Currently have a $38.00 target. GLTA
Pet Valu Holdings Ltd.
(PET-T) C$31.46
Expect PET to Hit Bottom of Guidance Despite Hardlines Softness
Event
PET will report Q4/23 results at 6:30 a.m. ET on March 5. Discretionary spending
appears to have remained weak, which reduces our Q4/23 SSS forecast to 3.0%
(from 4.5% previously) and our adjusted EPS to $0.53. Consensus is $0.51 (range:
$0.44-$0.54). Off this lower base, we now see SSS ramping back up to our long-
term 5% SSS assumption by Q4/24.
Impact: NEUTRAL
The 2% forecast EPS reduction is not overly meaningful, although it pushes us
to the bottom of the $1.60-1.63 guidance range for 2023. We still expect adjusted
EPS to increase 23% in Q4/23, supported by lower opex spend, ex-depreciation,
and 4%/17% in 2024/2025, held back initially by the higher depreciation and
interest tied to PET's substantial supply-chain investments.
We believe demand for discretionary hardlines (~20% of PET's sales) remained
under pressure through Q4/23 — declining LDD%; U.S. scanner data suggests
that the rate of decline moderated in January. Consumables and services
(~78%/2% of sales) are expected to grow ~6.5% (vs. HSD% in Q3/23 as inflation
moderated), with premium-tier products still outpacing. Overall, we now look for
SSSG of 3.0% in Q4/23 — the bottom end of management's implied guidance
for Q4/23 — led by inflation pass-through and minimal SS transaction growth
(loyalty program initiatives, offset by a shift to larger value-pack sizes). We assume
hardline sales will stabilize by mid-2024 and gradually improve to 5% by Q4/24
(averaging 3.9% in 2024).
We forecast 7.3% revenue growth (including 37 net new stores in LTM), and an
18% jump in adjusted EBITDA to $70.2mm as the benefits from the new GTA
DC surface (reduced labour hours, ramp-up in Chico distribution, and fewer 3PL
contracts), partly offset by unfavourable forex (30% of goods purchased in U.S.
dollars) and unfavourable mix (higher percentage of consumables vs. hardlines).
TD Investment Conclusion
PET has rebounded 30% over the past five months; at 18.8x our NTM EPS, it remains
among the lowest multiples within our peer group of high-growth retailers (23x-63x)
and franchisors (18x-26x). Although the stock could take a breather until SSS growth
re-accelerates, we still view PET as an attractive long-term growth story.