As growth investors, it’s our job to find thriving companies that create wealth, even when general economic conditions are tough. In doing so, we try to remember that an economy is a dynamic system whose growth rate is the overall average of many different sectors, any of which might be expanding or declining.
We look to capitalize on long-term trends that are continually restructuring economies bit by bit from within. Such trends are at work regardless of any shorter term fluctuations in general macroeconomic conditions, although these may impact the rhythm of the process.
In fact, we’ve seen an example of this in Dollarama, a Canadian discount retailer within our portfolio that’s benefitting from a structural shift in the retail market. Despite tough economic conditions in Canada, this company is seeing rising sales and margins. On the face of it, this is somewhat surprising since Dollarama isn’t a global player but a retailer focused on the domestic market only. Canada, which benefited from the commodities boom, is now suffering from the decline in commodity prices, particularly in the oil sector. After the sharp oil price drop late last year, the Canadian economy contracted through nearly all the first half of this year. The tough economic climate is reflected in the nation’s currency and stock markets: the Canadian Dollar – “the Loonie” – has lost over 13% of its value against the U.S. Dollar in 2015 and the S&P/Toronto Stock Exchange Composite Index has declined more than 7% this year.1
Dollarama Is Thriving Despite Canada’s Weak Economy
Yet in this environment Dollarama has continued to increase sales and earnings. How?
For one thing, as a discount retailer, Dollarama is in the right area of the retail market, given the direction in which it is evolving in Canada. In other developed economies, we have seen a long- term structural shift in the retail market as shoppers move from mid-range stores to hard discounters, dollar stores and Internet retailers. The Canadian market is following this pattern too. Dollarama is somewhat in charge of its destiny in this regard. It is funding a steady, five-year store expansion plan with internally generated cash. Expanding sales area naturally leads to expanding sales. Increasing scale has a dampening effect on per unit costs and is supportive of margins. And this year, Canadian shoppers appear to have accelerated the pace of the structural shift in the retail market in response to the challenging conditions they’re facing.
Canadians Are Looking After Their Loonies
As they experience a slower economy, concern for their jobs and higher prices for imported goods paid for with their weaker currency, Canadian shoppers are “looking after their Loonies.” They are doing the equivalent of what Americans did during the 2008 recession when they did a greater share of shopping at Walmart and a bigger share of eating out at McDonald’s. Dollarama’s same-store sales have grown faster this year than they did last year, when the growth rate of the economy as a whole was higher.2
We bought Dollarama quite a while ago, long before oil prices dropped. Our view was that this company was well-positioned for the retail market restructuring we had seen elsewhere and believed was getting underway in Canada. The tough macroeconomic environment we’ve seen in Canada this year merely throws that restructuring into sharper relief and shows the benefit of looking through relatively short-term cycles to invest in longer term growth trends.
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