Pet Valu Holdings Ltd T.PET

TD

[retiredcf]

Pretty clear that they think that PET's SP has overreacted to a potential threat from Chewy. So they're still looking for a near 60% appreciation as they maintain their $41.00 target. GLTA

Pet Valu Holdings Ltd.

(PET-T) C$25.78

Chewy Q2/23 Read-throughs for Pet Valu Event

Chewy (CHWY-US, not rated) reported Q2/23 results and commented on Canadian expansion plans.

Impact: NEUTRAL

Trade-down in consumables. Sales and EBITDA beat consensus, though full-year guidance was unchanged and Q3 sales guidance slightly missed consensus. Chewy noticed consumers becoming more "discernable" — e.g., seeking value by shifting to dry food from wet. Petco experienced some customers looking for value amidst an ongoing broader migration to premium. Pet Valu, conversely, underscored the absence of significant trade-down behaviour, adding its fastest growth occurred in premium-priced categories (e.g., frozen raw) and brands (e.g., Acana and Orijen). We see the differing consumer behaviour experience as a reflection of each company's respective customer segmentation (PET targets the least price- sensitive customers).

Pullback in discretionary. As inflation persists, Chewy saw customers allocating more of their budget to staples and less to discretionary items, like treats and toys, though it still manged to drive 14.3% sales growth from 0.6% fewer customers (Recall, PET experienced >10% pullback in Q2 hardline sales and >10% growth in consumables). Chewy suggested that this trend accelerated in July. Despite H1 promo activity not rising as much as anticipated, Chewy still expects U.S. promo activity to rise in H2. In Canada, PET said it was stepping up targeted promotional efforts to drive discretionary sales.

Comments regarding Chewy's Canadian expansion included:

• "Expecting launch imminently", but only "start feeling the impact in Q4" though not materially.

• Looking for "high-quality growth, not dilutive growth" in Canada

• Focusing on "ensuring the same convenient delivery experience and high bar service that [its] U.S customers enjoy."

• Chewy is "going to try and understand the customer...and then model the offering in a manner that appeals to them...[which is] the most efficient and a way of keeping our costs minimalized."

  What we did not hear was suggestion of relative price advantages or aggressive promotions being prepared for Canada. In fact, Chewy insisted it is generally "a price follower, not a price leader" with respect to promotions, which suggests to us that Chewy does not intend to disrupt industry profitability nor its own positive EBITDA trend that emerged over the past six quarters.

August 31, 2023