Pet Valu Holdings Ltd.
Pick of the litter: Q2 results reinforce PET favourable positioning in specialty retail
Our view: Strong and higher than forecast Q2 results reinforce our view of PET as a compelling, growth oriented, staple leaning, defensive SMID-cap idea in Canadian specialty retail. Performance and outlook supportive of the company’s premium valuation, and consistent with execution of strong long-term growth opportunity outlined at IPO. Strong Q2 results and higher guidance likely to drive upward bias on 2022 consensus view. Reiterating Outperform rating, target to $43 (+$1).
Key points:
Robust industry backdrop underpinned by 3 MM new pets adopted during the pandemic, 80% of which are under two years of age. Upside to long-term aspiration of 1,200+ stores, in our view. PET is currently filling the runway to 2023/24, with white space in both existing and new markets, and in the early innings of leveraging customer insights and incorporating location data in real estate decision process. Our long-term model remains predicated upon 1,200 stores with upside bias as PET takes share of wallet in existing/new markets and the Quebec opportunity comes into focus.
Raising forecasts to reflect Q2 results, higher F22 guidance and industry positioning. Raising SSS forecasts with H2/22 three-year stacked SSS in- line with H1. Revised 2022E SSS at the high-end of guidance range +13-15% (previously 9-12%) drives revenue to $918 MM at the mid-point of guidance $912-928 MM. SSS outlook underpinned by higher transaction count as pet owners return to pre-pandemic shopping behaviour, with notable increase in traffic drivers like self-serve dog wash. We are tweaking our gross margin assumptions upward reflecting i) rational competitive dynamics around promotional activity, ii) the Company’s strong and deliberate positioning in proprietary brands across good/better/ best profiles, and iii) traction of its loyalty program with >70% sales penetration. In our view, the combination of market share gains, network growth, fixed cost scaling, franchise structure leverage, and efficiencies should more than offset headwinds.
Capital light franchise model drives FCF growth and conversion, and shareholder returns. Our analysis suggests ample FCF and balance sheet capacity to fund growth, de-lever the balance sheet and, in time, accelerate return of capital to shareholders (Ex. 9 and 10). Franchise store penetration forecast to rise from 68% in Q2 to 71% at the end of F23, which should drive accelerating FCF conversion and ROIC in the high 30% range, at the high end of the range in our universe of coverage.
Results support PET’s premium valuation, reiterating OP rating underpinned by sustainable growth, FCF generation, and high-return franchise model. Incorporating today's share price increase, PET trades at ~13.2x NTM EBITDA (Ex. 12), towards the low end of its trading range. On a relative basis, trading multiple is well below DOL, largely in-line with ATZ