Expansion In Canada, Mexico And Australia Will Unlock New Markets

Key Takeaways

• International expansion and acquisitions diversify geographic reach, unlocking new growth opportunities and positioning for sustained revenue gains across multiple markets.
  
• Enhanced operational efficiency and disciplined cost control drive margin improvements, with automation and distribution investments supporting future profitability.
  
• International expansion and supply chain reliance heighten operational and profitability risks, while market saturation and rising competition threaten future growth and margin stability.

Catalysts

Operates a chain of stores and provides related logistical and administrative support activities.

• The company's aggressive international expansion-opening Dollarcity's first store in Mexico and acquiring Australia's largest discount retailer-unlocks new, large addressable markets, positioning Dollarama for multi-year top-line revenue growth through broader geographic and demographic exposure.
  
• Sustained consumer focus on value in the current environment of high cost of living and persistent inflation continues to drive higher transaction growth and steady demand for consumables in Canada and Latin America, supporting robust revenue and same-store sales.
  
• Ongoing investment in logistics (e.g., new Western Canada distribution hub) and merchandising efficiency is increasing operational leverage, as seen by improved gross margins driven by lower logistics costs and strategic sourcing, with further SG&A control and margin expansion likely as automation matures.
  
• The continued rollout of new stores-49 year-to-date in Canada and healthy expansion in Dollarcity markets-indicates ongoing secular tailwinds from urbanization and population growth, supporting future revenue and earnings growth as the network densifies.
  
• The transformation and integration of the Australian business to the Dollarama model (simplified pricing, improved assortment, and operational efficiencies) is expected to unlock margin improvement and profitability over the next several years, representing a significant future earnings catalyst once integration costs subside.

Dollarama Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dollarama's revenue will grow by 10.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 18.9% today to 17.5% in 3 years time.
• Analysts expect earnings to reach CA$1.6 billion (and earnings per share of CA$5.97) by about September 2028, up from CA$1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.9x on those 2028 earnings, down from 40.9x today. This future PE is greater than the current PE for the CA Multiline Retail industry at 26.0x.
• Analysts expect the number of shares outstanding to decline by 1.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.59%, as per the Simply Wall St company report.

Dollarama Future Earnings Per Share Growth

Risks

• The acquisition and transformation of The Reject Shop in Australia introduces substantial execution risk related to integrating new operations, aligning company culture, and implementing the Dollarama model; if integration challenges or local consumer resistance occur, this could delay profitability and negatively impact long-term earnings growth.
  
• Expansion into new international markets such as Mexico and Australia increases exposure to higher wage environments, currency volatility, and jurisdictional regulatory risks (e.g., minimum wage hikes, Pillar Two tax rules), which are likely to pressure net margins and reduce bottom-line profitability over time.
  
• Dollarama's ongoing aggressive store expansion strategy in Canada faces the risk of eventual market saturation, potentially leading to slowing same-store sales growth and diminishing incremental revenue contributions from new stores, thereby impacting future revenue growth rates.
  
• Supply chain disruptions, reliance on overseas suppliers, and potential for global trade tensions (e.g., tariffs, political instability, shipping bottlenecks) expose Dollarama to raw material price fluctuations and inventory delays, which could increase cost of goods sold and compress gross margins.
  
• Intensifying competition from established and well-resourced retailers (e.g., Walmart, Loblaws) increasing promotional activity in Canada may force Dollarama to limit price increases, threatening its ability to pass on higher costs to consumers and thereby squeezing net margins and limiting earnings growth.

Valuation

• The analysts have a consensus price target of CA$196.733 for Dollarama based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$223.0, and the most bearish reporting a price target of just CA$115.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$9.1 billion, earnings will come to CA$1.6 billion, and it would be trading on a PE ratio of 39.9x, assuming you use a discount rate of 7.6%.
• Given the current share price of CA$186.68, the analyst price target of CA$196.73 is 5.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.