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Pets at Home - A positive start to the year

George Salmon | 4 August 2016 | A A A
Pets at Home - A positive start to the year

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Pets At Home Group PLC Ordinary GBP0.01

Sell: 365.00 | Buy: 365.20 | Change 13.00 (3.68%)
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Pets at Home have this morning released a first quarter trading update, and the shares moved 3% higher on the news.

Total revenue growth was 8.9%, taking total revenue to £244.2m. Revenue growth was driven by the opening of 4 Pets at Home stores, 3 Vets4Pets practices and 6 Groom Room salons, as well as 2.7% like-for-like growth.

Merchandise revenue increased by 4.9% to £210.5m, while Services increased by 43.4% to £33.7m, reflecting Joint Venture vet practice fee income rising 22.5% to £12.4m, and the contribution from newly acquired specialist referral centres.

Pets now has 3.5m VIP club active members, an increase of around 200,000 since FY16 year end, and the group has also launched an app to remove the need to carry the loyalty card.

Ian Kellett, group CEO said that the group are "pleased with our positive start to the year, delivered through consistent performance in our core strengths of Advanced Nutrition, vet and grooming services, with a continued underpin from the growth in sales to our VIP members."

Despite some uncertainty around the UK's consumer sentiment, he added that the full year outlook remains unchanged, highlighting the historical resilience of the pet market in difficult economic times.

Our view:

It seems the money we are prepared to spend on our pets knows no end, and as market leader Pets at Home are the recipient of much of it. The group is targeting an ever increasing share of customers' wallets, both through higher margin products like advanced nutrition (posh pet food) and additional in-store groomers and veterinary practices.

The real attraction of Pets at Home is its ability to throw off cash, whilst opening new stores, both out of town and now, with its newer High Street formats, closer to its customers' homes too. Adding services to existing stores has the added benefit of increasing the frequency of customer visits and the revenues per store - contributing some impressive margins.

Although we agree with Mr Kellett that the pet market is likely to be fairly resilient to a downturn, we feel that it does raise the risk of customers migrating to larger online retailers such as Amazon, who can often offer more competitive prices.

The VIP loyalty card has been the group's secret weapon, allowing it 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.

Other minor headwinds in the near term include lower sterling raising the cost of supplies and the introduction of the living wage. However, with EBITDA margins of 16% at present this shouldn't be too damaging and is expected to be offset by growth in margins in the grooming and veterinary businesses in the medium term.

Pets aim to return spare capital to shareholders through special dividends where appropriate. Given the group's strong cash flows, history of deleveraging and indications that management would be willing to tolerate a higher debt level going forwards, there is potential for some meaningful payments. In the meantime, the group offers an ordinary dividend yield of just over 3% and trades on a forward PE of around 15.5x.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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