Interest Rate Hike Should Be Good News for Dollarama Stock

It looks like Dollarama (CA:DOL) investors took Wednesday’s earnings report as an opportunity to sell on the news. The numbers were excellent across the board. But, DOL stock zoomed higher before falling back to earth and finishing flat to the June 6 closing price.

So it is for Dollarama, a stock that has underperformed in 2023 relative to the strength of its business, up less than 4%. 

While the good news from its quarterly results hasn’t moved investors, the 0.25% increase in the Bank of Canada’s benchmark rate to 4.75% -- the highest level in 22 years -- ought to do the trick. 

A stock of Dollarama’s pedigree should not be struggling, given how efficiently its business performs. With Canadian mortgage-carrying homeowners stretched to the limits, the discount retailer’s stores will get busier if interest rates remain elevated.

That’s good news if you own Dollarama stock. 

Consumers’ Double Whammy

A combination of stubbornly high inflation with interest rates that haven't been this high for more than two decades has many average Canadians struggling to make ends meet. 

While Dollarama doesn’t generate nearly as much from consumables (44% in fiscal 2023) compared to U.S. counterparts Dollar General (US:DG) and Dollar Tree (US:DLTR) -- the former gets 81% of its revenue from consumables, the latter generates 48% of its Dollar Tree banner’s revenue from the category, while it’s 80% at its Family Dollar banner -- the company has noticed strong demand from this category. 

Speaking of those U.S. peers, it is worth noting that institutional owners seem down on the group, as evidenced by all three stocks’ Fintel Fund Sentiment Scores. Dollarama scores 25.24, DLTR stock comes in at 28.91 and DG stock scores 30.72. 

All are in the lower quintile of the 36,372 stocks assessed on that quant dashboard measuring Ownership Accumulation, calculated using two key factors: the change in the number of disclosed owners over the prior quarter, and the change in portfolio allocation of existing owners over the prior quarter.

Strong Fundamentals

“While we continue to experience strong demand for consumables in the context of persistent inflationary pressures, we are also seeing strength across our seasonal and general merchandise categories,” The Globe and Mail reported CEO Neil Rossey’s comments from the Q1 2024 conference call. “I am particularly pleased with the performance of our Easter season this year, demonstrating our strong fundamentals and the fact that the full mix is continuing to drive traffic to our stores.”

One thing is clear from Dollarama’s results: the average customer is visiting a Dollarama store more often -- a 15.5% increase in transactions -- and the average basket size is getting bigger -- up 1.4% over Q1 2023 -- a sign consumers are relying on Dollarama to make ends meet while expanding the types of products bought at the discount store. 

It’s a winning business model, particularly for recessionary times.

Little Weakness

It’s hard to find a weakness in the company’s first-quarter results

Its same-store sales, which indicates the revenue growth of stores open at least 13 months, grew by 17.1%, more than two-times a year earlier. Its outlook for 2024 is 5.5% growth at the midpoint of its guidance. 

As for new stores, it opened 21 net new stores in the quarter, more than double than 10 opened last year. It opened its 1,500th store during Q1 2024. It expects to open 65 in 2024, reaching 2,000 by 2031.   

Overall revenue was 20.7% higher to $1.29 billion. Over the past 12 months, it grew its store count by 76 to 1,507. Its earnings before interest, taxes, depreciation and amortization were $366.3 million, 22.1% higher than a year earlier.  

The only negative in the quarter was its gross margin of 42.2%. That was one basis point higher from Q1 2023. However, when you’re boosting sales by more than 20%, it’s not a problem. Further, it expects a gross margin of 44% for the entire year. 

Although its 50.1% investment in Dollarcity, the Latin American discount chain, only generated $13.1 million in the quarter, it was 51% higher than a year ago. The chain opened eight net new stores in the first quarter, bringing the total to 448, with 60% of the stores in Colombia, where the gross domestic product increased by 7.5% in 2022.

By the time it gets to 2,000 stores in 2031, Dollarcity will have become a far more critical part of its operations. It’s something for investors to consider when examining Dollarama’s potential. 

In the meantime, it looks as though there will be another rate increase in July, sending even more Canadians to Dollarama stores across the country.

This story originally appeared on Fintel.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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