Dollarama's Strategic Buyback and Global Ambitions: A Blueprint for Value Creation

The Canadian discount retail giant, Dollarama (TSX: DOL), has long been a poster child for disciplined capital allocation. With its renewed 5% share repurchase program and bold forays into Mexico and Australia, the company is now doubling down on strategies to amplify shareholder value. However, these moves come with risks—from elevated valuations to execution hurdles in new markets. Let's dissect whether Dollarama's latest initiatives justify its current premium or if investors should wait for a pullback.

The Buyback: A Double-Edged Sword of Value Creation

On July 3, 2025, Dollarama announced a renewal of its normal course issuer bid (NCIB), authorizing the repurchase of up to 13.87 million shares, or 5% of its public float. This follows a prior NCIB period (July 2024–July 2025) during which it bought 8.12 million shares at an average price of $131.55. As of June 2025, it had already repurchased 5.14 million shares under this program at an average cost of $139.27.

The renewed buyback underscores management's confidence in the stock's valuation. Yet, investors must ask: Is Dollarama repurchasing at a price that truly creates value? With a trailing P/E ratio of ~28x—well above the 18–20x range typical for discount retailers—the risk of overpaying is real. A would reveal whether this premium is justified by growth prospects or overbidding.

Crucially, Dollarama's free cash flow of $1.3 billion annually and net debt of $1.2 billion provide ample liquidity to fund both buybacks and growth. However, the company must avoid overextending itself. The success of this program hinges on repurchases at prices that align with intrinsic value—a balance management has historically navigated well.

Global Expansion: Scaling the $5 Model Beyond Borders

Dollarama's true growth engine lies in its international ambitions. The 60.1%-owned Dollarcity, which operates 644 stores across Colombia, Guatemala, El Salvador, and Peru, plans to enter Mexico by late 2025, targeting 850 stores by 2029. Simultaneously, the proposed acquisition of Australia's The Reject Shop (TRS)—slated to close by July 2025—will add over 200 stores, enabling Dollarama to test its $5 pricing model in a new market.

The scalability of the $1–$5 price point model is undeniable, but execution is key. Mexico and Australia present distinct challenges: regulatory environments, supply chain logistics, and cultural preferences for discount retail. A would illustrate the magnitude of this ambition.

Critically, Dollarcity has already proven its mettle, with a 20% EBITDA margin in 2024, suggesting that the model can thrive in diverse markets. However, risks persist. A misstep in pricing or store locations could dilute returns, especially in Australia, where TRS operates in a more competitive space than Dollarcity's Latin American markets.

Financial Fortitude and the Dividend Dividend

Dollarama's Q1 2026 results underscore its domestic strength. Sales rose 8.2% to $1.52 billion, driven by 4.9% comparable store sales growth and 22 new stores. EBITDA surged 18.8% to $496.2 million, with a margin of 32.6%, while net earnings jumped 26.9% to $273.8 million. The company also hiked its dividend by 15% to $0.1058 per share, extending its 18-year streak of annual increases.

This financial resilience supports its dual strategy of growth and shareholder returns. The dividend increase, in particular, signals confidence in cash flow stability—a critical factor for long-term investors.

Valuation and Risks: A Premium with a Purpose

At a P/E of ~28x, Dollarama trades at a premium to its historical average and peers. Bulls argue this is justified by its global growth runway and cash-generating machine. RBC Dominion Securities' price target of CAD 207 (15% upside) reflects this optimism.

However, risks loom large:
1. Overvaluation: If growth slows or buybacks are executed at inflated prices, the P/E could become unsustainable.
2. Execution in new markets: Mexico and Australia are unproven territories for the $5 model.
3. Economic sensitivity: Canadian consumers face a “fragile” environment, with transaction sizes declining 2.2%.

Investment Thesis: Buy with a Bias Toward Patience

Dollarama's renewed buyback and expansion plans are strategic moves to capitalize on its scalable model and strong balance sheet. The company's track record of disciplined capital allocation gives confidence that it can navigate risks.

Key Catalysts to Watch:
- Progress in Mexico store openings by late 2025.
- TRS acquisition integration and same-store sales performance post-acquisition.
- Buyback pricing relative to intrinsic value.

A would highlight the gap between expectations and reality.

Recommendation: A Buy rating for long-term investors who can stomach valuation risks. However, short-term traders may prefer to wait for a pullback to below CAD 180. Monitor buyback activity and international store performance closely—these metrics will determine whether Dollarama's premium is warranted.

In a sector where execution often trips up ambition, Dollarama's history of operational excellence suggests it's a bet worth making—if investors are willing to pay the price.

Final Note: Always consider personal risk tolerance and consult a financial advisor before making investment decisions.