The Canadian Investor - Canada vs. U.S. Series - Dollarama and Dollar General

Episode Date: May 13, 2020

This is the first episode of our Canada vs. U.S. series. During this series, we will be comparing canadian companies to similar U.S. businesses. For our first episode, we compared the canadian low cost retailer Dollarama to Dollar General. We hope you enjoy our discussion on these two very similar companies.Tickers of stocks mentioned : DOL.TO, DG, FIVE--- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

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are going to start a new series where we are going to compare a Canadian company to a U.S. company that are similar, like for like. And this first week, to kick it off, we are going to do Dollarama, ticker DOL on the Toronto Stock Exchange, versus Dollar General, DG, on the New York Stock Exchange, which is quite a bit bigger, obviously, bigger market. And we're going to compare them on various metrics. And then at the end of the day, say which one we like more. So Simon, what's up, man? How are you? Hey, Brayden. I'm good. Yeah, it's going to be a fun series. We have about four or five ideas of different companies coming up, probably even more as we think about it.

So it'll be fun just because we have a lot of companies in Canada and we tend to forget that sometimes we have them in Canada and it's good to know, like, how do they compare to their peers in their U.S.? Are they undervalued, overvalued? Are they run well compared to their US peers. So it's going to be a fun little series to do. If you guys have questions for us or some ideas, don't hesitate to reach out whether you want to do it directly on getstopmarket.com. Or if you want to go on Twitter, just send us a tweet or a direct message, let us know. But I think it'll be a fun little series to dig into absolutely so i'm gonna put you on the spot here because i get this question i would say maybe more than any other

question i ever get which is are you worried about the canadian dollar or um are you worried about investing in u.s stocks because of the canadian dollar um you know like i can somehow predict where the forex currency exchange is going to go but what kind of decisions like in your mind how does that affect your decisions you make when you're investing on US exchanges when it comes to the dollar? Yes, it does suck taking a 25-30% haircut on your dollar immediately. But for long-term investors, I would say it is not a huge, huge concern. Obviously, it does suck. But I'm interested to hear what your take is and and if you factor that in when you are comparing two businesses like dollar AMA to dollar general is currency going through your mind personally it doesn't

really go through my mind all that much I a firm believer in the long run it'll kind of even out and it's not something that I can really control. I'm a firm believer in the long run, it'll kind of even out and it's not something that I can really control. What I'm really focusing on is investing in really good businesses, whether they're Canadian or US based. The one consideration I will have, and we've talked about this before in other episodes, is I will try to keep my Canadian dividend paying stocks in my TFSA or US growth stocks. If I'm aiming for US dividend stocks, I'll tend to keep those in my RSPs a bit more because of the withholding taxes. So that's my main consideration. But aside from that, like what the companies will be looking at over here, to me, it shouldn't be too much of a consideration because as we'll see, they have pretty low

dividends in terms of Dollarama and Dollar General. So I'm really looking at, you know, which business is the best to hold in the long run if I'm looking to buy one of these discount retailers. Bingo. I have the same stance. When you're looking at these two things and you're looking at the currency, I mean, yes, it does suck taking that haircut, but you cannot control that. It's completely out of control. And what you can control is buying good corporations and holding them for the long term. That is the investing strategy that Simon and I do. That is the one I recommend everyone do because that is what turns into a compounding machine and grows wealth long term. So if you're able to buy the

best businesses, I would say go and do that. Currency or not, it is something to consider, something to think about. But when you have the ability to buy the best businesses, that's what you should be doing. So Simon, what do you think valuation-wise? I'm looking here very, very similar on a price-to-earnings multiple, 24 on Dollarama, 27 on Dollar General. And on enterprise value to EBITDA and EBIT, very, very similar, even free cash flow, somewhat similar. I believe 33 on Dollar General and actually no, much, much cheaper, 24 on Dollarama. So cheaper from a cash flow perspective for Dollarama. 24 on Dollarama. So cheaper from a cash flow perspective for Dollarama. But the one that sticks out to both of us is Dollarama trades almost twice the multiple on sales. What is

your thoughts on these two companies in terms of valuation ratios? Yeah, the overall, like you just said, they're pretty similar if we're looking at price-earnings ratio. A little bit of a difference in the cash flow metric. But yeah, the one that jumps out is the price-to-sell, where it's almost more than three times price-to-sales for Dollarama and around 1.5, a bit less than 2 for Dollar General. So that's already one thing that stands out. One thing to put in perspective too for our listeners, so the market cap in terms of Dollarama is $13.3 billion. Keep in mind this is in Canadian dollars and then the

