Canadian Rate Cut Winners: DOL, Low-Priced Necessities Expected to Continue Benefiting

Dollarama Inc. (DOL) is Canada's leading dollar store retailer, satisfying consumers' demand for high-value products with its affordable and wide selection of products. Currently, DOL has over 1,500 stores in the Canadian domestic market and has expanded its business through its subsidiary, Dollarcity, in Latin America, with over 500 stores.

DOL's main business is only one single department of daily necessities sales. The company provides a wide variety of daily consumer goods, daily necessities, and seasonal products through physical stores and online networks. It achieves sustained profit growth during operation through the method of low-profit and high-sales, and gains user reputation with low prices and thoughtful services.

1. Continuous Growth in Same-Store Sales, Stable Revenue Source
As of the first quarter of fiscal year 2025, DOL's same-store sales have achieved continuous growth for 11 quarters, demonstrating the company's good store operation performance. In the latest quarter, DOL's same-store sales growth rate was 5.6%, which is slightly lower than the market's consistent expectation of 5.7%, but still shows the company's continued optimization in sales and operational efficiency of existing stores.
At the earnings conference, the company's top management stated that the increase in same-store sales in this quarter was influenced by a positive factor of an 8.7% increase in store traffic, indicating DOL's strong performance in attracting customers to its stores. At the same time, the company also pointed out that due to seasonal factors (rather than consumer shopping upgrades), the average shopping unit price in the first quarter decreased by 2.8% compared to the previous quarter, which resulted in a slightly lower same-store sales growth rate than the customer growth rate, and the company stated that this negative factor will not have a long-term impact on the company's performance growth rate.

2. Addition of Multiple Stores, Expansion of Retail Network
In the first quarter of fiscal year 2025, DOL made actual progress in store expansion. In this quarter, the company opened 18 new Dollarama stores, 8 more than the number of new stores opened in the previous quarter, and the total number of stores worldwide reached 1,569, with the retail network covering every corner of Canada, including remote towns and villages.
In addition, through its subsidiary Dollarcity, DOL has further expanded its international retail network in Latin America. As of December 31, 2023, Dollarcity had a total of 532 stores in Latin America, and the number had increased to 547 by the end of the latest quarter.

3. Strong Business Development Momentum, Net Profit Growth Rate Reaches 20%
Thanks to the company's good same-store sales growth rate and the continuous addition of new stores, DOL's revenue in the first quarter was CAD 1.4 billion, an increase of 8.6% year-on-year. This is the third consecutive fiscal year in which the company achieved revenue growth. At the same time, the company renewed its transportation contract with a Canadian logistics and transportation company, which had expired in the previous quarter, resulting in lower logistics costs for DOL in the first quarter of fiscal year 2025 and saving the company expenses.
Under the dual positive impact of rising revenue and declining operating costs, DOL's gross profit margin rose to 43.2% in the first quarter, and the adjusted net profit also reached CAD 215 million, an increase of 20% year-on-year, demonstrating the company's strong profitability.

Chart: Changes in DOL's Adjusted Net Profit (CAD millions)

1. Acquisition of 10% Stake in Dollarcity, Expanding International Presence
DOL has acquired an additional 10% stake in Dollarcity through a strategic acquisition, raising its ownership to 60%. This further deepens the company's cooperation with Dollarcity, reflecting not only DOL's confidence in Dollarcity's future growth potential but also the company's vision to expand its influence in the Latin American market. According to the company's announcement, the stock purchase transaction was completed by issuing approximately 6.1 million Dollarama common shares, with a total implied value of USD 554 million.
Although issuing a large number of new shares may dilute shareholders' ownership in the short term and bring some pressure on the company's stock price, in the long term, the company can obtain more international market development opportunities from this integration. In the future, DOL can use strong performance growth to prove the synergy and potential value of the acquisition, and the stock price will return to a sustained growth trajectory.

2. Plan to Open 2,000 New Stores, Further Expanding Retail Network Layout
In the latest earnings conference, DOL revealed that the company plans to open 2,000 stores in Canada and 1,050 stores in Latin America by 2031. This plan not only significantly expands the company's retail network layout but also deepens its influence in existing markets, covering more consumer groups, increasing brand visibility, and further consolidating its leadership position in the value retail field.

Interest rate cuts are usually seen as an effective way to stimulate consumer willingness to spend. With the reduction of borrowing costs and the decrease in savings rates, consumers tend to spend more money on daily consumption. Therefore, in the context of Canada's interest rate cut, DOL is expected to attract more customers and drive same-store sales to achieve new growth.

In addition, DOL's positioning of low-priced goods has always been a popular choice for consumers seeking cost-effective products. In the context of the global macroeconomic recovery not yet fully underway, the development space of dollar stores offering low-priced goods would be better than that of high-end shopping malls. Therefore, we expect that under the background of interest rate cuts, DOL is expected to achieve a new high in same-store sales in the coming quarters.

With its solid foundation in the Canadian market and active expansion in the international market, DOL has demonstrated its leadership position in the value retail field. The company's profit growth rate is as high as 20%, and EPS has increased by 22% year-on-year to CAD 0.77. The company's current valuation is 20x PE, lower than the market's long-term valuation of 28x PE, placing it in a relatively low range.

Since the beginning of 2024, DOL's stock price has risen by more than 20%. Although the issuance of new shares and the lower-than-expected earnings in the latest quarter have had a negative impact on the company's stock price in the short term, in the long term, the company's continued growth in performance, the continuous addition of new stores, and the development opportunities brought by the interest rate cut, we expect the future trend of DOL's stock price to continue to rise. Investors may consider buying and holding the company's stock at the current low price, to gain long-term investment returns.