LITTLE CHANGE TO OUTLOOK DESPITE Q1 BEAT
THE TD COWEN INSIGHT
We like PET's leadership position in the attractive Canadian Pet Industry (seen growing at MSD% CAGR long term). Consumer weakness is currently pressuring transaction growth although we expect top-line momentum to build in H2/24. EPS growth should remain muted in 2024 as it faces an ~$0.20 headwind from incremental lease liability interest and depreciation associated with new distribution centres.
Event
Fine-tuning our model following Q1 results leaves our 2024E/2025E EPS relatively unchanged. Rolling out our 20x-21x P/E valuation another quarter increases our price target to $38 (from $37).
Impact: NEUTRAL
SS transactions declined a little more than expected driven by consumers continuing to trade up to larger-sized packages, fewer transactions from non-loyalty member customers (which account for <20% of PET's customers), a general slowdown in discretionary spend, and lower specialty pet business (e.g. fish, reptiles, small mammals) which affects sales of hay, crickets, etc., all of which are low dollar sales but generate weekly trips. We don't see this as an area of concern. The lower transactions were more than offset by higher average basket, which allowed SSSG of 0.8% to modestly exceed our 0.5% estimate.
Premium-tier consumables continue to outpace total consumables — we estimate that consumables (>80% of sales) grew MSD% — with culinary, i.e., frozen raw, gently-cooked and shelf-stable (dehydrated or freeze-dried) leading the charge. PET is capitalizing on this growth by launching a new proprietary brand (Performatrin Culinary) in Q2. In the lower- tier segment, PET is still seeing customers transition from national brands to its proprietary brands.
Hardlines continue to decline (although proprietary brand penetration is increasing as new SKUs continue to be added)—we expect a return to growth in Q3/24 as comps get easier.
Promotional activity remains elevated, particularly from regional chains, but PET is doing a good job managing through it. The targeted promotional investments implemented in Q4/23 are continuing into Q2/24, pressuring GM% a little but helping traffic and driving larger baskets. PET estimates it held or slightly increased market share.
Store count growth a very modest risk, in our view. Management alluded to reports that real estate developers could delay shovel-ready projects in 2025/2026 which, in turn, could limit real estate availability. For this reason, we were already at the bottom of PET's targeted 40-50 annual range for store openings (were we to trim this to 35, we estimate that it would only knock off a penny from 2025E EPS).