2026-02-16

Dollarama is Canada’s dominant dollar store chain, operating a high volume, low price retail model focused on consumables, household goods, seasonal merchandise, and discretionary low ticket items. It generates revenue through rapid inventory turnover, disciplined cost control, and expanding store count across Canada and Latin America. The company benefits from scale purchasing, efficient logistics, and a reputation for value among price sensitive consumers. Its earnings are driven by same store sales growth, new store openings, and margin expansion through sourcing efficiencies. Dollarama has delivered consistent double digit revenue growth, expanding profit margins, and exceptionally high returns on invested capital.

Investment Objective: The objective is to achieve a minimum compound annual return of 9 percent over a 16 year holding period, effectively tripling invested capital. The valuation determines whether Dollarama at its current price can realistically meet this long term compounding threshold. The buy, hold, or sell recommendation reflects this required return assumption.

INTRINSIC VALUE AND GROWTH METRICS

Intrinsic Value Results

Metric	Result
Discounted Cash Flow Value	$132 per share
Multiple Based Valuation	$150 per share
Blended Intrinsic Value	$141 per share
Current Price	$190
P/E (TTM)	45.65
PEG	3.27
PEGY	3.25

Inputs Used in Valuation

Input	Value
Revenue TTM	6.41B
Net Income TTM	1.31B
5 Year Avg Net Income	841.68M
Free Cash Flow TTM	1.33B
5 Year Avg FCF	970.44M
5 Year Revenue CAGR	11.11%
3 Year Revenue CAGR	13.98%
5 Year ROIC	31%
Shares Outstanding	273.59M
Dividend Yield	0.21%
Discount Rate	9%
Terminal Growth	3%

STRUCTURED INVESTMENT REVIEW

Question	Answer
Is the business model simple and sustainable?	Yes. Simple retail model with strong unit economics and predictable demand.
Intrinsic value, PE, PEG, PEGY	IV $132 to $150. Blended $141. PE 45.65. PEG 3.27. PEGY 3.25.
Durable moat?	Yes. Scale sourcing, brand strength, and cost leadership create durable advantage.
Competitors and positioning	Competes with Walmart, Giant Tiger, Costco, Amazon low ticket items. Positioned as value leader in dollar segment.
Management quality	Strong capital allocation, consistent buybacks, disciplined expansion.
Undervalued?	No. Trades roughly 35 percent above intrinsic value.
Capital efficiency	Exceptional. ROIC above 26 percent and 5 year average 31 percent.
Free cash flow strength	Very strong. FCF conversion high relative to net income.
Balance sheet strength	Debt to equity 5.55 reflects leveraged buyback strategy but manageable given FCF.
Earnings and revenue consistency	Highly consistent double digit revenue growth and expanding margins.
Margin of safety	Negative margin at current price.
Biggest risks	Valuation compression, consumer trade down reversal, competitive pressure.
Dilution?	Shares reduced 10 percent over 5 years. Accretive buybacks.
Cyclical or stable?	Defensive. Often performs well in recessions.
5–10 year outlook	Continued store expansion, possible international growth.
Buy if market closed 5 years?	Only at materially lower price.
PEGY meaning	PEGY above 3 indicates expensive relative to growth and dividend.
Capital allocation	Strong reinvestment and buybacks. Dividend minimal.
Why mispriced?	Market pricing in sustained high growth and defensive premium.
Key assumptions	Growth slows to 7–9 percent long term.
Portfolio fit	High quality compounder but valuation risk.
Buy, hold, sell?	Hold if owned. Do not buy at $190. Target buy below $140.
Values used	FCF, earnings, revenue growth, ROIC, share count, valuation multiples.

DETAILED ANALYSIS

Business Understanding

Dollarama operates a highly standardized discount retail model built on scale efficiency. The company sells low price general merchandise with tight SKU management and centralized procurement. Its value proposition centers on fixed or capped price points, driving predictable basket sizes and rapid inventory turnover.

Revenue growth stems from two engines: new store openings and same store sales increases. The company has delivered 10 to 14 percent revenue growth for a decade. Margins have steadily expanded from 15.92 percent ten years ago to 18.22 percent today.

Demand for low price consumables is structurally resilient. In downturns, customers trade down. In expansions, traffic remains stable because convenience and value persist. The risk lies not in demand collapse but in margin pressure from input cost volatility.

The model is simple, capital efficient, and scalable. What would impair it materially is supplier concentration risk, regulatory pricing constraints, or saturation in core markets.

Competitive Advantage

Dollarama’s moat rests on cost leadership. Scale purchasing gives it leverage with global suppliers. Its private label mix enhances margin. Store footprint density improves logistics efficiency.

Switching costs are low for consumers, but the habitual convenience and perceived value create behavioral stickiness. Brand strength in the discount niche is significant. Competitors such as Walmart cannot easily replicate the tight cost structure without diluting their broader format.

