Is Dollarama Stock a Buy Before its Q4 Earnings?

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Retail is a highly competitive industry with wafer-thin margins. It’s a saturated market, and one has to have a significant competitive advantage over its peers to sustain itself. Canadian discount retailer Dollarama (TSX:DOL) is one such business that has proven its mettle for the last several years. With its wide presence across Canada and effective supply chain, Dollarama has consistently outperformed its peers and created shareholder value.

What sets DOL stock apart from its peers?

Dollarama will release its fiscal fourth quarter 2023 earnings on March 29. While the company is expected to see stable earnings growth and margins for the said period, whether the numbers fuel its stock higher remains to be seen.

DOL stock has returned 13% in the last 12 months, notably beating the TSX Composite Index. Be it a bear or a bull market, DOL stock has played well and outperformed broader markets.

For the quarter that ended on January 31, 2023, Dollarama is expected to report earnings of $0.85 per share, according to analysts’ estimates. That represents an appealing 15% growth year over year. Analysts expect around 14% revenue growth for the said quarter.

During inflationary environments, retailers generally see pressure on margins and declining top line growth. However, Dollarama has been an exception. It has, in fact, seen consistent revenue growth and noteworthy margin stability.

For example, Dollarama has consistently seen its operating margin steadying around 25%, which is higher than its North American retailers. It’s quite a feat in the challenging retail industry.  

Dollarama: Competitive advantage and business strength

The key lies in Dollarama’s fundamental business strength. First, it operates the largest retail chain of more than 1,400 stores in Canada — far more than its peers. This enables convenience, as it serves 80% of Canadian households within 10 km of a Dollarama store.

Secondly, Dollarama’s private-label merchandise helps obtain better margins. It sources its merchandise from cost-effective vendors mainly from China and Vietnam. Instead of long-term contracts, Dollarama prefers its purchases on an order-by-order basis, giving it more flexibility and aiding in better cost management. It also gets its merchandise and packaging customized by select vendors, giving it an edge over its peers.

Moreover, it is the product mix that also helps in fetching higher margins. Dollarama, along with household merchandise, also sells basic foods, which many discount retailers and dollar stores don’t. 

As a result, Dollarama’s same-store sales growth has kept relatively stable at low double digits for years. Its net income has grown by 14% compounded annually in the last decade, remarkably beating its peers.

It will likely see a similar trend flourishing with more stores coming online. According to the company management, it aims to reach 2,000 new stores by 2031.

Dollarama has been focusing on its competitive advantage, which has worked very well over the years. Plus, the Canadian retail sector is much less crowded than the U.S., which further offers handsome growth prospects to already dominant Dollarama.

Conclusion   

As inflation will likely keep consumers on their toes, they will likely see value in discount stores like Dollarama. DOL stock is an excellent combination of growth and stability, which could outperform in current markets. It is an appealing bet for long-term investors, driven by its fundamentally strong business and stable financials.

The post Is Dollarama Stock a Buy Before its Q4 Earnings? appeared first on The Motley Fool Canada.

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Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.