Pets at Home's third quarter trading statement confirms continued momentum in sales trends. The shares rose 7.3% 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. Therefore the group should be able to hoover up business just by rolling out stores to new locations. Once open, additional services like grooming and vet practices can be tacked on, driving footfall up and increasing the likelihood of repeat custom.
However in 2017 growth slowed markedly. A possible explanation is that customers are migrating to online retailers. In the 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 made light work of.
Pets reacted by reducing prices, and customers have responded well. Despite the impact this'll have on margins, we feel the group made a sensible choice given the options available. Pets needs to keep the customers coming through the door if it's to effectively cross-sell those additional vet and grooming services.
The shares trade on 13.5 times expected earnings. The fact this is below the average of closer to 15 times since it listed in 2014 fits with our view that, while recent progress is encouraging, there's still a bit more work for Pets to do.
The website is generating more and click & collect growth, but if Pets is serious about competing online it needs to up its game even further. It'll be interesting to see if this is something the new CEO prioritises.
The dividend looks set to remain well covered by free cash flow, and debt remains well within target levels. These factors should underpin the prospective yield of 4%. The question is whether this can be maintained or grown over the longer-term.
Third quarter trading details
Group revenue rose 9.6% to £223.3m over the 12 week period from 13 October 2017 to 4 January 2018.
The Merchandise division saw revenue rise 9% to £193.4m. This reflects like-for-like sales growth of 6.8% and the addition of 15 net new stores in the last 12 months, including 2 in the quarter. The group now has 452 stores.
The group also announced the trial of specialist dog stores 'Barkers' is to be discontinued. Existing stores will be closed over the coming year and exceptional costs of c£2m are expected in relation to lease commitments and the write down of fixed assets.
Revenue in the Services division increased 13.6% to £29.9m. LFL sales growth was 10.1%, with good performances in first opinion and specialist referral vet services. There were 2 new vet practices and 5 new grooming salons opened in the quarter.
Ian Kellett, group CEO said "In the year since we launched our lower pricing initiatives we have seen a really strong customer response to the investments we have made. At the same time, we continued to deliver strong growth in our veterinary business across both first opinion practices and specialist referral centres."
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