ATB Pet Valu Holdings Ltd. is “well-positioned to capitalize on a growing pet economy,” according to ATB Capital Markets analyst Chris Murray, who also touted a “long runway for growth.”
“PET’s smaller store footprint supports a wide range of locations, offering a franchise-led model with local owner/operator knowledge focused on premium product offerings and services for dedicated pet owners backed by a national distribution network,” he said. “Pet Valu has delivered mid to high single-digit same-store sales for several years, reflecting a well-established operating model and secular tailwinds supporting pet ownership and spending levels. We expect same-store growth rates to mirror the industry’s historical mid-single-digit growth rate in the coming years.”
“PET operates a network of 766 stores, with management highlighting whitespace to expand to 1,200 stores over the next decade. We expect PET to maintain a 40 to 45 store per year run-rate in coming years consistent with historical levels, skewing heavily toward franchise stores as the Company executes a capital-light growth strategy focused on local franchises. PET is in the middle of a multi-year investment ($110-million) to bolster its distribution and IT capabilities, which we expect to translate into margin benefits through efficiency gains and cost absorption while providing the necessary capacity to support its next leg of store and ecommerce growth. We believe favourable secular growth trends and new unit expansion provide a compelling opportunity for longerterm growth that comes with limited execution risk and capital requirements.”
In a research report released Monday titled A Basket of Warm Valu, Mr. Murray initiated coverage of the Markham, Ont.-based retailer with an “outperform” recommendation, downplaying recent investor concerns about intensifying competition in the industry.
“Shares pulled back meaningfully in 2023 on concerns surrounding consumer spending and competitive pressures after Canadian Tire announced an expanded partnership with U.S.-based Petco and pet-focused, ecommerce player Chewy announced plans to enter the Canadian market,” he said. “While the developments are worth monitoring, we believe Pet Valu’s differentiated model, particularly its higher-touch experience, adaptable store format, and expanding omnichannel capabilities, allows the Company to maintain its leadership position in the domestic market.”
Calling it a “capital-light compounder,” the analyst set a target of $41 per share. The average target on the Street is $36.70.
“Pet Valu trades in line with Canada’s grocery stores despite operating as a specialty retailer and leveraging a capital-light growth model in an attractive category set to benefit from secular tailwinds,” Mr. Murray said. “We believe Pet Valu should trade closer to 13.0 times EV/EBITDA, in line with higher growth specialty retailers and franchise operators, providing upside to current valuations. We expect franchise-led growth to support a gradual increase in ROIC, positioning the Company for a re-rating over the medium term.”