Expansion In Australia And Mexico Will Intensify Operational Risks

Key Takeaways

• International expansion faces operational challenges, with unfamiliar markets and differing consumer preferences threatening underperformance and weak revenue contributions.
  
• Shifts toward e-commerce, stricter ESG standards, and rising labor costs are pressuring margins and complicating future earnings growth.
  
• International expansion, operational efficiency, and strong value-oriented demand position Dollarama for sustained growth, higher profitability, and increased shareholder value across multiple markets.

Catalysts

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

• Dollarama's expansion into international markets brings heightened operational risks as local consumer preferences may not align with the company's low-cost, disposable product model, which could lead to underperformance in new geographies and weak revenue contributions from acquired operations.
  
• The rapid growth of online shopping, especially in developed and urbanizing markets like Canada and Australia, threatens to erode Dollarama's in-store foot traffic and average basket size over time, potentially resulting in stagnating or declining same-store sales growth.
  
• A rising focus on environmental, social and governance standards from both consumers and regulators is likely to make Dollarama's reliance on low-priced, often non-sustainable goods less attractive, which could drive up costs of goods sold or require shifts in assortment that hurt gross and net margins.
  
• Intensifying minimum wage hikes and persistent wage inflation-already noted as significantly higher in Australia and Latin America-are expected to push up SG&A as a percentage of sales, directly pressuring operating profit and undermining earnings growth.
  
• Dollarama's heavy penetration in the Canadian market leaves limited room for further domestic store expansion; as international operations remain a multi-year work-in-progress, this makes sustained top-line revenue growth increasingly dependent on successful execution in complex and unfamiliar markets.

Dollarama Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Dollarama compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Dollarama's revenue will grow by 9.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 18.9% today to 18.0% in 3 years time.
• The bearish 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. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 29.9x 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 25.8x.
• 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

• Dollarama's aggressive international expansion, including the acquisition of Australia's largest discount retailer and the entry into Mexico, creates several new growth platforms that can significantly increase the company's total addressable market and drive future revenue growth.
  
• The core Canadian business remains highly profitable and robust, evidenced by consistently positive same-store sales, a large and growing store network now reaching 1,665 locations, and steady demand for consumables and general merchandise, supporting healthy earnings and gross margins over time.
  
• Both in Canada and with Dollarcity in Latin America, population growth, urbanization, and the consumer trend towards seeking value in times of economic uncertainty are increasing customer traffic for value-focused retailers, which can help sustain and even accelerate Dollarama's revenue and market share.
  
• Strategic investments in logistics-including a new Western Canada distribution hub and ongoing improvements to IT and supply chain infrastructure-enable operational efficiencies and margin protection, supporting continued net earnings and cash flow growth.
  
• Successful implementation of the Dollarama business model in new geographies, as demonstrated with Dollarcity, can produce operating leverage and margin expansion as local teams scale, ultimately boosting return on invested capital and long-term shareholder value.

Valuation

• The assumed bearish price target for Dollarama is CA$147.82, which represents two standard deviations below the consensus price target of CA$196.73. This valuation is based on what can be assumed as the expectations of Dollarama's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be CA$8.9 billion, earnings will come to CA$1.6 billion, and it would be trading on a PE ratio of 29.9x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of CA$186.68, the bearish analyst price target of CA$147.82 is 26.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.