CIBCEQUITY RESEARCH
May 9, 2023 Earnings Update
PET VALU HOLDINGS LTD.
Ruff Start, But Fundamentals Sound
Our Conclusion
PET’s noisy Q1 results led to its first EPS miss as a public company, and
weaker Q2 expectations and an unchanged outlook imply a higher bar for
H2. We believe PET’s value proposition remains strong and is supportive of
further share gains in 2023. Furthermore, the industry remains healthy, with
Chewy’s possible entry a near-term – but manageable – risk. Furthermore,
we believe these risks are more than priced in given PET is trading near
trough levels at 20x P/E. We have reduced our price target to $44 (from $48)
based on a lower target P/E multiple; PET remains rated Outperformer.
Key Points
Comps Are Healthy, Even as Shifts in Consumer Behaviour Add Noise:
Q1 marked a continued shift in the composition of spend amongst PET’s
core customers. Larger pack sizes are gaining momentum leading to fewer
trips and reduced impulse purchases. Hardlines (25% of sales) have also
slowed, while super premium food continues to lead the category. So while
pet category spending is resilient, consumers appear to be prioritizing
essentials. Importantly, we believe PET is well positioned to continue gaining
share even as comps normalize towards the industry’s long-term run rate.
Opex Growth Should Moderate From Here, With Leverage in H2: The
lowlight of Q1 was SG&A, which was up 25% from last year and 15% above
our forecast. Timing was a factor, and management noted that they expect
opex dollars to flatline from here for the balance of the year. This defers our
expectations for material SG&A leverage into Q4/F23 and F24, and we see a
greater likelihood of SG&A deleverage than leverage for full-year F23.
FX Pressures Could Extend Past H1: GM% contracted 130bps Y/Y driven
“almost entirely” by the weaker CAD. Mgmt. shared a helpful stat that every
penny change in the USD/CAD FX rate equates to a 10-15bps move on
GM%. PET is hopeful that FX headwinds will abate by Q3; we are slightly
more cautious though and believe FX pressures could persist into H2 if the
USD remains at current levels. We believe a hedging program is appropriate.
Competition is Not New; PET has a Differentiated Offer: The prospect of
Chewy entering Canada in the coming months has weighed on PET shares.
In our view, we believe Chewy presents more of a headline risk as opposed
to a fundamental threat to PET’s business for two main reasons. First,
executing online in the pet category in Canada presents greater challenges
than in the U.S, and penetration is lower (mid-to-high teens vs. ~38%,
respectively) for good reason. Second, Pet Valu has built a competitive moat
around its omni-channel business anchored around convenience, a curated
product offering and expert advice and service. This has clearly resonated in
the market given PET’s ~300bps of share gains since 2020 ex Chico, all
while the industry continues to post mid-single-digit square footage growth
annually. Chewy’s introductory offers could be disruptive, but assuming
mass/specialty product distribution differences hold, we believe the medium-
term impact on PET’s business will be manageable