US Expansion And Efficiency Gains Set To Propel Revenue And Margin Growth

Key Takeaways

• Expansion into the U.S. market and new store openings highlight significant growth opportunities and long-term revenue increases.
  
• Improvements in operational efficiencies and strong donation trends are expected to enhance net margins and support supply chain sustainability.
  
• Challenges in consumer spending, competition, and operational costs in the Canadian market may significantly impact sales, revenue growth, and profitability.

Catalysts

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

• Expansion into the U.S. market presents a significant growth opportunity, particularly as thrift becomes more mainstream; this is expected to drive revenue increases, especially in regions where Savers Value Village is currently underpenetrated, like the South and Southeast.
  
• New store openings are on track with the targeted number for the year, with a focus on the U.S. market, expected to fuel high single-digit annual sales growth over the long term, positively impacting revenue.
  
• Increasing operational efficiencies in off-site processing capabilities are driving cost per unit down, approaching the cost of traditional on-site processing, which is likely to improve net margins over time.
  
• Strong donation trends support the supply chain sustainability, ensuring a continuous flow of merchandise to meet future demand, essential for revenue growth and maintaining competitive pricing.
  
• Active membership growth in the loyalty program, particularly in Canada, despite macroeconomic challenges, shows consumer engagement and brand loyalty, indicating potential for increased spending and revenue as economic conditions improve.

Assumptions

• Analysts are assuming Savers Value Village's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 6.8% in 3 years time.
• Analysts expect earnings to reach $125.8 million (and earnings per share of $0.69) by about September 2027, up from $37.5 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 23.1x on those 2027 earnings, down from 43.4x today. This future PE is greater than the current PE for the US Multiline Retail industry at 17.6x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.52%, as per the Simply Wall St company report.

Risks

• The economic downturn and rising household debt levels in Canada pose a risk to consumer spending power, which could significantly affect sales and revenue in the Canadian market.
  
• Intense competition and market saturation, particularly in Canada where thrift shopping is mature, might limit customer growth and retention, challenging revenue growth and market share.
  
• The company's profitability may be impacted by the cost pressure from investments in new stores and central processing centers, especially if these initiatives do not achieve expected returns quickly.
  
• Foreign exchange fluctuations due to operations in multiple countries could influence financial performance, impacting net margins when converting sales and profits back into the company's reporting currency.
  
• Regulatory changes and increased scrutiny on for-profit thrift operations could introduce operational and compliance costs, potentially affecting the company's earnings and net margins.

Valuation

• The analysts have a consensus price target of $14.12 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 $22.0, 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 $125.8 million, and it would be trading on a PE ratio of 23.1x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $10.12, the analyst's price target of $14.12 is 28.4% 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.