Puuilo Q2'24: Growth on all fronts

This report is a summary translation of the report “Kasvua kaikilta rintamilta” published on 9/13/2024 at 7:10 am EEST.

Puuilo released a Q2 report that was quite in line with expectations. Strong revenue growth was driven by both new store openings and growth in existing stores. Profitability rose to near the historic highs of the COVID era due to favorable sales mix and successful cost control. The company revised the high end of its guidance range downward as a result of what we interpreted as a challenging outlook for the rest of the year, leading us to slightly lower our near-term forecasts. The expected total return on the stock looks attractive to us, even if the near-term valuation is somewhat stretched. We reiterate our Accumulate recommendation on the basis of a favorable risk/reward ratio but lower our price target to EUR 11.0 (was EUR 11.5) following the forecast changes.

Big picture shows quarter in line with expectations

Puuilo's revenue grew 15% year-on-year, driven by growth in both new and existing stores. The comparable growth in customer volumes was stronger than the growth in revenue, indicating that customers have focused on lower-priced products. However, we do not see this as a cause for concern, but rather see the growth in customer volumes as proof of the attractiveness of the concept. Overall, the performance can be considered good, as other players in the sector have generally reported sluggish revenue growth figures. Profitability grew faster than revenue, driven by improved gross margin and tight cost control. Although the company had signaled its intention to improve the scalability of growth, such a large relative jump in profitability came as a surprise to us. In relative terms, the company's adj. EBITA profitability rose to 20.7% of revenue, which is an excellent level for a retailer.

Guidance refined, good company-specific outlook despite challenging market environment

The company revised the upper end of its guidance range downwards and now expects revenue to settle between 380-400 (previously 380-410) MEUR and adj. EBITA between 60-66 (previously 60-70) MEUR. The revision of the guidance was the result of a combination of the H1 results and what we interpret as a challenging end of the year. We therefore expect the market environment remaining challenging, with the consumer situation easing only in 2025. On the other hand, we do not see this as a material drag on the company's results, as consumers seem to be increasingly focusing on products at lower price points, which is a more profitable business for the company. The company's revenue development will continue to be supported by the opening of approximately six new stores and the comparable growth resulting from the maturing store base. As a result, the company's profit level will improve as the stores opened in recent years start to approach full-flight altitude. However, increased competition in the retail sector creates some uncertainty for the company's trajectory.

Best to stay on board

In terms of realized earnings multiples (P/E 20x and IFRS 16 adj. EV/EBIT 16x), 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. We forecast Puuilo's result to grow at an annual rate of around 17% over the next three years. Given the 5% dividend yield and the slightly elevated valuation, the expected 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. 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.