Pet Valu Holdings Ltd T.PET

TD

[retiredcf]

Currently have a $37.00 target. GLTA

Q1/24 EXPECTED TO BE THE TROUGH

THE TD COWEN INSIGHT

We like PET's leadership position in the attractive Canadian Pet Industry (seen growing
at MSD% CAGR long term). Consumer weakness is currently pressuring growth, although we expect top-line momentum to build as 2024 progresses. EPS growth should remain muted in 2024 as it faces an ~$0.20 headwind from incremental lease liability interest and depreciation associated with new distribution centres.

Event

PET reports Q1/24 results May 7 at 6:30 a.m. ET. We expect adjusted EPS of $0.31 vs. $0.32 LY; consensus is also $0.31 (range: $0.28-$0.34).

Impact: NEUTRAL

Revenue growth of 3.0% is expected to come from 38 net new stores over the LTM, increasing self-distribution to Chico stores, and 0.5% SSSG (consensus is -0.2%):

Consumables and services (~78%/2% of sales) are expected to grow ~3%(vs. an estimated 6% in Q4/23 as inflation moderated by 350bps sequentially to 1.0%), with premium-tier products still outpacing. SS transaction declines should continue on the shift to larger value-pack sizes, partly offset by loyalty program initiatives. U.S. scanner data, which excludes the pet specialty channel, saw industry consumable sales grow 3.7% (down from 5.4% in Q4/23).

Spending on discretionary hardlines (~20% of PET's sales) is expected to decline ~10% as opposed to "mid-teens" in Q4//23 as comps get a little easier. U.S. scanner data (used as a guide) points to Pet industry hardlines sales declining 4.3% in Q1/24, an improvement over the 9.5% drop in Q4/23. We expect hardline sales to stabilize by mid-2024 (Q2/23 is when hardline sales really started to come under pressure) and gradually improve thereafter as PET also becomes more price competitive on certain early-stage products (e.g., dog beds/cages) in an effort to capture the new pet owner.

Margin expansion is expected to boost adjusted EBITDA by 9% to $53.2mm (marginally below consensus of $53.8mm) as PET benefits from its new GTA DC (reduced labour hours, fewer 3PL contracts) and ramp-ups up self-distribution to Chico. This should be partly offset by unfavourable mix (hardlines are higher margin).

Meaningfully higher depreciation and interest stemming from the company's substantial investments to consolidate, automate, and expand its supply chain are expected to push adjusted EPS down 3% in Q1/24 and remain a headwind through year end. That said, the new DCs provide capacity to cover ~10 years of growth, suggesting an opportunity for material operating leverage once completed.