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Dollarama employee, Sanaz Shirkhodaeitari restocks shelves at the Dollarama store in Vaughan on August 9, 2010. JENNIFER ROBERTS FOR THE GLOBE AND MAIL Story details: Dollarama has thrived on keeping it simple. A shift toward more expensive products is bringing the retailer into new territory, but the company risks losing its core customers. (JENNIFER ROBERTS/Jennifer Roberts for The Globe and Mail)
Dollarama employee, Sanaz Shirkhodaeitari restocks shelves at the Dollarama store in Vaughan on August 9, 2010. JENNIFER ROBERTS FOR THE GLOBE AND MAIL Story details: Dollarama has thrived on keeping it simple. A shift toward more expensive products is bringing the retailer into new territory, but the company risks losing its core customers. (JENNIFER ROBERTS/Jennifer Roberts for The Globe and Mail)

Retail

Dollarama beats expectations, disappoints investors Add to ...

Dollarama's stores may be a bargain lover's paradise, but its richly valued stock was apparently getting a tad expensive for some investors.

Even as the fast-growing discount retailer posted fourth-quarter earnings on Thursday that topped analyst estimates, the shares skidded 2.1 per cent, signalling that not everyone was impressed.

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With its cheerful green and yellow signs and aisles crammed with household goods, food and toys, Dollarama Inc. stands out as a rare success story in a retail industry still reeling from the recession. The shares have surged 72 per cent since the company's initial public offering in October, 2009, powered by an aggressive expansion strategy and a decision two years ago to lift the maximum price on items to $2 from $1.

As the fourth-quarter results show, higher prices are certainly paying off. For the three months ended Jan. 30, sales at stores open for more than a year rose 5.3 per cent, reflecting a 6.1-per-cent increase in the average transaction size, even as the number of transactions fell 0.7 per cent.

"Offering an assortment of merchandise at multiple price points proved to be a very efficient strategy in generating strong cash flows," said Larry Rossy, chief executive officer of Dollarama.

But as good as the quarterly results were, they evidently didn't live up to the lofty expectations of shareholders, who have been conditioned to expect Dollarama to handily beat estimates quarter after quarter.

In the most recent three months, profit rose 23.6 per cent to $42-million, and share profit of 56 cents topped the consensus estimate of 53 cents.

But sales of $408.7-million came in "slightly below expectations," Versant Partners analyst Neil Linsdell said in a research note. Still, he reiterated his "buy" rating and one-year price target of $36 - nearly a 20-per-cent premium to Thursday's closing price of $30.12.

Unlike its merchandise, Dollarama's shares aren't cheap. Prior to Thursday's pullback, they traded at more than 19 times trailing 12-month earnings, compared with about 18 for U.S. peers Dollar General, Family Dollar and Dollar Tree. Mr. Linsdell believes Dollarama's valuation is warranted.

"While at the high end of the comparable valuation range, Dollarama deserves a premium value based on its industry-leading growth, profitability and dominant market position," he wrote.

Despite Thursday's pullback, other analysts also remain bullish on the stock. Seven of the nine analysts who follow the company have a "buy" on the shares, while just two rate it a "hold," according to Bloomberg. The average price target is $33.71.

For its part, Dollarama says its growth is still going strong. The company added 49 stores in the most recent fiscal year, for a total of 652. "Given our current pipeline, we believe we can open approximately 50 new stores" in the current fiscal year, Mr. Rossy said.

Follow on Twitter: @johnheinzl

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