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Pets at Home - profit ahead of expectations, but sales will dip

Sophie Lund-Yates, Equity Analyst | 2 April 2020 | A A A
Pets at Home - profit ahead of expectations, but sales will dip

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Pets At Home Group PLC Ordinary GBP0.01

Sell: 420.00 | Buy: 420.40 | Change 25.40 (6.38%)
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Pets at Home expects underlying full year pre-tax profit to be slightly above the top end of market expectations of £92m - £97.1m. The closing weeks of the financial year have seen "exceptional" levels of demand in store and online as the coronavirus outbreak progressed.

However, Pets at Home anticipates lower revenues at the start of the new financial year.

Due to the uncertainty the group is unable to give guidance for next year.

The shares rose 1.3% 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.

But the next few months will still be challenging. With the government advising animals should only visit a vet for emergency treatment at the moment, vet revenues will dip.

While the recent uptick in trading is good news, to a large extent this will simply be a pull forward of sales, so things should even out in the fullness of time. Together with the new social distancing rules, that means sales are likely to slow as time goes on. Coupled with the closure of the grooming salons, and we understand why the beginning of the new financial year will be sluggish.

Fortunately Pets at Home's performance before coronavirus was actually very positive.

Perhaps most eye-catching was 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.

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. Recent growth has been impressive, but investment to get the current website where it needs to be won't come cheap, and the likes of Amazon still loom large. The current disruption could see investment in this area paused too.

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.

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COVID-19 trading update

Expectations of lower revenue at the start of next year reflects the closure of all grooming rooms, and emergency only opening for veterinary clinics. Store revenues are also expected to reduce as the group enforces measures in line with government guidance.

The group also believes the recent surge in demand has pulled sales forward from a later date, as customers have increased their average basket size.

Pets at Home has total liquidity including cash of £160m, and a significant proportion of its £248m credit facility is undrawn. There is "extensive" headroom before being in breach of any of the terms set by its lenders.

The group also announced it's providing £1.1m of funding to nominated pet charities, as well as a £1m crisis fund for colleagues and discounts to NHS workers.

Full year results are expected on 21 May, but this date will be reviewed.

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

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.