Upcoming Store Expansion And Supply Chain Investments Will Increase Future Market Reach

Key Takeaways

• Expansion into new markets, including Germany, and a store format update are positioned to drive revenue growth and improve net margins.
  
• Strong self-financed growth strategy and supply chain investments enhance financial stability, gross margins, and overall earnings.
  
• Currency volatility and high freight costs pose risks to margins and profitability, while expansion challenges and significant capital demands could stress cash flow and earnings.

Catalysts

Rusta AB (publ) retails home and leisure products in Sweden, Norway, Finland, and Germany.

• Expansion plans for opening 50 to 80 new stores over the next 3 years, including in Germany, where market conditions are becoming more favorable. This will likely drive revenue growth as the company enters new markets and increases store presence.
  
• Successful store format update designed to enhance space utilization and customer experience, giving a projected 1.5% to 2% like-for-like sales boost. This is expected to improve revenue growth and potentially enhance net margins through efficiencies.
  
• Positive signs of consumer behavior in Sweden and Norway, with increased sales of higher-ticket items and regained customer confidence, should contribute to higher revenues and improved profit margins from a better product mix.
  
• Significant investments in supply chain efficiency, including warehouse automation, scheduled for completion by 2026. This should improve gross margins and operating efficiencies, contributing to enhanced overall earnings.
  
• Strong balance sheet and self-financed growth strategy with no need for bank loans, allowing for aggressive and sustainable expansion, which should contribute positively to earnings and financial stability.

Rusta Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rusta's revenue will grow by 9.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 5.2% in 3 years time.
• Analysts expect earnings to reach SEK 802.5 million (and earnings per share of SEK 5.24) by about August 2028, up from SEK 476.0 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 20.3x on those 2028 earnings, down from 24.1x today. This future PE is about the same as the current PE for the SE Multiline Retail industry at 20.3x.
• Analysts expect the number of shares outstanding to grow by 0.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.52%, as per the Simply Wall St company report.

Rusta Future Earnings Per Share Growth

Risks

• The strengthening of the Swedish krona against key trading currencies, while beneficial in the long term, presents short-term headwinds that could negatively impact sales and gross margins, particularly due to exchange rate fluctuations affecting the euro and Norwegian krone. This could affect net margins and revenue stability.
  
• The highly competitive and challenging German market presents significant risks in achieving profitability, and the need for further store expansion before establishing proof-of-concept may delay financial returns, impacting overall earnings and net profit.
  
• Mixed consumer sentiment or cautious consumer behavior, particularly outside of Sweden and Norway, and reliance on campaign-driven sales could affect revenue growth if consumer preferences shift or economic conditions worsen, impacting revenue and profitability.
  
• Currency volatility and rising sea freight costs could increase expenses and erode profit margins, particularly if the stronger US dollar persists longer term, negatively impacting net profit and earnings.
  
• Investment in new store concepts and existing store refurbishments, while potentially driving sales, demands significant capital outlay (SEK 65 million), which could stress cash flow if projected sales boosts do not materialize quickly, impacting net profit and overall financial performance.

Valuation

• The analysts have a consensus price target of SEK83.333 for Rusta 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 SEK95.0, and the most bearish reporting a price target of just SEK75.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK15.6 billion, earnings will come to SEK802.5 million, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 7.5%.
• Given the current share price of SEK75.05, the analyst price target of SEK83.33 is 9.9% 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.