Pet Valu Holdings Ltd.
Hello kitty: Tweaking assumptions ahead of Q2 release, forecasts essentially unchanged
Our view: Forecasting Q2 EBITDA $56MM, in line with consensus, when Pet Valu reports on August 6, 2024. Outlook remains solid, in our view, anchored by the stability of PET offering, heavily weighting toward consumables and services (over 80%), and loyal customer base of devoted pet owners, offset modestly by value-seeking consumer behaviour, normalizing promotional mix, and demand headwinds in more discretionary categories. Reiterating OP rating, $35 price target.
Key points:
PET's business remains fundamentally strong notwithstanding more cautious discretionary consumer spending. In our view, PET continues to be well positioned for mix shift with good/better/best positioning and growing mix of proprietary brands at attractive absolute and relative value. F24-26 forecasts reflect ongoing pressure on household budgets driving heightened value-seeking consumer behaviour, demand headwinds in more discretionary categories, higher wholesale revenues, normalizing promotional mix, infrastructure investments and elevated interest rates, partly offset by sustained demand for premium nutrition, store and infrastructure occupancy leverage, rising franchise fees and efficiency gains. F24-26 forecasts essentially unchanged with forecast EBITDA moderated by <0.5%, with our estimates of IFRS GM% around 34.6%-34.7% broadly consistent with NT guidance “slightly below the company's historical range of 35% to 36%”.
Strategic priorities, including Performance&Culinary, digital platform transformation and supply chain initiatives should drive solid MT/LT performance. In the NT, leaning into innovation and loyalty to drive traffic, share and margins, notably i) modest pricing investments in April/May, ii) personalized promos targeting almost 3 MM active loyalty customers, iii) launch of Performatrin CulinaryTM raw and gently cooked line-up, broadening its competitively priced offering at higher end of market, and iv) rollout of new proprietary SKUs in discretionary hard goods.
Capital allocation favouring reinvestment into the business through store growth/renovations/supply chain initiatives and debt management. Consistent with management's view, favouring capex/debt repayment over NCIB in the NT. Looking ahead, probable return of capital to shareholders in 2025E as FCF accelerates to >$100 MM, almost 2x our 2024E, caveat being interest rates/cost of debt in 2025.
Reiterate OP rating, PT unchanged. Target multiple 11.0x, a tick above 2024E EV/EBITDA ~10.0x, reflects anticipated improvement in funds flow. PET continues to operate from a position of strength rooted in a capital- light business model, generating sector-leading ROIC close to 25% and attractive FCF yield. Current valuation presents an attractive entry point, with PET trading at the low end of post-IPO average (Ex. 5).