Store Expansion In Greece, Cyprus And Romania Will Boost Success

Key Takeaways

• Store expansion and new distribution centers in key markets aim to boost revenue growth and improve net margins through enhanced logistics.
  
• Favorable sourcing and share buybacks will likely improve gross margins and bolster earnings per share, supported by a strong net cash position.
  
• Rising competition, geopolitical uncertainty, and unstable supply chains may impact Jumbo's margins, with cautious cash flow strategies signaling concern for future shareholder returns.

Catalysts

Engages in the retail sale of toys, baby products, gift articles, household products, stationery, seasonal and decoration items, books, and related products primarily in Greece, Cyprus, Bulgaria, and Romania.

• The company plans to expand its store footprint in key markets such as Greece, Cyprus, and Romania, with new store openings, which could lead to increased revenue growth.
  
• Strategic investments in two new distribution centers are expected to enhance logistics and efficiency, potentially improving net margins.
  
• Favorable sourcing terms due to geopolitical shifts could reduce product costs and improve gross margins.
  
• Ongoing share buyback programs could bolster earnings per share (EPS) by reducing the number of shares outstanding.
  
• A strong net cash position allows flexibility in capital allocation, prioritizing strategic inventory purchases over dividend payouts, potentially supporting long-term earnings growth.

Jumbo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Jumbo's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.8% today to 26.6% in 3 years time.
• Analysts expect earnings to reach €364.7 million (and earnings per share of €2.68) by about August 2028, up from €320.1 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 16.5x on those 2028 earnings, up from 13.5x today. This future PE is lower than the current PE for the GB Specialty Retail industry at 22.5x.
• Analysts expect the number of shares outstanding to decline by 1.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.91%, as per the Simply Wall St company report.

Jumbo Future Earnings Per Share Growth

Risks

• The ongoing global market rebalancing poses significant uncertainty to Jumbo's supply chains and costs, which could negatively impact gross and net margins.
  
• Management's reluctance to increase dividends signals potential caution about cash flow stability and the need to preserve liquidity for strategic inventory purchases, which may affect future shareholder returns and earnings.
  
• Increased presence of international competitors like Action entering the Central and Eastern European markets, particularly Romania, poses a risk to Jumbo’s market share and revenue growth.
  
• The uncertainty surrounding freight rates and transport costs can influence operational costs and affect net profit margins if rates do not perform favorably.
  
• Unpredictable geopolitical situations, such as ongoing wars affecting markets like Israel, introduce a risk to consistent revenue and market stability in those regions.

Valuation

• The analysts have a consensus price target of €34.25 for Jumbo based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.4 billion, earnings will come to €364.7 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 10.9%.
• Given the current share price of €32.24, the analyst price target of €34.25 is 5.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.