Translation: Original published in Finnish on 7/21/2025 at 8:05 am EEST.

Tokmanni issued a profit warning and lowered its guidance due to a weak Q2 performance and the outlook for a presumably challenging H2. We expected a profit warning, but it materialized deeper than anticipated, which led to downward revisions to estimates. As a result, we lower our target price to EUR 10.0 (was EUR 11.5). In our view, the share's expected return remains too limited given its neutral valuation. We reiterate our Reduce recommendation.

The profit warning was expected

Tokmanni issued a profit warning on Friday and lowered its guidance for the current financial year. The profit warning was expected, but it materialized stronger than our forecasts. The company expects 2025 revenue to be 1,700-1,790 MEUR and adjusted EBIT to settle between 85-105 MEUR. The midpoint of the new guidance points to around 4% revenue growth and profitability of just over 5%.  Previously, the company expected revenue of 1,720-1,820 MEUR and EBIT of 100-130 MEUR. The drop was particularly steep on the earnings line, which underlines a weak Q2 and likely a challenging H2.

The Q2 earnings drop was driven by the Tokmanni segment

At the same time, the company provided preliminary information for Q2. Revenue (443 MEUR) was broadly in line with our expectations, but earnings (21 MEUR) significantly missed both our (28 MEUR) and consensus (29 MEUR) estimates. In our view, the earnings decline is primarily due to the Tokmanni segment, whose seasonal business has suffered from weak summer sales due to the cold early summer in Finland. This has led to sluggish demand, which forced to actions to accelerate inventory turnover resulting in a negative impact on the bottom line. We estimate that the impact has also continued into Q3. In our view, clearance sales of the Dollarstore segment's discontinued assortment have also somewhat weakened the group's profitability.

Forecast cuts and gross margin concerns

In connection with the update, we lowered our forecasts for the Tokmanni segment, specifically for both sales and margin, due to a weak Q2 and a likely challenging H2. Our new revenue forecast (1753 MEUR) is positioned at the mid-point of the guidance, while for earnings (91 MEUR) we are slightly below the mid-point. It is noteworthy that achieving even the new guidance requires the company to deliver at least approximately the comparison period's level of earnings in H2, given that H1's actual result is over 10 MEUR behind the previous year. In our view, the company's fluctuating performance has highlighted the impact of the tightened competitive environment, which in Tokmanni's case has hit comparable growth and profitability the hardest. We estimate the company will increase campaigning to regain customer trust, which will be reflected in weaker margin development over the coming years. For this reason, we also made downward revisions to our earnings estimates for future years.

Risk/reward at a subdued level

We believe the stock's short-term valuation is elevated (2025e P/E 14x 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. This would leave the expected return on the share dependent on a dividend yield of just over 5%, but this alone is insufficient to compensate for the required return (10%). The share is priced at a discount to its peers, but this is justified by their superior return on capital. Limited upside is also signaled by the value indicated by the DCF model (EUR 10.7), which relies on our strong forecasted earnings growth (11% p.a. for 2024-27e) and cash flow generation. 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.