Thrift-store operator Savers Value Village assigned at least six buy ratings after IPO

By Ciara Linnane

Stock is already 39% above its IPO price, and analysts remain bullish

Savers Value Village's stock rose 3.2% Monday, after analysts initiated coverage of the stock that hit public markets in June with a slew of buy ratings.

The stock, which went public at $18 a share, was last quoted at $25.97, or about 39% above its issue price. All six analysts tracked by FactSet have assigned the stock a buy rating or the equivalent on Monday, now that the lockup period after the Savers Value IPO has expired.

The company is the biggest for-profit thrift-store chain in North America, with 317 stores that operate under multiple names.

"Savers stands at the intersection of value and convenience given the combination of (i) accelerating secular tailwinds with the U.S. Thrift/Secondhand total addressable market projected to grow (by) high teens annually to $82 billion by 2026, (ii) white-space opportunity at 317 stores today with a long-term store saturation target of 2,200 stores (= more than 50 years of new store growth), and (iii) average unit retail under $5 or 70% below value peers," wrote JPMorgan analysts in a note to clients.

Average unit retail, or AUR, is the average selling price for an item within a specific period.

JPMorgan assigned the stock an overweight rating, the equivalent of buy, and a price target of $29.

See also: Like choosy shoppers at a retail store, IPO investors are demanding discounts and displaying price sensitivity

The forecast for the U.S. secondhand market represents compound annual growth rates between now and 2026 of more than 18%, the analysts wrote. That's well ahead of expected growth for apparel and footwear with more than one in three U.S. shoppers and nearly half of Canadian shoppers surveyed recently reporting that they care more about the environmental impact of their clothing choices today than they did three years ago.

"On barriers to entry, Savers operates a store base 9 times larger than the next largest for-profit thrift operator in the U.S. & Canada, integrating three highly complex parts of thrift operations (supply & processing, retail, and sales to wholesale markets), creating a highly differentiated model against online competition and traditional retail," they wrote.

Jefferies analysts compared the company to "adept" value retail peers TJX Cos. (TJX) and Ross Stores Inc. (ROST)

"We believe the company is well-positioned to drive robust top-line growth, maintain its strong margin profile (20% EBITDA margins), and gain market share over time given its significant opportunity for new store growth (high-single-digits % annually) and ongoing operational improvements," analysts led by Randal J. Konik wrote in a note to clients.

Jefferies assigned the stock a buy rating and a $29 price target.

As Savers disclosed in its IPO filing documents, it is profitable, with net income of $11.9 million in the quarter through April 2, after a loss of $10.2 million in the same period a year earlier. For all of 2022, it had net income of $84.7 million, up from $83.4 million in 2021.

Revenue for the quarter came to $327.5 million, down from $345.7 million in the year-earlier period. Revenue totaled $1.4 billion for 2022, up from $1.2 billion in 2021.

Jefferies is expecting the company to gain market share as it expands and grows brand awareness. "Meanwhile, we believe the company's ESG focus is a compelling sticking point for customers given the company's 4.7M loyalty members that account for 70% of sales," the analysts wrote.

Guggenheim also assigned the stock a buy rating but opted for a slightly lower price target of $28, while highlighting the company's "experienced and cohesive" management team.

That includes a real-estate team that is expected to drive new-store openings.

"With experienced real estate leadership in place and a rigorous site selection process that considers not only the demand piece of an equation but also a hyper-localized supply, we believe the strategy will prove to be beneficial," analysts Robert Drbul and Arian Razai wrote in a note.

In addition to plans to open stores over the next several years, Savers is actively reviewing potential acquisitions "that could even further accelerate the expansion into desirable and underpenetrated markets," they wrote.

Other positives include the company's supply of high-quality clothing, some of which is gathered through on-site donations.

"While the concept of donations is perceived as volatile, the company has a track record of extremely consistent supply," the analysts said.

It is important to note that the company has plans to reduce dependence on higher cost delivered supply into on-site donations (OSDs)," they wrote.

"Notably, items sourced through OSDs have cost per pound that is on average one-third that of delivered supply from the company's non-profit partners," they wrote.

Savers is another consumer deal that has fared well in this year's IPO market. Other examples include Cava Group Inc. , the loss-making Mediterranean-style fast-casual restaurant group, which raised $317 million in its mid-June deal at a valuation of $2.5 billion. The stock popped more than 99% on its first day of trade.

For more: Cava Group CFO is confident restaurant chain will be profitable -- but she won't say when

That was followed by Gen Restaurant Group , a profitable Korean barbecue chain that made its debut in late June with a more than 50% pop in early trade

Last week, Oddity Tech, an Israeli digital consumer technology platform for the beauty and wellness market, joined the list, soaring 38% out of the gate after the company's initial public offering priced above its proposed range. The deal was upsized in a further sign of strong demand.

For more, read:Il Makiage parent Oddity Tech's stock rockets out of the gate in trading debut

The Renaissance IPO ETF (IPO) has gained 39% to date in 2023, while the S&P 500 has gained 18%.

-Ciara Linnane

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07-25-23 0759ET

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