Skip to main content

Shoppers at the Dollarama store on Spadina Avenue in Toronto on June 13, 2012.

Deborah Baic/THE GLOBE AND MAIL

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.

Story continues below advertisement

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.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Discussion loading ...

Cannabis pro newsletter