This Weekly is an update taking a second look at North American “dollar store” operators Dollar General and Dollarama. After almost exactly to the day two years ago, I featured both names in an analysis concluding that I have sympathies for the businesses as such, but not for their stocks. Something quite interesting has happened since: one stock totally cratered, the other advanced by another 75%. The development could not have been more different! What do both have in store now?
Summary and key takeaways from today’s Weekly
– Since my first article about these two dollar store operators, both companies and also their stocks have developed entirely differently.
– Dollar General was hit massively on an operational level, causing its stock to drop 70% (!) from its high.
– Dollarama on the other hand continued to grow impressively. Is there any value to be found?
In between the Christmas holidays on one side and year end on the other, I thought it would make sense to have a second look at the stocks of dollar store companies. It is this time of the year, the fourth quarter, where retailers are making the biggest chunk of their business.
Two years ago, I published my first version of this comparison (see here).
I sent the US’ biggest representative Dollar General (ISIN: US2566771059, Ticker: DG) as well as its Canadian counterpart Dollarama (ISIN: CA25675T1075, Ticker: DOL) into the face-off.
My conclusion back then was that I like the business models and especially their higher margins compared to “normal” supermarkets and comparable concepts.
On the negative side were a more aggressive leverage profile as well as higher valuations which despite decent growth plans didn’t leave enough margin of safety for me to consider one or the other to be a buy for me. On top, aggressive buybacks at the top at lofty valuations made me step to the side entirely.
I am going to take a look at the development over the last couple of years of both.
Is at least one of them a buy now?
Due to Christmas holidays and me taking a week off, I’ll update the usual charts next week.
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What happened in the last two years and is at least one dollar store company a buy?
As a reminder, though both companies have a comparable business model, they are not competing directly with each other.
Both are selling everyday goods for prices that are on the value side, though, due to the high cost inflation of the last few years not necessarily only for or below a single buck anymore – as the concept’s name suggests. Besides packaged food and drinks (no fresh produce), household goods, some apparel and also more seasonal goods like gardening or holiday-specific products can be found.
That’s the commonality, thought the specific assortment can differ.
But: Dollar General isn’t active in Canada, while Dollarama isn’t operating on US soil.
However, the latter is expanding in selected Latin-American countries. That said, in a few years both for the first time will likely compete in one market – in Mexico where Dollar General is operating “Mi Súper Dollar General” stores (see here) while Dollarama this year announced its major expansion plans (see here).
As I teased above, both stocks since my first comparison have gone into entirely different directions. Here’s what happened over the last two years with both stocks:
Coincidentally, as of writing 69% for both on the performance side – however, Dollarama up and Dollar General down.
Dollarama already back then showed a high valuation. What is expensive can become even more expensive, though. But this was at least supported by strong business results and ongoing positive momentum.
That can’t be said about its US-counterpart. Clearly more surprising is the demise of Dollar General. The company likewise had a lofty valuation two years ago. However, such a dramatic fall from grace for a perceived defensive and even recession-proof retail company is not something you see quite often.
The main difference is the business dynamic which caused the hot air to be left out.
When Dollar General published its half-year results, the stock subsequently fell by more than 30% under very high volume – in one single trading session! Again – this for long has been seen as a defensive stock due to selling everyday goods!
The good news is that since this major smash the stock has stabilized and more or less hovered around its new normal level. However, this shall not cover up the fact that Dollar General’s stock lost ~70% (!) from its high in 2022. Even worse, while market indexes unit recently made new highs.
Here’s a comparison of the stocks of both over the last ten years – quite dramatic!
Note: For a better comparison, I used the USD charts of both.
Dollar General is only up by a paltry 11% over the last decade, while Dollarama almost 6x-ed. I’m leaving out the dividends on purpose, as they are small. Both companies have been buying back stock aggressively instead.
One created shareholder value, the other massively destroyed it.
In reaction to the challenges which could be felt already during the year 2023, the old long-time CEO was brought back from retirement to turn this ship around in October 2023 (see here).
However, even he could not reverse the trend, at least for the time being.
