Pets at Home's Q1 revenues rose 5% to £256.5m, driven by like-for-like (LFL) revenue growth of 2.7% and the opening of new stores and services. This growth represents an improvement on that reported in recent quarters. The shares rose 5.3% 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 to new locations. Once stores are open, additional services like grooming and vet practices can be tacked on, driving footfall up and raising the likelihood of repeat custom. The catch is that, despite a better start to 2017, growth is slower than it once was.
A possible explanation is that customers are migrating to online retailers. In the big bad world of the internet, Pets is by no means a big fish and online competitors are much more dangerous than the independent stores the group has previously made light work of. 2016's full year results showed this side of the market growing at an accelerating rate.
Pets has reacted to falling sales growth by reducing prices, and the early indications are that customers have responded well. It might not be good news for margins, but it seems the right thing to do. After all, you need the customers coming through the door in the first place if you are to effectively cross-sell additional services.
Nonetheless, we still feel there is more Pets could do. Yes, improvements are being made to the website and click & collect growth has been impressive recently, but if Pets is serious about competing in this sphere then it needs to up its game even further.
Despite the hit to margins, Pets is still a cash-generative business, so the prospective yield of 4.4% looks well underpinned for now. The question is whether the payout can be maintained or grown over the longer-term. Reflecting the current challenges, the shares trade on 12.8 times expected earnings, well below the average since listing in 2014.
First quarter trading statement
The Merchandise division delivered LFL growth of 1.5%, as the investment into pricing and operational cost savings both continue as planned. Following the positive customer response to price changes earlier in the year, the group is set to continue rolling out lower everyday prices. The opening of 16 Pets at Home superstores over the last 12 months, including 5 in this quarter, together with the LFL sales growth, helped total Merchandise revenue increase 2.8%.
In the Services division, LFL sales rose 10.5%, driven by growth in first opinion and specialist referral vet services. This LFL growth, and the addition of 49 vet practices and 50 'Groom Room' salons over the year helped Services revenue rise 18.8% to £40.1m.
Ian Kellett, Group Chief Executive Officer, commented: "Whilst it is still early in the year, the financial outlook is in line with our expectations. We are confident the investments we are making to grow our veterinary business and to reposition our pricing and deliver everyday value for our customers are creating a strong platform for sustainable future growth."
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