Dollar stores struggling south of the border

THRIVING IN CANADA

chief financial officer Michael Ross. Unlike U.S. rivals that saw opportunities in using food to attract customers, Dollarama was unscathed by a recent run of food deflation that hurt margins for grocers and discount chains on both sides of the border, including Metro Inc.

“We want to make sure that we keep our costs to the lowest level possible, allowing us to give more value to our customers,” Ross said in a phone interview. “In a dollar-store environment, you’re managing pennies, and your margin for error is very small.”

Founder Larry Rossy, a third-generation retailer who was succeeded last year as chief executive officer by his son Neil, converted the small Quebec-based family chain to the dollar-store concept in 1992. Dollarama now manages almost 1,100 stores across in Canada, including 26 added in the past quarter.

Its closest competitor is Chesapeake, Va.-based Dollar Tree, which operates 226 stores in Canada. The U.S. retailer, with more than 14,000 stores in all, entered the country via an acquisition in 2010 and said in its latest annual report that the revenue and assets there “are not material.”

“Dollarama has defined the dollar segment in Canada, grown the segment and increased its share,” Keith Howlett, an analyst at Desjardins Capital Markets, said in a note where he also raised his target price on the stock to $120 from $116. “No external competitive impediment to Dollarama is currently visible.”

Shares of Dollarama closed at $109.12, down 0.99 per cent on Monday in Toronto after touching a record high of $111.70 intraday and rising 11 per cent on March 30, when quarterly results were announced. The company went public at $17.50 in October 2009.

Canadians turn to Dollarama’s yellow-andgreen bannered stores for party accessories, kitchenware and seasonal goods like Halloween decorations. While some chips or candies are on display, there’s no milk, eggs or frozen meals. Consumable products account for 38 per cent of the value of merchandise offered. Dollar General generates roughly 75 per cent of sales from such items.

Dollarama has invested in technology to boost productivity, builds stores in a consistent “10,000 square-foot box format” and stays away from advertising. It changes about a quarter of its offerings every year, according to Ross, who joined in 2010.

On Thursday, the company said it plans to open 1,700 stores in the next eight to 10 years, more than the 1,400 previously anticipated. The decision was made after looking at population trends, competition, the company’s own results and real-estate opportunities, Ross said.

According to Barclays Capital, that would help bring the number of dollar stores in Canada close to U.S. levels, at about one outlet per 15,000 people.

The Montreal-based retailer was bought by Bain Capital LLC in 2004, which took the company public five years later and sold its stake in 2011.

In U.S. dollar terms, Dollarama shares have returned 262 per cent over the past five years, more than four times the gain of the Bloomberg Intelligence Dollar Store index, while the broader Toronto S&P/TSX Composite Index has advanced 7.6 per cent.

The company, which buys more than half of its goods outside of North America, would benefit if the Trump administration implements a border tax on imported goods, which would hurt U.S.-based retailers, said Bloomberg Intelligence senior analyst Poonam Goyal.

CEO Rossy told analysts on a call Thursday that “a slightly soft Chinese market” helped boost margins in the quarter ended Jan. 29, by lowering purchasing costs. The company’s profit for the period beat the highest forecast as customers spent more per visit, snapping up $3.50 and $4 products that were recently introduced.