CIBC 2EQUITY RESEARCH
August 9, 2022 Earnings Update
PET VALU HOLDINGS LTD.
Market Share Gains And Share Price Upside
Our Conclusion
Pet Valu posted another excellent quarter led by strong same-store sales
(SSS) and GM% amidst an inflationary backdrop. The pandemic pet
pandemonium is fading, and we expect the industry to settle into a steady,
sustained mid-single-digit annual growth rate. Importantly, we also continue
to believe PET has multiple levers to build market share. Combined with
attractive defensive attributes, we believe PET remains a compelling
investment. Our price target rises to $48 (was $43) based on the average of
our F2022 and F2023 EPS estimates, and our rating stays at Outperformer.
Key Points
Outlook Raised, Still Likely Conservative: With Q2, PET updated its F22
outlook and now sees full-year SSS growth between 13% and 15% (from 9%
to 12%). We continue to believe management’s guidance embeds a healthy
level of conservatism, and our forecasts sit just above the high end of the
ranges for SSS and EPS. Notably, company-wide SSS was “firmly in double
digits” during the last three weeks of Q2 as PET began comping against a
period of fewer COVID-19 restrictions across Ontario. Early Q3 remains in
double-digit growth. Furthermore, we believe SSS has the potential to
accelerate modestly on a three-year stack due to: 1) continued inflation; 2)
rising store traffic as basket size normalizes; and 3) the increased usage of
in-store services and the accompanying merchandise purchased during the
same visit. We model SSS at 11% for Q3 and 15.8% for F22.
Though ongoing cost (i.e., freight, product costs and interest) and FX
headwinds will limit the flow-through to the bottom line, we believe PET is
well positioned to navigate the current operating environment and pass
through higher costs. Promotional activity continues to remain muted and
early ordering on imported goods (inventory +35% Y/Y) sets up the company
well from an in-stock perspective ahead of its peak sales seasons in H2.
Market Share Opportunities Remain Attractive: Pet Valu has been gaining
share even as industry growth gradually returns to its long-term growth rate,
and we see many initiatives with further potential. New store cohorts from
2019, 2020 and 2021 are delivering strong economics for both corporate and
franchisees; the loyalty program continues to grow and be leveraged in new
ways; online penetration is rising and we believe a better omnichannel
experience will build share of wallet; and private label keeps growing,
particularly in hard goods ahead of the seasonally heavy Q4.
Defensiveness At A Reasonable Price: The pet category has shown
resilience during previous economic downturns as owners prioritize pets and
premiumization continues. We believe this defensiveness is underscored by
food being the majority of sales. PET trades at only a 1.0x PEG (based on
F22 and F23 EPS and 20-23E CAGR). Our target multiple implies closer to
1.5x, which we view as justified by the combination of growth and
defensiveness. Pet Valu remains Outperformer rated.