Yahoo Finance Value Village has shopping list of levers to increase market share: CIBC
The analysts are beginning coverage with an "outperform" rating and US$27 per share price target
Analysts at CIBC kicked off research coverage of newly public Savers Value Village (SVV) with an outperform rating, saying the company has a number of levers it can pull to increase market share and take advantage of the growing popularity of buying secondhand.
“GlobalData forecasts secondhand to double its share of apparel spending in the next decade. There are multiple trends supporting this growth, but we call out sustainability and value as important drivers,” Mark Petrie, analyst at CIBC Capital Markets, wrote in a note on Sunday.
“Gen Z and Millennial cohorts are accounting for more and more retail spend, and over 60% of secondhand industry growth is expected to come from these groups. Ultimately, we believe secondhand will continue to broaden its customer base and gain share of wallet.”
Value Village, the largest for-profit thrift store operator in Canada and the U.S., went public on the New York Stock Exchange on June 29. The company upsized its initial public offering to 22.3-million shares at US$18.00 each.
CIBC has a 12-month price target of US$27.00 on the stock.
The thrift store industry is extremely fragmented, which could work in Value Village’s favour, Petrie says, because its larger scale gives it a higher level of sophistication compared to its peers and could open the door to mergers and acquisitions.
“We believe Savers can execute both on its new store rollout as well as consolidation. At only 317 stores today, the network growth potential is material and estimated at approximately 2,200 stores,” he said.
Value Village executives aim to ramp up its expansion by opening 20 or more new stores each year starting in 2024.
Management has also set out long-term financial targets of 10 per cent revenue growth, comparable store sales (a key sales metric that measures sales at stores open for at least one year) in the low- to mid-single digit range, and adjusted profit margin growth of 20 per cent.
Risks to Value Village as an investment
While CIBC says the company’s financial targets are “reasonable” and “achievable,” it says accelerating store openings will come with risks since it will challenge the company to “execute in a way it has not previously.”
The quicker store expansion could be bogged down by having to build awareness of being a donation destination in new neighbourhoods, and because the process of sorting and grading clothing is so labour intensive.
Not to mention there’s been a general long-term decline in the quality of clothing being produced, meaning items have shorter lifespans and therefore may be less desirable or useful in the secondhand thrifting world.
Grading donated items can represent as much as 60 per cent of the cost of merchandise sold, Petrie says.
The tight labour market, particularly in low-paying sectors, could also be an issue.
“Given the uniqueness of Savers’ business model, the company has greater exposure to labour costs compared to traditional retailers,” he said.
“Any challenges or changes in the labour market with respect to turnover, labour shortages and rising wage rates could weigh on profitability.”
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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