Savers Value Village: Robust Financial Performance And Promising Strategic Initiatives

Overview

My recommendation for Savers Value Village (NYSE:SVV) is a buy rating. Amidst a challenging economic environment characterized by persistent inflation, the retail industry has witnessed significant shifts in consumer behavior. SVV, a leading thrift store, has adeptly navigated this landscape, emerging as a key player in the retail sector. The company's robust financial performance, underscored by impressive revenue and EBITDA figures, is a testament to its resilience. Strategic collaborations, such as the GreenDrop initiative, and targeted expansion plans further solidify SVV's position, ensuring a steady supply of quality donations and enhanced brand visibility. As consumers increasingly seek cost-effective alternatives, SVV's approach positions it for continued growth and market dominance.

Business

SVV is a prominent thrift store chain. They operate a series of stores that offer second-hand items, encompassing categories such as clothing, accessories, and household goods. A distinguishing feature of SVV's business model is its reliance on inventory primarily sourced through donations. In many of their locations, SVV collaborates with local non-profit organizations. They collect donations on behalf of these organizations and, in turn, compensate them based on the sales of these donated items in the stores. This approach not only provides consumers with a budget-friendly shopping alternative but also actively supports community initiatives. Additionally, by promoting the reuse of items, SVV contributes to environmental sustainability by reducing waste.

In the past four years, SVV's revenues have clearly been bolstered by the COVID-19 pandemic and the subsequent inflationary pressure it triggered. These circumstances have led consumers to seek more cost-effective alternatives, given the significant decline in their disposable income. In 2021, SVV reported an impressive growth rate of 44%, which then moderated to 19% in 2022. This slowdown in 2022 can be attributed to tapering inflation, which decreased from 6.4% at the start of 2023 to the current rate of 3.7%. Nonetheless, as of October, inflation remains elevated at over 3%, still surpassing the Federal Reserve's 2% target.

Recent results & updates

SVV recently announced strong revenue and EBITDA figures. The company reported revenue of $379 million, which was bolstered by a 5.5% increase in comparable sales. This growth in sales was consistent throughout the quarter, with the primary driver being a 6.8% growth in transactions. However, this was slightly offset by a decrease in the average transaction value. SVV's management attributed this to consumers buying more items at lower prices, suggesting that inflation is having a negative impact on consumer spending. Looking forward, the company's management noted that quarter-to-date sales trends are in line with those of the second quarter. Additionally, SVV reported an adjusted EBITDA of $89.3 million, which is 23.5% of the total sales. This impressive figure was due to better cost management, although it was slightly tempered by a margin that was softer than anticipated.

In September 2023, the US inflation rate held steady at 3.7%, contrary to market predictions that anticipated a slight dip to 3.6%. This stability was due to a milder decrease in energy prices, which balanced out the reduced inflationary pressures in other sectors. Notably, inflation has consistently exceeded the target rate of 2%. Since June 2023, there's been a noticeable uptick, with rates climbing from 3% to September's 3.7%. This sustained inflation is diminishing consumers' disposable income, leading to reduced purchasing power. Generally, as the price of new goods and services increases, consumers may gravitate towards thrift stores in search of more budget-friendly options. Such a trend could result in increasing footfall and revenue for thrift stores, including SVV.

Capitalizing on the current inflationary environment, SVV is strategically expanding its retail presence. The company has plans to inaugurate 12 new stores in FY23 and an additional 22 in FY24. Notably, management highlighted their upcoming signing of the 16th lease, indicating a clear vision for their expansion trajectory. Given the ongoing inflation, the decision to establish more brick-and-mortar locations positions SVV to swiftly capture a larger market share and cater to consumers seeking cost-effective alternatives.

