Dollarama stands apart from global discount retailers. The company has established dominant market share in its operating regions, appeals to consumers across all demographic segments, and has consistently delivered operating margins exceeding 20% – more than double those of its U.S. counterparts. It sustains this through high private label penetration, direct sourcing, a lean and highly efficient operating model, and a strong culture which is driven from the top with the founder's son leading the company since 2004.
The TRS acquisition represents a third region for Dollarama, in addition to Canada and Latam. Its Latam expansion has been extremely successful. After a seven-year partnership, in 2019 it acquired 50.1% of Dollarcity for approximately C$120m. Just five years later, in CY24, the subsidiary is estimated to have generated over C$180m in consolidated net profit. We expect Dollarama will use a similar playbook in Australia as they did in Latam, leveraging existing management while sharing its sourcing and operating model to improve selection, drive increased margins, and expand the store footprint.
While the Australian retail market is highly competitive, Australia's discount retail market is less saturated than Canada’s (52,000 vs 18,000 people per store) and Dollarama has a differentiated offering. It has outlined plans to expand TRS’s store network from 393 to 700 by 2034. While TRS has faced operational difficulties in recent years, we highly rate Dollarama’s management and believe they have a good chance to successfully navigate these challenges.
In all though, the acquisition represents a relatively minor financial commitment for Dollarama (<1% of its market cap) that will not materially impact its near-term earnings or leverage profile, but it provides potential upside should it lift TRS’s margin and growth profile.