Needless to say, Stifel is way below consensus. GLTA
Despite Pet Valu Holdings Ltd.’s quarterly results topping projections, Stifel analyst Martin Landry now sees its the risk-reward proposition for its shares as “less attractive at current levels,” leading him to downgrade his rating to “hold” from “buy” previously.
“Pet Valu reported Q1/24 results which were higher than expected,” he said. “However, investments in supply chain infrastructure and advertising/promotions are expected to weight on Q2/24 and Q3/24 results, translating in potential EPS declines year-over-year, which may disappoint investors. Hence, we have reduced our earnings for the remainder of 2024 by 5 per cent. In addition, our 2025 EPS estimates are reduced by 5 per cent to reflect the longer than expected margin headwinds from Pet Valu’s supply chain transformation. Given this backdrop, we do not expect a valuation multiple expansion nor significant earnings upside. As such, Pet Valu’s shares have reached a level where the risk/reward profile is less attractive in our view, given they are valued at 18 times forward earnings, representing a PEG ratio of approximately 1.5 times, assuming normalized earnings growth potential.”
Shares of the Markham, Ont.-based retailer slid 3.5 per cent on Tuesday following the premarket quarterly release, which saw sales rise 4 per cent year-over-year to $261-million, largely in line with expectations, driven by a 0.8-per-cent gain in same-store-sales and store network growth.
“Traffic declined year-over-year for the second consecutive quarter as customers purchased larger quantities to stretch their dollars and fight inflationary pressures,” said Mr. Landry. “However, cost-cutting initiatives implemented last year translated in a strong Adjusted EBITDA margin of 21.7 per cent, up 220 basis points year-over-year, and higher than our expectations of 20 per cent. This led to the earnings beat with adjusted EPS of $0.35, up 9 per cent year-over-year and higher than our estimate of $0.29 and consensus of $0.31.”
“Management expects Q2/24 same-store sales to grow at a similar pace to Q1/24 of 0.8 per cent. This is slower than consensus expectations of 2.5 per cent and suggests a deceleration of same-store-sales growth on a 2-year stack basis from 10 per cent in Q1/24 to roughly 7 per cent in Q2/24. Management is planning to invest in promotional activity in Q2/24 to stimulate consumer demand, which could result in market share gains. Q2/24 EBITDA margin is expected to be flat year-over-year, which could lead to an EPS decline of low-single-digits year-over-year in Q2/24, lower than previous expectations for a growth of low single digits percentage.”
In justifying the change to his rating, Mr. Landry pointed to two factors: the expectation for “more pronounced and longer than previously expected” margin headwinds and seeing its shares as “fairly valued.”
“We are reducing our EPS estimate by 5 per cent for the remainder of 2024 and also for 2025,” he noted. “It will take several years for the company to fully leverage its large supply chain investments and for gross margins to return above 35 per cent. As such, 2024 is experiencing subdued EPS growth in the range of negative 3 per cent to up 1 per cent year-over-year. In addition, 2025 EPS growth could remain underwhelming (mid-single-digits percentage) due to further increases in the cost structure as the Vancouver DC comes online, resulting in an 3-year EPS CAGR [compound annual growth rate] in the low-single-digits.”
“Pet Valu’s shares have performed well up 8 per cent year-to-date, outpacing the S&P TSX Consumer Discretionary Index, which is up 2 per cent during the same period. At these levels, we see limited multiple expansion potential. In addition, we do not see much upside to consensus estimates. Hence, we view the risk/reward profile for Pet Valu as less attractive at 18 times forward EPS, representing a PEG ratio of 1.5 times assuming a normalized earnings growth rate of 10-15 per cent.”
With his forecast reductions, Mr. Landry trimmed his target for Pet Valu shares by $1 to $32. The average target on the Street is $36.88, according to LSEG data.
Elsewhere, others making target adjustments include:
* ATB Capital Markets’ Chris Murray to $41 from $42 with an “outperform” rating.
“While same-store sales growth came in better than feared in what is a seasonally weak quarter with management having called out changing consumer patterns and more aggressive promotional activity by competitors with Q4/23 results, traffic levels remain soft,” said Mr. Murray. “Guidance for Q2/24 was weaker than expected, which likely contributed to the pullback in the shares, and will require a significant reversal in recent same-store growth trends in H2/24 to meet full-year guidance. The Company opened 11 new stores in Q1/24, exiting the quarter with 794 locations. Management maintained full-year guidance calling for Adjusted EBITDA of $248-million-$254-million and 40-50 new store openings. PET delivered a decent quarter despite a challenging backdrop, and its two-pronged growth story remains intact. We would look to add to positions as valuations remain attractive as we see an H2 and 2025 recovery as feasible with additional upside.”