TD Pet Valu Holdings Ltd.
(PET-T) C$29.99
Solid SSS, EBITDA Outlook, but EPS Held Back by Lease Cost
Event
Reducing 2024E/2025E EPS by 5%/7%, reflecting slightly lower SSSG in 2024,
some GM% compression, and higher lease-related costs (new DCs). Applying
20x-21x P/E valuation to our revised EPS estimates and rolling out another quarter
reduces our target to $37.00 (from $38.00).
Impact: SLIGHTLY NEGATIVE
SSS decelerated slightly more than expected in Q4/23. Consumers have been
switching to larger-pack sizes, which is pushing traffic/transaction count lower. We
estimate consumables and services (80% of sales) grew 6%, with management
confirming that premium pet-food tiers continue to outperform. Hardlines' (20%
of sales) decline is believed to have accelerated to mid-teens as it lapped last year's
strong holiday season and chose to not match its competitors' heavier promotional
activity. In Q4/23, loyalty members (>80% of sales) have remained loyal, while
cherry-pickers have gone elsewhere for the bigger deals.
Two main investor concerns of-late include: 1) PET's ability to sustain positive
SSS growth amidst a tough consumer environment and 2) whether competition
was narrowing PET's addressable white space. Both appear unfounded. SSSG
of 1.9% in Q4/23 and 2-5% guidance for 2024 reaffirm the view that this is a
resilient long-term growth industry. We expect SSS to slip to ~0.5% in Q1/24
before re-accelerating over the rest of the year as hardlines comparisons become
easier, averaging 3.1% in 2024E (previously 3.9%) and 5% in 2025. Moreover, PET
reiterated plans to add 40-50 stores in 2024 and, following its success to-date in
Quebec, believes that its 1,200-store end-state may now be conservative.
Ongoing investments to consolidate, automate, and expand its supply chain will
provide capacity to cover ~10 years' growth, but is providing significant EPS
headwinds. 2024 EBITDA growth guidance is an impressive 7.5-10%, but EPS
should be relatively flat y/y as most overhead/lease costs surface over the next
six quarters.
PET expects share buybacks to start in 2024 (we assume Q3/24) as FCF improves.
TD Investment Conclusion
At 18.9x our NTM EPS, PET remains among the lowest multiples within our peer
group of high-growth retailers (23x-64x) and franchisors (18x-26x). The stock could
take a breather until SSS growth re-accelerates (expected in Q2/24), but we still view
PET as an attractive long-term growth story.