Private Label Expansion And Cobasi Merger Will Strengthen Long Term Pet Retail Position

Catalysts

About Pet Center Comércio e Participações

Pet Center Comércio e Participações operates a nationwide, omnichannel pet retail platform in Brazil, combining physical stores, digital channels, services, and proprietary brands.

What are the underlying business or industry changes driving this perspective?

• Accelerating mix shift to Private Label, including higher value food lines and acquired brands like Zee Dog and Petix, should structurally widen gross margins as penetration moves from roughly 13 percent toward management’s 20 percent ambition. This supports EBITDA and earnings growth.
• Ongoing formalization and premiumization of pet care, with consumers trading up to better nutrition and recurring medications, provides a resilient demand base. Pet Center’s expanding national footprint and services network can capture higher average tickets and volumes, which may lift revenue and operating leverage.
• Clubz loyalty and subscription tiers, together with the emerging pet health plan, deepen customer relationships and increase purchase frequency and share of wallet. This should support steadier same store sales growth and improve net margins through lower acquisition costs.
• Disciplined capital allocation, with materially lower CapEx, tighter working capital, and a net cash balance sheet, positions the company to self fund growth and seek higher free cash flow conversion as interest rates eventually normalize. This can benefit net income and potential shareholder distributions.
• Expected approval and integration of the Cobasi merger would aim to unlock meaningful fixed and variable cost synergies, allowing the combined platform to lower prices while defending profitability in the face of marketplace competition. This supports potential revenue acceleration and margin resilience.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Pet Center Comércio e Participações's revenue will grow by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.1% today to 4.0% in 3 years time.
• Analysts expect earnings to reach R$181.3 million (and earnings per share of R$0.39) by about December 2028, up from R$3.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$210.2 million in earnings, and the most bearish expecting R$146.6 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 22.5x on those 2028 earnings, down from 507.6x today. This future PE is greater than the current PE for the BR Specialty Retail industry at 12.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 23.08%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Intensifying price competition from digital marketplaces and small retailers, including unfair practices such as selling products without invoices or at zero margin, could force Pet Center to sacrifice pricing power in key categories. This would pressure revenue growth and compress gross margin and EBITDA margin over time.
• Management already acknowledges that digital sales have grown below the broader online pet market for two consecutive years. If this market share loss continues as e-commerce penetration structurally rises in Brazil, the company risks structurally slower top line growth and weaker earnings versus the sector.
• The company plans to react to aggressive online pricing in medications and other high value categories by lowering prices. With already low net margins, this strategic choice could erode profitability faster than cost cutting and synergies can offset, limiting future net income and earnings growth.
• The long term thesis relies heavily on approval and execution of the Cobasi merger to deliver cost synergies and restore competitiveness. Any adverse CADE ruling, delay, or weaker than expected synergy realization would leave the company facing rising competitive pressure with a less efficient cost base, reducing operating leverage and future earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of R$4.85 for Pet Center Comércio e Participações based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$5.4, and the most bearish reporting a price target of just R$4.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be R$4.5 billion, earnings will come to R$181.3 million, and it would be trading on a PE ratio of 22.5x, assuming you use a discount rate of 23.1%.
  
• Given the current share price of R$4.1, the analyst price target of R$4.85 is 15.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.