market cap for Dollar General Corporation is $46 billion or so, again in US dollars. When we'll be talking, obviously, when we talk about Dollarama, we'll be talking about Canadian figures and then US figures for a dollar general. Yeah, it's a good thing to point out. Dollarama is at least four times smaller than the peer that we're comparing it to. But from a ratio perspective, this is why we use ratios. They look very comparable from an earnings perspective, that's for sure. So I'm looking across the board here, 10-year compound annual growth rate of Dollarama at around 11.7% on their top line versus just a little under 10 for dollar general. So on the surface, it looks like in

recent years, you know, they're growing very low double digits, you know, in the low teens or high single digits, they kind of bounce around very similar growth story. The US obviously being a much bigger market. We are no expert in the dollar store business, but where does this growth come from? The one metric that I was looking at a lot is same store sales growth, which I think is kind of the holy grail of metrics when it comes to brick and mortar retail. And we were looking at before very, very similar, just a little under 5% for both businesses. So very, very similar on same-store sales growth.

But Simon, where are these companies driving top-line growth? Yeah, so top-line growth will be a mix. So just like you said, same-store sales is really interesting to see because you look at what the growth is without opening new stores. So they're around, I think, 4% for the last year and around 2-3% for the years before that. I know Dollar General and I think Dollarama is around the same spot. The rest of the growth comes from opening new stores. So to put things in perspective, Dollarama, they had 1095 stores in 2017, so February of 2017. And then they were at 1291 as of February 2020. So that's about 18% increase in store count since 2017. increase in store count since 2017. And Dollar General, on the other hand, they had $13,429 in 2017 and $16,368 as of February 2020. And that's a 21% increase in store count since 2017. So

in terms of store opening, very similar for both companies in that perspective, but that's where they would get most of their growth. similar for for both companies in that perspective but that's where they would get most of their growth something that you pointed out which i believe to be very very interesting and and confusing is last year dollar ram was balance sheet they really really started creeping up on those liabilities it was pretty stagnant for like 10 years, keeping liabilities down. Short-term liabilities in terms of taking on debt ballooned in 2019, which you researched that they bought back stock and opened stores with. What is your take on that, using debt to buy back stock? As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now.

Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money.

Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started.

But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Airbnb.ca forward slash host. Yeah, I think we've talked about that before. And I also think I've said I'm not a big fan of buying back stock in general. So Dollarama, this is where I think Dollarama really kind of or Dollar General, sorry, starts differentiating itself from Dollarama in my book, and I start liking Dollar General a bit more. So in terms of debt, and we were talking about this before we started recording. So when we look at the total asset to liabilities, so obviously liabilities

doesn't include just debt, it includes other liabilitiesabilities but the assets to liabilities and I subtracted goodwill because goodwill to me is not really an asset is just the extra money that you pay to buy another business so I like to subtract that to wrap my head a bit more what around what the financial situation is for the business so the asset to liabilities when subtracting goodwill is 0.8 for Dollarama. So that means they actually have less assets than their total liabilities. So that's a bit, that's a red flag for me right there. And when you compare it to Dollar General, same type of metric, Dollar General has 1.15 times assets to liabilities when subtracting

goodwill. So they're already in much better shape there. One of the other things when looking at the balance sheet is there are debt starts coming due in 2021 when you look at Dollarama, whereas Dollar General, most of their debt starts coming due in 2023 and later. So that's really important to keep in mind. And another thing to put in perspective in terms of debt is they actually have both companies have 100 million a year in interest payments, yet Dollar General has a lot more money coming in than Dollarama. So Dollarama pays a lot more in terms of interest payments compared to dollar general and that's in part because they've been opening new stores but buying back shares a lot as well with that debt so from that perspective i would definitely give plus one to dollar general

looking at the balance sheet uh you know in a vacuum dollar general definitely wins that uh i can't really wrap my head around why they took on so much debt in 2019 um again i would have to do much more research into that uh looking here gross margins is the obvious metric for me looking at personally, they're selling these, you know, items less than $5, which, you know, in a way seems at the surface, like, how do we keep up with inflation if you're selling dollar stuff? just increase that dollar item to $1.50 or to $2 and massively boost margins with little notice from the consumer. So they've been able to prove that kind of Bay Street, Wall Street concern about this business model that raising prices has actually not been an issue at all for them. And in that sort of pricing model is actually really, really nice to be able to boost the top and bottom lines just by boosting

it by 25 cents, 50 cents a dollar. Gross margins from Dollarama have gone from 36 to 44% and consecutively growing like a few half percentage a year. So they have been doing things to increase their margin versus dollar general, 32% in 2011, and 30% in 2020. Their gross margins have actually been going down by, you know, a few basis points a year. So I wonder what these two businesses are doing to, you know, what Dollarama is doing right, because that 43% gross margin on these little less than $5 items seems really, really incredible. And they've been able to lock down some sort of supply chain. and they've been able to lock down some sort of supply chain. Have you considered what that supply chain might look like in 2020?