ROIC above 26 percent confirms economic moat. Sustained high returns over five years indicate durable competitive positioning.

The moat appears stable and likely widening as scale compounds.

Financial Strength: Profitability

Revenue growth of 11 percent over five years combined with net income growth of 604M signals operational leverage. Net margin expansion to 18.22 percent is exceptional in retail.

ROE near 98 percent reflects high leverage and share buybacks but also extraordinary profitability. Even adjusting for leverage, ROIC at 26 percent demonstrates capital productivity.

However, valuation has expanded dramatically. Five year average PE of 63 indicates sustained premium pricing.

Financial Strength: Balance Sheet

Debt to equity at 5.55 reflects aggressive buybacks. Current ratio at 1.18 is adequate for retail but not conservative.

Long term liabilities relative to five year FCF at 4.41 remains within reasonable range for a high cash flow business.

The balance sheet is leveraged but supported by strong cash generation.

Financial Strength: Cash Flow

Free cash flow of 1.33B nearly matches net income. Five year average FCF of 970M demonstrates durability.

Price to FCF of 40 is elevated. Investors are paying forward for future growth.

Dividend yield is minimal, reflecting reinvestment and buyback focus.

Margin of Safety

Intrinsic value near 141 versus price 190 implies 26 percent overvaluation. There is no margin of safety.

Mispricing Thesis

The stock is expensive because investors prize defensive growth. It is priced as a perpetual high growth compounder.

The risk lies in multiple compression rather than earnings collapse.

Management Quality

Management has reduced shares outstanding by 10 percent in five years. Capital allocation has been disciplined. Growth has been organic rather than acquisition driven.

Buybacks have been executed even at high valuations, which could reduce future returns.

Long Term Outlook

Dollarama likely continues expanding store base and international exposure. Growth may moderate from 11 percent to mid single digits over next decade as market saturates.

Even with slower growth, high ROIC supports compounding.

Risk Assessment

Primary risk is valuation compression. If PE contracts from 45 to 25, stock could fall materially even if earnings grow.

Other risks include wage inflation, supply chain disruption, and competitive price wars.

Investment Thesis

Dollarama is a high quality compounder trading at a premium valuation. Intrinsic value around 141 implies current price embeds optimistic growth.

For a 9 percent 16 year target, entry price should be near 125 to 140 depending on growth assumptions.

At 190, expected return likely closer to 4 to 6 percent annually.

Red Flag Scan Additions

• Multiple expansion dependency
• Aggressive buybacks at peak valuations
• Slowing same store sales growth
• Margin compression trend

WEIGHTED SWOT

Factor	Weight	Impact	Score
High ROIC	0.20	Positive	0.80
Revenue growth	0.15	Positive	0.60
Strong FCF	0.15	Positive	0.60
Premium valuation	0.20	Negative	-0.80
Leverage	0.10	Neutral	0.00
Defensive model	0.10	Positive	0.40
Market saturation risk	0.10	Negative	-0.30
Total	1.00		1.30 Net Positive Business, Overpriced Equity

SCENARIO VALUES

Scenario	Assumptions	Value
Bear	Growth slows to 5%	$115
Base	Growth 8%	$141
Bull	Growth sustained 11%	$170

ENTRY AND EXIT STRATEGY

Enter during market correction or recession when valuation compresses below 30 times earnings.

Exit or trim when PE exceeds 50 and growth slows below 8 percent.

BUY PRICE FOR 16 YEAR RETURNS

Return	Max Buy Price
5%	190
6%	170
7%	155
8%	140
9%	125
10%	115

BUY PRICE FOR 9% TARGET

Period	Max Buy Price
5 Years	130
7 Years	135
10 Years	138
12 Years	140
14 Years	140
16 Years	125

TRIM AND SELL

Action	Price Level
Begin trimming	$210 to $220
Sell majority	$240
Full exit	Above $260 if growth decelerates

NUMBERS USED

Used: Revenue growth rates, net income, free cash flow, ROIC, ROE, margins, share count change, debt ratio, PE, PS, EV metrics.

Ignored: Moving averages, short term trading levels, 52 week high and low except contextually.

FINAL SUMMARY AND VERDICT

Dollarama is an exceptional retailer with outstanding capital efficiency and durable competitive advantages. Revenue growth, margin expansion, and buybacks have created enormous shareholder value.

However, the stock price reflects these strengths fully and more. At 190, investors are paying a premium multiple that assumes sustained high growth and margin durability for many years.

Intrinsic value around 141 implies material overvaluation. For a disciplined investor requiring 9 percent annual returns over 16 years, purchase below 125 to 140 is prudent.

Current recommendation: Hold if owned. Do not initiate at current valuation. Wait for correction.

Disclaimer: This analysis is for informational purposes only and does not constitute investment advice. Always perform your own due diligence or consult with a financial advisor before making investment decisions.