CIBCHave a $43.00 target. GLTA
EQUITY RESEARCH
February 25, 2022 Flash Research
PET VALU HOLDINGS LTD.
Pet Valu’s Entry Into Quebec Via Acquisition Of Chico
Pet Valu announced the acquisition of Quebec’s largest pet specialty
franchisor, Les Franchises Chico Inc. (Chico), marking PET’s entry into the
province. Chico operates 66 small-format stores (mostly located around the Greater Montreal Area), averaging 3,000 square feet in size (similar to PET). Transaction Highlights: Financial details were limited in the release but Chico generated $79MM in system-wide sales in 2021 and revenue of
$7MM. The deal was funded with cash on hand and is expected to be
immediately accretive to adjusted net income. Chico will operate as a
separate subsidiary with the existing management team remaining in place. The Chico banner is also expected to be preserved.
In terms of consideration, we expect EBITDA margins are likely in the
30%-40% range, and the takeout multiple would be in the high-teens. This
implies a cost of $40MM-$50MM, which would add 0.2x-0.3x to PET’s
leverage. We estimate low-single-digit EPS accretion.
Potential To Wholesale Goods: Based on the disclosed financials, we
assume that Chico sources goods from a third-party wholesaler. In contrast, PET currently wholesales ~90% of goods sold by franchisees. We believe it is highly likely that PET would look to sell goods to the Chico franchisees once existing contracts permit. PET sells at prices competitive with wholesalers, so franchisee costs would not materially change, and they would then have access to PET’s robust and growing private-label portfolio, which carries higher margins for franchisees. We estimate this could add ~$40MM in revenue and potentially ~$4MM of EBITDA for PET. We believe this would take estimated accretion to mid- to high-single digits.
Quebec Pet Market: As we highlighted in our initiation report, average
household pet spending in Quebec has historically been below the national average by a wide margin ($452 vs. $756 in 2019). We believe this is because: 1) cats comprise a larger portion of the overall pet population (~62% in QC vs. the national average of ~50% and the cost of care for a cat is lower than for a dog); and, 2) pet humanization trends (and the associated “trading up” or premiumization) are not as prevalent in Quebec. We estimate Chico has a ~5% market share in Quebec. Mondou is the strongest player, and operates a similar model to PET. It has a sizeable network (77 stores) and we estimate a 25%-30% market share. Note, Mondou acquired Ren’s Pets in July 2021 to expand outside QC. In addition to specialty players, large format retailers feature the pet category, though it is worth noting that PetSmart does not operate any stores in Quebec.
Chico’s Current Operations: Chico’s current offering is consistent with its
peers and Pet Valu: online shopping with delivery to home, grooming
services, and a loyalty program. That being said, we believe Pet Valu’s
increasing focus on data and analytics will help to further enhance day-to-day operations at Chico over time.