Puuilo Q3'24: Quarter of outstanding results

Translation: Original published in Finnish on 12/12/2024 at 7:40 am EET.

Puuilo's profitability in Q3 was at an excellent level and revenue growth continued to be supported by new stores. Although like-for-like store sales were flat year-on-year, we believe that the increase in customer numbers indicates that the concept's appeal has remained unchanged. We believe that the expected return from the stock's earnings growth remains attractive. Therefore, we reiterate our Accumulate recommendation. We raise our target price to EUR 11.5 (was 11.0) due to positive forecast changes.

Growth and excellent cost efficiency

Puuilo's revenue grew by 11% year-on-year on the back of new stores. As a result of the lower average basket, like-for-like store revenue was flat versus the prior year. However, we do not see this as a cause for concern, but rather as evidence of the attractiveness of the concept in terms of customer growth (15% for the Group and 2.5% for old stores). Overall, the performance can be considered good, as other players in the sector have reported rather sluggish growth rates. EBITA grew faster than revenue, driven by improved gross margin and tight cost control. Although the company had communicated that it had invested in store efficiency, such a large relative jump in profitability surprised us. In relative terms, the company's adjusted EBITA margin rose to 19.2% of revenue, which is an excellent level for a retailer.

Guidance reiterated; small tweaks to forecasts

The company reiterated its guidance of 380-400 MEUR for revenue and 60-66 MEUR for EBITA. In our view, the reiteration of guidance signals that the business environment will remain challenging for the remainder of the year, as we believe a turnaround in like-for-like growth in Q4 would drive EBITA above guidance. Our forecast revisions based on the report highlighted the excellent Q3 spending performance and the weak outlook for the rest of the year for like-for-like stores. We also increased our store forecasts for 2025-26, which was reflected in a 2% increase in the profit line.

Maintaining the investor story also requires like-for-like store growth

The company's revenue development will continue to be supported by an average annual opening rate of six new stores. As long as customer numbers continue to grow, we believe Puuilo's investor story will remain unchanged. As such, the current challenges to like-for-like sales should not be given too much weight, and we believe the trend will turn positive during 2025 as the improving market environment paves the way for the company's average basket to rebound. We expect the company's earnings to improve as the stores opened in previous years come into full operation, shift scheduling efficiencies begin to take effect and the share of private label sales increases. However, increased competition in the retail sector creates some uncertainty for the company's trajectory. In addition, competitive pressure in the market is increasing as several low-cost players plan to expand their store networks in the Nordic countries. However, so far Puuilo has managed to navigate the challenging market very well, which we believe is a sign of the company's competitive concept. We forecast Puuilo's adjusted EPS to grow at a CAGR of 18% (2023-26e).

Expected return remains attractive

In terms of realized earnings multiples (P/E 19x and IFRS 16 adj. EV/EBIT 14x), the company is priced slightly above our comfort zone. However, this is justified as we expect the company to deliver strong earnings growth in the coming years. Taking into account our earnings growth forecasts, valuation multiples that are slightly elevated on actual earnings, and a 5% dividend yield, the expected total return on the stock is around 15%. We find this level attractive, and it exceeds our WACC, which means that the stock's risk/reward ratio is favorable. The EUR 12.3 per share implied by our cash flow model also suggests upside and justifies a positive view on the stock. We see Puuilo as one of the highest quality companies in the sector, with a concept that has proven its competitiveness in both favorable and challenging markets.