Dollarama's Stock Valuation Amid Mixed Earnings Signals: A Case for Strategic Buy-In

Dollarama Inc. (DOL.TO) has long been a poster child for defensive retail investing, offering a blend of operational efficiency, geographic diversification, and a loyal customer base. Its Q2 2025 earnings report, released on August 27, 2025, reinforced this reputation with stellar financials: revenue surged 10.2% to C$1.723 billion, net earnings rose 12.4% to C$321.5 million, and EBITDA hit C$588.5 million—surpassing analyst estimates across the board. Yet, despite these robust results, the stock closed at C$192.07, down 0.51% from its pre-earnings high. This apparent disconnect between performance and investor sentiment raises a critical question: Is the market overreacting to cautious guidance, and does this present a strategic buying opportunity for long-term investors?

The Strong Q2 Performance: A Resilient Business Model

Dollarama's Q2 results underscored the durability of its value-driven retail model. The company's gross margin expanded to 45.5%, driven by optimized logistics and disciplined cost management. In Canada, same-store sales grew 4.9%, fueled by a 3.9% increase in transactions and a 0.9% rise in average ticket size. Internationally, the acquisition of The Reject Shop (TRS) in Australia added 395 stores and C$25.7 million in sales, while Dollarcity's Latin American operations nearly doubled their net earnings contribution to C$22.7 million.

The company's capital allocation strategy further strengthened its appeal. During Q2, Dollarama repurchased 932,046 shares for C$174.8 million and announced a C$0.1058 quarterly dividend. These actions signal confidence in the business's ability to generate consistent cash flows, even amid macroeconomic headwinds.

The Guidance Conundrum: Prudence or Pessimism?

The caution in management's guidance, however, has tempered investor enthusiasm. Dollarama projected Canadian same-store sales growth of 3.5%–4.5% for fiscal 2026, with gross margins expected to face pressure in Q3 and Q4 due to rising logistics costs. While this outlook is conservative, it aligns with the company's historical approach of underpromising to exceed expectations. For instance, in Q1 2026, Dollarama guided for 3.0%–4.0% same-store sales growth but delivered 4.9% in Q2.

The market's reaction—a modest 0.51% dip—suggests skepticism about the sustainability of Dollarama's margins. However, this skepticism may be misplaced. The company's disciplined cost management, including labor productivity initiatives and fixed-rate debt (89% of its capital structure), provides a buffer against margin compression. Moreover, its international expansion—targeting 1,050 stores in Latin America and 700 in Australia by 2034—offers a long-term growth tailwind that is not fully priced into the stock.

Valuation Metrics: A Compelling Case for Long-Term Investors

To assess whether the market's caution is justified, let's examine Dollarama's valuation. As of August 21, 2025, the stock trades at a price-to-earnings (P/E) ratio of 28.5x, below its 5-year average of 32x. Its price-to-EBITDA (P/EBITDA) ratio stands at 18.5x, compared to a sector median of 22x. These metrics suggest the stock is undervalued relative to its historical performance and peers.

The company's leverage ratio of 2.05x and BBB credit rating further reinforce its financial stability. With a 10-year total shareholder return of 608%, Dollarama has consistently outperformed the market, even during periods of economic volatility. The current dip, driven by short-term margin concerns, appears to overlook its long-term growth drivers.

Strategic Buy-In: A Calculated Opportunity

For long-term investors, the key question is whether the market's focus on near-term margin pressures is overblown. Dollarama's history of outperforming guidance—such as its 4.9% Canadian same-store sales growth in Q2 versus a 3.5%–4.5% forecast—suggests management's caution is a strategic hedge, not a reflection of declining fundamentals. The company's international expansion, particularly in Australia and Mexico, also offers untapped potential.

Moreover, Dollarama's share repurchase program and dividend yield of 1.2% (based on its current price) provide immediate returns while the market digests its long-term strategy. Given its defensive business model and robust capital returns, the current valuation appears to present a compelling entry point for investors with a 3–5 year horizon.

Conclusion: Navigating the Disconnect

Dollarama's Q2 results highlight a company that is both resilient and adaptive. While the market's reaction to cautious guidance may seem puzzling, it reflects a broader tendency to overemphasize short-term risks in a volatile macroeconomic environment. For long-term investors, this presents an opportunity to capitalize on a stock that is undervalued relative to its fundamentals and growth trajectory.

In a world where consumer spending remains cautious, Dollarama's value proposition—offering everyday essentials at unbeatable prices—remains as relevant as ever. The current dip in its stock price is not a warning sign but a reminder of the importance of separating noise from substance in investment decisions. For those willing to look beyond the near-term, Dollarama's mix of operational excellence and strategic expansion makes it a compelling addition to a diversified portfolio.