The Dog Days Of A Growth Story Our Conclusion
Though Pet Valu closed 2023 with strong results, the 2024 outlook calls for
another year of muted EPS growth, this time weighted by slower same-store
sales (SSS) growth, accelerated price investments, and higher D&A and I/E.
This will likely defer upside, though we remain confident in PET’s ability to
outpace the industry. Our 2024 EPS estimate falls to $1.60 and we introduce
our 2025 estimate of $1.86, implying mid-teens growth. Improving FCF is
supportive and our price target moves to $34 based on 18x 2025E EPS. Our
rating stays Outperformer.
Key Points
Another Year Of Muted EPS Growth: Guidance for 2024 includes 2%-5%
SSS growth (CIBCe 3.3%) and revenue growth of 5%-8% (CIBCe 6.5%),
driven by 40-50 new stores (CIBCe 43) and ~$20MM-25MM of incremental
shipments to Chico. However, there are two key factors that should negate
this growth and keep EPS approximately flat. First, the company is investing
in its value proposition to hold relevance. Second, we expect higher D&A and
I/E will clip ~20 cents more of EPS this year vs. last year.
Consumer Remains An Impediment: We remain cautious in our view of
overall consumer health and spending, and do not expect the pressure from
higher interest rates on household budgets to abate anytime soon. On the
positive, the pet industry has proven resilient in past periods of contraction
and PET is not seeing substantial evidence of trade-down. We view the price
investments as a prudent step to mitigate risk of channel shift given the
macro backdrop. However, PET will need to maintain discipline and take
specific measures to ensure leverage materializes as conditions improve.
Maintain Conviction In Medium-term Opportunity: The prospect of two
years without any EPS growth is disappointing, but we believe PET will
emerge from this period of investment a stronger business. PET will launch a
new digital platform in Q2/24 that will vastly improve the omnichannel
experience and enable better engagement. The supply chain is already in
much better shape than 18 months ago and will likely be incrementally better
again 18 months from now. We believe these investments will drive a re-
ignition of market share gains (PET held at 18% in 2023, still #1 spot),
supported by further store openings. Importantly, franchisee economics were
also updated in the annual disclosures and remain excellent.
Valuation Supported By Free Cash Flow Ramp-up: At an 18.7x 2024E
P/E, PET shares do not jump out as compelling given the muted EPS
growth. However, this moderates to 16x based on 2025, which we view as
attractive for a business with a mid-teens EPS growth formula. PET needs to
execute and re-build some credibility to begin to get more credit, but in the
meantime, capex is moderating, inventory investments are done, and PET is
largely done de-leveraging. FCF should more than double in 2024 and put
PET in a position to act on its NCIB in H2/24, accelerating in 2025. Though
some patience is needed, we believe investors will be rewarded in time.