While I don’t think that Dollarama is extremely compelling at the current P/E of 26.5, I do own the stock because I am trying to diversify. The company’s earnings growth is impressive and I like the new CEO, even though his father passed on the family business in 2016. And while the related party transactions continue under Neil Rossy, they haven’t meaningfully impacted shareholder returns in the past two decades.
(This post is long and may not be very interesting to you. This is not an actionable idea.)
Lately I’ve been trying to learn more about the retail industry. Two things about Dollarama struck me:
- Its returns on capital are very high. My 2013 post on dollar stores put Dollarama’s return on capital at around 57.8%, dramatically better than all of its dollar store peers.
- Dollarama is a technology backwater. Dollarama did not fully implement a point-of-sale system until 2011.
Dollarama has higher returns on capital than most other retailers out there, yet it’s not obvious why that is. My take is that Dollarama is really good at doing three things:
- Choosing what products to buy.
- Choosing what prices to sell that product at. Dollarama buys high-margin items and undercuts its competition on pricing.
- Cutting out the middlemen. Dollarama sources a lot of its product directly from manufacturers rather than going through distributors.
(This is not an actionable idea.)
Dollarama’s stock has performed phenomenally well since its IPO. The underlying business has grown its profits as fast as Salesforce has grown its revenues. Their returns on invested capital are phenomenal (see my post on dollar stores).
Yet I cannot get past the company’s self-dealing with members of the Rossy family and how the financial statements don’t add up.
Dollar Tree is a quickly growing retailer with a P/E around 18 and revenue growth in the ballpark of 17%/year. I don’t think it’s that cheap right now but it’s on my radar since it is a quality business with very high returns on capital.