Have a $44.00 target. GLTA
PET VALU HOLDINGS LTD
Q2 Preview: Expecting Solid Sales And FX/Rate Pressures
Pet Valu will report its Q2 results on Tuesday August 8 before market open.
Mgmt. will host a conference call at 8:30am EST; dial-in number 1-833-950-
0062 (ID: 675228). The quarter ran from April 2 to July 1.
Thoughts On The Remainder Of F23: We are expecting PET to reiterate
2023 guidance next week with multiple puts and takes to consider in H2. In
terms of the top line, we believe same-store sales (SSS) will continue to be
healthy, led by growth in consumables (75% of sales) and services,
supported by inflation. With respect to margins, mgmt.’s EBITDA margin
guide of ~22% implies a ~350bps sequential acceleration in H2 driven
primarily by 1) SG&A leverage as PET annualizes labour and technology
investments, and 2) USD/CAD FX headwinds abating in H2. With respect to
FX, the strengthening of the CAD in the last two months is a welcome
tailwind to GM%. But we also note that USD strength persisted in April and
May and since PET turns inventory every ~90 days, we believe FX will be at
least a partial headwind to GM% in Q3. Lastly, while we expect Q2 to be the
low watermark in terms of EPS growth, we note that recent rate hikes (and
PET’s exposure to floating rate debt) will also weigh on EPS growth in H2.
Q2 Preview: We model Q2 SSS of +10% driven primarily by larger basket
size; on a one-year basis, this equates to a 60bps sequential deceleration
when normalizing for the timing of New Year’s Day in Q1. We also expect Q2
to showcase the continued trend of customers purchasing larger bag and can
sizes of pet food for better economics per pound resulting in fewer visits,
which will pressure store traffic. Below the top line, we model 248bps of
gross margin compression driven by unfavourable FX and higher wholesale
merchandise sales partially offset by lower freight costs. We expect SG&A to
deleverage 48bps Y/Y due to investments in headcount, wages, and
technology. This translates to EBITDA of $52MM and EPS of $0.34 with
higher interest expense negatively impacting EPS growth. The table in
Exhibit 1 summarizes our estimates and consensus.