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Dollarama’s stock is up roughly 40 per cent since the end of 2011. (Deborah Baic/The Globe and Mail)
Dollarama’s stock is up roughly 40 per cent since the end of 2011. (Deborah Baic/The Globe and Mail)

Doubts over dollar-store stocks begin to grow Add to ...

The improving North American economy is starting to claim victims: dollar stores are struggling.

Dollarama Inc. underlined this trend on Wednesday when it reported its fiscal first-quarter results, missing analysts’ expectations for the first time as a public company.

While analysts had expected the Canadian retailer to report earnings of 67 cents a share, Dollarama reported earnings of 62 cents a share. Sales at stores open for at least one year rose just 3.7 per cent, down from a year ago. Gross margins also fell.

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The shares fell 3.3 per cent in afternoon trading, adding to the decline of more than 7 per cent since the start of May.

In the U.S., Dollar General Corp., Dollar Tree and Family Dollar have also had the wind knocked out of them in recent weeks – though the declines there are in line with a general rotation out of economically defensive stocks that has seen, for example, utilities and consumer staples hit hard.

To be sure, there have been doubts about dollar stores before. Dollarama fell 13 per cent between November and December, when investors weighed slowing sales growth in the third quarter and a disappointing full-year forecast. The stock recovered soon after, though, and moved on to new highs.

Analysts, most of whom have “buy” recommendations on Dollarama, remain enthusiastic. RBC Dominion Securities kept its “outperform” recommendation and a price target of $81. Raymond James kept its price target of $75.

But if dollar stores took off at a time when the North American economy was struggling, you have to wonder what impact an improving economy will have on them. In May, both U.S. and Canadian employment reports were strong, and some observers are now contemplating an end to economic stimulus by the Federal Reserve.

A strong economy is good. But it’s not going to be good for everyone.

Follow on Twitter: @dberman_ROB

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