Pet Valu Holdings Ltd.
Wagging their tails - Strong Q1 results reinforce constructive view
Our view: Q1/F22 results were strong and higher than forecast/guidance and supportive of the company’s premium valuation. 2022 revenue outlook revised upward, but higher expense trend moderating EBITDA/EPS benefit, guidance largely unchanged. Performance and outlook consistent with strong long-term growth opportunity outlined at IPO. Reiterating Outperform rating, $42 target.
Key points:
High quality Q1 results underpinned by stronger-than-expected top line growth, gross margin and SG&A leverage. Outlook solid albeit moderating on tough comps, normalizing adoption rates, inflation and rising rates. Nonetheless, industry backdrop robust and in the very early innings of a long tail of organic growth underpinned by 3 MM new pets adopted during the pandemic, 80% of which are under two years of age.
Long-term aspiration of 1,200+ stores achievable, in our view. PET is currently filling the runway to 2023/24, with white space in both existing and new markets. In the first month since the acquisition, Chico added one new store and is on track with 2022 rollout, shaping the pipe for 2023. Prior to the acquisition of Chico, management had identified the potential for approximately 200 stores in the province of Quebec, but the acquisition is providing insight into potential markets that were previously excluded.
Incorporating Q1 results, tweaking GM rate, raising SG&A and interest expense results in 2022/2023 EPS forecasts essentially unchanged.Raising 2022E SSS to the high-end of the guidance range 9-12% drives revenue to $892MM (guidance: $870-895 MM). SSS underpinned by strong basket composition with stable mix of consumable vs discretionary, and transaction counts normalizing consistent with adoption rates. While competitive dynamics are rational against the backdrop of vendor price increases, we are trimming our GM forecast to reflect product and freight inflation and raising SG&A (wages, supply chain capacity expansion, corporate store costs), resulting in 2022E EBITDA $198 MM, largely unchanged and at the high end of guidance range $191-$198 MM. The combination of market share gains, network growth, fixed cost scaling, franchise structure leverage, and efficiencies should more than offset headwinds.
Results support PET’s premium valuation, reiterating OP rating underpinned by sustainable growth, FCF generation, and high-return franchise model. Incorporating today's 3.5% share price increase, PET trades at EV/EBITDA-growth 1.6x, roughly in line with peer group average (Exhibit 4). Franchise store penetration forecast to rise from 67% in Q1 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.