Weak In-Store Demand Will Erode Margins Despite Digital Shift

Key Takeaways

• Growing e-commerce adoption and unfavorable demographic trends are limiting store revenue growth and long-term expansion opportunities for Tokmanni.
  
• Rising regulatory, wage, and operational expenses threaten profitability, while continued store expansion risks market saturation and diminishing returns.
  
• Expanded private labels, integration synergies, and digitalization drive efficiency and margins, while strong customer growth and retail partnerships support long-term revenue and profitability.

Catalysts

Operates as a variety discount retailer in Finland, Sweden, and Denmark.

• Physical store revenue growth remains under threat as consumers continue shifting their spending towards e-commerce, pressuring Tokmanni's sales volumes, store productivity, and contributing to stagnating or even declining like-for-like revenue across both segments.
  
• Demographic shifts in Finland, especially an aging population and stagnant population growth, may result in a gradually shrinking customer base for discount retail, directly limiting long-term revenue potential and store expansion returns.
  
• Tightening environmental regulations and rising sustainability requirements across the Nordics will drive up compliance and operational costs, forcing Tokmanni to choose between absorbing higher costs or passing them to customers-both of which are likely to erode net profit margins over time.
  
• Persistent wage inflation in the retail sector and Tokmanni's ongoing higher personnel and marketing expenses, especially as new store openings continue, risk structuring the business for structurally lower EBIT margins and reduced overall earnings power.
  
• The aggressive physical store expansion strategy risks oversaturating the Finnish and Nordics markets, increasing the likelihood of sales cannibalization and excess fixed costs, with limited potential for meaningful long-term revenue growth and further compression of returns on invested capital.

Tokmanni Group Oyj Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Tokmanni Group Oyj compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Tokmanni Group Oyj's revenue will grow by 3.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.2% today to 3.4% in 3 years time.
• The bearish analysts expect earnings to reach €64.0 million (and earnings per share of €1.11) by about August 2028, up from €37.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.9x on those 2028 earnings, down from 14.3x today. This future PE is lower than the current PE for the GB Multiline Retail industry at 27.3x.
• Analysts expect the number of shares outstanding to grow by 1.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.03%, as per the Simply Wall St company report.

Tokmanni Group Oyj Future Earnings Per Share Growth

Risks

• Continued expansion of the Dollarstore segment in Sweden and Big Dollar in Denmark, with robust revenue and customer traffic growth, positions Tokmanni to benefit from urbanization and rising population density, driving top-line revenue expansion in the long term.
  
• Significant progress in rolling out Tokmanni Group's private label products, which are showing strong sales and improving the product mix in Dollarstore, points to enhanced product differentiation and margin potential, supporting sustained net profit margin improvement.
  
• The group's integration efforts-most notably the One Company model and combined supply chain and sourcing operations-target substantial cost and operational synergies, with a stated annual synergy target of over €20 million, which can contribute to improved operating margins and higher earnings.
  
• Strategic investments in digitalization and omnichannel solutions, including upgraded supply chain management and warehouse systems, are expected to deliver higher operational efficiency, better inventory turnover, and margin expansion as Tokmanni capitalizes on e-commerce and automation.
  
• Despite short-term margin pressures, customer visits and like-for-like sales continue to rise, especially in core categories such as groceries, while Tokmanni's collaboration with SPAR International and the launch of EUROSPAR supermarkets offer exposure to retail best practices, supporting future sales growth and profitability.

Valuation

• The assumed bearish price target for Tokmanni Group Oyj is €8.2, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Tokmanni Group Oyj's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €17.0, and the most bearish reporting a price target of just €8.2.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €1.9 billion, earnings will come to €64.0 million, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 11.0%.
  
• Given the current share price of €9.08, the bearish analyst price target of €8.2 is 10.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.