Never mind the naysayers. Dollarama is defying the odds.
For months there’s been speculation that the treasured stock would plummet once the market realized that the company simply couldn’t keep churning out solid earnings. But Dollarama proved the doubters wrong again when it released second-quarter earnings on Tuesday.
To truly appreciate the figures, you need to grasp the Canadian market’s troubles. In-store traffic is down, online competition is fierce, unemployment rates aren’t falling fast and cross-border shopping for Canadians is climbing higher. Plus, it’s extremely difficult for most stores to generate sales momentum without massive promotions.
Despite all of that, Dollarama’s same store sales rose 7.3 per cent and same store traffic climbed 2.7 per cent. That, says analyst Perry Caicco at CIBC World Markets, is “especially remarkable.”
In the market, though, there are two dilemmas for the company’s stock. First, analysts have gotten used to this explosive growth, so even though the results were fantastic, they only beat expectations by about 2 cents per share and that barely nudged the shares higher.
Then there is the bigger issue: the expectation of future profits. Mr. Caicco says it best: “The fear is that the slightest misstep in results could cause the valuation to contract quickly and the share price to begin a precipitous slide.”
The concern now isn’t so much around whether Dollarama will continue to perform, but whether too many people are piling in. Dollarama’s high for the year is about $64 per share; today the stock is just shy of $60. At the current level, it’s up 76 per cent in a year. But as Eye on Equities noted yesterday, analysts still think the stock has room to grow. Irene Nattel at RBC Dominion Securities has a target of $69 per share, which equates to 20 times expected fiscal 2014 earnings, but she thinks it’s the higher valuation is warranted.
Mr. Caicco has similar expectations for share performance, and thinks the current level is “not at all outrageous.”
Given the recent performance, no one can blame them for their rosy outlooks. But, as Mr. Caicco acknowledges, everyone has to hope that Dollarama won’t trade like a miner if its justified bubble pops.