CIBCEQUITY RESEARCH
November 8, 2022 Earnings Update
PET VALU HOLDINGS LTD.
A Well-trained Growth Story
Our Conclusion
Pet Valu delivered another excellent quarter highlighted by strong same-
store sales (SSS) momentum and earnings growth, and accompanied by
another increase in the full-year outlook. Our forecasts rise accordingly. We continue to view PET as an attractive business with both defensiveness and growth. Our price target stays at $48 on a modestly moderated multiple, rolled forward to 2023. PET remains a top pick and Outperformer rated.
Key Points
Q4 Guide Implies SSS Moderation, But Still Expect A Strong Finish: The
highlight of Q3 results was again SSS growth, which actually accelerated
from H1 trends on a three-year stack (55% vs. 50% in H1). The updated
guide implies mid- to high single-digit Q4 SSS, which implies a reversion
from H1 trends. In our view, this reflects some conservatism given the
company has not experienced any meaningful trade-down behaviour QTD, and traffic growth is actually a bigger sales driver than basket. We model Q4 SSS of 11% and expect PET has gained at least 1% market share again in2022.
Selective Price Investments Into Proprietary Brands: Pet Valu noted it
has not passed all COGS increases through to consumers. We interpret this as it making targeted price investments in its private label portfolio with the goal of widening its price gap relative to national brands that have taken price more aggressively. The goal, of course, is to encourage consumers to trade down within the same price tier (i.e., from branded food to private label) as opposed to trading down to a lower price tier (i.e., from natural enhanced to scientific). Though we believe many PET shoppers will not trade down, we see this as a savvy tactic, particularly given the inflationary backdrop.
Consolidation In The Pet Food Market Presents Manageable Risks:
Mars Petcare (the maker of Pedigree, Whiskas, etc.) recently announced it will acquire Champion Petfoods, manufacturer of Acana and Orijen. These are leading specialty dog food brands that are strategically important to Pet Valu. We see potential risk to PET’s store traffic and price positioning should Mars broaden its distribution of these brands to the mass channel (i.e., grocery). That said, when Blue Buffalo (BB) was bought by General Mills and expanded into the mass channel, Pet Valu saw no material impact to BB sales or profitability and this gives PET a successful template to work from.
Expect High Single-digit EPS Growth In F2023, And More Beyond: We
continue to believe PET is one of the best positioned discretionary stocks in our coverage that can deliver solid EPS growth even in a consumer-led
downturn. Expense headwinds (FX, interest costs, and wages) will likely limit SG&A leverage next year, but we see more upside than downside to our forecasts of high single-digit EPS growth. Furthermore, we believe PET can deliver double-digit EPS beyond F2023 driven by new store expansion, market share wins, and margin leverage, supported by FCF generation.