Dollarama's Buybacks and Expansion: A Test of Capital Allocation and Global Ambition

Dollarama, Canada's discount retail powerhouse, has long balanced growth and shareholder returns. Now, with its renewed $1.068 billion share buyback program and aggressive expansion into Mexico, Australia, and beyond, the company is at a pivotal juncture. The question for investors is clear: Can Dollarama efficiently allocate capital to fuel growth while enhancing shareholder value, or will its ambitions strain financial flexibility?

The Buyback Play: A Strategic Use of Cash or Overextension?
Dollarama's renewed normal course issuer bid (NCIB), announced in July 2025, authorizes repurchases of up to 5% of its outstanding shares—13.87 million units—over 12 months. This follows a prior buyback that utilized just 31% of its authorized limit, underscoring management's confidence in the stock's valuation. At a current price of around CAD 150, the program could cost up to CAD 2.1 billion, though the exact amount will depend on market conditions.

The buyback is framed as a tool to boost earnings per share (EPS) accretion, with repurchased shares either cancelled or held to offset dilution from equity-based compensation. Yet, the move raises questions. With Dollarama's price-to-earnings (P/E) ratio hovering near 28x—significantly above the broader Canadian retail sector's average of 18x—is this a signal of confidence or overvaluation?

Critics argue the high P/E reflects investor optimism about future growth, not current profitability. Meanwhile, Dollarama's net debt of CAD 1.2 billion, while manageable, leaves less room for error. The buyback's success hinges on execution: if share repurchases occur at lower prices, the EPS boost will be meaningful. If not, the program risks diluting returns.

Expansion: A Growth Engine or Risky Gamble?
While the buyback focuses on returns, Dollarama's growth strategy is equally bold. In Canada, the company aims to add 70–80 stores in fiscal 2026, pushing its domestic total toward 2,200 by 2034. This requires careful site selection, as the company targets underserved rural and suburban markets. A new 500,000-square-foot Montreal distribution center will underpin this push, aiming to cut logistics costs and improve inventory turnover.

Internationally, Dollarama's ambitions are even more ambitious. Its 60.1%-owned Dollarcity unit plans to enter Mexico—a market of 130 million consumers—with initial stores expected by late 2025. Meanwhile, its acquisition of Australia's The Reject Shop (TRS) in March 2025 provides a foothold in the Oceania discount retail sector. By replicating Dollarama's $5 pricing model in these regions, management aims to replicate its Canadian success.

Yet risks loom large. Mexico's fragmented retail landscape and Australia's higher labor costs could strain margins. Dollarcity's existing Latin American stores face tariffs and inflation, while TRS's integration requires cultural alignment. A misstep in either market could divert cash from core operations, testing Dollarama's financial discipline.

The Capital Allocation Tightrope
Dollarama's challenge is to balance growth investments with shareholder returns without overextending. Its free cash flow (CAD 1.3 billion annually) provides a strong base, but prioritization is key. For instance, the CAD 1.2 billion distribution center in Montreal is a capital-heavy bet—its success hinges on reducing costs by at least 5%, as management claims.

The buyback and dividend hikes (a 15% increase in April 2025) further strain resources. With a payout ratio near 40%, Dollarama retains flexibility to reinvest, but its high P/E ratio implies investors expect rapid growth. If domestic store openings stall or international ventures underperform, the stock could face a reckoning.

Catalysts to Watch
- Mexico's First Stores (Late 2025): Early sales data will indicate whether Dollarcity's model translates to Mexico's price-sensitive consumers.
- TRS Integration Progress: Cost synergies and revenue growth in Australia could validate Dollarama's global strategy.
- Buyback Pacing: If repurchases exceed 50% of the authorized limit by early 2026, it would signal management's confidence in valuation.

Investment Thesis
Dollarama remains a compelling growth story for long-term investors, but with caveats. Its Canadian stores offer predictable cash flow, and its international ventures, while risky, could unlock multiyear upside. The buyback program, if executed at lower prices, could amplify returns. However, investors should monitor debt levels and execution risks closely.

Final Take
Dollarama's renewed buyback and expansion plans are a dual test of its capital allocation prowess. The company's financial strength and disciplined model give it room to maneuver, but overvaluation and execution risks cannot be ignored. For investors, this is a “hold” with a cautiously optimistic tilt—ideal for those willing to accept volatility for long-term growth. A pullback to CAD 130 could present a better entry point, while a sustained EPS beat or Mexico success story could push shares toward RBC's CAD 207 price target. Stay vigilant, but stay invested.