Why Dollarama Is A Broken Growth Story And We See 40%+ Downside Risk
Ben Axler, 31 October 2018
Spruce Point believes that Dollarama (TSX: DOL / OTC: OTC:DLMAF or “the Company”) is now a broken growth story that will fail to hit its lofty long-term growth targets, placing its industry-leading margins and valuation multiple at risk of material contraction. As a result, we see ~40% downside risk to C$24.60 per share.
Rising product prices, progressively saturated markets due to heightened competition, and increasingly stale stores out of touch with Millennials have caused per-store traffic to contract for several years as consumers realize it is no longer a true dollar store. The Company is on pace for its lowest new store count in years despite management’s continued efforts to expand the store base. Dollarama’s gross and EBITDA margins are inexplicably high relative to peers, and seem too good to be true. Management also claims to have never closed a store for performance reasons. We expect growth and profitability expectations to fall back to reasonable levels as a number of fundamental factors – tougher competition, wage increases, FX, and logistics costs, among others – pressure the business going forward.
