Opening 40 New Stores In 2025 Will Expand Market Reach And Customer Accessibility

Key Takeaways

• Store network expansion and proprietary brand emphasis promote revenue growth and profitability through market reach and high-margin products.
  
• Supply chain improvements enhance efficiencies, operating costs, and cash flow, enabling share repurchases and boosting earnings per share.
  
• Economic uncertainties, supply chain challenges, and competitive pressures could impact revenue, margins, and growth, while investments may not yield short-term returns.

Catalysts

Engages in the retail and wholesale of pet foods and pet-related supplies for dogs, cats, fish, birds, reptiles, and small animals in Canada.

• Expansion of store network with plans to open approximately 40 new stores in 2025 will drive incremental revenue growth by increasing market reach and customer accessibility.
  
• Completion of the $100 million supply chain transformation, including the opening of a new Calgary distribution center, is expected to enhance efficiencies and reduce operating costs, positively impacting net margins.
  
• Increased focus on proprietary brands, which are typically priced below national brands, is expected to support revenue growth and enhance profitability through higher margin contributions relative to national brand products.
  
• Enhanced capabilities in promotional pricing and planning systems, launching in the middle of 2025, are expected to improve sales growth and margin optimization by better targeting promotions to consumer demand.
  
• Strong free cash flow conversion, supported by reduced capital expenditures following the completion of the supply chain transformation, enables share repurchases, contributing to increased earnings per share.

Pet Valu Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pet Valu Holdings's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.0% today to 10.2% in 3 years time.
• Analysts expect earnings to reach CA$137.2 million (and earnings per share of CA$1.96) by about March 2028, up from CA$87.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.0x on those 2028 earnings, up from 19.8x today. This future PE is greater than the current PE for the CA Specialty Retail industry at 19.8x.
• Analysts expect the number of shares outstanding to decline by 1.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.04%, as per the Simply Wall St company report.

Pet Valu Holdings Future Earnings Per Share Growth

Risks

• The uncertainty in the macroeconomic environment, including potential inflationary pressures and a weaker Canadian dollar, could impact consumer demand and affect revenue growth and margins.
  
• The potential for tariffs and impacts on Canadian supply chains could lead to increased costs, particularly for the 15% of products sourced directly from the U.S., impacting net margins and earnings.
  
• The slowing population growth in Canada, along with subdued pet ownership trends post-pandemic, might limit the potential for customer growth, potentially impacting same-store sales and revenue.
  
• The competitive intensity, especially with the promotional environment, could pressure margins as the company balances promotional competitiveness with long-term profitability.
  
• The substantial and ongoing investments in supply chain transformation and new store openings might not yield the expected returns in the short-term, impacting net income and cash flow.

Valuation

• The analysts have a consensus price target of CA$32.455 for Pet Valu Holdings 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 CA$39.0, and the most bearish reporting a price target of just CA$28.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.3 billion, earnings will come to CA$137.2 million, and it would be trading on a PE ratio of 20.0x, assuming you use a discount rate of 8.0%.
• Given the current share price of CA$24.49, the analyst price target of CA$32.45 is 24.5% 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.