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Pets at Home - on track to hit full year targets

George Salmon | 22 January 2019 | A A A
Pets at Home - on track to hit full year targets

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Pets At Home Group PLC Ordinary GBP0.01

Sell: 362.20 | Buy: 363.00 | Change 9.40 (2.66%)
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Pets at Home is on track to deliver full year targets, including profit before tax of £80m - £85m.

Group like-for-like revenues grew 5.1% in the third quarter.

The shares rose 3.5% in early trading.

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Our view

Pets at Home serves a resilient and growing market, and its stores are slicker and larger than most independent rivals.

In the past that's helped it 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 all's not been so simple more recently. Cheaper online alternatives have forced Pets to cut prices to remain competitive. In an online world, Pets is by no means a big fish and competitors are much more dangerous than the independent stores the group has made light work of.

Despite lower sales prices trashing 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 turnaround is going well, with customers returning on the back of price changes. But the problems now seem to have shifted to the veterinary business.

That's partly due to factors outside Pets' control. A decline in the number of EU vets in the UK is putting pressure on salaries and also making it more difficult to find new partners.

A shakeup of the business is going to be expensive, and Pets at Home is buying back some of its struggling franchised clinics. But sales momentum is positive, and the bumpy start shouldn't hinder longer-term progress. Pets still has the chance to make its stores a relatively attractive one stop shop for owners.

For now, the dividend remains covered by free cash flow, and debt is well within target levels. So, provided restructuring costs don't get out of hand and recent sales momentum continues, investors should get a prospective yield of 5.9% while they find out if there's a recovery around the corner.

As ever though, there are no guarantees.

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Third Quarter Results

Group revenue increased 6.3% to £237.2m.

Pets' Retail division saw revenues rise 5.5% to £213.4m in the third quarter, with online sales rising 41.5% to £19m and like-for-like (LFL) growth of 4.7%. The group continues to keep prices low.

The Vets Group saw total revenue rise 13.6% to £23.8m, as mature practices continue to grow ahead of the market.

Vet LFLs grew 9.1%. That's behind 16.7% growth at the half year, as fee income for the practices being bought back buy the group has not been included this quarter.

Active VIP club members have increased by 400,000 since the same period last year, to 4.2m and 70% of revenue is now accompanied by a VIP card swipe.

Looking ahead, the group expects a charge of up to £42m, including a cash charge of up to £13m, relating to the Vet Group restructure. It also said it will consider increasing inventories by £8m in response to Brexit.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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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