Dollarama bests U.S. discount rivals with frugal strategy
Retailer avoids pitfalls by experimenting, avoiding fresh food and keeping costs low
Dollar stores have been going through a tough slog in the U.S., but business is booming north of the border for Dollarama Inc.
Shares of Canada’s biggest discount retailer touched new highs last week after beating analysts’ earnings estimates, raising its margin forecasts and accelerating expansion plans. Meanwhile U.S. counterparts Dollar General Corp. and Dollar Tree Inc. have plunged 20 per cent or more from recent highs.
Dollarama’s secret? The same penny-pinching strategy as its customers.
By staying away from fresh food, keeping costs low and relentlessly testing new ideas, Dollarama has avoided pitfalls that tripped up competitors, according to 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 discounts 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 dollarstore 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-and-green 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 anticipated. 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.
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. With the amounts spent per visit rising, the company will now accept credit cards.
That wasn’t a quick decision. Credit cards were first tested five years ago, a testament to how the company proceeds with important decisions, according to Ross.
Dollarama has defined the dollar segment in Canada, grown the segment and increased its share.