It’s hard to believe how far shares of Pet Valu Holdings (TSX: PET) have fallen over the years. Just when it looked like shares of the pet supply retail play were turning around, the shares went on to nosedive close to 55% in just under a year.
Undoubtedly, there are serious concerns for Canadian consumers as inflation stays overheated. May’s Consumer Price Index numbers weren’t quite as hot as during the COVID days.
But regardless, the war in Iran and other factors have weighed heavily on consumers who arguably haven’t even had the chance to recover from the pandemic-driven wave of inflation quite yet. With the threat of artificial intelligence (AI) and its longer-term impact on the jobs market, questions linger as to whether the consumer will feel good about spending on nice-to-haves again.
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Consumer pressures come to pet supplies
In any case, Canadians want value, and they’re willing to go to great lengths in order to find it. With same-store sales growth (SSSG) over at the local Pet Valu flatlining, it seems like the retailer is really having a tough time as consumers look to trim costs. Indeed, when one is facing a bit of a budget crunch, perhaps it’s just too easy to trade down at the local pet food shop, from premium-branded dog food to just some cheap kibble.
With inflation marching higher again and its potential to keep coming in hot in the second half after the Bank of Canada didn’t raise rates, questions linger as to whether the worst of retail’s woes are now in the rearview mirror. In any case, pets have definitely felt the effects of heated inflation and their owner’s hunt for a better deal when it comes to food, toys, grooming, and other supplies.
Despite the consumer-facing pressures, however, I do think that Pet Valu has a golden opportunity to smooth out inefficiencies across the supply chain.
Whether we’re talking about smart investments to unlock operating efficiencies or changing the mix of merchandise to better cater to cost-conscious petowners (the company is named Pet Valu, after all!), I think there are reasons to be a bit more optimistic about a name that I believe is oversold and a tad on the undervalued side, despite there being few, if any, timely catalysts in sight.
A dirt-cheap defensive hiding in plain sight?
Though it might not seem like it, I still view Pet Valu as more of a defensive than a discretionary. At the end of the day, pets have to eat, and while nothing can stop the trend of “trading down,” I think that, in due time, when consumers are put in a better spot, there will be more opportunities to trade back up again.
For now, management is doing a decent job of playing the hand it was dealt. With a fresh slate, lower expectations for profit and growth ahead, and a dirt-cheap 12.6 times trailing price-to-earnings (P/E) multiple, I think it might be time to think about buying.
The dividend yield is quite bountiful at 3%. And while the name might be falling fast, I think that the payout is destined for decent long-term growth.
