June 15, 2015 Dollarama update

Dollarama is updated and rated Weak Buy at $72.01. I first added Dollarama to the list in early 2012 rated Weak Buy at $21.75 (all stock prices mentioned here are split adjusted). I considered it then to be very well managed but it seemed too expensive at a P/E of 22 and the valuation of over $5 million per store seemed too rich. Also Bain Capital which had owned 80% of the company had sold all of its shares at prices from $12 to $16.25. It turns out that Bain apparently made a mistake in selling all of their shares and that I was far too conservative in projecting the growth of the company (I considered it could grow at 12% based on new stores and same-store growth plus some additional growth beyond that 12% for economies of scale).

Earnings per share growth has been closer to 30%, which is remarkable. This growth came from a combination of same-store sales growth, new stores, share buybacks, economies of scale and some additional financial debt leverage.

It seems clear that Dollarama has been one of the very best managed companies in Canada. The problem is that the market is well aware of the performance and has pushed the P/E up to 31. The value per store is now a remarkable $10 million. The total value of all the shares is $9.4 billion. To put that in some context, Canadian Tire has a value of $10.3 billion. And recall Canadian Tire includes Sports Chek and other sports stores as well as Mark’s and owns most of the real estate of the Canadian Tire brand stores and has a huge and profitable MasterCard operation.

Despite the performance of Dollarama, I am not a buyer at 31 times earnings. At the same time I won’t rate it a Sell but if I owned it I would reduce my position especially if I had a large position.

While I have never owned it, I enjoy reading its financial reports and learning how it has been so successful. Every retailer should study this company.

Some analysts have commented that Dollarama’s success is a reflection of a poor economy. That is not the case. I don’t think consumers have suddenly become more value conscious. Most people have always looked for value. What is new is the availability of the value provided. Dollarama is delivering every day products at notably lower prices than traditional retailers and, at the same time, making far higher profits. That is a combination which greatly benefits consumers. One analyst said that Dollarama is the best dollar store operator in the world. Its remarkable success is something to celebrate and to learn from.