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Dollarama: A Dollar Store With A Strong Free Cash Flow Yield

Published Thu, 24 Dec 2020 09:36:00 -0500 on Seeking Alpha

Seeking AlphaLong Ideas | Services  | CanadaDollarama: A Dollar Store With A Strong Free Cash Flow YieldDec. 24, 2020 9:36 AM ET|| About: Dollarama Inc. (DLMAF)by: The Investment DoctorThe Investment Doctor European Small-Cap IdeasWe zoom in on capital gains and dividend income in European small-capsSummaryDollarama is a Canadian dollar store benefiting from the COVID-19 pandemic as the recent quarterly results have been strong.
The company is trading at a free cash flow yield of just around 4%, but should continue to grow in the next few years.
Rather than buying the stock at the current level, writing an out of the money put option may be a more ideal solution.
I like Dollarama as a long-term pick, but I don't think there's any rush to get in.
Introduction
Although I can’t say I’m a frequent visitor of dollar stores in North America, I have to confess I have a soft spot for Dollarama (OTC:DLMAF) and I regularly pop in for a visit whenever I’m in Canada. Not just because it has my favorite candy at Walmart prices, but it also is an excellent destination quickly stocking up on stationery and perhaps a drink to take back to the hotel room. Whenever I’m in Canada, I tend to end up at Dollarama at least once. Dollarama as a company has never been really cheap, but I’m getting ready to pull the trigger to initiate a long position as the dollar store has proven to be very resilient this year.
Data by YChartsThe Q3 results confirm Dollarama’s status as a cash cow
Dollarama’s financial year ends in January, so the company is currently in its final quarter of FY 2021 and has recently reported the financial results for Q3 FY 2021, which ended on Nov. 1.
The revenue increased by in excess of 10% to C$1.06B and as the COGS increased by a similar percentage, the gross profit jumped to almost C$469M and we see a similar percentage increase in the operating income which was boosted from C$212M to C$244M resulting in an operating margin... Read more