Dollarama has long been a part of Canadian shopping culture since most of us were just kids. The cheap chain store has made itself a staple in a lot of people's childhoods, thanks to their wide selection of goods for insanely low prices. Though it seems some people believe the company's days could be numbered, or at the very least are about to hit some rough waters.
Yes, there are people out there that believe Dollarama is about to head into some pretty hard times, so much so that they are backing up their claims with bets that allow them to cash out when it happens. It sounds like a bold claim, considering Dollarama has been around for ages. What could have changed recently that is making people want to short sell it?
If you are unaware of the practice of short selling, the concept follows the process of borrowing shares of a stock then selling those shares. When you eventually buy the shares back - hopefully for less than what you paid for - you'll make a profit. Meaning you actually want the stock to do poorly because you make a profit when the security price goes down - the maximum profit you'd make would be if the stock goes all the way down to zero.
The process of short selling is an extremely risky one, considering that while the payout could make you a lot of money, it can also cost you a lot if the stock doesn't dip as aggressively as you planned. Meaning that when Spruce Point Capital Management publicly took a short-selling position on Dollarama, claiming the stock will tumble around 40%, it was a pretty big deal.
The reason Spruce Point and other investment managers believe that Dollarama is headed for rough waters has to do with "troublesome management and governance red flags." Another aspect also being that prices at Dollarama are no longer $1 or $1.25, going against the whole point of the store in the first place, leaving customers looking elsewhere for deals.
On top of that, "questionable accounting practices" have also been a reason why some investment managers are taking a short-selling position on Dollarama. One short activist, Ben Axler, claims it has to do with the company making money "through sales in Canadian dollars while most purchases are linked to the U.S dollar."
The report that was released by Spruce Point claimed that "Dollarama is now a broken growth story that will fail to hit its lofty long-term growth targets," including in the report that they predict the share price could drop to $24.60.
In the past six months alone, Dollarama's stock price has dropped 21%, so their prediction wouldn't be off-trend for the company as of right now.
When the Financial Post attempted to reach Dollarama for comment, Lyla Radmanovich, a representative for the store declined to comment. Regardless, it seems that heightened competition and laboured costs mixed with the rising cost to transport goods could trigger the ultimate downfall of Dollarama.
Source: Financial Post