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Report on Business Dollarama moves into Latin America with purchase of retail chain Dollarcity

The deal comes as Dollarama looks to turn the corner on a bumpy period for its shareholders amid stagnating sales growth.

Fred Lum/The Globe and Mail

Montreal-based Dollarama Inc. is looking abroad for its next stage growth, acquiring a 50.1-per-cent stake in rapidly-growing Latin American value retailer Dollarcity.

Dollarama, which entered a commercial partnership with Dollarcity in 2013, will pay an estimated US$85-million to US$95-million for the majority stake, including US$40-million upfront.

The deal, which is expected to close in August, comes as Dollarama looks to turn the corner on a bumpy period for its shareholders amid stagnating sales growth. Traffic at the discount retailer declined for four consecutive quarters before breaking that streak and posting a surprisingly strong increase in comparable store sales in its most recent quarter.

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On top of the traffic troubles, price inflation in the marketplace has slowed as rivals such as Walmart and Dollar Tree Inc. have limited price hikes due to stiff competition.

Dollarcity’s growth, meanwhile, has been rapid, amassing 180 stores spread between El Salvador, Guatemala and Colombia since opening its doors in 2009. It’s aiming to more than triple its store count in the next decade.

“Latin America has a young, increasingly urban population with similar spending habits to North America,” Dollarama’s president and chief executive officer Neil Rossy said during a conference call on Tuesday.

"They have responded very well to Dollarcity’s value proposition in three different markets. Much like in Canada when we got started in the ’90s, there is no national dollar store chain, so we want to capture this opportunity.”

Dollarama spent the past six years providing Dollarcity with business expertise, getting acquainted with Latin America and testing its concept in a new market. Mr. Rossy said he is pleased with growth prospects in the region.

Latin America has also demonstrated its resilience and an ability to “bounce back from economic lows," he added. And the long history of global retailers and brands in the region have allowed Dollarama to learn from the experiences of those who have succeeded, as well as those who have not fared as well.

Dollarcity currently has 44 stores in El Salvador, 54 in Guatemala and 82 in Colombia. It’s aiming to operate 600 stores across those three countries by 2029, though its focus is primarily on Colombia.

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Dollarcity has been growing rapidly but methodically, Mr. Rossy said. Just six years ago, it converted its first 10 locations in El Salvador into concept stores designed using Dollarama’s blueprint. Customers responded positively to the change, so the company brought the new concept stores to Guatemala. By the end of 2015, Dollarcity had more than 40 stores in two markets. The following year they expanded to Colombia.

Over time, Dollarcity could expand into other markets as well, Cannacord Genuity Corp. analyst Derek Dley said in a note to clients.

“We believe the entry into Latin America provides an incremental growth avenue alongside Dollarama’s Canadian operations over the near and long term,” Mr. Dley wrote.

He added that the price – which is based on a five-times multiple of Dollarcity’s earnings before interest, tax, depreciation and amortization, minus its net debt – is lower than he had anticipated.

Dollarama’s shares have see-sawed over the past 18 months, falling dramatically from an all-time high of $56.43 in January of 2018 to $31.67 by the end of the calendar year. Shares have rebounded in 2019, closing up 3.7 per cent Tuesday at $47.76.

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