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We initiate coverage on Canadian dollar store chain Dollarama with a narrow economic moat rating based on the retailer’s intangible assets as well as cost advantages from its sourcing and distribution scale. Our fair value estimate stands at C$106 per share, which implies 16 times enterprise value to 2026 adjusted EBITDA. Shares look expensive trading at a 39% premium to our intrinsic valuation. Given the competitive intensity in retail, we don’t think the stock price has incorporated realistic growth and margin assumptions for the retailer in the coming years.
Dollarama DOL
We model Dollarama to grow revenue at an 8% compounded annual rate over our 10-year explicit forecast period, driven by mid-single-digit same-store sales growth and 60 to 65 new store openings each year. Consistent with practices the past 20 years, we expect the firm to add higher fixed price points of C$5.50 and C$6.00 in 2029 and 2030, which we expect will elevate same-store sales growth to around 8% for the two years. Excluding that, we view a 5% average same-store sales growth as achievable on a balanced mix of higher transaction counts and a larger average basket size.
For new store openings, we model 65 new stores each year between 2025 and 2031, which squares with management’s updated outlook for 2,000 stores by 2031. We expect about half of the new stores will be in Quebec and Ontario, while the retailer also steps up efforts to scout for more locations in the western provinces that remain underpenetrated by dollar stores.
On profitability, we forecast operating margins to widen to 25.4% by 2032, versus 24.2% in 2024, with the bulk of gains on the gross margin line (up 100 basis points) thanks to efficiency improvement in procurement and logistics and a lift from higher price points to be introduced in the coming years. In addition, we expect moderate leverage on the selling and labor cost line, with such expenses representing 14.1% of sales in 2034, down from 14.4% in 2024.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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