Puuilo updates its strategy

Translation: Original comment published in Finnish on 4/22/2024 at 9:31 am EEST.

Puuilo has published targets that reflect its new updated strategy. Looking at the big picture, we believe the targets for growth and excellent profitability are realistic and achievable. The press release was short on details, and we expect the presentation of the strategy's cornerstones and implementation methods to be left to tomorrow's Investor Day, which starts at 1 pm EEST and will be broadcast in English on InderesTV.

Aiming for a larger network of stores

Under its previous strategy, Puuilo estimated that there would be room for just over 60 Puuilo stores in Finland with the current concept. The target has now been raised and the company expects to reach a network of more than 70 Puuilo stores by 2028. In other words, the company aims to open 5-6 stores per year. The press release did not mention whether the store expansion will be limited to Finland and whether the entire store network will consist of stores based on the current concept. The planned store opening rate is ambitious in historical terms, as Puuilo has opened an average of 3-4 new stores per year, and we are initially cautious about this, as we estimate that this will require the company to make stronger growth efforts (e.g. more aggressive recruitment, more efficient store opening team, etc.) than before. On the other hand, an improving economic environment would provide a tailwind for growth, and instead of being driven by store openings, the company would also receive stronger support from its existing stores.

The target for the increased number of stores is of course also reflected in the level of revenue, which the company has increased by approximately 200 MEUR (10 MEUR per store). By the end of 2028, the company is targeting a revenue of over 600 MEUR. In practice, this suggests that the expansion will be done with the current store concept, as Puuilo's best stores, after ramp-up, generate well over 10 MEUR per store, while the stores in smaller towns are slightly below this. In terms of growth, achieving the new target would mean an annual revenue growth of more than 12% over the coming years, which is quite ambitious compared to our forecasts. We currently expect the company to achieve a revenue of just over 500 MEUR with a network of exactly 60 stores. In other words, we believe the company will be able to operate stores that are efficient in terms of revenue, but our lower revenue forecast compared to the new targets is explained by a lower store opening rate than in the targets.

Largely unchanged profitability target

As a completely new target line, the company is setting an absolute EBITA profitability target of over 105 MEUR. In addition, the company aims to achieve an EBITA-% of more than 17%, which is in line with the company's previous target of 17-19% EBITA-%. More than 600 MEUR in revenue and more than 105 MEUR in EBITA would imply an EBITA margin of 17.5%, which we believe is achievable and which the company even reached at the time of the COVID pandemic (2020 and 2021 EBITA-% of 18.1% and 17.9%, respectively). However, this period was characterized by a heated consumer environment, as well as an easier pricing environment than, for example, in 2023, when the company achieved a margin of 16%. If the company is able to achieve its store and revenue targets, we believe the profitability target is realistic, as the company's store network will have reached a more profitable level by 2028. Currently, half of Puuilo's stores are less than 5 years old, which have a lower profitability potential than 10-year-old stores.

Profit distribution unchanged, but with new terminology

Puuilo will continue to aim to distribute more than 80% of its net income to its owners. In the previous strategy, the objective referred directly to dividend distribution, while in the new objectives the company now talks about profit distribution. In our view, this implies that other forms of profit distribution have become relevant for the company, i.e. we believe that Puuilo may, for example, use the purchase of its own shares as part of its profit distribution policy.

Leverage target remains unchanged

The company has kept its leverage indicator unchanged, with the target of a net debt/EBITDA ratio below 2x (incl. IFRS16). Puuilo's efficient cash flow machine will ensure that the target remains well below this level, as the company will be able to finance its planned store openings with growth. An increase in debt could be appropriate if the company plans a major acquisition or aggressive internationalization, the likelihood of which we will certainly get more insight into at tomorrow's Investor Day. At the end of the financial year 2023, the company's gearing was 1.5x.