Savers Value Village: Canada Headwinds Likely To Drag Down Overall Performance

Investment Overview - Savers Value Village (NYSE:SVV) is rated as a hold due to expected underperformance in Canada operations, influenced by high mortgage rates affecting household income [2] - The robust outlook in the US is not anticipated to sufficiently offset the weaknesses in Canada, suggesting better investment alternatives in the US market [2] Business Description - SVV operates as a leading for-profit thrift store in the US and Canada, sourcing merchandise through non-profit partners and processing it in centralized centers [3] - The US market accounts for 52% of FY23 revenue, while Canada contributes 40% [3] 2Q24 Earnings - SVV reported sales of $386.7 million, missing consensus expectations of$391.1 million, with same-store sales growth declining from 0.3% in 1Q24 to -0.1% in 2Q24 [4] - Gross margin was reported at 57.9%, below the expected 59.1%, leading to an adjusted EBITDA margin of 20.7%, also below the consensus of 21.4% [4] - Management has lowered FY24 guidance for adjusted EBITDA to $290 to$310 million, down from $330 to$340 million, with expected sales revised to $1.53 to$1.56 billion [4] US Market Outlook - US same-store sales growth remains strong, with a favorable macro environment driving consumer behavior towards value purchases [5][6] - The loyalty program is experiencing double-digit growth, particularly among younger and higher-income customers, indicating a positive trend for SVV [7] Canada Market Outlook - Canada operations are facing significant headwinds, with deteriorating same-store sales growth and negative consumer demand trends [9] - High interest rates in Canada are expected to pressure household income, particularly as many mortgages are up for refinancing at higher rates [10] Valuation - SVV's valuation is likely to remain depressed due to concerns over Canadian performance, despite a strong outlook in the US [11] - Competitors like Ross Stores and Ollie's Bargain Outlet are seen as better investment options due to clearer growth prospects [11] Conclusion - The overall performance of SVV is expected to be weak in the near term, primarily due to challenges in Canada, which are likely to outweigh the benefits from the US market [12]