Though Pet Valu Holdings Ltd.’s momentum continued in the second quarter as it continues to expand its market share, Stifel analyst Martin Landry warned it will be difficult to maintain such growth moving forward.
“Pet Valu reported strong Q2/22 results and was ahead of expectations for the fourth consecutive quarter,” he said. “The company continues to gain market share, highlighted by its same-store-sales, which are up 45 per cent over the last three years. The pace of organic growth is expected to normalize in the coming quarters and range between 6-9 per cent, still a healthy pace. The integration of Chico seems to be progressing well with Performatrin, Pet Valu’s private label brand, expected to be introduced into Chico stores starting in September. We have not changed our forecasts which are now more aligned with management’s EPS guidance, which has been revised upward by 6 per cent. Q3/22 faces a difficult comp and EPS could be down year-over-year as a result. The balance sheet continues to improve and leverage should be around 1.7 times net debt/EBITDA.”
Before the bell on Tuesday, the Markham, Ont.-based retailer reported adjusted earnings per share of 39 cents, rising 225 per cent year-over-year and above the expectations of both Mr. Landry (33 cents) and consensus (32 cents) as gross margins expanded.
“According to management, market share gains over the last year come from a combination of competitors, including specialty peers, mass players and smaller mom-and-pop operators, especially in smaller rural markets where there is a limited offering,” the analyst said. “Proactive actions to strengthen inventory position in-store by ordering products early allowed the company to have the appropriate product mix in-store to meet customer demand and gain share of wallet. This initiative is continuing with Pet Valu accelerating purchases of imported merchandise by a few months for the holiday season.”
“Pet Valu’s same-store sales growth of 21.2 per cent year-over-year was driven by a 19.3-per-cent increase in transaction growth and a 1.5-per-cent increase in same-store basket size. Intuitively, one would have expected to see the basket size increase at a faster rate given the 5-10-per-cent price increases implemented by the company in recent quarters. The muted basket growth was due to fewer items per basket compared to last year as customers are visiting stores more often for casual visits rather than a once a month larger trip. Moving forward, the company expects SSS growth of 5 per cent to 9 per cent in H2/22 attributed to 60-per-cent transaction growth and 40 per cent from average spend growth, in-line with historical average.”
While he raised his earnings and revenue estimates for 2022 and 2023, Mr. Landry kept a $42 target for its shares (with a “buy” rating), warning a reliance of the U.S. dollar and a greater use of third party logistics providers could weigh on margins moving forward. The average is $42.71.
“Pet Valu is a growth story with a significant growth runway,” he said. “We believe that the company can double its store count over time to 1,200-plus, an increase of 70-per-cent from current levels. According to our analysis, PET has the potential to grow its EPS sustainably at a CAGR of mid-to-high teens. Pet Valu’s balance sheet is healthy with leverage expected to decrease to 1.5 times in Q1/23, providing the company with good flexibility to allocate capital.”
“Pet Valu has several positive attributes, which include: (1) more than 2 million members in its loyalty program, generating more than 70 per cent of all system sales in Q1/22, (2) high performing private label brands, generating more than 30 per cent of sales and margins 1,200bps higher than similarly priced national brands, (3) a rapid payback of three years on new corporate stores, (4) flexible store formats that enable increased penetration in rural areas, a significant differentiation vs PetSmart and (5) a healthy network with 99 per cent of corporate stores profitable after 24 months of operations..”
Others making changes include:
* National Bank’s Vishal Shreedhar to $42 from $39 with a “sector perform” rating.
“We consider Pet Valu to be a well-managed retailer underpinned by solid and stable growth in a defensive sector. Pet ownership has increased through the pandemic, providing a tailwind,” said Mr. Shreedhar. “According to Statistics Canada, the total pet market (excl. veterinary/other) increased by $1.339-billion from 2019 to 2021, or about 23 per cent. “For reference, over that same time period PET’s system sales grew by 35 per cent (market share gains) ... While we have a favourable orientation on PET, we remain on the sidelines as we see better value elsewhere in our coverage.”
* CIBC’s Mark Petrie to $48 from $43 with an “outperformer” rating.
* RBC’s Irene Nattel to $43 from $42 with an “outperform” rating.