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Pets at Home - Throwing shareholders a bone

George Salmon | 3 August 2018 | A A A
Pets at Home - Throwing shareholders a bone

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Pets At Home Group PLC Ordinary GBP0.01

Sell: 220.20 | Buy: 220.60 | Change 0.40 (0.18%)
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Pets at Home's first quarter results show sales in both the Retail and Veterinary businesses have continued to rise strongly, and management's guidance for the full year remains unchanged.

Having fallen sharply year to date, the shares jumped 12.9% on the news.

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Our view

In theory, practice and theory are the same thing. In practice, they're not. Pets at Home is finding that out the hard way.

The group leads a resilient and growing market, and its stores are slicker and larger than independent rivals. 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.

Unfortunately it's not been that simple. Growth began stalling a year or so ago, and Pets has had to cut prices to remain competitive. A possible explanation is that customers are migrating to online retailers. In an online world, 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.

Despite the impact of lower prices on margins, we feel the group made a sensible choice given the options available. Pets needs to keep customers coming through the door if it's to effectively cross-sell those additional vet and grooming services.

The early part of the turnaround has gone reasonably well, with customers returning on the back of price changes. There's positive news elsewhere too, with sales of regular flea treatments jumping.

Pets will likely try and shift more sales onto similar subscription models. This kind of revenue is more valuable as it's likely to recur year-on-year. The group should be able to use its bank of customer data to run targeted marketing campaigns, but changes to data protection rules mean this isn't a formality.

The dividend should continue to be covered by free cash flow, and debt remains well within target levels. These factors underpin the prospective yield of 6.7%. However, for the dividend to grow over the longer term, Pets will need to make improvements stick.

The shares trade on 8.3 times expected earnings. This is below the average of around 14.4 since listing, and fits with our view that there's still plenty more work for new CEO Peter Pritchard to do.

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Trading details

First quarter sales rose 8.1% to £277.4m.

Retail sales rose 6.9%, to £245m. That growth includes a 5.3% increase in like-for-like sales and a 47.3% increase online and click & collect. One new superstore was opened in the quarter, as well as one new grooming studio.

Veterinary sales rose 18.4% to £32.4m. The group says its mature practices are growing ahead of the market, while less well established set ups grow in line with expectations. Seven new practices opened their doors in the quarter.

The group's VIP scheme now has 4m members, up from 3.7m a year ago. 70% of sales include a swipe of the card.

New CEO Peter Pritchard said he's pleased with the group's start to the year, however, he acknowledged the group continues to face challenges, and will share a strategic update in November's half year results.

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