A brief year end trading update from Pets at Home shows overall performance in line with market forecasts. The level of like for like (LFL) sales has picked up in the fourth quarter, driven by double digit growth in revenue from the group's veterinary and grooming services.
In Q4, LFL sales accelerated to +3.2% from +2.2% in Q3 to leave the annual rate at 2.2%. In a minor complication, the financial year just ended was a 53 week year. Taking account of the 53rd week, LFL sales growth drops marginally to +2.1%.
In absolute terms, revenues rose 6.7% to £778m, or by 8.8% to £793m if the 53rd week is included. Merchandise accounted for the bulk, 89.5% with Services contributing 10.5% of the total. Merchandise revenues rose by 4.6% and Services revenues rose by 29.2%.
On a LFL basis, Merchandise revenues rose by 1.5% for the 52 weeks and Services LFL revenues rose by 10.4%.
During the year the group opened 21 superstores and closed one. 6 Barkers stores and 1 trial Whiskers 'n Paws outlet aimed at cat and dog owners (i.e. a gerbil-free zone). 50 new vet practices and 60 grooming salons were opened.
The market consensus is stated by Pets at Home to be for profits before tax of between £93m and £97m.
There were occasions during 2015 when investors could be forgiven for wondering whether Pets at Home was fully house-trained. A slowdown in Merchandise revenue growth was attributed to a weak flea and tick season. The degree of volatility in tick and flea infestations is not something that many investors were familiar with, we suspect. Perhaps we should have asked the cat?
By year end though, we were through the flea and tick season, and encouragingly, merchandise LFL sales duly improved. Hopefully, (for investors, if not cats and dogs) 2016 will see a more normal level of wee jumping and bloodsucking beasties out there and Pets at Home could see a useful recovery in Merchandise LFL sales in the spring and summer months.
But the real attraction of Pets at Home is its ability to open new stores, both out of town and now, with its newer, High Street formats, closer to its customers' homes too. Adding services to the mix brings in additional, higher margin revenue streams and has the added benefit of increasing the frequency of customer visits and the revenues per store.
The VIP loyalty card is the secret weapon, allowing the group to better understand what individual customers are buying and allowing personalised marketing offers to be created. Almost two thirds of till sales are now covered by VIP cards, giving a vast wealth of data to exploit.
Analysts are forecasting around 5% revenue growth, this year and next, with earnings per share rising at a broadly similar pace. Debt is falling rapidly, reflecting modest store opening costs and a pay-out ratio of only around 40%. A prospective PE of 16x is well above that of retailers like Next or M&S, which both trade around 12x forward earnings. This is probably reflective of greater potential for new store openings at Pets at Home and also a slower pace of trade shifting online in the pet sector, compared to the wider retail market.
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