Rising Costs And E-Commerce Shift Will Undermine Future Retail Performance

Key Takeaways

• Store network growth is nearing its limit, increasing dependence on challenging international expansion and uncertain same-store sales improvements.
  
• Cost pressures and intensifying competition threaten profitability, while shifting demographics and e-commerce growth risk dampening long-term demand.
  
• Expanding internationally while maintaining strong domestic growth and operational efficiencies positions Dollarama for long-term revenue and margin gains amid macroeconomic challenges.

Catalysts

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

• The risk of long-term decline in brick-and-mortar traffic as e-commerce continues to gain market share and consumers increasingly shift to online shopping, potentially eroding same-store sales growth and pressuring top-line revenue, remains acute for Dollarama despite in-person convenience trends.
  
• Demographic shifts in Canada, especially an aging and more single-person population, are likely to further reduce frequency and volume of household consumption over time, stifling long-term demand for Dollarama's bulk-oriented, low-ticket consumables and muting future sales growth.
  
• Store network expansion in Canada is approaching saturation, leaving Dollarama heavily reliant on same-store sales gains and international ventures where competitive intensity and uncertain consumer acceptance-such as the unproven Mexico entry-heighten the risk of slowing or volatile revenue growth and diminished earnings resilience.
  
• Persistent cost pressures from global supply chain volatility, rising wages, and inflation are likely to compress gross and net margins, especially as Dollarama's price follower strategy limits its ability to offset higher costs, directly threatening profitability and long-term earnings.
  
• Escalating competition from international discounters and private label expansion by major grocery chains, combined with looming regulatory costs tied to sustainability and packaging, poses a credible threat to Dollarama's market share, pricing power, and margin structure in the years ahead.

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 5.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 18.8% today to 21.0% in 3 years time.
• The bearish analysts expect earnings to reach CA$1.6 billion (and earnings per share of CA$6.1) by about August 2028, up from CA$1.2 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 29.8x on those 2028 earnings, down from 43.3x today. This future PE is greater than the current PE for the CA Multiline Retail industry at 27.2x.
• Analysts expect the number of shares outstanding to decline by 1.67% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

Dollarama Future Earnings Per Share Growth

Risks

• Dollarama is seeing continued strong demand for consumables and resilience in a challenging macro environment, with 4.9% same-store sales growth and solid traffic trends, which suggests its value proposition remains relevant and could support revenue growth over the long term.
  
• The company is accelerating store network expansion in Canada, maintaining a robust pipeline, and launching growth in Mexico and soon Australia, which could drive top-line revenue expansion beyond domestic saturation and deliver operating leverage through scale.
  
• Dollarcity's growth in Latin America remains strong, with positive same-store sales and high operational leverage, and management reports that their new market entries (such as Peru, Colombia, and soon Mexico) have followed a steady and successful ramp-up, supporting international earnings growth.
  
• Operational efficiencies-including improved logistics costs, lower inventory shrink from loss prevention initiatives, and disciplined SG&A management-have lifted gross margins and EBITDA, providing resilience to net earnings even in the face of cost headwinds.
  
• Management continues to articulate a disciplined capital allocation strategy, emphasizing share repurchases, dividends, and high-return investments like the new Calgary logistics hub, which is expected to generate transportation savings and further support net earnings and margin expansion over time.

Valuation

• The assumed bearish price target for Dollarama is CA$148.91, which represents two standard deviations below the consensus price target of CA$197.4. 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$7.8 billion, earnings will come to CA$1.6 billion, and it would be trading on a PE ratio of 29.8x, assuming you use a discount rate of 7.5%.
• Given the current share price of CA$192.31, the bearish analyst price target of CA$148.91 is 29.1% 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.