While Dollarama continued to grow sales (+20%) and increase its operating margins even more to brutally high levels for a retailer, Dollar General only managed to achieve 6% more sales, but operating margins almost halved!
Actually, it would be straightforward to assume that in times of financial stress and tighter consumer budgets, exactly these types of businesses should even thrive due to their – at least optically – low price points and everyday essentials.
But the opposite happened.
The target group is holding money back. While higher sales are there due to higher prices, part of the reason for the margin breakaway is that higher-margin seasonal and discretionary items which are not urgently needed saw less demand.
Dollarama didn’t experience the same.
Not only did the business continue to grow in Canada, but also the international expansion in Latin America continued. During the year, Dollarama even increased the equity stake in its international subsidiary holding from 50.1% to 60.1%.
Besides, with Mexico the next new market entry was announced.
Plus, Dollarama upped its multi-year target of new store openings as management is confident that more stores can be operated profitably with a quick payback period.
That’s more or less in brief what happened over the last two years.
Today as of writing, this is how the respective valuations have changed. I am using the net debt figure without leasing liabilities.
| EV / sales two years ago | EV / sales now | EV / FCF two years ago | EV / FCF now | |
| Dollarama | 5.6x | 6.1x | 56x | ~40x |
| Dollar General | 2.0x | ~0.6x | neg. | ~23x |
source: data from TIKR
Quite a lot has happened on the valuation front!
Dollar General has seen a big valuation multiple compression to only 0.6x sales and 23x FCF, both compared to their enterprise value (financial debt only, without leasing). On the sales basis, DG looks cheap, while the FCF figure is still not low. Especially when taking into consideration that growth has cooled down dramatically into low single digits only at best.
Dollarama on the other side delivered on an operational basis. Their sales multiple – I am taking sales, because it fluctuates less than FCF due to CAPEX – has even expanded by 10%. The FCF multiple is still pretty lofty.
And with this, I come to my conclusion.
Dollar General looks to be rather fairly valued – yes, despite being down so much. Despite even trading for the lowest sales multiple since 2010, the growth dynamic isn’t there anymore. This absolutely justifies a lower multiple. The good thing is, though, that not much is expected anymore.
Should the company find to its growth path back again – organic growth but also higher margins (more operating leverage) – the stock could be interesting. But currently rather for the watchlist only.
Dollarama on the other side has been performing strongly. However, there are first signs of cracks – not what I want to see in a growth story which is also priced as such.
Below is a table with some growth metrics of the last quarters, as published.
| growth of: | Q3 23 | Q4 23 | Q1 24 | Q2 24 | most recent |
| total sales | 15% | 11% | 9% | 7% | 6% |
| same-store sales | 11% | 9% | 6% | 5% | 3% |
| op. income | 28% | 22% | 16% | 15% | 5% |
The trend is clearly down!
This does not support the margin expansion dynamic, to the contrary. With slower growth, not just for a quarter, but as the overall trend, I see absolutely no justification for such a lofty valuation.
I know that I have said that in my weekly two years ago already. But multiples are up while the dynamic is clearly down. This doesn’t match. And it is unlikely to continue forever, as pressure is mounting up and sooner or later will need to be left out. Either growth returns or multiplies compress. I tend to expect the latter to happen.
Not in the table, but from the press release, earnings per share despite still aggressive buybacks, are up by not even 7%. For a company that is valued for high-growth, this is practically nothing.
The only positive from the latest earnings release is that the target for new store openings has been increased. But this has to be taken with a grain of salt. Growth shouldn’t be pursued for the sake of growth only. It is not bad per se, but it looks a bit strange to me to go full-throttle now when the economy is weak…
To conclude, none of them is a clear buy for me.
In the case of Dollar General I’d like to see at least a glimmer of hope of a successful turnaround. Regarding Dollarama, the valuation needs to drop significantly first. It is priced for perfection.
Conclusion
Since my first article about these two dollar store operators, both companies and also their stocks have developed entirely differently.
Dollar General was hit massively on an operational level, causing its stock to drop 70% (!) from its high.
Dollarama on the other hand continued to grow impressively. Is there any value to be found?
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