It's got to be so complicated. And most of it, I'm assuming, coming from Asia. So do you think 2020 looks sketchy for them in terms of manufacturing? Yeah, that I really don't know. So that's a good question to ask. and anyone wanting to invest in those companies they should dig into that in terms of you know supply chain a lot of this stuff will obviously come from asia and other countries but you're absolutely right the gross margin looks a lot better when you look at dollarama i'm not sure really what the cause is for that if it's because Dollar General has higher overall costs or more competition maybe in the States that's a good guess but this part definitely Dollarama looks better from a gross margin perspective. been dominant in Canada. And you can see here that last decade for both these companies was really solid, especially Dollarama, achieving over 10% top line growth every year all the way

up till 2019. And I wonder why last two years revenue growth has slowed down a bit. Do you see Dollarama and Dollar General being quite Amazon-proof? I know when I walk by their stores down here in Toronto, they are very, very busy in terms of a physical distancing line going down the street. So in a contracting economy, a type of economy. Really, really good for these businesses. They're selling really cheap items. I could see revenue potentially accelerating through this, which is obviously nice to see some recession proof there. I'm curious on your thoughts about these

less than $5 items. Are people ordering that on Amazon? Like I think that some people are as like those tack on items and Amazon seems to be getting better and better at adding more items into your cart. I know that I, uh, when I check out all of a sudden, I have about seven other trinkets in the checkout that I wasn't planning on having. in the checkout that I wasn't planning on having. So I wonder as Amazon gets better at that, it could be a reason for this somewhat slowdown in their revenue growth, going from over double digits to 8.6% and then 6.7% top line growth in 2019 and 2020. So have you considered that as well with these you know how recession proof are these items i mean sorry sorry amazon proof are these items yeah i mean it's who knows

in the end but i think i think there is going to be a place with them at least for the foreseeable future a lot of these items uh amazon just can't deliver on a same day basis because they're so small. So I think until they can achieve that or get those items to you within a few hours, I definitely think there's going to be a place for these type of discount retailers, like really low discount retailers. 2020 is going to be really interesting whether you talk about them being Amazon proof or not. It's going to be interesting how their sales progress in 2020 as a whole. How is COVID-19 going to affect these businesses? I'm sure for the most part they'll remain open but if there's a lower volume of people going to the stores because they just are imposing

physical distancing that could still have an impact on sales the other thing I look at for these two businesses is how COVID-19 would impact expansion so the opening of new stores so that's definitely something I would look at because like I mentioned earlier, they've been opening quite a bit of stores in the past three, four years. And when finances can be a bit tighter for businesses, even though they might be fairly stable in this environment, they might actually pull back on the opening of new stores. I know Starbucks has pulled back on opening a lot of new stores in china because of covid19 so i could definitely see the same thing happening so don't be surprised if you see the growth slowing down for this year and potentially next year for these businesses

there might still be some growth but probably lower than it was yeah it's a good point and it's probably the reason why I haven't entered a position in Dollarama, which looks very enticing from a dividend growth perspective. Both of them, if you own these stocks, you're owning them for the dividend growth, in my opinion. They're kind of really, really nice dividend growth the last couple years. And even beyond that, it's been really, really solid with safe payout ratios, generating lots of free cash. So I will say this, I think they're both pretty solid investments. I think they're both really good companies. And something that you would think is a so-so business model, it's actually been a really, really good business model,

which is kind of surprising to wrap your head around. How is a dollar store a great business model? We talked about it. Pricing power is actually really solid. So for me, okay, so I'm going to put us both on the spot here, Simon. You're in a, you know, you can't see the stock market for the next 10 years and you have to own one of them. What are you going to own? I would pick Dollar General.

There's three main reasons. First of all, it's not a big difference, but it is a difference. Dollar General pays a 0.8% dividend yield, whereas Dollarama is 0.4%. So that's already, you know, it's doubled the dividend yield. So that's all already a difference. Oh, you're going to get really rich on it, buddy. No, but the main reasons, all jokes aside, a dividend yield is a bit higher. But the main reason for me is the balance sheet. So if I were to not look at it for the next 10 years, I'd feel a lot more confident with Dollar General to be coming out on top and not having to worry. There would always be,

on top of my head, the debt situation looming for Dollarama. And I wasn't impressed how management, the share buyback and issuing more debt during those times, like it's a speculation that they issued debt for share buybacks, but looking at their financial statement, it's hard to not come to that conclusion. So I guess I said three reasons. Those are probably the two main reasons. conclusion. So I guess I said three reasons. Those are probably the two main reasons. As we mentioned, there's a lot of similarities, but I would go with the balance sheet strength and stick with Dollar General. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online

broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money, visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best

products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host.

