Pet Valu is the next major retail stock, Beacon says

Beacon Securities analyst Doug Cooper raised his price target on Pet Valu Holdings (Pet Valu Holdings Stock Quote, Chart, News, Analysts, Financials TSX:PET) to $45.00 from $35.75 in an August 5 report, maintaining a “Buy” rating. The new target is based on 12x FY26 EBITDA and reflects stronger-than-expected second-quarter results and improving margin trends.

Cooper said Pet Valu’s performance places it alongside leading Canadian retailers such as Dollarama, Tim Hortons, and Loblaw.

“Yet the stock trades at a discount,” he said. “Based on updated forecasts, Pet Valu trades at 9.6 times EBITDA and 18 times earnings, compared to 22 times EBITDA and 37 times earnings for Dollarama, and 11 times EBITDA and 22 times earnings for Loblaw. Given its growth profile, we believe Pet Valu deserves to trade at least in line with peers, or at a premium. In fact, given the spread, it would not surprise us to see Dollarama make a bid for PET at some point.”

Pet Valu is a Canadian retailer of pet food and supplies with over 700 corporate-owned and franchised stores across the country.

In Q2/FY25, Pet Valu reported revenue of $280.6-million, up 6% year over year, with system-wide sales rising 4.6% to $370-million. Adjusted EBITDA grew 4% to $60.2-million, with a 21.4% margin. Adjusted EPS came in at $0.38, compared to $0.36 a year ago.

The company raised its full-year outlook, now guiding to $1.18–$1.21-billion in revenue, $257–$262-million in EBITDA (~22% margin), and EPS of $1.63–$1.68. It also plans to add around 40 new stores in 2025.

Pet Valu repurchased 2.3 million shares during the quarter at an average price of $28.48.

Franchise operations contributed $178.9-million in revenue, up 8.4% year over year, supported by 35 net new franchise locations and a 3.3% rise in revenue per franchise. Corporate store revenue was $101.7-million, slightly up from $100.1-million last year.

Same-store sales growth reached 2.6%, the strongest in six quarters, helped by a 0.8% increase in same-store transaction volume, the best in two years.

Gross margin rose to 33.4% from 33.0% in Q1. Cooper noted that, excluding full-margin royalty revenue, merchandise margins rose to 27% from 26.5%.

Net debt increased to $300-million from $241-million in Q1, which Cooper attributed entirely to the share buyback activity.

“Management expects to pay off its $32-million revolver by year-end,” he said. “That would put debt/EBITDA at approximately 1x (excluding lease liabilities), a very conservative position, leaving the company with full availability on its $175-million revolver.”

Cooper forecasts Pet Valu will generate $262.8-million in Adjusted EBITDA on revenue of $1,198.6-million in fiscal 2025, improving to $283.5-million on revenue of $1,285.7-million in 2026.

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