When it comes to retail and consumer stocks, Canadians have a few staples to choose from: Canadian Tire (TSX: CTC), Shoppers Drug Mart (TSX: SC), Tim Horton’s (TSX: THI), even some income trusts like Cineplex Galaxy Income Fund (TSX: CGX.UN) and Pizza Pizza Income Fund (TSX: PZA.UN).
Now Canadians can add another staple of the retail environment to that list: Dollarama, Canada’s leading dollar store chain. Like Tim’s and Shoppers, Dollarama is a discount chain familiar to most Canadians, whether or not they shop there.
Dollarama Began “As-If, When-Issued” Trading on Friday, October 8th
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About one month ago, Dollarama announced plans to begin trading as a public company. This would make it Canada’s first publicly-traded dollar store, and thus an equity offering unique to the Canadian market.
Initial analysis estimated the value of the company at about $1.3 billion, with initial share prices expected to be about $17.50/share. Shares will trade on the TSX under the ticker DOL.
Although the official beginning of trading is set for Friday, October 16, 2009, Dollarama (TSX: DOL) shares began “as-if, when-issued” trading on Friday. Oct. 8, upon which they closed the day at $19.49.
The initial IPO (initial public offering) raised the company $300 million.
Since 1992, Dollarama has grown from 44 stores to almost 600 all across Canada. And just in the last 7 years, they have pulled in an average of 16% annual sales growth, and 18% annual EBITDA growth.
Recently, they’ve updated their business model and now do not actually sell everything for just one dollar. Some items are priced at $1.50, others at $2 and some even at $2.50. This allows them to sell more merchandise. Perhaps it is these extra margins which allow them to outperform the sector in Canada as well as in the U.S.
The 4 Largest Publicly-Traded Dollar Store Chains in the U.S.
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The U.S. has about four major dollar store chains, and although they’ve all posted healthy returns so far this year – not hard to do, perhaps, since everything had been so beaten up with the credit crisis – these four have still underperformed the U.S. SPDRS Retail ETF (XRT), which is up 72% year to date.
Dollar Tree (Nasdaq: DLTR) – 16% return year to date. $4.4 billion market cap. No dividend.
Family Dollar Stores (NYSE: FDO) – 11% return ytd. $4.0b market cap. 1.88% yield.
99Cents Only (NYSE: NDN) – 28% return ytd. $1 billion market cap. No dividend.
Fred’s (Nasdaq: FRED) – 21% return ytd. $526 million market cap. 0.92% yield.
Is Dollarama A Good Investment?
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The analysts I’ve heard speak about it lately thought that the initial pricing of 17.50 was fair value for the stock. Now that it’s trading at $19, it is possible it is a bit overpriced. Also, there is no dividend to speak of yet.
With its brand recognition and time in the Canadian market, Dollarama has a fair degree of customer loyalty already on its side. And certainly, no one can improve upon its recession-resistant business. So it is possible that Dollarama could turn out to be another nicely defensive Canadian stock.
If in doubt, you could always put in half a position on TSX: DOL now, and wait another month or so to see where the stock goes – then add the second half of your position when it’s more favourable or more clear what type of growth the stock will see. Most certainly, this stock will be getting more press again in the near future as one of only a few IPOs we have seen in this post-crash market.
[source: BNN]
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