Founded in 1954, Savers Value Village (NYSE:SVV) operates thrift stores in the United States, Canada, and Australia under the Savers, Value Village, Village des Valeurs, Unique, and 2nd Avenue brands. The company retails a variety of items, ranging from clothing to houseware and books. Around half of Savers Value Village’s revenues come from the United States, with the rest coming mostly from Canada.
The company had an IPO and began trading in June of 2023. Since, the stock has lost around 30% of its value.
Looking Ahead for a Sustainable Growth Level
Due to the Covid pandemic, Savers Value Village had very low revenues in 2020. Since, the company has experienced a good recovery both in 2021 and 2022, bolstering growth in the years far above a sustainable growth rate. It seems that Savers Value Village’s management took the opportunity to show great growth for an IPO, as the company went public after the years.
A more sustainable estimate of growth should be compared to a pre-pandemic revenue level. From 2019 to guided 2023 revenues of $1.50 billion, Savers Value Village has had a CAGR of 5.6%, representing a more fair estimate for the future. Fairly in line, the achieved growth in 2023 year-over-year is 4.4% with the guidance. In 2023, the company opened up 12 new stores, but is accelerating the store base growth in 2024 with a target of 22 new stores, almost doubling the growth. On the other hand, as inflation is slowing down from previous years’ high level, the growth also has pressure downwards – I wouldn’t estimate too high acceleration going forward, but still believe that the company is positioned well for some growth in coming years. Representative of possibly accelerating growth, Savers Value Village has spent an increasing amount in CapEx in 2022 and 2023 with an average annual spend of $106 million in the years, compared to a 2019-2021 average of just $30 million.
Stable in Macroeconomic Turbulence
Savers Value Village has had a consistent performance in recent quarters – the growth has been consistent, ranging from a 5.6% growth in Q1 to a Q3 growth of 3.8%. Unlike many retailers such as Target, Big 5 Sporting Goods, Caleres, and Foot Locker, Savers Value Village’s revenues haven’t seen decreases due to currently pressured consumer spending. Typical for thrift stores, the company offers a very low price point for customers, and a good amount of the spending in the company’s stores can be characterized as necessary rather than discretionary. I believe that these factors play a key role in Savers Value Village’s fantastic stability.
In addition to a stable revenue performance, margins have mostly been stable and well above the 2019 pre-pandemic EBIT margin level of 3.8%. In Q3, the company’s GAAP EBIT margin seemingly fell highly with a 5.2% figure in the quarter compared to a previous year’s EBIT margin of 17.4%. Adjusting for a $48.3 million one-time stock-based compensation cost related to the IPO, though, the profitability has been kept with an adjusted EBIT margin of 17.5% in the quarter. The sales yield per pound processed is up from $1.42 in Q3/2022 to $1.50 in Q3/2023, a bit above inflation in the United States in the period.
The proven stability is valuable for investors – the low earnings volatility should be seen in a low beta, lowering the company’s cost of capital, and consequently jacking up the stock’s fair value. While the low volatility is likely to be seen as a lower overall long-term anticipated return, the company fits well into a risk-averse stock portfolio.
Some Undervaluation Despite a High P/E
With a forward P/E multiple of 26.5 at the time of writing, Savers Value Village seems very expensive. Due to the company’s low-risk nature and some earnings growth capability, the multiple doesn’t seem like a fair evaluation of the entire picture, though. To better evaluate the valuation and to estimate a rough fair value for the stock, I constructed a discounted cash flow model.
In the DCF model, I anticipate a modest amount of growth going forward with a 2024 and 2025 estimate of 6%, representing a slightly accelerated growth with the anticipated higher store count growth. Afterwards, I estimate the growth to slow down into a perpetual growth of 2%, representing a total revenue CAGR of 4.3% from 2022 to 2032. For the margins, I don’t see significant factors altering the long-term level. After a 2023 EBIT margin of 10.3%, though, I estimate the margin to scale into 14.0% for 2024 and forward, as the one-time stock compensation expense of $48.3 million is included in the 2023 EBIT figure. Due to higher store count growth, I estimate an initially weak cash flow conversion, that improves over time with slowing growth.
With the mentioned estimates along with a cost of capital of 6.73%, the DCF model estimates Savers Value Village’s fair value at $20.46, around 23% above the stock price at the time of writing. The stock has a favorable risk-to-reward according to the model as the stock’s risk level is low.
The used weighed average cost of capital is derived from a capital asset pricing model:
In Q3, Savers Value Village had around $18.7 million in interest expenses. With the company’s current amount of interest-bearing debt, Savers Value Village’s annualized interest rate comes up to 9.48%; the amount seems very high, even though a part could possibly be attributed to the company’s leases. As the IPO was made with debt payoffs in mind, I estimate the debt-to-equity ratio to lower slightly in the long-term into a figure of 20%.
For the risk-free rate on the cost of equity side, I use the United States’ 10-year bond yield of 4.05%. The equity risk premium of 4.60 % is Professor Aswath Damodaran’s latest estimate for the United States, made on the 5th of January. As a recent IPO company, Savers Value Village doesn’t yet have beta estimates available. Due to the previously mentioned stability, though, I estimate the beta to be very low; in the CAPM, I estimate the beta at 0.5. Finally, I add a small liquidity premium of 0.3%, crafting a cost of equity of 6.65% and a WACC of 6.73%.
Savers Value Village is accelerating its store count growth with a growing amount of capital expenditures. The company has stabilized its operations from the pandemic and post-pandemic effects, showing a more representative long-term growth level in recent quarters. Unlike many retailers, Savers Value Village has kept up stable operations in the currently pressured macroeconomic environment, making the stock a low-risk pick. Due to the company’s proven stability, I believe the stock still has some undervaluation despite a high-seeming price tag. For the time being, I have a buy rating for the stock.