Stifel Raises Target Stifel analyst Martin Landry believes Pet Valu Holdings Ltd. is “well positioned to benefit from the continued strength of the industry.”
“Following a decade of rapid industry growth, what’s next for the Canadian Pet Industry? Rarely can an industry grow 2-3 times faster than GDP for an extended period of time,” he said. “Could we see the industry plateau, slowdown or even decline in coming years? It is difficult to say, but the experts who participated in our webinar on the pet industry where upbeat for 2023. Our survey suggests industry growth rates of mid-single digits to high-single digits for 2023 for pet food sales while slightly slower growth rates for accessories. The humanization of the pet industry is a strong underlying trend which should continue for the foreseeable future, according to our experts.”
After hosting a webinar on the industry on Friday, Mr. Landry acknowledged there are trends to monitor that could provide headwinds to an acceleration in growth for the Markham, Ont.-based company, including veterinary clinics encroaching into pet food sales and continued shift to e-commerce. However, he called the expectations for 2023 “promising.”
“According to our survey results, pet food revenues are expected to grow in 2023, albeit at a slower rate compared to the last 3 years,” he said. “83 per cent of respondents expects growth in volumes in 2023 compared to 2022, while 87 per cent expects prices to increase. These numbers are encouraging given the growth over the last 3 years with industry growing at 15 per cent in 2020, 7 per cent in 2021 and 12 per cent for the first 3 quarters of 2022.”
“Opportunity appears widespread in 2023. Our survey shows a wide array of opportunities in 2023 for the Canadian pet industry, including the continuation of the premiumization and humanization trends, the increase penetration of private label brands and online sales. Additional opportunities mentioned for 2023 include (1) incremental sales for special occasion products, (2) innovation within pet food with alternative source of proteins (i.e. insects and yeast proteins) and (3) increased innovation within non-consumable products, creating more opportunities for industry growth.”
Reiterating a “buy” recommendation for Pet Valu shares, Mr. Landry raised his target to $45 from $42, touting “appealing industry characteristics” as well as its “strong growth prospects” and “solid business economics and competitive positioning.” The average on the Street is $45.17.
“Pet Valu is a growth story with a significant growth runway,” he concluded. “We believe that the company can double its store count over time to 1,200-plus, an increase of 70 per cent from current levels. According to our analysis, PET has the potential to grow its EPS sustainably at a CAGR [compound annual growth rate] of mid-to-high teens. Pet Valu’s balance sheet is healthy with leverage expected to decrease to 1.5x in Q1/23, providing the company with good flexibility to allocate capital.”
“Pet Valu has several positive attributes, which include: (1) more than 2 million members in its loyalty program, generating more than 70 per cent of all system sales in Q1/22, (2) high performing private label brands, generating more than 30 per cent of sales and margins 1,200 basis points higher than similarly priced national brands, (3) a rapid payback of three years on new corporate stores, (4) flexible store formats which enable increased penetration in rural areas, a significant differentiation vs PetSmart and (5) a healthy network with 99 per cent of corporate stores profitable after 24 months of operations.”