Updated: Nov 21, 2018
Author: Fahad Salman Research Analyst
Over the past week, May 13th to May 18th, we have seen slight losses in equities, with the majority of the gains coming from consumer discretionary, energy, and industrials.
Continued gains in the energy sector are in-line with the rising oil prices caused by the United States withdrawing from the Iran Nuclear Deal. There are also additional concerns for adequate oil supply due to the U.S. imposing new sanctions on Venezuela, pushing prices up even higher.
Dollarama (DOL:TSX) is an interesting company to keep an eye on over the next few quarters as we head deeper into the late-cycle phase of the expansion our economy has been seeing. Dollarama operates hundreds of dollar stores across Canada that sell all items for $4 or less with retail operations in every Canadian province.
Dollarama is a defensive stock with a low beta of 0.26, meaning that a slowdown of the economy wouldn’t cause it to decrease as much as the entire market. Also, simply by analyzing the nature of the business, we can expect more people to visit these stores if the economy slows down due to the lower price points they offer. As they increase their store count across Canada, we can see even greater top-line (sales / revenue) growth going forward and bottom-line (net income / net earnings) growth following shortly as payback periods per store are around 2-3 years.1 Also, if some of the items don’t attract more shoppers, they will still tend to sell similar amounts as these items are more-so quick-stop consumer staples rather than consumer discretionary products (e.g., arts supplies, party supplies, wrapping paper, etc.).
Risks that Dollarama faces include increased competition and increasing product costs. Increased competition comes from Dollar Tree and Asian discount retailer Miniso expanding to Canada. Increased product costs are a result of increased minimum wage and a decrease in the unemployment rate which causes a lack of qualified and available workers.
Another interesting thing about Dollarama is that it is currently in the middle of a leveraged recapitalization of the corporation. This means that it has taken on large amounts of debt in order to repurchase large amounts of its outstanding shares, with the authorization to purchase up to 5.7 million common shares out of the 112.8 million it has outstanding until June 18th. A result of this is that its retained earnings have turned negative even though it has an RoAA of over 20%. This will also be causing the price to increase and provides support levels to the company’s shares if they begin to decrease. May 21, 2018 2 UWFA Research
Overall, Dollarama is an interesting company to keep an eye on to see how all the above factors affect its various stakeholders.
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the authors, which do not necessarily correspond to the opinions of University of Waterloo Finance Association (“UWFA”). Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by UWFA. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.