Petz (PETZ3) had a strong result, but the stock drops as much as 15%: is the drop exaggerated?

Petz (PETZ3) released its results last Thursday night, recording an adjusted net income of R$ 21.1 million in the first quarter of 2022 (1Q22), which represents a growth of 57.7% in relation to the same quarter of 2021.

Market analysts highlighted the company’s numbers as positive. According to Levante, the numbers came back strong again, showing the company’s top-notch execution in its expansion plan. In addition, Petz delivered healthy margins despite an adverse macroeconomic scenario.

The research house’s analysis team points out that the company’s 1Q22 was marked by advances on the main fronts
strategic. Among them, the following stand out: (i) the announcement of the acquisition of Petix; (ii) the start of the Zee.Dog integration process, which has progressed as expected, focusing on medium/long term value creation; (iii) the acceleration of the analysis process at the front of laboratories in the pet health vertical (through a specialized strategic consultancy, and also through inorganic opportunities); and (iv) the acceleration of the Petz store expansion plan, which reached a
record level of 42 openings in 16 Brazilian states in the last 12 months.

For XP, Petz delivered solid results, with earnings before interest, taxes, depreciation and amortization (Ebitda) 5% above its estimates. Net revenue grew 29% year-on-year, supported by strong same-store sales performance (14%) in addition to the company’s strong store openings (+42 units opened in the last 12 months). The performance of the digital channel was another highlight, with growth of 41.5% year-on-year and record penetration of 31.7% in the company’s consolidated revenue.

However, the session as a whole post-balance sheet is quite negative for assets. PETZ3 shares fell by 15.10% at the lowest of the day, at R$12.88, closing down by 12.72%, at R$13.24. What explains this strong devaluation?

According to a market analyst, it is difficult to pinpoint a specific reason, but it is mainly a macro movement of the sector as a whole in the face of rising interest rates and inflation, amidst bets of greater monetary tightening, which impact retail, especially papers that trade with valuations considered higher, which end up suffering more than the rest of the papers. In addition, investors are concerned about the impact of inflation and the company’s price pass-through power, although analysts highlight the company’s good repricing power.

Looking at profitability, the company delivered a gross margin at stable levels (down 0.3 percentage point on an annual basis), explained by the successful transfer that the company made from cost inflation to prices, but which was still not enough to offset the higher share of the food category and sales from the digital channel.

XP highlighted in a report that “it is interesting to note that this was the first quarter in which Zee.Dog was fully reflected in the company’s results, with sales growing 50% on an annual basis, while Ebitda was still negative by R$ 3 million . However, according to analysts, the numbers should improve in the coming quarters as the company begins to benefit from the synergies between operations from the second quarter, with all of them to be reflected by the end of the first half of 2023, maintaining a buy recommendation for the shares.

Bradesco BBI evaluated strong and resilient growth and profitability. According to analysts, there was some pressure on the Ebitda margin [Ebitda sobre receita líquida] excluding IFRS16, which contracted 0.60 percentage point on an annual basis – also highlighting that part of this is due to the consolidation of Zee.Dog (whose profitability is low, perhaps a little negative) and part is a consequence of the acceleration of the opening of new stores, as well as inflation. Finally, adjusted net income of R$11 million was slightly below its estimate due to net financial results and slightly higher depreciation and amortization.

Exaggerated fall?

However, for Luis Nuin, an analyst at Levante Ideias de Investimentos, it is difficult to find a number so catastrophic as to justify a drop of almost 15% on the day. “The only drawback is that a good part of the net income for the quarter was a financial result, due to the follow-on cash [oferta de ações]”. For the analyst, this is a great time to buy for those looking to make a consolidation call for the next few years.

Overall, he assesses, the numbers were good, with a very good execution in the expansion plan, in addition to healthy margins, despite a very complicated macroeconomic scenario.

For BBI, although there is some pressure on the Ebitda margin, the main adverse factors are the acceleration of store openings and the acquisition of Zee.Dog, both of which we consider “good” headwinds, as they will significantly contribute to growth. of future revenue and cost dilution.

“We think there are some concerns among investors that the difficult macro environment in Brazil could lead to downtrading. [com mudanças para marcas mais baratas] within the pet food category, thus putting pressure on sales growth and gross margin, but we note that these results show no evidence of this (a point that management emphasized in its commentary),” the analysts say.

In the same vein, Nuin, from Levante, assesses that a problem in the entire sector, inflation, has been very well handled by the company. “In this aspect, the company reinforced that it has been able to pass on the high prices, in an integral way, to the final consumer. The final consumer always thinks twice when it comes to changing the food for their animals. It is not uncommon to see tutors changing their consumption habits downwards, with the idea of ​​maintaining the habits of their animals. With this, the transfer of increases is ‘facilitated’”, he says.

Thus, the results are consistent with the optimistic view of Petz, as also pointed out by BBI, seeing the company well positioned to capitalize on the growth opportunity offered by a highly fragmented market (through store openings) and the omni model (multichannel ) in the category allows Petz to offer the best levels of e-commerce service in the industry, thus protecting the company from competition in the markets.

Analysts predict a CAGR (weighted average annual growth rate) of sales of around 33% in the period
2021-24 rising to above 40% relative to earnings. Therefore, while the shares trade at a strong multiple of price over earnings of 51 times expected in 2022, this drops sharply to around 36 times in 2023. “Thus, we maintain our buy recommendation and target price of R$ 25 with only small changes in the estimates”, they evaluate.

Levante reinforces that the company managed to maintain profitability while looking for alternatives to mitigate the effects of inflation.

“In this context, being capitalized and making good use of financial resources constitutes a competitive advantage for it, ensuring the availability of recurring products superior to the competition (efficient management of stockout levels) and the execution (and acceleration) of the store expansion plan Petz, which helps to accelerate the process of capturing market share in a Pet segment with high growth potential, which is still highly fragmented”, he points out.

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