Analyst predicts Dollarama will buy Latin American partner

A Dollarama analyst expects the discount chain will eventually expand in Latin America as its Canadian growth winds down.

Peter Sklar of BMO Capital Markets says it is increasingly likely that the Montreal-based company will exercise its option to acquire majority ownership in Dollar City in February 2019.

Dollarama is attempting to determine if its business model is suitable for Latin America. Instead of investing money, it has been guiding Dollar City for the last three years by providing advice and access to Dollarama sales items.

Dollar City has about 25 stores in El Salvador and two in Guatemala.

Dollarama told shareholders at its annual meeting earlier this month that a decision on exercising the option will only be made closer to the 2019 deadline.

Sklar said the positive signs from the small initial markets increase the likelihood that the success will be replicated in larger cities and prompt Dollarama to seek an ownership stake.

"If Dollarama were to exercise its option and roll out its model throughout Columbia and Peru, it could offer years of future growth in Latin America,'' he wrote in a report.

Expansion to a new market would come just before its Canadian expansion is expected to run its course.

Dollarama has 972 stores across the country, selling a variety of merchandise at prices up to $3. It expects to continue adding 70 to 80 locations annually until it reaches a saturation point of some 1,400 stores under its current store format.