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Pets at Home - sales up and guidance unchanged

Sophie Lund-Yates | 22 January 2020 | A A A
Pets at Home - sales up and guidance unchanged

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Pets At Home Group PLC Ordinary GBP0.01

Sell: 233.40 | Buy: 234.00 | Change 0.00 (0.00%)
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Pets at Home's revenue grew 7.9% to £255.9m in the third quarter, reflecting group like-for-like (LFL) growth of 7.2%. That includes a strong performance from Retail and the Vet Group.

Outlook for the full year is unchanged, with underlying pre-tax profit in line with market consensus of £87m - £101m expected.

The shares were little moved following the announcement.

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Our view

Pets at Home's fetching those sales. While it's stuck in a sector facing falling footfall and swathes of competition, it's more than holding its own.

Perhaps most impressive is the uptick in repeat business within the retail division, despite the continued rise of online competitors. Added to that is a sterling effort on cost control, which has seen reduced rents, combined with lower staff and distribution costs. Put all that together and you get a healthy rise in operating margins and profits.

Longer term, we like the group's differentiated business model. Pets has 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. There have been bumps along the road - particularly in vet clinics, which has faced substantial charges and restructuring efforts in recent years - but the heavy lifting's been done and the path looks clear from here.

That's welcome news and so far the dividend remains covered by free cash flow. Reduced capital spending going forwards should also maintain a net debt to cash profits ratio that looks conservative.

As ever though, nothing's perfect. In order to compete, Pets continues to invest in price, and at the moment sales are tilted towards lower-margin food products, rather than more lucrative accessories. Cost savings mean this isn't a problem for operating profit at the moment, but it would be nice to see the group reclaiming its share of higher margin sales over time.

Pets was a little late to the digital party, meaning revenues from the website are still only a small chunk of sales. Growth's pretty healthy these days, but investment to get the current website where it needs to be won't come cheap, and the likes of Amazon still loom large.

Overall it's hard to knock Pets' progress and discipline. But all that progress and potential comes at a price. The shares currently change hands for 19.2 times expected earnings, some way above the long run average and most peers. There's a prospective yield of 2.7%, although there are no guarantees.

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Third Quarter Results

Pets' Retail division saw revenues rise 7.2%, that includes online growth of 23.4%, and a LFL increase of 7%. The division enjoyed record-breaking performance in the period, with the biggest ever trading days noted both on and offline.

The Vets Group revenue was up 14.4%, with mature practices growing ahead of the market. LFLs were up 8.9%, with fees from Joint Ventures rising 5.6%. Expansion plans at both Dick White Referrals and the new Specialist Referral centre in Scotland remain on track.

The number of VIP members who bought products and a service increased 24% compared to last year, and there are now over 5.3m VIPs. The number of people signed up to one of Pets at Home's subscription services, including Vet health plans or easy repeat plans online, is now over 850,000.

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