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Dollarama has the highest revenue growth and EPS growth among major North American discount retailers over the past 12 months. (Deborah Baic/The Globe and Mail)
Dollarama has the highest revenue growth and EPS growth among major North American discount retailers over the past 12 months. (Deborah Baic/The Globe and Mail)

number cruncher

Discount-store stocks: An investor's guide to finding value Add to ...

Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high net worth clients. michael@wickhaminvestments.com

What are we looking for?

This week my colleague Rob Belanger and I look at publicly traded North American discount stores.

The screen

Price-to-free-cash-flow (P/FCF) is a valuation metric that compares a company’s market price to its level of annual free cash flow, which is operating cash flow reduced by capital expenditures. The higher the number, the more richly valued the company is considered.

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Revenue growth shows how much a company’s sales have increased in the past 12 months.

Earnings per share (EPS) is generally considered to be the single most important variable in determining a share’s price, and we are showing the EPS growth for the past year.

Operating margin is a measurement of what portion of a company’s revenue is left over after paying for variable costs such as wages and inventory. If a company has an operating margin of 12 per cent it means that it makes 12 cents before interest and taxes for every dollar of sales.

The inventory turnover is the number of times a company’s inventory is sold and replaced in the past 12 months. A higher number is preferred.

What did we find?

PriceSmart Inc. is the most richly valued company on our screen with a P/FCF of 182.74. This San Diego-based company has 31 locations in Central America, Colombia and the Caribbean.

Highly efficient companies will have the one-year EPS growth higher than the one-year revenue growth, and that is the case with five of our companies. It shows that these firms are effectively converting sales into profits. If the revenue is growing but the EPS is decreasing, it may show the company has slimmer profit margins, or in the case of Target, they may be pumping money into renovations and new store openings.

Costco, headquartered in Issaquah, Wash., has turned over its inventory 12.5 times in the past 12 months, the highest turnover in our screen.

With 800 stores, Montreal-based Dollarama stands out from the rest. It has the highest revenue growth and EPS growth even though it opened 93 new stores. It makes 16.5 cents on every dollar of revenue, also the highest on our screen, and investors have reaped over 32 per cent return on their investment, far surpassing any other company.

As always, when analyzing companies investors should contact an investment professional, or conduct further research.

 

North American discount stores

Company Ticker Market
Cap
($-bil)
P/FCF
Wal-Mart Stores WMT-N 249.338 21.10
Costco Wholesale COST-Q 52.638 31.16
Target Corp. TGT-N 41.448 12.30
Dollar General DG-N 18.942 28.25
Dollar Tree Inc. DLTR-Q 12.650 38.54
Family Dollar Stores FDO-N 8.540 -2.02
Dollarama Inc. DOL-T 5.818 30.35
Pricesmart Inc. PSMT-Q 2.832 182.74
Big Lots Inc. BIG-N 2.178 -2.89
North West Co. NWC-T 1.114 20.58

Source: Wickham Investment Counsel Inc., Bloomberg

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