We’re adding Dollarama to our Best Ideas List as a Long, and are presenting a Black Book on April 23rd. We think this is a rare opportunity to buy a premium retail growth compounder that experienced multiple compression over the past year during a temporary lull in its longer-term growth cycle – something we think will change dramatically over a 12-month time period.
Most US investors aren’t that familiar with the Canadian dollar store. It is similar to the Dollar Tree banner, only better. Way better. Our call on Dollar Tree in fact is in large part, because we think it can become more like Dollarama. What makes Dollarama superior? It starts with the competitive environment. Dollarama does not have a national direct competitor of any size. Sales productivity far exceeds the US dollar stores. Merchandise margins are 200-300 hundred basis points higher. The cost of doing business is greater in Canada, but Dollarama leverages its greater productivity and the greater costs serves to reduce competitive entrants. The US dollar store business is very good – but in Canada it’s great.
Dollarama hit its first growth wall in 2018 since it went public in 2009. And let’s put this into context – the ‘wall’ it hit still resulted in 2.7% comps – respectable (if not aspirational) by some US standards. That’s a remarkable stretch, but the growth isn’t over from where we see it. There were several headwinds at once that tested investors’ willingness to continue to pay that multiple premium. We’ll go through the deep dive in our Black Book as to why some of the headwinds are abating in 2019 before the tailwinds kick in next year.
There are two tailwinds investors should know about – price increases and new price points. We don’t expect either to happen this year – but rather will see ‘em both in 2020. Importantly it is not priced in to happen in 2020 either. The Street is only looking for 3% comps (i.e. still hitting a wall) at a time when DOL will raise price points in its store from $4.50 to $5.00 – a period when we have comps accelerating/doubling to 5-6%. Once investors get a hint of those tailwinds coming $2 in EPS power will be priced in. That’s 30% upside from here at a (conservative) 20% discount to its historical multiple one year out. Dollarama is a compounder so roll that 30% return the following year as well, backed by EPS growth at 2-3x its peer group.
It may seem a little early to buy the shares here when the catalysts we see coming are a year away. However, this is not a fashion company or a company with a lot of cyclicality. Investors will be compensated for getting in early, as buying ahead of the catalysts is the investment opportunity. In the meantime numbers have been lowered, expectations for the introduction of higher prices points has been reset, and the overall retail environment in Canada (just exited Quad 4) is soft so a quick turnaround is not in the share price.
Dollarama sets up perfectly in our Macro Team’s GIP (growth/inflation/policy) quad framework. Canada just exited Quad 4 (Growth Slowing as Inflation Decelerates) and like the US, is currently in quad 3 (Growth Slowing as Inflation Accelerates). Unlike the US, which is stuck in Quad 3 for another 2 quarters, Canada is set to shift into quad 2 (Growth Accelerating as Inflation Accelerates) and then Quad 1 (Growth Accelerating as Inflation Decelerates) later this year. Dollarama is exactly the kind of defensive consumer name you want to own in Quad 3, and works even better in accelerating environment of Quad2, and then at the time we see Quad 1 (when virtually anything in consumer discretionary works) we’ll get visibility into higher price points and comp acceleration at DOL. The company just reset numbers for this year, so there’s safety in near term numbers…then the Macro climate is at its back, then a multi-year company-specific growth drives this beast higher. There’s your multiple expansion call.
Call Details:
Date/Time: Tuesday, April 23rd, 10AM EDT
Toll Free:
Toll:
UK: 0
Confirmation Number: 13689290
Live Video Link: Will be provided prior to call.
