European Expansion Will Increase Market Reach Amid Margin Challenges

Key Takeaways

• HORNBACH's expansion in Europe and integration of e-commerce channels position it for increased revenue growth through diverse sales avenues.
  
• Financial improvements and reduced debt suggest a solid platform for future growth and potential earnings enhancement.
  
• Soft consumer sentiment and increased operational costs threaten revenue growth, margins, and profitability, with lowered annual guidance emphasizing sales challenges.

Catalysts

Through its subsidiaries, develops and operates do-it-yourself (DIY) megastores with garden centers in Germany and other European countries.

• HORNBACH's focus on expanding its market share in multiple European countries and the opening of new stores, particularly in regions with strong performance like Sweden and Romania, suggests potential for increased revenue growth.
  
• The integration and growth of e-commerce channels, including successful Click & Collect and Direct Delivery services, indicates that HORNBACH is enhancing its revenue streams through online and offline sales interconnectedness.
  
• Continued improvement in gross margins (up 1.3 percentage points) and cost efficiency management, despite salary increases, suggest a potential improvement in net margins going forward.
  
• The re-opening of the Nuremberg store and additional store openings in Germany, Austria, and Romania, will add substantial new retail space, driving revenue growth through expanded sales capacity.
  
• A strong balance sheet with reduced net financial debt and improved cash flows provide a foundation for capturing future growth opportunities, potentially impacting future earnings positively.

HORNBACH Holding KGaA Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HORNBACH Holding KGaA's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.6% today to 2.3% in 3 years time.
• Analysts expect earnings to reach €153.3 million (and earnings per share of €9.59) by about February 2028, down from €160.9 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €171.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, up from 7.7x today. This future PE is lower than the current PE for the GB Specialty Retail industry at 20.6x.
• Analysts expect the number of shares outstanding to decline by 0.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.97%, as per the Simply Wall St company report.

HORNBACH Holding KGaA Future Earnings Per Share Growth

Risks

• The company's sales growth has been modest, with only a 0.5% increase over the first 9 months, despite challenging macroeconomic conditions in Germany. This raises concerns about the potential for revenue growth if economic conditions do not improve significantly.
  
• Consumer sentiment remains soft, with reluctant spending behavior in the DIY sector, especially regarding larger projects. This could continue to limit revenue growth if consumer confidence does not recover.
  
• Although the company achieved growth in footfall, average ticket sizes remain slightly down year-over-year, indicating potential pressure on net margins unless consumer spending increases.
  
• Salary increases, particularly in Germany due to trade union agreements, could raise operational costs without proportionate revenue growth, potentially impacting net earnings and EBIT margins.
  
• The company's revenue guidance for the full year was reduced, highlighting the potential for sales challenges which could result in lower-than-expected revenue and profitability.

Valuation

• The analysts have a consensus price target of €99.109 for HORNBACH Holding KGaA 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 €110.0, and the most bearish reporting a price target of just €85.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €6.8 billion, earnings will come to €153.3 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of €77.2, the analyst price target of €99.11 is 22.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.