Expansion Into New Markets And Efficiency Investments Will Drive Future Profitability

Key Takeaways

• Strategic expansion and U.S. market penetration aim for sales growth and increased market share in under-represented regions.
  
• Technological investments enhance efficiency, reduce costs, and improve inventory strategies, bolstering profitability and customer retention.
  
• Challenging economic conditions and strategic risks such as inventory management and new store openings may pressure margins and slow earnings growth.

Catalysts

Sells second-hand merchandise in retail stores in the United States, Canada, and Australia.

• Savers Value Village's expansion of store openings, with plans to open up to 30 new stores in 2025, suggests a strategy for high-single-digit total annual sales growth over the long term. This will increase revenue as new locations begin contributing to overall sales.
  
• Investment in off-site processing capabilities is enhancing operational efficiency. As throughput and productivity increase, the cost per unit is expected to decline, which will positively impact net margins and long-term profitability.
  
• The successful implementation of centralized processing, automated book processing, and self-checkout is driving long-term profitable growth. These innovations will likely improve earnings through enhanced operational efficiency.
  
• The planned use of data and technology to improve inventory selection and pricing strategies will sharpen their value proposition, potentially driving stronger sales and enhancing net margins through better customer retention and engagement.
  
• The company's strategic focus on U.S. market penetration, particularly in under-represented regions, will likely contribute to revenue growth and market share gains, supporting overall earnings growth.

Savers Value Village Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Savers Value Village's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.9% today to 6.1% in 3 years time.
• Analysts expect earnings to reach $113.8 million (and earnings per share of $0.87) by about December 2027, up from $74.8 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 18.5x on those 2027 earnings, down from 22.0x today. This future PE is lower than the current PE for the US Multiline Retail industry at 20.2x.
• Analysts expect the number of shares outstanding to decline by 6.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.66%, as per the Simply Wall St company report.

Savers Value Village Future Earnings Per Share Growth

Risks

• The challenging macroeconomic environment in Canada, with high unemployment and rising costs of living, could continue to negatively impact sales and revenue growth, especially considering that a significant portion of the customer base is low-income.
  
• Pulling back too far on processing levels in response to softer demand in Canada previously contributed to sales deceleration, suggesting risks in inventory management that might affect revenue and margins if not properly balanced.
  
• The reliance on new store openings to drive revenue growth presents risks, such as initial losses or low profitability in the first year of new stores, which can impact overall net margins and earnings.
  
• Investments in off-site processing centers are affecting profit margins due to increased overheads and operating costs, which could continue to exert pressure on short-term profitability, impacting earnings.
  
• Competitive pricing pressures within certain categories and regions may necessitate strategic price reductions, potentially squeezing margins and reducing earnings unless offset by increased sales volume.
  

Valuation

• The analysts have a consensus price target of $12.64 for Savers Value Village 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 $16.0, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.9 billion, earnings will come to $113.8 million, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 8.7%.
• Given the current share price of $10.31, the analyst's price target of $12.64 is 18.5% 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.