Store Expansion And Automation Will Improve Efficiency By 2026 Amid Shift To Low-Price Options

Key Takeaways

• Strategic store expansions and favorable lease opportunities are expected to drive revenue growth and improve net margins through increased consumer reach and cost-effective operations.
  
• Investments in automation and internal financing will enhance operational efficiency and support aggressive growth without significant debt, potentially boosting future earnings.
  
• Rising operating expenses and currency volatility threaten Rusta's profitability, with risks from low consumer spending and challenging market expansions potentially exacerbating pressures on margins.

Catalysts

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

• Rusta is actively expanding its store count, with plans to open 50 to 80 new stores over the next three years, surpassing previous guidance. This store expansion is expected to drive revenue growth by increasing the company's footprint and consumer reach.
  
• The availability of attractive rental locations due to current economic conditions allows Rusta to secure favorable leases, enhancing the company's potential to improve net margins through more cost-effective store expansions.
  
• Rusta is seeing a shift in consumer behavior towards low-price options, which aligns with its value proposition. This trend is expected to continue, supporting both revenue growth and potentially improving net margins by increasing sales volumes without significant price increases.
  
• The company is making strategic investments in automation and warehouse optimization, set to be completed by 2026. This can lead to increased operational efficiency, likely reducing costs and improving net margins and earnings.
  
• Rusta's strong balance sheet and decision to fully finance growth internally indicate a robust financial position, allowing the company to pursue growth opportunities aggressively without incurring significant debt, potentially enhancing future earnings.

Rusta Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rusta's revenue will grow by 10.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.9% today to 6.0% in 3 years time.
• Analysts expect earnings to reach SEK 899.8 million (and earnings per share of SEK 5.17) by about February 2028, up from SEK 438.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.6x on those 2028 earnings, down from 27.8x today. This future PE is lower than the current PE for the SE Multiline Retail industry at 28.5x.
• Analysts expect the number of shares outstanding to decline by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.68%, as per the Simply Wall St company report.

Rusta Future Earnings Per Share Growth

Risks

• The company's sales growth is largely driven by volume rather than price, indicating that overall revenue could be impacted if consumers start spending less even if foot traffic increases. (Revenue)
  
• There is significant pressure on operating expenses (OpEx) due to higher electricity costs and costs from new store openings, which could squeeze net margins if these costs aren't offset by sufficient revenue growth. (Net Margins)
  
• Profitability is currently being negatively affected by exchange rate fluctuations, particularly with a weaker NOK impacting the Norwegian segment negatively. This currency volatility could further impact earnings unpredictably. (Earnings)
  
• Despite setting ambitious store expansion goals, the profitability and success of these new stores can be uncertain, particularly when entering or expanding in challenging markets such as Germany, which is currently facing tough economic conditions. (Earnings)
  
• The consumer sentiment remains pressured, with customers seeking lower price points, which poses a risk of lower profit per transaction if volume growth does not keep pace with reduced price offerings. (Revenue and Net Margins)

Valuation

• The analysts have a consensus price target of SEK86.0 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 SEK15.1 billion, earnings will come to SEK899.8 million, and it would be trading on a PE ratio of 17.6x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of SEK79.75, the analyst price target of SEK86.0 is 7.3% 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.