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Investing.com -- Bernstein has initiated coverage on North American discount retailers Dollarama and Five Below, taking a bullish stance on the Canadian chain while remaining cautious on its U.S. peer.
On Dollarama, Bernstein assigned an Outperform rating with a C$220 price target, arguing the company is “Canada’s ‘Costco’, and at a cheaper valuation.”
Analysts highlighted that Dollarama is “not your average American dollar store,” citing stores that are clean, appeal to all income levels, and are about “50% more productive than US dollar banners.”
With a roughly 45% gross margin and 27% EBIT margin, Bernstein said these figures are “unheard of by the US standard.”
Despite Dollarama’s premium valuation near 40x earnings, Bernstein sees further upside.
The firm noted that its core Canadian business and stake in Latin America’s Dollarcity already justify the current market value, meaning investors can “effectively buy growth in Mexico, Australia, and any new market that DOL enters in the future for free.”
Bernstein’s long-term model suggests a global opportunity of more than 10,000 stores versus the current 2,700, pointing to “~19% potential upside, led by new markets including Australia, Mexico, and other international markets.”
In contrast, Bernstein initiated Five Below with a Market-Perform rating and a $160 price target.
While new management has delivered a short-term rebound, comparable sales rose 7% in Q1 and 12% in Q2, the firm warned it is “too early to declare victory.” Temporary factors, including tariff-driven pricing and Party City’s closures, may have flattered results.
Bernstein said Five Below still has meaningful growth potential, estimating a 5,600-store total addressable market.
But with inflation weighing on store economics and valuation already at ~30x earnings, the analysts advised it was “prudent to stay on the sidelines until we see more evidence of a turnaround apart from macro drivers.”