Pet Valu Holdings Ltd T.PET

RBC

[retiredcf]

Pet Valu Holdings Ltd.

Paw Patrol: PET Q2/23 solid and in line with forecast, whisker above consensus; outlook reiterated

TSX: PET | CAD 30.32 | Outperform | Price Target CAD 50.00

Sentiment: Neutral

Bottom line: Neutral, with virtually all operating metrics solid and as expected. Tone of the release confident but noting recent shift in consumer demand.

2023 outlook reaffirmed with no changes to financial metrics, and is supportive of our constructive view of PET, company’s premium valuation, and consistent with execution of strong long-term growth opportunity outlined at IPO, augmented by step up investment to support growth.

Highlights of Q2/2023 results:

• Adjusted EPS $0.36, -7% Y/Y vs forecast/consensus $0.35/$0.34.

• SSS growth/revenue growth as forecast: SSS Q2 +6.0%, driven by 4.8% increase in transaction count, 1.2% increase in average transaction size. Total revenue growth +12.6%, in line.

• Store count: 758, +41 Y/Y (+5.7%), franchised stores 70.2% of total vs 67.9% at Q2/22, +230 bps.

• Adjusted EBITDA $53.8 MM +3.9% Y/Y vs forecast/consensus $53/$52 MM.

• Solid balance sheet/CF to support growth, net leverage at Q2 2.2x, +0.4x sequentially as a result of inclusion of new GTA DC lease.

• Inventory: +12% Y/Y, a welcome sequential improvement from Q1 +39%. 2023 Operating outlook reiterated, capex/business transformation costs revised moderately upward, IT costs downward:

• SSS: +7-10%.

• Store openings: 40-50.

• Revenue: $1,050 MM and $1,075 MM, +10-13% vs last published forecast $1,073 MM, +12.3%.

• Adjusted EBITDA $230-$237 MM, +7-10% vs last published $235 MM, +9.1%.

• EPS $1.60-$1.66, +1-4%, vs prior published $1.64, +2.4%.

• Business transformation costs $17 MM, vs prior $13 MM, IT costs $4 MM vs prior $7 MM, share based comp $7 MM vs prior $8 MM.

• Capex: $60 MM, vs prior $50 MM.

  Conference call 8:30 am: 1-833-950-0062 (ID: 675228)

  Expect focus of the call to be: i) key drivers of Q2 performance; ii) colour around consumer spending trends, notably any trade-down or slowing of discretionary spend given "recent shift in consumer demand" noted in press release; iii) competitive/ promotional intensity and any changes in advance of imminent entry of Chewy (NYSE: CHWY) into GTA; iv) surrender/adoption rate; v) update on e-Commerce, consumer uptake of subscription services in late September; v) update on GTA DC with shipments to stores commencing this month; vi) upward revision to planned capex spend.