Tokmanni Q2'25: Theme for the rest of the year is profitability

Translation: Original published in Finnish on 8/18/2025 at 7:10 am EEST.

Tokmanni's Q2 result weakened, driven by both segments. The company has turned its attention to improving profitability, which is essential for the balance sheet position and thus dividend payout. Neutral valuation leaves the stock's expected return to rely on a solid 5% dividend yield, which in itself is not enough to cover our required return. Therefore, we reiterate our Reduce recommendation. Also, our target price remains at EUR 10 due to broadly unchanged forecasts. 

Burdensome cost structure weakened profitability

The Group’s Q2 revenue grew by 5% to 443 MEUR, largely due to store expansion and comparable growth in the Dollarstore segment. In Finland, sales in the Tokmanni segment grew slightly due to an expanded store network and mild comparable revenue growth. Despite top-line growth, the Group's Q2 adjusted EBIT weakened to 21 MEUR (Q2’24: 28 MEUR), which represented 4.8% of revenue. The Group-level earnings decline is explained by a lower gross margin compared to the comparison period, as well as fixed costs growing faster than revenue. The gross margin was particularly weakened by the sales mix in the Tokmanni segment shifting towards lower-margin daily consumer goods. Fixed costs, in turn, grew due to rising personnel costs and high marketing costs relative to the volume level. Tokmanni issued a negative profit warning in the summer, meaning that the Q2 operational figures were already known to us, and therefore the report did not offer any major surprises.

Eyes on profitability

In its Q2 report, the company emphasized that it had shifted its focus towards profitability at least for the rest of the year. It aims to achieve this through comparable growth, by improving its gross margin and with strict cost control. In addition, the company aims to improve the efficiency of working hours and marketing, areas where the company failed in Q2. Margin improvement is crucial for short-term development, as a weak year-end would lead to weak cash flow development. As a result, leverage would remain at an elevated level, and servicing it might take precedence over profit distribution in line with the dividend policy (70% of net profit). For this reason, optimizing inventory levels is also a key theme during the rest of the year, which, if successful, would support cash flow through the release of working capital.

In the long term, a potential earnings growth component is improved efficiency through Dollarstore's growth (especially comparable growth). In addition, the company must ensure the attractiveness and competitiveness of the Tokmanni segment, so that its recent volatile development does not continue and thus undermine the earnings improvement enabled by Dollarstore.

Expected return is at an insufficient level

We believe the stock's short-term valuation is elevated (2025e P/E 13x and IFRS-15-adj. EV/EBIT 13x), and our earnings growth forecast puts it at a fairly neutral level (2026e P/E 10x and IFRS-16-adj. EV/EBIT 10x). We especially examine EV multiples that take into account the leveraged balance sheet. Considering a neutral valuation that factors in earnings growth, the stock's expected return is dependent on a dividend yield of just over 5%, which itself is not enough to meet our required return (10%). In addition, the level of dividend is subject to slight uncertainty if the performance level and thus the balance sheet position cannot be improved during the rest of the year. The share is priced at a discount to its peers, but this is justified by their superior return on capital. The limited upside is also reflected in the value indicated by the DCF model (EUR 10.2), which is based on our strong forecasted earnings growth (12% p.a. for 2024-27e) and cash flow generation capacity. The stock's neutral valuation does not encourage taking on the risks associated with the competitiveness of the Tokmanni segment, the earnings potential of the Dollarstore concept, and consequently, the earnings growth driver. We remain on the sidelines regarding the company, as we currently see the share's risk/reward ratio as unattractive.