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Dollarama (TSX:DOL) and Canadian Tire (TSX: CTC.A) are two prominent Canadian retail stocks, but Dollarama has significantly outperformed Canadian Tire in the last 1, 3, 5, and 10 years, creating more wealth for long-term investors. While Dollarama's stock has shown impressive returns, its current valuation seems to be at its peak, potentially limiting near-term upside and margin of safety.
Dollarama's Business vs. Canadian Tire:
- Dollarama: A value retailer operating in Canada with little competition, offering a broad range of consumable products, general merchandise, and seasonal items at price points up to $5. Resilient even in recessions, Dollarama (TSX:DOL) has about 1,525 locations across Canada and a controlling interest in Dollarcity, a growing value retailer in Latin America.
- Canadian Tire: More sensitive to economic cycles, as TSX:CTC.A has a significant portion of durable goods with lower consumer demand during economic downturns. Operates in essentials and experiences greater volatility in its results.
Recent Results:
- Dollarama: Reported strong fiscal 2024 second-quarter results with a 15.5% comparable store sales growth and 23.8% growth in EBITDA. Sales growth for the fiscal year to date was 20%, and earnings per share grew by 28%.
- Canadian Tire: Reported a 1.6% decline in comparable sales in the third quarter. Year-to-date normalized diluted earnings per share fell by 26% to $7.
Dividends:
- Dollarama: Pays a small dividend yield of less than 0.3% but has increased its dividend for about 12 consecutive years, with a 10-year dividend growth rate of about 12%.
- Canadian Tire: Offers a dividend yield of close to 5%, and its 10-year dividend growth rate is about 17%.
Investor Takeaway:
- Dollarama: Despite its high valuation (trading at about 30 times earnings), Dollarama's solid market position and track record of outperformance make it an attractive stock. Cautious investors may consider buying on any dips.
- Canadian Tire: Trading at about 10.7 times earnings, Canadian Tire could be a better investment for those able to time their trades, considering its historical volatility and potential for significant returns in certain market conditions.
In summary, Dollarama has been a consistent outperformer, while Canadian Tire's performance may be more influenced by market timing. Investors should weigh their risk tolerance and investment strategy when considering these retail stocks.
