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PRINT EDITION
A rare decline for Dollarama leaves investors to wonder
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Discount retailer's shares plunge 17.2 per cent, their worst one-day drop since the company's 2009 IPO
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By DAVID BERMAN
  
  

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Friday, September 14, 2018 – Page B2

Dollarama Inc. shares fell sharply Thursday after the Montrealbased discount retailer showed signs of slowing growth in its latest quarterly results, marking a rare setback for one of the top-performing stocks in the S&P/TSX Composite Index over the past nine years.

The shares plunged 17.2 per cent on Thursday, marking their worst one-day decline since Dollarama's initial public offering in 2009. Investors are now left wondering if the stock has become a tempting buying opportunity, or will continue to struggle amid a tough retailing environment.

While Dollarama's fiscal second-quarter profit increased 13.2 per cent over last year on a per-share basis, sales at stores open for at least one year (or same-store sales) increased just 2.6 per cent.

That was well below growth of 6.1 per cent reported a year ago and it missed analysts' forecasts by a wide margin. Analysts had been expecting a sales increase of more than 5 per cent, according to Thomson Reuters I/B/E/S.

Dollarama also lowered its forecast for same-store sales for its fiscal year. Management now believes sales will rise between 2.5 per cent and 3.5 per cent, down from a previous forecast of 4 per cent to 5 per cent, raising questions during a conference call with analysts.

"It feels as though something has changed a little bit in the environment," said Irene Nattel, an analyst at RBC Dominion Securities. She asked: "Are you seeing any kind of change in consumer willingness to shop at Dollarama?" Michael Ross, Dollarama's chief financial officer, pointed to tough comparisons with strong same-store sales growth last year, when souvenirs related to Canada's 150th birthday celebrations were flying off the shelves, the retailer introduced higherpriced items and began accepting creditcard payments.

But he also noted that Dollarama's competitors haven't passed along higher costs, related to rising minimum wages, to their customers. This has pushed Dollarama to hold back on price increases as well.

"We have decided to protect our compelling value, not to transfer these costs out to the consumer with mark ups," Mr. Ross said during the conference call.

After years of rewarding long-term investors with head-spinning expansion and a surging stock price, Dollarama is now in the dumps as investors wonder if the discount retailer's best days are behind it.

Dollarama debuted as a stock during the dark days of 2009, when discount retailers looked to be the right approach: The Canadian economy was stunned by the financial crisis and unemployment was at more than 8 per cent.

But the company grew even as economic activity picked up and unemployment fell.

A wide range of consumers loved the mix of low-priced party supplies, kitchen containers and crafts - all sold within well-lit, nicely organized stores. Credit-card purchases, which increased the level of convenience for consumers, now account for 18.4 per cent of sales, up from 12.4 per cent last year.

Prior to its IPO, Dollarama operated 585 locations; today, the number is 1,178. It has doubled its footprint in just nine years, with an average of 65 new openings a year since 2009.

Investors cheered the heady expansion.

At its peak this January, Dollarama's share price had risen nearly 18-fold from its lows.

The share price outpaced the rise in profit, leading to a lofty valuation: The stock's price-to-earnings ratio was a reasonable 17 in 2010; it soared to 37 in January.

Now, after Thursday's plunge, the shares trade at 26.5-times earnings.

That's the lowest valuation in about 2½ years. But are the shares cheap?

If Dollarama can get back to its previous growth trajectory, the sell off appears to be a good buying opportunity.

Management believes it can continue to open more stores, targeting as many as 70 new openings this fiscal year. It is also launching an e-commerce test in Quebec, which could add bulk online sales if it is successful. And the company is introducing efficiencies related to cash-handling and labour scheduling.

However, investors are starting to question Dollarama's ability to increase sales and pass along price increases to consumers who look to the retailer for one feature - cheap stuff. And this new outlook among investors could weigh on the stock's valuation.

A hefty valuation might not matter when a company is growing fast. But when growth slows, look out below.

DOLLARAMA (DOL) CLOSE: $43.12, DOWN $8.95

Associated Graphic

Dollarama has doubled its footprint in the nine years since its initial public offering. The discount retailer operated 585 stores across the country in 2009. Today, it has 1,178 locations, including this one seen Thursday in Ontario.

MELISSA TAIT/THE GLOBE AND MAIL


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