EQUITY RESEARCH
May 7, 2024 Earnings Update
PET VALU HOLDINGS LTD.
Executing Despite Continued Consumer Caution
Our Conclusion
PET reported solid Q1 results on modest expectations, with GM% and earnings
benefitting in part from a deferral of planned price investments into Q2. The full-
year outlook was unchanged and we adjust our estimates slightly. PET is
contending with consumer caution, but continues to build relevance with its core
and is benefitting from the ongoing humanization of pets. While 2024 was known
to bring limited EPS growth, we are confident in fundamentals and a return to
mid-teens growth in 2025. Our price target moves from $34 to $36 (based on
19x 2025E EPS) and PET stays Outperformer rated.
Key Points
Consumer Behaviour Remains Cautious But PET Holding Share:
Consumer trends are consistent with prior quarters, with consumers cutting
back on visits and prioritizing staples over discretionary. Spending from
loyalty members is holding in and demand for premium offerings continues to
drive growth, but non-loyalty members and slower specialty pet-related sales
drive softness. Rural and suburban markets are outperforming urban.
Q2 SSS Commentary Implies Slowing Two-year Stack: Management
outlined views for Q2 same-store sales (SSS) to be similar to Q1 as traffic
softness continues; our estimates fall to 1.0% (was 2.0%) as a result. Price
investments will take time to pay off and are focused on lower-priced foods
and discretionary, which are important but not the core part of the offering.
Beyond price investments, there are initiatives underway to stimulate H2
comps, including a new private label in super-premium and a revamped
website. We still see full-year guidance as reasonable, but see lower-half of
the SSS growth range as more likely; our full-year SSS estimate is
moderated from 3.3% to 2.8%.
Q2 EBITDA Margin Guide Softer But Supply Chain Work Paying Off: Q1
EBITDA margins beat expectations in part due to the deferral of planned price
investments into Q2, though the bigger driver was better realized efficiencies
as the bulk picking capabilities in the new Toronto DC ramped up. Even still,
adjusted EBITDA margins for Q2 were guided to be in line with last year at
~21%. Our Q2 EPS falls to offset the Q1 beat, and our full-year 2024 and
2025 earnings estimates are little changed, with the modestly better GM%
results offset by somewhat higher SG&A in the balance of the year.
Valuation Increases With Growth Returning And FCF Ramping: Our
target multiple increases to 19x on the back of PET’s healthy competitive
position and long-term growth potential, which are increasingly valued as a
return to better EPS growth comes into focus. We expect PET to improve
working capital and drive robust FCF generation and de-leveraging as
management reiterated its target of $100MM in FCF by the end of F2025.