U.S. dollar store stocks have had a rough week – indeed, a rough second half of 2012. There's good reason for that. Less clear is why Canada's Dollarama stock has been caught in the downdraft, trading down 6 per cent in the last month. Its stock is getting an unfair markdown.
The whole North American dollar store sector, including Dollarama, took a hit in October after Dollar Tree warned of disappointing third-quarter sales due in part to higher gas prices and caution among its customers. This week, it was Dollar General's turn to offer a disappointing forecast for the year, which again weighed on dollar store stocks.
But dollar stores in the U.S. are different from Dollarama. They are much more geared toward economically disadvantaged customers, so higher gas prices squeeze their spending overall. If the fiscal cliff situation in the U.S. isn't resolved, payroll tax cuts for low income earners could end. That would be bad news for dollar stores. Dollarama, by contrast, draws from a much broader cross-section of Canadians.
U.S. dollar stores are also much more grocery-focused to offer products for people who use food stamps, with roughly 60 per cent to 70 per cent of sales made up of lower-margin "consumable" products – more than twice the level for Dollarama. U.S. dollar stores are even moving into tobacco and alcohol sales, which have lower margins and are more economically sensitive. And they face a resurgent Wal-Mart, which has refocused on its everyday low-pricing strategy and is stepping up its plans south of the border to expand its line of small-format stores, hurting dollar stores.
Competition among U.S. dollar stores is fierce, but in Canada, Dollarama is by far the dominant dollar-store retailer and will be so for years to come, with only recently arrived U.S. chain Dollar Tree offering any kind of real competition, from a much smaller base of stores. Meanwhile, Dollarama has excellent real estate. Store locations, personally chosen by CEO and billionaire founder Larry Rossy, are as likely to be low-income areas as upscale malls, reflecting its broad appeal.
Dollarama has carved out a distinct niche in Canada. It isn't so much bargain-basement buck shop as super-value mini-department store, full of private-label items designed by and custom made for the company (much of it in China). Dollarama prices now extend up to $3 and a majority of its sales come from items priced at more than $1.
The company has been driving sales growth by investing in technology including inventory management and debit card reader systems. It continues to expand margins, as well as sales per store, (up 6.6 per cent in the third quarter ended Oct. 28), revenues per transaction (up 4.9 per cent) and number of transactions (up 1.6 per cent). It rightfully trades at a premium to U.S. dollar stores, because it is different than US dollar stores, and from the Canadian stores of newly arrived Dollar Tree, which has retained the "consumables" focus of its U.S. sister outlets.
If Dollarama stock falls in tandem with U.S. dollar stores for no other reason than the fact it has "dollar" in its name, then the market is pricing in a discount that shouldn't be there.
Sean Silcoff