Dollarama ups stake in Latin American business Dollarcity, plans expansion to Mexico

Dollarama Inc. has upped its stake in Dollarcity to 60.1 per cent and revealed it has big plans for expanding the Latin American chain.

Montreal-based Dollarama announced Wednesday that it had snatched up an additional 10 per cent interest in Dollarcity, which it intends to bring to Mexico.

The additional stake was acquired in exchange for 6,060,478 Dollarama common shares, which are worth about $761.7 million based on Dollarama's share price of $125.68 on Tuesday. Dollarama also nabbed an option to buy an additional 9.89 per cent stake in Dollarcity at any time on or before Dec. 31, 2027.

Dollarama chief executive Neil Rossy called the moves the "natural next step" in the ongoing partnership his company has with Dollarcity's founding stockholders.

"The timing seemed like the right time ... We've been discussing it with our partners for some time and it got to the point where we both felt it made sense for both parties," he said on a Wednesday call with analysts.

"So it's an evolution of the business and an evolution of the partnership at the same time."

Dollarama and the Dollarcity founding stockholders will indirectly have an 80.05 per cent and 19.95 per cent interest, respectively, in the Mexican portion of the business.

Dollarcity plans to pilot its first store in Mexico in 2026.

"Every new country of operation requires a large expenditure of energy and time and resources and dollars," Rossy said.

"So in order to make the best use of all of those resources, the partnership decided together that Mexico, being the largest market between Latin America and Canada, made the most sense."

The Mexico expansion comes after Dollarcity entered Colombia in 2017 and Peru in 2021.

Across these foreign markets along with El Salvador and Guatemala, Dollarcity has 547 stores and a plan to reach 1,050 locations in these markets by 2031, up from the 850 sites it previously said it expected to be operating by 2029.

The vast majority of the growth will come in Colombia and Peru, Rossy said.

The expansion announcement came on the same day that Dollarama reported a profit of $215.8 million or 77 cents per diluted for its quarter ended April 28, up from a profit of $179.9 million or 63 cents per diluted share a year earlier.

Sales for what was Dollarama's first quarter totalled $1.4 billion, up from $1.3 billion in the same quarter last year.

Comparable store sales for the quarter rose 5.6 per cent, including an 8.7 per cent increase in the number of transactions and a 2.8 per cent decrease in average transaction size.

The growth came despite shoppers taking a more prudent approach to discretionary spending.

"People are coming more often to our stores — clearly, they value our value proposition — but they're just purchasing slightly less in terms of basket dollars," chief financial officer Patrick Bui said on the earnings call.

Dollarama has noticed the more careful approach to spending for several quarters. Many have chalked up the trend to high interest rates and inflation, which have both recently begun to ease.

The quarter also encompassed Easter, a period whose performance Rossy said can be highly dependent on timing and weather.

"It wasn't one of our best Easters. It was an OK Easter," he said.

"All these years later, I still have a hard time figuring out if it's going to be a great holiday season or not."

Dollarama's share price dropped four per cent, or roughly $5.14, to close at $120.54 on Wednesday.

This report by The Canadian Press was first published June 12, 2024.

Companies in this story: (TSX:DOL)

Tara Deschamps, The Canadian Press