Dollarama is 'a broken growth story,' Spruce Point says.Melissa Tait/The Globe and Mail
Spruce Point Capital Management, which focuses on in-depth research of companies’ vulnerabilities, sees room for Dollarama Inc.’s stock price to tumble roughly 40 per cent after the Canadian retailer raised prices and fewer customers are shopping at its stores.
“Spruce Point believes Dollarama is a ‘strong sell’ with an approximately 40-per-cent downside risk,” Ben Axler, who runs the hedge fund, said at an investment conference on Tuesday, according to a person familiar with his presentation. He examined the company’s products, pricing and what he called “troublesome management and governance red flags.”
Mr. Axler presented the idea at the Robin Hood Investors Conference in New York and, on Wednesday, he released a report detailing the company’s problems.
“Dollarama is now a broken growth story that will fail to hit its lofty long-term growth targets,” the report said, adding that the share price could drop to $24.60 a share. It fell nearly 7 per cent to $35.90 by Wednesday afternoon.
Mr. Axler is one of a handful of so-called short activists, investment managers who often spend months researching a company and then publicize the information to convince others the stock will fall a lot. Dollarama’s stock price has already dropped 21 per cent in the past six months.
Dollarama is no longer a true dollar store after a series of price increases that have taken a bite out of store traffic, Mr. Axler said.
Lyla Radmanovich, a spokesperson for Dollarama, said the retailer was aware of the Spruce Point report but declined to comment on it in detail. “We are confident our existing disclosure provides our investors with accurate, up-to-date and comprehensive information regarding the company, its performance, as well as its relevant governance, accounting and other policies,” she said. “We won’t be providing further comment at this time.”
Mr. Axler also pointed to what he called “questionable accounting practices,” noting the company made money through its currency hedges over the past years because sales are in Canadian dollars while most purchases are linked to the U.S. dollar. Those benefits have been erased, he said, but “management reports that gross margins have effectively remained flat through this period.”
More competition, higher labour costs, rising transportation costs and the lapsing currency-hedge benefit could all chip away at the company’s profitability, he predicted.
Mr. Axler’s brand of short activism has found favour with investors recently, as his fund, which invests US$169-million, returned 18 per cent after fees so far this year, according to an investor note.
For funds that pursue this type of research-heavy shorting strategy, Mr. Axler said, recent market volatility is a plus. “Investors are looking for differentiated research especially and they are now searching for uncorrelated investments.”