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Pets at Home - stores to remain open

Sophie Lund-Yates, Equity Analyst | 24 March 2020 | A A A
Pets at Home - stores to remain open

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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 has said its stores, website and veterinary practices will remain open amid the current lockdown in the UK. That's because as a supplier of 'essential' goods and services, it doesn't have to shut up shop.

All grooming rooms have been temporarily closed.

The shares fell 2.5% following the announcement.

View the latest Pets at home share price and how to deal

Our view

Pets' position as a provider of pet care products and services means it can keep its doors open during current disruption. That should mean it's able to sustain at least some revenues during the current crisis.

The news comes on the tail of some reasonably impressive numbers. Perhaps most eye-catching 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.

Of course it's positive the vet clinics can stay open, but with the government advising animals should only visit a vet for emergency treatment at the moment, we can expect a dip in vet revenue.

There are other ongoing pressures too. Pets continues to invest in price, and 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. Coronavirus might prove a short term tailwind, but to some extent this is simply displaced customers that would otherwise have shopped in-store.

Last we heard from the group the dividend remained covered by free cash flow. Reduced capital spending going forwards should also maintain a net debt to cash profits ratio that looks conservative. However, given the uncertainty at the moment Pets could decide to preserve its cash, which could mean a dividend cut. At the time of writing the shares offer a prospective yield of 3.1%, but this isn't guaranteed.

Overall Pets is in a much more attractive position than most retailers at the moment, but the coming months will still prove challenging.

Register for updates on Pets at Home

Third Quarter Results (22 January 2020)

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.

Pets' Retail division saw revenues rise 7.2%, that at 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.

Find out more about Pets at Home shares including how to invest

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