Integrating ÖoB And Expanding In Norway Will Improve Customer Experience By 2028

Key Takeaways

• Successful integration and product strategy in Sweden could enhance revenue, margins, and customer experience long-term.
  
• Expansion and logistics upgrades in Norway and Sweden are poised to increase revenue and operational efficiency.
  
• Intense competition, reliance on discounts, and acquisition losses threaten Europris' margins and earnings, with currency and inventory risks compounding liquidity concerns.

Catalysts

Operates as a discount variety retailer in Norway.

• Europris' integration of ÖoB in Sweden is progressing on schedule, with category harmonization and joint sourcing expected to enhance product offerings and drive both revenues and margins by 2028.
  
• The ongoing upgrade of ÖoB's product range and store modernization set to begin in 2025 is likely to improve customer experience and boost footfall, potentially increasing revenues over the long term.
  
• Expansion plans in Norway include opening new stores in densely populated areas and updating 23 existing locations, which may lead to an increase in revenue and footfall.
  
• The development of private label products has helped Europris maintain competitive pricing while improving gross margins, an advantage that could enhance profitability over time.
  
• The planned improvements to logistics and the ERP system in Sweden through 2025 are expected to enhance operational efficiency and reduce costs, potentially contributing to better net margins.

Europris Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Europris's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.6% today to 7.8% in 3 years time.
• Analysts expect earnings to reach NOK 1.2 billion (and earnings per share of NOK 7.3) by about February 2028, up from NOK 839.0 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 15.2x on those 2028 earnings, down from 15.4x today. This future PE is lower than the current PE for the GB Multiline Retail industry at 15.5x.
• Analysts expect the number of shares outstanding to grow by 1.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.65%, as per the Simply Wall St company report.

Europris Future Earnings Per Share Growth

Risks

• Intense price competition, particularly from grocery chains, has led to lower sales from groceries, which could impact Europris' revenue and net margins.
  
• Continued reliance on seasonal campaigns and discounting to drive footfall could pressure gross margins and earnings over time if consumer behavior shifts or competition increases.
  
• The ÖoB acquisition has resulted in losses that weigh on group EBIT, and the timeline for achieving EBIT breakeven remains uncertain, impacting overall earnings prospects.
  
• Fluctuations in currency exchange rates and freight agreements add uncertainty to cost structures, potentially affecting gross margins negatively if not managed successfully.
  
• A planned inventory buildup that impacted cash flow may present risks if sales targets are not met, possibly straining liquidity and net profit.

Valuation

• The analysts have a consensus price target of NOK87.25 for Europris 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 NOK95.0, and the most bearish reporting a price target of just NOK74.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK15.8 billion, earnings will come to NOK1.2 billion, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of NOK79.1, the analyst price target of NOK87.25 is 9.3% 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.