Dollar stores these days are having a bit of a renaissance. Uncertain economic conditions are leaving plenty concerned about the state of their next meal, let alone any of those other things like clothes and such. That is giving Canadian dollar store chain Dollarama (TSE:DOL) room to run, and a new acquisition is opening up a whole new frontier for the chain. That gave investors a little boost, and notched Dollarama shares up fractionally in Thursday morning’s trading.
Dollarama bought an Australian retailer known as the Reject Shop, which has around 400 stores to its name so far. But they will not become Dollarama stores; rather, they will continue to operate as the Reject Shop, and give Dollarama indirect access to the Australian market. In fact, Dollarama looks to ramp up the Reject Shop, putting around 700 stores in place by 2034.
Basically, Dollarama picked up the Reject Shop because it has many common parallels with Dollarama. Thus, Dollarama should be able to run it about like they run Dollarama, making it a fairly natural fit for operations. It is entirely possible that they may even be able to share some suppliers, and take further advantage of economies of scale via bulk purchasing.
But It Was Not Such a Bargain Itself
The Reject Shop may be dedicated to providing bargains, but a closer look at the deal Dollarama made suggests that it did not get the Reject Shop for much of a bargain in its own right. Dollarama bought the operation for A$259 million, or about $163 million, at the time. That valued Reject Shop shares at around A$6.68, reports note.
That would be all fine and well, except that Wednesday’s closing price was A$3.15, meaning that Dollarama paid basically double retail for the Reject Shop. Why Dollarama felt the need to offer over a 100% premium to get the operation is unclear at best, but it is a safe bet it wanted a smooth transaction without any haggling or pot-sweetening later. It just went right for the throat on that one, and so, it got the shop and a tangential presence in another location.
Is Dollarama a Good Stock to Buy?
Turning to Wall Street, analysts have a Moderate Buy consensus rating on Dollarama stock based on three Buys and two Holds assigned in the past three months, as indicated by the graphic below. After a 45.22% rally in its share price over the past year, the average Dollarama price target of C$154.15 per share implies 3.17% upside potential.
