is so high that any economist would tell you the profits should not be sustainable. Somehow it sells everyday products that it buys from others and charges less than other retailers but makes significantly more money doing it. It was recently making 13.5% bottom line after¬†income tax ¬†profits on sales. This is unheard of for a retailer selling non-proprietary products. It puts in stores at a cost of about $700,000 (fully stocked) and the company trades on the market with a value of $12 million per store. The stores have a payback period of about two years. Its ROE is running at 47%. Its profit in the latest quarter grew by 43%, up from the “mere” 28% of the past three quarters.

In theory, its competitors should learn from it and replicate its model and drive down profits. Why would WalMart not have a large dollar store section and why couldn’t it source products as cheap as Dollarama?

So we are left with Dollarama trading at 34 times earnings. That seems very expensive. It also seemed expensive over the years (I was never able to rate it higher than a (lower) Buy) and yet its growth has justified buying at expensive prices in the past. And not only is it 34 times earnings but it is 34 times an earnings level that really should be competed lower – but that has not happened.

In the end the company has my greatest respect. But I cannot bring myself to invest at this price. Neither would I dare short it though. If it continues along its past path and if smarter competitors don’t emerge then its earnings should continue to rise. And it may even have the ability to replicate its success in other countries over time. I would not be comfortable holding a large position in it. But those who did so have done exceptionally well. The reality is that if I held I would have sold it a long time ago and if I held it today I suspect I would sell it all.

I am sorry that I cannot have a more definitive Buy / Sell position on this company but I have provided my analysis and my thinking.