While acknowledging “some near-term headwinds,” Desjardins Securities analyst Chris Li sees Pet Valu Holdings Ltd. as “a highly compelling long-term growth story,” initiating coverage with a “buy” recommendation on Thursday.
“Despite transitory headwinds from macro challenges and higher lease expenses from new DCs, we believe PET is well-positioned to achieve low-double-digit EPS growth over the longer term, supported by attractive mid-single-digit industry growth, new store openings and market share gains,” he said. “We believe valuation is supported by strong ROIC and FCF conversion in FY25 as capex normalizes, supporting an increase in capital returns.”
Mr. Li called the Markham, Ont.-based company “a compelling investment” beyond “attractive and resilient industry growth (humanization and premiumization trends).” That includes “loyalty program/data analytics, proprietary brands and an experienced management team.
“Key share price catalysts include acceleration in EPS growth (14 per cent in fiscal 2025 vs 4 per cent in FY24), strong FCF conversion in FY25 as capex normalizes following heavy investments in supply chain infrastructure to support rapid growth and the initiation of share buybacks,” he said. “The two biggest risks are a prolonged downturn and new entrant competition. Stress testing our SSSG [same-store sales growth] and margin assumptions, we derive FY24–25 EPS that are 5–8 per cent below our base case, implying a downside valuation of $28.”
He expects its fourth-quarter 2023 results, scheduled to be released on March 5, to fall in line with the Street’s expectations and “reflect a continuation of the trends from 3Q,” including slowing same-store sales growth due to a tough consumer backdrop impacting discretionary hardlines.
Mr. Li set a target of $38 per share, exceeding the average on the Street by 71 cents.