Dollarama's Buyback Bonanza and Global Gamble: A Cautionary Hold

Investors, let's talk about Dollarama (TSX: DOL), the Canadian discount retail giant that's decided to double down on its shareholders and its ambitions. On the surface, its renewed $2.1 billion share buyback program and aggressive push into Mexico, Australia, and beyond sound like a bold move. But here's the catch: this stock is trading at a P/E ratio of 28x—nearly double its sector peers. That's a red flag. Let's dissect whether this “value” play is really worth the risk or if investors should tread carefully.

The Buyback Play: A Double-Edged Sword

Dollarama's new normal course issuer bid (NCIB) allows it to buy back up to 5% of its shares over the next year. At current prices, that could cost up to $2.1 billion. The goal? Boost earnings per share (EPS) and offset equity dilution from stock-based compensation. On paper, this makes sense—buybacks can juice returns if executed smartly.

But here's the hitch: the last NCIB, authorized in 2024, only saw 49% of its shares repurchased by early 2025. Why? Market conditions or strategic hesitancy? The answer matters. If Dollarama's management is overpaying for shares now—given its stock's lofty valuation—the buyback could end up being a costly mistake.

Expansion Gambits: Can They Pull It Off?

The real question isn't just about share repurchases—it's about where Dollarama is plowing its cash. The company's aggressive international push is the linchpin of its high P/E ratio. Let's break it down:

1. Mexico: Opening stores by late 2025, but Mexico's retail landscape is fragmented and competitive. Can Dollarama's “one-price” model thrive here?
2. Australia: The Reject Shop (TRS) acquisition is a big bet, but labor costs and supply chain hurdles loom large.
3. Latin America: Its Dollarcity venture is still in early stages. Scaling successfully here requires navigating new regulatory and cultural challenges.

The problem? These expansions are expensive. If any of these ventures stumble—like TRS's recent labor disputes—the valuation premium could evaporate. Analysts are split: some see this as a “moonshot” growth story, others as a “reckoning” in the making.

The Numbers Game: Valuation and Debt

Let's get real about the math. Dollarama's P/E of 28x vs. the sector's 18x means investors are betting big on future growth. The company's free cash flow ($1.3 billion annually) is robust, but its debt has climbed to $1.2 billion. That's manageable today, but if buybacks and expansion sap cash flow, debt could become a burden.

The key metric to watch: how much of the buyback gets done—and at what price. If shares stay near $150, the EPS accretion will be minimal. And if growth in Mexico or Australia falters, the stock could face a harsh correction.

Bottom Line: Hold With a Cautious Tilt

Dollarama's strategy isn't all bad. Its Canadian dominance and cash flow are undeniable strengths. But the risks are too high to go all-in here. Investors should hold the stock but keep a close eye on three things:

1. Buyback Execution: Are they buying shares below $130? That's where they purchased in the last NCIB. Anything above $140 and the accretion weakens.
2. Expansion Milestones: Mexico store openings by late 2025 and TRS's profit contributions are make-or-break moments.
3. Valuation Check: If the P/E slips below 25x, it could signal a buying opportunity. Above 30x? Time to worry.

In conclusion, Dollarama's moves are bold, but so is the price tag. For now, it's a hold—but don't let that P/E ratio lull you into complacency. This is a stock where execution isn't just a buzzword—it's the difference between a home run and a strikeout.