Desjardins Securities analyst Chris Li is maintaining his “favourable” view of Pet Valu Holdings Ltd. despite Tuesday’s release of fourth-quarter 2023 results and an outlook for the current fiscal year that “reflect transitory headwinds from macro pressures and higher lease expenses. "
“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, market share gains (loyalty, proprietary brands, assortment enhancement, etc),” he said. “PET’s valuation is supported by strong ROIC and FCF conversion in FY25 as capex normalizes, supporting an increase in capital returns.”
Before the bell on Tuesday, the retailer reported fourth-quarter revenue of $287-million, up 7.8 per cent year-over-year and above the $285-million estimate of both Mr. Li and the Street. Adjusted earnings per share of 54 cents was 3 cents above projections, due largely to “good” expense control.
However, Pet Valu’s outlook for fiscal 2024 was weaker than anticipated with EPS expected to come in at $1.57-$1.63. Mr. Li was projecting $1.65 and the consensus sat at $1.68.
“Prior to the results, the Street was expecting muted growth this year due to ongoing macro pressures weighing on consumer spending (especially discretionary) and incremental lease expenses (depreciation and interest) related to new DCs,” he said. “Management’s FY24 adjusted EPS guidance ... confirmed this view. While investors will take heed of an increase in pricing investments, we believe it is largely transitory vs structural. There is no change to our positive long-term view. As discussed in our recent initiation report, we believe PET is well-positioned to achieve low-double-digit EPS growth from FY25.
“We have revised our FY24 estimates to the low end of management’s guidance: SSSG [same-store sales growth] of 2.3 per cent vs 2–5 per cent; revenue of $1.11-billion vs $1.11–1.14-billion; adjusted EBITDA of $248-million vs $248–254-million; and adjusted EPS of $1.57 vs $1.57–1.63. There is upside from improvement in macro conditions in 2H. While our FY24 revisions have a flowthrough impact on FY25, we expect solid EPS growth of 14 per cent, mainly driven by 5.6-per-cent SSSG (structural tailwinds from humanization and premiumization and company-specific initiatives aimed at increasing market share); new store openings (approximately 40); incremental wholesale revenue to Chico; supply chain efficiencies; and cost optimization.”
After trimming his projections through 2025, Mr. Li reduced his target for Pet Valu shares to $36 from $38, maintaining a “buy” recommendation. The average target on the Street is $37.54.
“Despite near-term headwinds, our favourable view reflects PET as well-positioned to achieve attractive low-double-digit organic EPS growth over the longer term, its resilient business model and high ROIC,” he said.
Elsewhere, others making changes include:
* National Bank’s Vishal Shreedhar to $34 from $35 with an “outperform” rating.
* CIBC’s Mark Petrie to $34 from $31 with an “outperformer” rating.