US Store Expansion And Tech Upgrades Poised To Improve Operational Efficiency

Key Takeaways

• New stores in high-growth regions are expected to drive revenue and profitability, despite an initial drag on adjusted EBITDA.
  
• Competitive pricing and expanded off-site processing improve agility, operational efficiency, and potentially enhance net margins and earnings long-term.
  
• The Canadian segment faces revenue challenges from declining transactions and cost pressures, while currency fluctuations could impact profitability and growth strategies.

Catalysts

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

• The planned opening of 25 to 30 new stores in 2025, with a focus on high-growth regions like the U.S., is expected to be a significant driver of increased revenue. Although there is a current drag on adjusted EBITDA, these stores are anticipated to contribute to an inflection in profitability by 2026 as they mature.
  
• The implementation of competitive pricing tools and targeted pricing strategies are poised to enhance agility and responsiveness to market dynamics, potentially boosting both revenue and net margins by offering strong price-value propositions to consumers.
  
• Expansion of off-site processing capabilities is expected to lower costs and improve operational efficiency, which can positively impact net margins as more stores utilize these cost-effective methods for inventory management and distribution.
  
• Growth in the loyalty program with double-digit percent increases in active members, who contributed 72% of total sales, suggests future revenue growth potential as these customers tend to have higher purchase frequencies and average basket sizes.
  
• The focus on innovation and technology, such as automated book processing, is aimed at improving operational efficiencies. This can enhance net margins by reducing costs per unit and thus improve earnings in the long term.

Savers Value Village Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Savers Value Village's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 6.0% in 3 years time.
• Analysts expect earnings to reach $113.7 million (and earnings per share of $0.78) by about March 2028, up from $29.0 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 21.3x on those 2028 earnings, down from 38.4x today. This future PE is greater than the current PE for the US Multiline Retail industry at 16.2x.
• Analysts expect the number of shares outstanding to decline by 1.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.7%, as per the Simply Wall St company report.

Savers Value Village Future Earnings Per Share Growth

Risks

• The Canadian segment has experienced a decline in comparable store sales, primarily driven by a decrease in transactions, which negatively impacts the company's overall revenue and earnings.
  
• Fluctuations in the Canadian dollar value against the U.S. dollar could lead to foreign currency-related losses, affecting net income and adjusted EBITDA.
  
• New store openings, while expected to drive long-term growth, currently represent a headwind to adjusted EBITDA due to first-year losses and preopening expenses, which could pressure short-term earnings.
  
• Higher costs of merchandise sold and increased wages are leading to decreased margins, impacting profitability despite revenue growth.
  
• Continued macroeconomic challenges, such as potential new tariffs and inflation in Canada, may create additional uncertainties affecting consumer spending and comparable store sales.

Valuation

• The analysts have a consensus price target of $12.286 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 $9.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $113.7 million, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of $7.03, the analyst price target of $12.29 is 42.8% 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.