Dollarama (TSE:DOL): Is This “Strong Buy” Stock Still Worth Buying?

Dollar-store company Dollarama (TSE: DOL) (OTC: DLMAF) has seen its shares perform exceptionally well this year, rallying about 25%, while the overall market is down year-to-date. This may cause investors to wonder if it’s too late to buy the stock. While we personally wouldn’t buy the stock at current levels, it’s still a solid stock and maintains a Strong Buy rating from analysts, making it worth considering.

Dollarama’s Strong Results are Keeping Its Stock Afloat

Dollarama has been generating some solid financial results. In its most recent earnings report (Q2-2023), released on September 9, the company’s sales increased by 18.2% to nearly C$1.22 billion. This was due to an increase in the number of stores in operation and due to growth in same-store sales, which grew by an impressive 13.2%, demonstrating that the demand for affordable products is rising. 

The company’s profit margins also grew year-over-year, as its gross margin went from 43.4% to 43.6%, and its EBITDA margins climbed to 30.4% compared to 28.5% in the prior year. Additionally, DOL’s diluted earnings per share (EPS) came in at C$0.66 compared to C$0.48 last year. 

Finally, Dollarama upped its sales guidance recently. Its earnings release states, “The Corporation has increased its comparable store sales growth assumption for Fiscal 2023 from a range of 4.0% to 5.0% to the range of 6.5% to 7.5%.” Overall, things are looking healthy for Dollarama.

Solid Results are Funding Share Repurchases

Dollarama also has the option to buy back up to 7.5% of its outstanding shares within a one-year timeframe. Its buyback program started on July 7, 2022, and it ends on July 6, 2023. Its trailing-12-months buyback yield is 4.4%, which isn’t amazing, but it’s a boost, nonetheless. Its average buyback yield over the past five years is 3.1%.

However, since the company’s share price is near all-time highs and because its valuation isn’t low (as discussed below), buybacks may not be the smartest move, as they won’t be able to move the needle that much.

Is Dollarama’s Valuation Too High?

Dollarama currently has a P/E ratio of 31.6x and a price-to-free-cash-flow ratio of 28.7x. These numbers are on the high end for a dollar-store stock. However, let’s take a look at some more data to confirm this. Dollarama’s EPS is expected to increase by 23.3% and 17.6% in Fiscal 2023 and 2024, respectively. This would bring the company’s Fiscal 2024 P/E multiple down to about 25x. While this isn’t a sky-high multiple, it’s also not that cheap. 

Also, DOL’s forward (next 12 months) price-to-free-cash-flow ratio is 25.9x. In the past five years, its forward P/FCF ratio averaged 25x, meaning it is trading at slightly elevated levels. This makes DOL much less attractive in a market where most companies are trading at bargain multiples much below their historical averages. Nonetheless, the valuation isn’t necessarily horrible, given Dollarama’s growth rate and defensive qualities.

What is the Price Target for Dollarama Stock?

Analysts give DOL stock a Strong Buy consensus rating based on seven Buys and two Holds. The average Dollarama stock price target of C$87.76 implies 11.1% upside potential. The modest upside potential reaffirms that the stock may not be the greatest bargain at current levels but that it isn’t massively overpriced.

Conclusion: With Dollarama, You Get What You Pay For

While shoppers may walk into a Dollarama store to buy inexpensive products (that may also be of relatively cheap quality, depending on the product), the stock is the opposite. DOL stock is trading at a relatively-high valuation in a market that is downtrending. It looks like that with Dollarama, you get what you pay for, whether you’re shopping in-store for inexpensive products or shopping in the stock market.

You’ll be paying a high price tag in the market for a stock that is equally backed by its high-quality fundamentals. Nonetheless, we would hold off on buying the stock for now.

Disclosure