Puuilo Q1'25: Strong performance across the board

Translation: Original published in Finnish on 06/10/2025 at 07:50 pm EEST

Puuilo’s Q1 earnings were very strong, which makes the reiterated guidance seem cautious. We continue to see strong conditions for business growth and value creation, but the stretched valuation leaves the stock's short-term return expectation dependent on the dividend. We raise the target price to EUR 13.5 (was EUR 12.0) but reiterate our Reduce recommendation due to the subdued risk/reward ratio.

A quarter of strong growth

In Q1, Puuilo's revenue increased by 18% to 89 MEUR driven by both new and old stores. The number of customers also increased in both new and old stores, which we believe indicates the competitiveness of the concept. The good growth in comparable revenue and the number of customers has likely been affected by the favorable spring conditions in Finland. The decline in the average shopping basket stopped, although customers' price-driven consumption continued. At the same time, private label sales grew strongly, driven by, e.g., new product launches, which in turn was the most significant factor in the gross margin improvement. Also, fixed costs flexed with revenue growth as the headcount remained at the comparison period's level. In our opinion, this demonstrates the quality of the company's exceptionally scalable business model for its industry, even in an international context. As a result, the company's Q1 EBITA increased to 10.8 MEUR, corresponding to a profitability of around 12%.

Guidance seems cautious

The company reiterated its guidance, which indicates that revenue is between 425 and 455 MEUR and adj. EBITA 70-80 MEUR. Reaching and even exceeding the guidance seems likely after a strong Q1, although Q2 is likely to be slightly quieter than the start of the year due to the unfavorable summer weather. In any case, we consider the probability of a positive earnings revision high, following the recent positive development of product margins and cost structure. In connection with the report, we raised our earnings estimates by some 10%, as a result of which we expect EBITA (2025e EBITA 80 MEUR) to settle at the top end of the guidance range.

Earnings grow also in the long term…

We expect the company to continue its strong growth throughout the 2020s, reaching its target of over 70 stores by the end of the decade. After this, without new growth drivers, it is likely that growth depends on comparable stores. In the mature stage, the company's growth investments will decrease proportionally, and the internal profitability of comparable stores should improve with scalable growth. Thus, we see the company clearly exceeding its targeted profitability level (17%), although we expect the competitive environment in the discount retail sector to tighten over the years. Balancing these opposing drivers, we expect Puuilo to achieve an excellent EBITA margin of good 18% in 2030.

… but the high valuation weighs on the stock's risk/reward ratio

We feel the short-term valuation of Puuilo's stock is stretched. With our 2025 estimates, the stock trades at 20x P/E and 16x IFRS 16 adj. EV/EBIT multiples. These levels are above our comfort zone, meaning that the 17% earnings growth we forecast will largely be used to digest multiples. In this case, the dividend yield (~5% p.a.) supports the expected return, but it is not enough to cover our required return (9%) on its own. With these parameters, the expected return of the stock is too narrow in our papers. The challenging risk/reward ratio is also supported by the marginal upside of the current share price to the value of our DCF model (EUR 13.8). Although we see Puuilo as the highest quality company in its sector and the business as value-creating, the safety margin protecting investors from uncertainties is almost non-existent at the current share price.