Dollarama: Thriving in Tough Times and Expanding Globally—Is This Stock Overvalued or Undervalued?

Dollarama, Canada's discount retail powerhouse, has long been a beacon of resilience in volatile markets. As it reports another quarter of stellar results, investors are debating whether its sky-high valuation is justified—or if the company's expansion ambitions can sustain its momentum. Here's what the numbers reveal.

Resilience in a Recessionary Climate

Dollarama's Q1 2025 earnings underscore its ability to weather economic headwinds. With an 8.2% revenue surge to $1.52 billion and a 27.3% jump in EPS to $0.98, the company outperformed expectations even as broader retail sectors falter. Same-store sales rose 4.9%, driven by a mix of increased customer traffic (3.7%) and higher average spending (1.2%). This performance reflects the enduring appeal of its ultra-affordable “everything under $5” model, which caters to budget-conscious shoppers during inflationary pressures.

The retailer's operational efficiency also stands out. Gross margins expanded to 44.2%, aided by lower logistics costs and inventory shrink. EBITDA hit $496.2 million (32.6% margin), even after excluding a $10.4 million unrealized gain on its Dollarcity subsidiary. CEO Neil Rossi emphasized the strength of consumables and Easter sales, while CFO Patrick Bouie noted cautious optimism amid macroeconomic uncertainty.

Valuation Metrics: A High Bar, but Sustainable?

Dollarama's valuation metrics are eye-catching but contentious. As of early 2025, its P/E ratio reached 35.93, up 13% from its four-quarter average and nearly 38% above its 10-year average of 27.51. Meanwhile, its P/B ratio soared to 89.6, a staggering figure that suggests investors are paying nearly 90 times its book value for growth potential.

This premium pricing contrasts sharply with peers like Canadian Tire (P/E 14.29) or Loblaw (P/E 25.35), reinforcing its status as a growth darling. But skeptics argue that a P/B ratio of 89.6—far beyond its historical norms—hints at overvaluation. Proponents counter that the metric reflects intangible assets like brand loyalty and the scalability of its franchise model.

Expansion: The Next Frontier

Dollarama's growth engine isn't just firing domestically. Its store count in Canada rose to 1,638, with plans for 70–80 new locations in 2025. But the real excitement lies in its international expansion. Through its Dollarcity subsidiary, the company now operates 644 stores across Colombia, Peru, El Salvador, and Guatemala. Mexico is next: the first stores are set to open imminently, leveraging the same “$1” pricing strategy.

Meanwhile, a proposed $2.8 billion acquisition of Australia's TRS—set to close by late July 2025—aims to capitalize on its operational expertise in discount retail. This move could provide a foothold in a new market, though risks like cultural fit and regulatory hurdles remain.

Risks Looming Over the Horizon

Despite the optimism, challenges loom. Economic uncertainty could crimp consumer spending, particularly on discretionary items. Tariffs on imported goods—critical to Dollarama's supply chain—could squeeze margins. New markets, like Mexico, might face initial losses as the company adapts to local preferences.

Domestically, capital expenditures are rising, with spending projected to hit $285–330 million in 2025, driven by a Western Canada logistics hub. While this investment aims to boost efficiency, delays or cost overruns could strain cash flow.

Investment Takeaway: Hold for Growth, but Mind the Risks

Dollarama's Q1 results and expansion plans justify its premium valuation—if its growth trajectory holds. The high P/E and P/B ratios are a bet on sustained outperformance in Canada and successful global rollouts.

For investors, the key questions are:
1. Can international markets replicate Dollarama's Canadian success?
2. Will margin pressures from inflation or tariffs be contained?
3. Is the stock's valuation a bubble waiting to burst, or a rational price for a high-growth model?

Recommendation:
- Hold for long-term investors who believe in Dollarama's global expansion and operational moat.
- Proceed with caution for short-term traders, as valuation sensitivity to macroeconomic headwinds could amplify volatility.

The dividend—$0.58 per share, with a 15-year track record of increases—adds a safety net for income-focused investors. Yet, the stock's meteoric rise (21.83% year-to-date) leaves little room for error.

Final Word

Dollarama's story is one of resilience and ambition. Its Q1 results and expansion into high-growth markets like Mexico and Australia offer compelling upside. But with valuation metrics at historic highs, investors must weigh the risks of overexuberance. For now, Dollarama remains a top-tier play in discount retail—but watch those P/B ratios closely.