Pet Valu Holdings Ltd T.PET

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Have a $38.00 target. GLTA

Q2/24 PREVIEW: NOT MUCH EXPECTED TO CHANGE SEQUENTIALLY

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 slowly build in H2/24. 2024 EPS growth should remain muted as it faces an ~$0.20 headwind from incremental lease-related interest and depreciation tied to the new distribution centres.

Event

PET reports Q2/24 results August 6 at 6:30 a.m. ET. We expect adjusted EPS of $0.35 vs. $0.36 LY. Consensus is $0.34 (range: $0.31-$0.35).

Impact: NEUTRAL

Revenue growth of 3.2% is expected to come from 45 net new stores LTM, increasing self- distribution to Chico stores, and a modest 1.0% SSSG (consensus is 0.8%) — this would be relatively stable versus the 0.8% in Q1:

 Consumables/services (>80% of sales) are expected to grow 2%-3% (vs an estimated
4% in Q1 as inflation moderated (Pet Food & Supplies CPI fell 230bps sequentially), with premium-tier products such as culinary (frozen raw, gently-cooked, dehydrated and freeze-dried) still outpacing, supplemented by the launch of Performatirn Culinary in Q2. SS transaction declines should continue on the shift to larger value-pack sizes and fewer transactions from non-loyalty members (<20% of PET's customers), partly offset by loyalty program initiatives. Trade down from certain national brands (e.g., Blue Buffalo) to PET's proprietary brands is believed to be ongoing.

 Spending on discretionary hardlines (<20% of PET's sales) is expected to decline again, supplemented by the rising proprietary brand penetration as PET adds new lower-cost SKUs. We expect -5% as opposed to an estimated -12% in Q1 as comps get a little easier (hardline softness started in May LY). U.S. scanner data (which excludes the specialty pet channel) points to pet industry hardlines sales of -6.1% vs. -3.8% in Q1 and -9.2% in Q4/23. We see hardline sales stabilizing by Q3/24 and returning to growth thereafter.

 Promo 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 continued in Q2/24, likely pressuring GM% a little but helping traffic and driving larger baskets.

Adjusted EBITDA is forecast to grow 4% to $55.9mm (marginally below consensus of $56.2mm) on the higher revenues and a modest 10bps of EBITDA% expansion. Meaningfully higher depreciation and interest stemming from substantial supply chain investments are expected to remain a headwind through Q4.