First half results showed group revenue up by 9.1%, and the interim dividend is increased by 25%. While the outlook for the full year is unchanged, the group say that trading since the half year stage has been softer. The shares fell by 4.3% on the news.
The theory behind the Pets at Home growth story is simple. It is the market leader in a resilient and growing market, and its stores are slicker and larger than independent rivals. This means that the group should be able to hoover up business just by rolling out stores in new locations. Once stores are open, additional services like grooming and vet practices can be tacked on, driving footfall and raising the likelihood of repeat custom.
The catch is that growth looks to be slowing. One explanation is that although the pet market is likely to be fairly resilient to a downturn, it does raise the risk of customers migrating to online retailers. The competitors here are much more dangerous than the dingy independent stores that Pets has so far made light work of. Rivals such as Amazon can save the trouble of a trip to the store and often offer lower prices.
Pets' VIP loyalty card is the group's secret weapon, allowing it to better understand what individual customers are buying and allowing personalised marketing offers to be created. Pets has over 3.5m active loyalty card customers and almost two thirds of till sales are now covered by VIP cards.
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 15%, this shouldn't be too damaging, especially with margins set to grow in the grooming and veterinary businesses.
The group aims 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 shares offer a prospective dividend yield of just over 3.5% and trade on a forward PE of around 14.8x.
First half trading in detail:
Group revenue grew to £441m, driven by new store openings and like-for-like (LFL) sales growth of 2.5%. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 7.3%, with margins slightly lower as a result of the newly acquired specialist referral centres and the opening of new grooming salons.
The Merchandise division, which accounts for close to 90% of group sales and includes pet food and accessories, saw revenue growth of 4.7%. LFL growth in the division was 1.9%, down on the 2.2% growth in Q1, but up on the 1% growth in H1 last year. Within Accessories, Health & Hygiene returned a more normalised performance after a weak first half last year. 8 new superstores were opened in the period.
Revenue in the Services business, which includes vet services and grooming, increased by 47.6%, primarily driven by the opening of 17 new vet practices and 18 grooming salons. LFL growth was 8.7%.
Free cash flow grew by 12% to £34.4m, however as result of £15m of acquisitions and dividend payments totalling £27.4m, net debt increased to £171m. The net debt to EBITDA ratio remains unchanged at 1.3x, well within the group's targeted range. The interim dividend is increased from 2p per share to 2.5p.
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