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Pets at Home - Back in profitable growth

Nicholas Hyett | 22 May 2019 | A A A
Pets at Home - Back in profitable growth

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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: 400.20 | Buy: 401.60 | Change -7.80 (-1.91%)
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Pets saw revenue rise 6.9% in 2018 to £961m, with growth across both the Veterinary and Retail businesses. Property and employee cost savings drove an improved operating margin in Retail, with group level operating profits up 6.1% as a result to £89.7m.

The full year dividend remains unchanged at 7.5p per share.

The shares rose 9.3% in early trading.

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Our view

Like many retailers, Pets at Home has been struggling with a barrage of online competition in recent years. The group's had to cut prices to remain competitive, with inevitable negative consequences for margins.

Fortunately the bitter pill seems to have done the trick. Transaction numbers are up, even when Pets go toe-to-toe with rivals online, and rising sales have more than offset the cut in prices. Retail profits are growing once again.

Keeping customers coming through the door is crucial to Pets' long term plan of tacking on grooming and veterinary services to drive up footfall and encourage repeat business.

But while the Retail turnaround is going well, problems 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. That's led to a $40.4m charge in 2018, as the group writes-off loans and incurs closure costs.

Fortunately sales at the remaining practices seem to be doing well, and the current restructuring looks unlikely to 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 a net debt to EBITDA ratio of 0.9 times is well within target levels. Provided restructuring costs don't get out of hand, investors should get a prospective yield of 5.2% while they find out if there's a recovery around the corner.

As ever though, there are no guarantees.

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Full Year Results

Retail revenue rose 6.2% in the year to £854.6m, with like-for-like (LFL) sales up 5.1%. The recovery reflects the group's focus on competitively priced pet options - now within 5% of the most competitive online rival - as well as a 43% increase in online sales and the opening of four new stores. Operating profits in the division rose 3.2% to £65.1m.

The Veterinary business saw revenue rose 11.2% to £94.1m and operating profits rise 8.5% to £29.6m. The group has stepped up its buyout programme of underperforming joint ventures, and now manages 50 practices directly (up from 17 last year), with 420 independently managed joint venture practices.

Free cash flow improved by 14% to £63.6m, supporting a small reduction in net debt to £120.5m despite money spent on buying out veterinary joint ventures.

Pets expects revenues to grow in both Retail and Vets next year, with profit growth expected to continue in Retail. Profits in vets is expected to be impacted by further moves to acquire or close underperforming practices and changes to fee arrangements for some practices.

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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 disclosure for more information.