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Pets at Home - full year profit guidance upgraded

Nicholas Hyett | 2 August 2019 | A A A
Pets at Home - full year profit guidance upgraded

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Pets At Home Group PLC Ordinary GBP0.01

Sell: 479.80 | Buy: 480.40 | Change 8.20 (1.74%)
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Pets at Home expects full year underlying profit to be slightly above market expectations, where the average estimate is £85m.

That reflects good growth in retail, and the restructuring of the vets business progressing as planned.

The shares rose 4.2% following the announcement.

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Our view

Pets at Home is making progress, and cautiously optimistic.

Retail sales are moving in the right direction, no mean feat in a prickly trading environment. There's particular pressure from cheaper online competitors in the sector, but Pets' decision to cut prices paid dividends with increased transactions offsetting the dent to margins last year.

We also like the group's differentiated business model. In the midst of declining footfall, it's worked hard to become a destination, rather than just a shop. Vet clinics and grooming rooms provide extra revenue streams, but also encourage cross-selling in the core retail business.

The road hasn't been totally smooth though. The vets business is facing structural and cost pressures - with the group facing £40.4m in restructuring costs in 2018. But after making difficult decisions, like buying some franchises and waiving fees for some clinics, there are real signs of improvements. Concerns restructuring costs could run away from the group have been allayed too.

That's welcome news and should mean the dividend remains covered by free cash flow for the time being. A lack of unexpected spending should also support at Net Debt to EBITDA (earnings before, interest, tax, depreciation and amortisation) ratio that's comfortably within target levels.

But caution is needed. The retail environment is still a very difficult place to be, with stories of struggling shops continuing to swirl. Pets' turnaround is scampering ahead, but it doesn't diffuse all the risks posed by online competitors.

Pets' online business is growing well, but it was a little late to the party, meaning revenues from the website are still only a small chunk of sales. Investment to get the current website where it needs to be won't come cheap, and the likes of Amazon loom large.

All-in-all, Pets is doing well with the options it has, and a service-lead business should entice people through the doors. With the shares trading above the longer term average at 15.7 times earnings, investors are clearly upbeat about Pets' future. A prospective yield of 3.5% isn't generous by market standards, but if earnings can pull ahead there's scope for that to grow.

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Half Year Results

Group revenue rose 9.9%, to £303.4m, with like-for-like (LFL) growth of 8% following a good performance in both the retail and vets divisions.

Within Retail, revenue improved 8.7% to £266.4m. Online sales of £26m are 36% ahead of last year. LFL sales were up 8.2%. A strong performance from food and online sales more than offset a shift to lower margin products.

Veterinary revenue rose 18.8% to £37m, as LFLs grew 6.2%. Including the impact of waived fees for some clinics, LFL joint venture fee income was up 1.1% to £16.2m. The costs associated with the division's recalibration, including the purchase and closure of some franchises, are said to be comfortably within expectations.

The amount of customers now signed up to a vet health plan, or retail subscription package has now reached 765,000. The amount of sales generated from Pets' VIP loyalty customer scheme increased 20.7% year-on-year.

Looking ahead, the group is mindful of "ongoing uncertainty across the wider retail sector", but remains "cautiously optimistic" about its future.

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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.