E-commerce Investments And Store Expansions Will Strengthen Future Performance

Key Takeaways

• Investment in e-commerce and Click & Collect enhances omnichannel presence, driving store traffic and supporting revenue growth.
  
• Consolidating warehouse operations with automation improves operational efficiency, boosting margins and net earnings.
  
• Operational inefficiencies, high costs, and execution risks in market expansions may strain profit margins despite revenue growth.

Catalysts

Operates as a home textile retailer in Norway, Sweden, Finland, and Estonia.

• The expansion of new categories since 2022, which accounted for NOK 55.1 million compared to NOK 33.9 million the previous quarter, is expected to drive future growth by attracting more customer traffic and enhancing sales of existing assortments, impacting revenue.
  
• The ongoing investment in e-commerce, supported by strong online growth (13.7% in Q4, 15.6% for the full year), along with Click & Collect options, positions Kid for further revenue growth by enhancing omnichannel presence and driving store traffic.
  
• The consolidation of warehouse operations in Sweden, which will increase storage space by 40% with innovative automation solutions at no additional rental cost, is expected to bolster operational efficiency, reducing costs and enhancing margins and net earnings as logistics are streamlined.
  
• Expansion and relocation plans for new and existing stores—particularly in Finland and Sweden, where several new stores are planned or underway—suggest potential for increased revenue through geographic growth and increased market presence.
  
• The digital pilot for the European market under the Hemtex brand, with marketing investments aimed at the German market, aims to capture new market segments, potentially increasing revenue through enhanced brand reach and online sales.

Kid Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kid's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 11.3% in 3 years time.
• Analysts expect earnings to reach NOK 538.0 million (and earnings per share of NOK 13.25) by about April 2028, up from NOK 398.6 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 16.1x on those 2028 earnings, up from 14.6x today. This future PE is greater than the current PE for the GB Specialty Retail industry at 14.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.8%, as per the Simply Wall St company report.

Kid Future Earnings Per Share Growth

Risks

• The decrease in gross margin by 2.2% compared to the previous year, primarily due to the performance of Kid Interior, indicates potential pressure on profit margins despite revenue growth. This can impact net margins and overall earnings.
  
• Logistical challenges in the Norwegian e-commerce channel, resulting in increased lead times, suggest potential operational inefficiencies that could affect customer satisfaction and future revenue growth if not addressed.
  
• The expansion of the Borås warehouse to replace the Lier warehouse will incur nonrecurring transition costs estimated at approximately NOK 30 million, which may temporarily affect net margins and earnings during 2025.
  
• Increased operating expenses, including employee benefit expenses, suggest rising OpEx as a result of wage increases and high project activities. This could strain net margins if revenue doesn’t grow proportionately.
  
• Potential risks associated with new category introductions and market expansions, such as the pilot e-commerce test in European markets under the Hemtex brand, carry execution risks. If these initiatives do not succeed, they might not contribute as positively to revenue or earnings as expected.

Valuation

• The analysts have a consensus price target of NOK172.5 for Kid 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 NOK4.7 billion, earnings will come to NOK538.0 million, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 7.8%.
• Given the current share price of NOK143.0, the analyst price target of NOK172.5 is 17.1% 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.