In this edition of ‘Stock Teasers’ we are going to be looking at a submission to /r/CanadianInvestor on Reddit where the user is asking if dollar stores will start failing. Let’s dive in!

Below we can see the user’s submission where they highlight recent weakness for US dollar store stocks and question if this trend will also be seen in long term Canadian winner Dollarama (DOL).

Source: Reddit

Investing in Dollar Stores

While dollar stores are not the most exciting equity investment, in both the Canadian and US markets, they have a strong history of generating returns. They operate as consumer staples businesses typically seen as ‘defensive’ investments. A defensive investment is one that should have consistent earnings and revenue growth irrespective of the market conditions. During times of recessions and high inflationary periods, these investments tend to perform well compared to higher growth stocks. Given the economic landscape in both US and Canadian markets, investing in dollar stores has made plenty of sense recently. Recessionary fears and inflation have both been high, prompting greater attention to dollar stores. Investors have been hoping for increased growth amidst potential economic uncertainty from these discount retailers.

Recent US Dollar Store Performance

We have provided the one-year price charts for both the US stocks mentioned being Dollar Tree (DLTR) and Dollar General (DG):

We can see the big gap down in price at the end of August for DG and start of September for DLTR. This was earnings driven as both companies missed on both EPS and sales estimates for the quarter as displayed in the chart below:

Both companies had attributed the poor results to weakness in the core lower income consumer and inflationary pressures.

Outlook on Dollarama (DOL)

The weakness in two comparable companies may sound some alarm bells for DOL, but we would not be so worried. While DOL, DG, and DLTR are all discount retailers, competitive positioning is the key factor here. DOL is almost a monopoly in the Canadian market for discount retailers while DG and DLTR’s primary market in the United States is much more saturated. DOL has not reported any significant consumer slowdown affecting them and same-store sales-growth was 4.5% in recent quarterly results. DOL is also expanding into Mexico which is further aiding its growth. We have briefly highlighted the fundamentals of each business below:

The above chart displays how much better DOL appears on paper compared to DG and DLTR. The comparison here is one of the rare cases where the differing competitive forces in the Canadian market acts as a benefit compared to the US. DOL has further executed much better over time relative to its US peers. To address the user’s question, we do not believe that DOL will suffer the same fate as DLTR and DG due to its competitive positioning and track record of growth. One last chart we will leave you with is a historical performance comparison of the three since DOL became publicly traded at the end of 2009.

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