Shares of Savers Value Village traded hands Wednesday in New York at $24.07.Damian Lugowski/iStockPhoto / Getty Images
Analysts like Savers Value Village Inc. SVV-N And consumers like thrifting for second-hand clothing and other used things at the company’s Value Village stores. But investors beware: The stock isn’t exactly a bargain.
It premiered in late June after an initial public offering at US$18. The shares traded hands Wednesday in New York at $24.07 – a 34-per-cent gain in just four weeks.
The strong performance follows reports of consumers feeling relatively upbeat, while U.S. stocks are enjoying a bull-market run. But Savers Value Village stands out as a particularly bright development.
The for-profit second-hand retailer – based in Belleville, Wash., but with nearly half of its 317 stores located in Canada – taps into a couple of powerful trends: thrifting, which is especially popular among younger consumers who show off their “hauls” on social media, and a broader desire to push back against waste by donating and reusing old stuff.
Analysts, who are now issuing reports on the stock, are enthusiastic.
Mark Petrie, an analyst at CIBC Capital Markets, said the thrift market is highly fragmented. But Savers Value Village – the largest for-profit player – commands a share eight times the size of the next largest for-profit second-hand retailer, giving it a competitive advantage.
“This scale clearly allows for investment in process and efficiency that would be impossible with a smaller network,” Mr. Petrie said in a note.
While non-profits, such as the Salvation Army, offer meaningful competition for donated goods, Mr. Petrie doesn’t believe they are a threat from a retail perspective.
Randal Konik, an analyst at Jefferies, noted this week that the company’s reported sales of nearly US$1.5-billion in 2022 is a small fraction of the US$43-billion second-hand apparel market. He estimates that Savers Value Village can eventually increase its number of stores by eight times, to about 2,500 stores, over the long term.
He expects the retailer could ramp up its pace of openings from eight in 2022 to about 25 new stores by 2025.
“Additionally, there is an opportunity for Savers Value Village to branch into new markets through acquisitions, which could present meaningful upside to our current model,” Mr. Konik said in a note this week.
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Apart from growth, the company should benefit from operational improvements as well. It has already introduced self-checkout capabilities, and is developing a centralized processing centre to improve its efficiency and support profit margins of at least 20 per cent over the longer term.
Mr. Konik estimates Savers Value Village will generate adjusted EBITDA (earnings before interest, taxes depreciation and amortization) of US$420-million by 2026, up from $300-million in 2022 – a 40-per-cent increase in four years.
The impressive trajectory reminds him of other successful value retail pioneers, such as TJX Cos., TJX-N which operates under banners such as Marshalls, Winners and HomeSense. Its share price has doubled over the past five years, putting the value of the company at about US$100-billion. Savers Value Village is valued at US$3.8-billion.
Canadian investors can look to Dollarama Inc. DOL-T for inspiration. The Montreal-based company has transcended the image of a deep-discount retailer with well-organized stores and an efficient operation, spurring an expansion to 1,507 locations from 1,170 five years ago. The share price has doubled over this period.
Savers Value Village could have similar long-term success. The problem? The stock’s valuation isn’t going to appeal to bargain hunters.
Mr. Konik values the shares using a ratio that compares enterprise value (essentially market capitalization and debt, minus cash) to EBITDA. Using 2025 estimates, the ratio is 13, which is near the top of the range compared with peers.
He thinks the stock deserves an even steeper valuation, which could drive the share price to US$29 within 12 months, implying a gain of more than 20 per cent from the current level.
However, just as shoppers need to be choosy about what they thrift, investors may want to consider their timing here.
Stock prices tend to subside once the initial enthusiasm for an IPO wears thin. As well, analysts are overwhelmingly bullish on the retail stock right now, leaving little room for disappointment.
Savers Value Village is a compelling stock. But browsing is encouraged.
David Berman