Oggonomics has covered the carnage of the U.S. dollar store theme before. These stores simply cannot hope that the Federal Reserve’s interest rate cutting cycle arrives fast enough. Dollar General Corporation (NYSE: DG) and Dollar Tree, Inc. (NASDAQ: DLTR) are both facing very negative performance as their customers are cash-strapped after the effects of inflation.
While Oggonomics has asked if investing now is a strategic move or a terminal move, perhaps these two companies need to look north to Canada. Dollarama Inc. (DOL-Toronto) stock has not yet broken out above its C$137.72 high from August, but it is only about 1% under that high. U.S. dollar store stocks were recently both putting in 52-week lows.
Dollarama shares were last seen up 41.7% so far in 2024 versus YTD performance of -38% for Dollar General and -51% for Dollar Tree. It’s truly unacceptable on a relative basis by too many measures. Why shouldn’t U.S. dollar store operators look and see what is working so well up in Canada (and maybe even look toward more selective efforts in Latin America)?
RESULTS MATTER
The Canadian dollar store chain Dollarama is not at all in the same boat as Dollar General nor Dollar Tree. In fact, it’s doing quite well. The Canadian company’s second quarter results showed a much better showing than its U.S. counterparts:
- 7.4% total sales gain to $1,563.4 million;
- comparable store sales rising 4.7%;
- EBITDA increased by 14.7% to $524.3 million;
- Operating income rose 15.3% to $422.9 million;
- and diluted earnings rose 18.6% to $1.02 per common share.
Dollarama President & CEO Neil Rossy was much more upbeat than his lagging U.S. counterparts:
“For the second quarter of fiscal 2025, we generated strong results across the board as comparable store sales continue to normalize. Canadian consumers continue to recognize and rely on our compelling value as they deploy their discretionary spending prudently in a challenging economic environment. Our strong traffic trends quarter after quarter also confirm that the breadth of our product offering is allowing us to meet the needs of our consumers.”
WHAT ANALYSTS ARE SAYING
Dollarama’s pool of analysts in Canada have by and large all raised their price targets for the chain. Analysts for the Dollar General and Dollar Tree in the U.S. have been slashing and burning the price targets left and right. Some analysts have issued multiple target price cuts in the U.S. Here is the latest round of upgraded price targets seen for Dollarama on the heels of its earnings report:
- BMO target raised to C$147 from C$138.
- CIBC target raised to C$138 from C$128.
- Desjardins target raised to C$143 from C$140.
- National Bank target raised to C$143 from C$141.
- RBC target raised to C$147 from C$144.
- Stifel target raised to C$136 from C$125.
- TD Securities target raised to C$154 from C$150.
Two formal ratings changes were seen as well:
- Independent research CFRA raised Dollarama to Buy from Hold and took its target to C$155 from C$125.
- Wells Fargo downgraded Dollarama to $Equal Weight from Overweight and cut its target to C$130 from C$136.
WHAT MAKES DOLLARAMA DIFFERENT
Dollarama is a based in Canada and the bulk of its operations consist of 1,569 locations across Canada’s larger cities, smaller cities and small towns at select fixed price points up to $5.00. The company also owns a 60.1% interest in a growing Latin American value retailer named Dollarcity, with price points up to $4.00 (US-equivalent) with 547 stores spread over El Salvador, Guatemala, Colombia and Peru.
Dollarama’s market cap in Canada is C$38 billion. That might be too large of a company for either U.S. dollar store giant to acquire. Perhaps they could figure out some common themes that can help their ailing U.S. stores.
