Dollarama Outperforms Wal-Mart as Retail Stock

Dollarama Inc. (DOL) is beating Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) as the top North American mass retail stock this year on forecasts its dominance of the Canadian market will be unchallenged for as much as five years.

The Montreal-based company with more than 700 stores has gained 42 percent this year, 16 percentage points more than second-place Wal-Mart, according to data compiled by Bloomberg. Target is third with a 23 percent gain. U.S. dollar store Dollar General Corp. (DG) has risen 15 percent.

“It’s really, really easy to see your stock price grow and your performance soar when you have no competitors,” said Dutch Fox, a retail analyst with Friedman Billings Ramsey & Co. by phone from Arlington, Virginia.

While retailers such as Canadian Tire Corp. face increased competition from Target’s entry into Canada in 2013, the only firm with the potential to take on Dollarama is U.S. chain Dollar Tree Inc. which is at least five years from having the scale to compete, Perry Caicco, an analyst with CIBC World Markets, wrote in a Sept. 12 note.

“People realize Dollar Tree is coming, but they have to prove they can actually work in the Canadian space, and there’s not a lot of retailers that have,” Vanessa Morgan, president of Morgan, Meighen & Associates, which owns 365,000 Dollarama shares, or about 0.5 percent. Competition won’t affect the share price any time soon, Morgan said by phone from Toronto.

Dollarama fell 7 Canadian cents to C$63.14 at the close in Toronto today, for a market value of C$4.66 billion ($4.73 billion). Wal-Mart fell 21 cents to $75.11 in New York and Target rose 80 cents to $63.92. The Standard & Poor’s TSX Consumer Discretionary Index has risen 13 percent this year.

Dollar Giant

Chesapeake, Virginia-based Dollar Tree (DLTR) bought Dollar Giant Stores Ltd. in 2010 for C$52 million cash, giving it 85 Canadian locations. The company is in the preliminary stages of adding stores and building the infrastructure to sustain a national network, said Fox.

“Dollar Tree right now is focusing on getting the acquisition integrated and realizing the immediately available synergies before they really start ramping up and rolling out,” Fox said. Even if the company opens 75 stores a year it would be a few years before being able to “disrupt” Dollarama, Fox said.

Dollar Tree will have about 1,000 stores in Canada, Chief Executive Officer Bob Sasser said in a conference call Oct. 11, without giving a time frame. Calls and e-mails yesterday to Tim Reid, a Dollar Tree spokesman, were not returned.

Growth Potential

Lyla Radmanovich, a spokeswoman for Dollarama, declined to comment.

Dollarama has more stores than its competitors combined, said Neil Linsdell, an analyst at Industrial Alliance Securities Inc. With plans to open 50-60 stores a year for an eventual total of 1,000, it has plenty of room to grow in a Canadian market that could sustain as many as 2,400 dollar stores, he said. On average, the top six dollar store chains in Canada serve 28,500 people per store, compared with 14,000 people per store among the top five U.S. chains, he said.

“When the market was really open to that type of offering, Dollarama was really the first one to jump in with scale, with speed, and basically just completely dominates the market,” Linsdell said by phone from Montreal.

Dollarama’s specialization in items that can be bought for pocket change also blunts competition with mass retailers like Bentonville, Arkansas-based Wal-Mart, which has experimented with dollar offerings, but for the most part sells higher priced goods, Linsdell said.

“We have many items across our stores that sell for $1,” said Andrew Pelletier, a spokesman for Wal-Mart. “It’s not limited to a program or a particular zone of the store. We work with our suppliers to offer great items throughout our stores for $1.”

More Traffic

Slower economic growth in Canada, which is forecast in a Bloomberg survey to be 2 percent next year after 2.6 percent in 2011, make Dollarama’s prices appealing. Its focus on small- ticket, convenience items such as napkins and pens has immunized the chain from shifts to online and cross-border shopping, Caicco at CIBC said in his note.

For the same reason, Dollarama needn’t be concerned about the arrival of Minneapolis-based Target next year, Jim Durran, an analyst with Barclays Plc, wrote in a note Oct. 1. Dollarama will benefit from increased traffic when a Target opens nearby, he said.

The company’s introduction of debit payment and items priced above a dollar helped boost sales in recent quarters, said Brian Yarbrough, an analyst with Edward Jones & Co. by phone from St. Louis, Missouri. Those improvements mean large year-over-year sales increases are unlikely in the future, even with the five-year window before competition ramps up, he said.

Sales Moderate

Yarbrough, who rates the stock hold, said when Dollarama’s sales figures start to moderate, disappointed investors might send the stock down. Ten analysts say buy the stock, four say hold it and no one says sell it, according to data compiled by Bloomberg.

“When you look at analysts’ numbers and all these guys with buys, to justify upside in the stock they all have operating margin targets and same store sales growing much higher than the company said they’re comfortable with,” he said. “One of two things is going to happen: The company is going to attain those targets, or at some point it settles in that they can’t hit 18 and 19 percent operating margins and the company gets a little weaker.”

Earnings Beat

Dollarama is estimated to report earnings of 70 Canadian cents a share, adjusted for certain items in the third quarter, after beating the average of analysts’ estimates in Bloomberg surveys for at least the past five quarters. Dollarama’s revenue grew 14 percent to C$441 million in the second quarter from a year earlier. Profit climbed to C$49.8 million or 66 cents a share, adjusted.

Dollarama has also posted higher sales per store and sales per square foot compared with three of its four U.S. peers, and similar outperformance on same-store sales, a key retail metric that discounts newly opened and recently closed stores, CIBC World Market’s Caicco said in his note.

To contact the reporter on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net

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