From darling to dud: Why Dollarama's $4 items could be bad for business

Higher priced items could be spooking Dollarama shoppers (Giphy)

Dollarama shares are on sale today, after reporting a lackluster quarter. The total dollar amount of sales was up 3.1 per cent, but the number of transactions fell by nearly one per cent.

Not long ago, Dollarama (DOL.TO) was a stock market darling. But consecutive poor earnings reports have sent shares tumbling by more than 30 per cent over the past year.

Dollarama shares tumbling after missing earnings estimates

“It looks like Dollarama is sort of falling to earth and starting to saturate, they are starting to become a regular retail company,” Bruce Winder, co-founder & partner at Retail Advisors Network, told Yahoo Finance Canada. “They were amazing, they were best in class, they were putting up incredible numbers, they were growing, they didn’t have a lot of competition.”

The competition includes U.S.-based Dollar Tree, which stocks its shelves with items costing no more than $1.25. Dollarama’s items sell for as much as $4.

“Dollar Tree is starting to hit the tipping point in terms of being a competitor,” says Winder. “That’s making it a lot harder for Dollarama now.”

Dollarama has more than 1,000 stores in Canada. Dollar Tree has quickly grown to 220 stores. Winder says in addition to Dollar Tree’s everything for a $1.25 model, in and out specials are also creating excitement for consumers.

Getting back to growth

Dollarama announced it’s cutting back its capital expenditure, which suggests the company recognizes it doesn’t need to expand at its previous pace.

Winder says that while the variety of products at various price points was one a key driver, international expansion could be the best path back to growth.

“If they can get an international strategy going then certainly they could get a nice runway to once again be a darling on bay street,” says Winder. “If they’re going to continue staying in Canada they will settle into a solid blue chip stock with low single digit growth.”

John Williams, Partner at J.C. Williams Group, told Yahoo Finance Canada he doesn’t think Dollarama is in trouble, but thinks rising prices could be an issue.

“Obviously there appears to be some sort of price sensitivity over $2 because they were doing very well at $2 so it has triggered some sort of pushback from consumers,” says Williams.

Williams says Dollarama remains one of Canada’s great retailers and is smart enough to adjust and get going again.

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