From a supply perspective, the consistency of donations has been stable. Given this steady influx, the company's goal to inaugurate 50 new locations this year appears well-grounded, especially as management has pinpointed 40-45 prospective sites. Savers' collaboration with GreenDrop is anticipated to elevate the quality of incoming donations, thanks to the strategic placement of these mobile drop-off points in upscale neighborhoods. This partnership ensures a continuous flow of items, ensuring well-stocked shelves and satisfied customers. Additionally, it amplifies Savers' visibility, potentially boosting sales-a crucial aspect considering SVV's expansion plans. Lastly, this alliance with GreenDrop bolsters Savers' reputation, underscoring its commitment to both social responsibility and environmental conservation.

With ongoing inflation consistently surpassing the 2% mark and now showing an upward trend, I anticipate a surge in demand for affordable alternatives. Coupled with SVV's impressive comparable sales figures and a promising expansion strategy for both stores and the GreenDrop initiative, I am confident that SVV is primed for increased market share and robust financial growth in the future.

Valuation and risk

According to my model, my target price for SVV is approximately $17.8, which would mark 19% upside. My projection of a 5% increase for FY23 is rooted in the guidance provided by SVV's management in their second quarter 2023 earnings report. As for the 5% forecast for FY24, it is slightly lower than the market consensus of 8%. On the flip side, this projected growth is still positive, and it is underpinned by SVV's aggressive store expansion strategy for FY24, aiming to tap into the growing segment of consumers seeking budget-friendly options amidst sustained inflation. Furthermore, SVV's partnership with GreenDrop, set to launch 50 new locations by the close of FY23, is poised to boost foot traffic in FY24. This is attributed to anticipated enhancements in donation quality, consistently replenished inventory, and heightened brand awareness and reputation for Savers. This synergy from the GreenDrop collaboration complements SVV's overarching expansion strategy. The reason I've adjusted my projections lower than market consensus is due to the management's guidance of 5% for FY23, a marked decrease from the 19% of 2022. Additionally, while the current elevated inflation is benefiting SVV, predicting its future trajectory remains uncertain.

Currently, SVV is trading at a forward P/E of 22.48x. When examining profitability, SVV boasts a net margin of 5.89% and an EBITDA margin of 26.04%. In both of these metrics, SVV surpasses Ollie's Bargain Outlet (OLLI), justifying its higher forward P/E. Based on its present P/E, my target price for SVV is approximately $17.80, indicating a potential upside of 19%. My model aligns with the management's projections, and, while it's somewhat more conservative than the broader market consensus, it still suggests a promising 19% return. Hence, I recommend a buy rating for SVV. Should SVV achieve the market's anticipated growth of 8% for FY24, the upside could further expand to roughly 30%.

Risk

A potential risk to my buy rating on SVV is a favorable shift in the inflationary landscape. The future trajectory of inflation remains unpredictable. Should inflation decrease to the 2% mark, the Federal Reserve may reduce interest rates to ward off deflation. A reduced interest rate typically stimulates economic growth by boosting retail spending in the U.S. As a result, consumers might shift their preferences from budget-friendly items to more premium products. In such a scenario, SVV, operating within the thrift store segment, could face challenges.

Summary

Recent financial results highlight SVV's resilience in the retail sector. Their announcement of strong revenue and EBITDA figures, combined with consistent growth in sales, showcases their adeptness in navigating the challenges of an inflationary environment. As inflation continues to impact consumer behavior, with disposable incomes feeling the pinch and the cost of new goods on the rise, thrift stores like SVV are becoming increasingly appealing to budget-conscious consumers.

SVV's strategic response to these market dynamics is commendable. Their ambitious expansion plans for the coming years, coupled with their collaboration with GreenDrop, demonstrate a proactive approach to capturing a larger market share. This partnership not only ensures a steady supply of quality donations but also enhances SVV's brand visibility and reputation.

In conclusion, given the ongoing inflationary pressures and SVV's strategic initiatives, it's evident that the company is well-positioned to capitalize on the shifting consumer landscape. Their commitment to offering affordable alternatives, expanding their retail presence, and ensuring a consistent supply of quality inventory sets the stage for future growth and market leadership. On the back of these, I recommend a buy rating for SVV.