Why Did Dollarama Stock Slide After a Strong Q2 Earnings Beat?

Dollarama Inc. reported a strong second-quarter performance with earnings per share (EPS) that exceeded expectations. Despite this positive financial result, the company's shares experienced a decline, reflecting investor concerns over the long-term profitability of its recent acquisition, The Reject Shop, and the anticipated impact of a new global minimum tax rate.

Q2 Financial Performance:

Dollarama's financial results for the second quarter of fiscal 2026 were robust across several key metrics:

• Sales: Sales increased by 10.3% to $1,723.8 million, up from $1,563.4 million in the same period last year. This growth was driven by an expanding store count and solid sales performance.

• Earnings per Share (EPS): The company's EPS came in at $1.16, marking a notable increase from $1.02 a year ago. This result surpassed analyst projections and matched the Street's forecast.

• Comparable Store Sales: Comparable store sales in Canada increased by a healthy 4.9%, consisting of a 3.9% increase in the number of transactions and a 0.9% increase in average transaction size.

• Margins: The company's gross margin improved to 45.5% of sales from 45.2% a year ago, primarily due to lower logistics costs. EBITDA increased by 12.2% to $588.5 million, with an EBITDA margin of 34.1%.

  
  

Market and Analyst Outlook:

Despite the positive earnings, shares slid over 3.6%. The decline was attributed to investor concerns and a more cautious outlook from analysts regarding future profitability. This cautionary tone stems from challenges related to the recent acquisition and new tax policies.

The Reject Shop Acquisition:

The Q2 report marked a significant milestone with the completion of the acquisition of Australia's largest discount retailer, The Reject Shop, which added 395 stores to Dollarama's network. While the Australian segment contributed $25.7 million in sales during the post-acquisition period, it had a negative impact on EBITDA margin by 40 basis points.

Analyst Mark Petrie notes that the expansion into Australia and Mexico will likely be a "slow process," but ultimately successful. Dollarama's CEO, Neil Rossy, has stated his long-term goal is to revitalize the business and grow the store count to 700 by 2034. The company's strategy is to leverage its expertise in sourcing, merchandising, and operations to improve the Australian business.

Analyst Consensus on Investment:

Based on the consensus from analysts, the stock presents a mixed picture. While a majority of analysts maintain "outperform" or "sector outperform" ratings, suggesting they believe the stock will still perform well, they have also adjusted their price targets downward. The average analyst price target is currently $203.36, but this represents a reduction from prior estimates.

• Vishal Shreedhar (National Bank): While reiterating an "outperform" rating, Mr. Shreedhar cut his EPS estimates for fiscal 2026 and 2027 to $4.59 and $5.22, respectively, down from his previous projections. He also trimmed his price target to $203 from $213. His positive view is based on the company's "stable, high return on capital international growth story," but he removed the stock from the firm's "Top Pick" list due to its strong performance year-to-date.

  
  

• John Zamparo (Scotia): Mr. Zamparo lowered his price target to $205 from $210, maintaining a "sector outperform" rating. He attributed his target change to the stock's high year-to-date performance and a more conservative outlook from management. He noted a key concern is valuation, with a forward P/E ratio of approximately 37 times, leading to a 3.1 times PEG ratio, which is significantly higher than the long-term average of 1.8 times.

  
  

• Mark Petrie (CIBC): With a "neutral" rating, Mr. Petrie lowered his price target to $199 from $204. He views the stock's recent pullback as a reflection of its "premium valuation, unchanged outlook, and a change in tax policy" rather than any fundamental issues. He remains confident in the long-term success of the company's international expansion.

  
  

• Luke Hannan (Canaccord Genuity): Mr. Hannan also trimmed his price target to $195 from $200 and maintained a "hold" rating, reflecting a more cautious view.