Oof. Yeah. It's tough because I look at them both and Dollarama is just like crushes on so many metrics. And then the balance sheet, it's just like, Oh, what happened in 2019? And then also like, so the reporting schedule is really strange for both these companies. They've actually reported reported fiscal 2020 already. So if you look at it, 2020, fiscal 2020 for Dollarama, growth has the speed of growth on the top line has halved since 2018. So that right there, I'm like, okay, this company seems to be contracting that top line for a company that's trading at 25 times earnings. that top line for a company that's trading at 25 times earnings. It seems expensive here. It seems safe, but it seems expensive. And then Dollar General seems to be maintaining that growth that they had through all of last decade. So I don't think I would buy either of them here, but I am going to actually disagree with you slightly because i'm concerned about

the 2020 growth and i'm concerned about the balance sheet on dollar uh dollarama but i think there's so much more competition in the states right now uh there's you know there's what is it five under dollar tree dollar general five below um yeah my parents have five below five below there's so many dollar stores whereas dollarama and canada over the last 10 years has really just consolidated to being kind of the player and their gross margins are so much significantly better and are growing free cash at a better rate and have much better free cash margins. So I would say, here's my answer, I would own neither of them right now. And looking out for another year, looking at Dollarama, but I'd probably take Dollarama

over Dollar General for those reasons I've listed. I think they're just doing a little better on some of those metrics but very very similar uh i would own neither yeah i mean i'm not saying i wouldn't necessarily buy dollar general but if i had to choose between both of them i would pick dollar general fair enough fair enough i think there's better opportunities out there at 25 times earnings. Okay, so I'll stop rambling. I would take Dollarama for my pick. So next week, what do we have? We're going to do Waste Connections, ticker WCN, versus Waste Management in the States, ticker WM.

This one should be exciting. I think WCN has been such a good acquirer over the last 10 years, and they have rewarded shareholders tremendously. Yeah, I think that's going to be an interesting one. Weren't we texting about that a few weeks ago? Yeah, if I remember correctly, I think waste management trades a bit cheaper than waste connection. But again, we'll try to dig in a bit more.

I did a few hours of research for this. Obviously, it's still an overview. It's not like going into really deep. If anyone's interested in these two companies, I would also recommend listening to what management on both ends said recently about COVID-19. I did not look into that. So it would be interesting just to get their thoughts and just to see if they're disagreeing on it or they're saying the same thing. It's always interesting to just listen to that, especially when you have two very similar businesses and especially if management in one company says one thing and the

other company says another so that's something i would recommend but make sure you do your due diligence if you're uh you're looking to invest in one of these two companies but yeah next week very excited to talk about waste management waste connections and we have about four or five other companies lined up and if you guys have some suggestions on some Canadian companies compared to U.S. peers, feel free to let us know and we'll have a look into them too. Yes, sir. As always, go to GetStockMarket.com. Just before recording this, shout out to Colin, one of the subscribers.

Just before recording this, shout out to Colin, one of the subscribers. He listened to our review on Nutrien and some of the agricultural stocks and got out of the stock after listening to our podcast. And you know what? We accept form payment by check or credit, Colin. Nutrien slash dividend, 75% stock weighed down. I think it's covered a little bit with the rest of the economy or with the rest of the stock market, sorry. And yeah, so we're helping some people.

We're helping people out there, Simon. So keep listening, guys. Thank you so much. We will see you next week. Should we do this series weekly for a little bit, Simon, or are we going to mix it up? Yeah, we'll see. We'll do it weekly,

and maybe we'll put in some bonus episodes if anything crazy happens in between. But I think weekly is a good thing. That way it gives us more time to do some research. If we're comparing companies, it takes definitely a few hours at least to start digging into it, to get some good content for you guys. Sure thing.

And I don't know if we mentioned this on the podcast last week. I think we did. Shopify passing Royal bank as Canada's most valued. Oh man, the TSX would be in rough shape in terms of the index without Shopify going on such a hot streak. Cannot wrap my head around the valuation. But as Simon and I have said,

we couldn't wrap our head around the valuation three years ago and now we look stupid. So I hope Shopify keeps on winning. It's a great story. And I will continue to sit on the sidelines. All right, guys, we'll see you next week. Go to GetStockMarket.com. Have a good week. not to be taken as investment advice. Braden or Simone may own securities mentioned on this podcast. Always make sure to do your own research and due diligence before making investment decisions. Thanks for listening to this episode of the Canadian Investor. To get a list of the top Canadian dividend stocks right now

and other valuable investing resources, go to GetStockMarket.com.