Dollarama's Resilience in Inflationary Markets Positions It for Summer Growth

Retailers have struggled to maintain profitability in the face of persistent inflation, but Dollarama Inc. (DLMAF) continues to defy the odds. The Canadian discount retail giant has demonstrated remarkable margin resilience, accelerated store growth, and a shareholder-friendly dividend policy, all while expanding into new markets. As the company prepares for its Q1 2026 earnings call, its financial discipline and strategic execution make it a compelling defensive play for investors seeking stability in volatile markets.

Margin Resilience: A Shield Against Inflation

Dollarama's ability to maintain and even expand margins amid rising costs is central to its success. In Q4 2025, gross margins rose to 46.8% of sales, up from 46.3% a year earlier, driven by lower logistics costs and disciplined pricing. EBITDA surged 19.9% year-over-year to $670.1 million, with margins hitting 35.6%, reflecting operational efficiencies.

This resilience is critical in an inflationary environment. While many retailers have struggled to pass along cost increases without hurting sales, Dollarama's “value-driven” model—anchored in its single-price-point strategy—has kept customers loyal. Management's focus on scaling efficiencies, such as optimizing supply chains and reducing SG&A expenses as a percentage of sales, has further insulated the bottom line.

Store Growth: Domestic Stability and International Ambition

Dollarama's store expansion remains a key growth lever. In fiscal 2025, it added 65 net new domestic stores, maintaining its pace despite the economic climate. While modest compared to its peak expansion in 2020, this consistency underscores its ability to navigate saturation in mature markets.

Internationally, its subsidiary Dollarcity has become a major driver. With 632 stores across Colombia, Guatemala, El Salvador, and Peru as of late 2024, Dollarcity plans to enter Mexico in summer 2025—a market of 130 million people—testing its “dollar-store” model in a new region. The Calgary logistics hub, a $450 million investment over three years, will also bolster efficiency in Western Canada, supporting future growth.

Dividend Policy: Rewarding Shareholders in Uncertain Times

Dollarama's 15% dividend hike in Q1 2025 to $0.1058 per share signals confidence in its cash flow. Combined with $1.07 billion in share repurchases in fiscal 2025, the company has returned $1.13 billion to shareholders—a testament to its financial strength.

This combination of dividends and buybacks positions Dollarama as a defensive stock, offering both income and capital appreciation potential. With a payout ratio well below 50%, there's ample room for further increases.

Expansion Potential: Beyond Borders and Inflationary Headwinds

Dollarama's expansion into Mexico and its stake in Dollarcity's high-growth markets (Latin America's middle class is expanding, favoring affordable retailers) provide a clear path to long-term growth. Meanwhile, its proposed acquisition of The Reject Shop in Australia—a leading “two-dollar” retailer—hints at a broader global strategy, though this is excluded from fiscal 2026 guidance.

Risks and Mitigants

The company acknowledges risks such as labor costs, supply chain volatility, and shifting consumer preferences. However, its conservative capital allocation—projected 2026 capex of $185–210 million—and focus on high-return projects (e.g., the Calgary hub) mitigate these risks. The guidance for 3–4% comparable store sales growth in 2026, supported by margin improvements, suggests management's confidence is justified.

Investment Thesis: A Defensive Play with Undervalued Upside

Dollarama's stock has lagged peers in recent months, trading at a P/E of 22x versus the sector average of 25x—a discount that may not reflect its defensive qualities. With summer sales momentum typically strong for discount retailers, now could be an ideal entry point.

Investors should monitor Q1 2026 results for signs of margin expansion and store execution. A beat on comparable sales or a positive update on Mexico's pilot stores could catalyze a revaluation.

Conclusion

Dollarama's combination of margin discipline, steady growth, and shareholder returns makes it a standout defensive stock. As inflation remains a lingering threat, its value proposition and geographic diversification offer a hedge against economic uncertainty. With an attractive dividend yield, a manageable valuation, and catalysts ahead, DLMAF presents a compelling opportunity to capitalize on its resilience—and its potential to grow through the next phase of expansion.

Investors should consider the risks of inflation, supply chain disruptions, and geopolitical instability, but Dollarama's track record suggests it is well-equipped to navigate them.