October 31, 2018 / 11:02 AM / 22 days ago

Spruce Point sees Dollarama stock price tumbling

BOSTON, Oct 31 (Reuters) - 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 percent 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 percent 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."

Axler presented the idea at the Robin Hood Investors Conference in New York and is expected to release a report detailing the company's problems on Wednesday.

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 that the stock will fall a lot. Dollarama's stock price has already dropped 21 percent in the last six months.

Dollarama is no longer a true dollar store after a series of price hikes that have taken a bite out of store traffic, Axler said.

Lyla Radmanovich, a Dollarama spokeswoman, said she was not aware of the presentation and declined to comment on "speculation regarding our stock price."

Axler also pointed to what he called "questionable accounting practices" noting that the company made money through its currency hedges over the last 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 labor costs, rising transportation costs and the lapsing currency hedge benefit could all chip away at the company's profitability, he predicted.

Axler's brand of short activism has found favor with investors recently as his fund, which invests $169 million, returned 18 percent after fees so far this year, according to an investor note.

For funds that pursue this type of research-heavy shorting strategy, Axler said, recent market volatility is a plus. "Investors are looking for differentiated research especially and they are now searching for uncorrelated investments." (Reporting by Svea Herbst-Bayliss Editing by Phil Berlowitz)

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