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Pets at Home - full year guidance upgraded

Sophie Lund-Yates, Equity Analyst | 24 September 2020 | A A A
Pets at Home - full year guidance upgraded

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Pets At Home Group PLC Ordinary GBP0.01

Sell: 402.00 | Buy: 402.40 | Change -0.80 (-0.20%)
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Pets at Home now expects full year pre-tax profit to be ahead of market expectations of £73m. That comes as positive sales momentum has continued into the second quarter, with shopping habits normalising and veterinary procedures resuming following the end of lockdown.

There was double digit like-for-like sales growth in the eight weeks to 10 September.

Performance has been better than anticipated so far, but the group is mindful of remaining uncertainty and the risks of a second lockdown, which would hamper progress.

The shares rose 9.1% following the announcement.

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

Our view

Stockpiling in lockdowns poached revenue from down the line, so it's impressive to see profit expectations upgraded. We're going to have to wait and see how close they get to last year's £99.5m though. We're not in a "business as usual" scenario just yet.

Still, we think Pets at Home is doing rather well.

Most eye-catching is the continued rise in like-for-like retail sales, 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 costs. Put all that together and there's a stronger foundation to lay profit growth in the future - although there are no guarantees.

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.

And we think there could be a chance for the group to claim its share of higher margin sales over time. Lockdown means a lot of pet-owners are going to come out appreciating their furry companions more than ever before. That could lead to a spike in demand for higher-margin accessories to pamper our pets with, as well as items to aid wellbeing like more expensive foods or supplements.

Coronavirus has also accelerated the shift to online shopping. Pets has invested heavily and ramped up its digital capacity, which is a good move in our view. But in order for this to be really profitable the new infrastructure will need to be leveraged with a sustained increase in demand to match. We're excited by the group's enviable hoard of customer data, with 5.7m "VIP" members, whose data can be harnessed to provide better outcomes and drive sales.

Crucially, if done right, this will continue to boost the number of customers who buy both a product and a service from the group - a leap which will massively increase the average annual spend of these customers. Pets at Home has only just started to crack this nut, so there's huge potential here.

The conservative net debt position is comforting in these uncertain times, and for now the dividend is well covered by free cash flow. But remember dividends are never guaranteed and the uncertainty could see Pets decide to keep that cash in the business in the near-term.

Overall we think Pets at Home is in a good position. We're genuinely impressed by the legwork being put into marketing and online infrastructure. At the moment this is a bit of a waiting game to see if these efforts come up with the goods. While we have faith they will, the shares trade on a premium, making the share price sensitive to any disappointment.

Pets at Home key facts

  • 12m forward Price/Earnings ratio: 23.0
  • Average 12m forward Price/Earnings ratio since listing (2014): 14.4
  • Prospective yield: 2.5%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First Quarter Results (31 July 2020)

Pets at Home's revenue fell 1% in the first quarter. That reflects a 0.7% drop in like-for-like sales and a sharper drop in sales in the first eight weeks of the period. The declines were driven by the Vet group, with Retail sales moving slightly higher.

Pets also announced plans to overhaul its online distribution and capacity.

Pets' Retail division saw revenue and like for like (LFL) sales rise 0.4%. This reflects strong merchandise sales, which offset the closure of grooming rooms and the non-sale of pets in the period. It's also a reflection of weaker trading following the stockpiling seen in the final quarter of last year.

Online sales grew 71%. The group announced plans to invest £48m spread between 2021 - 2026 to improve and consolidate its online infrastructure. Under the terms of the agreement, Stoford will finance and construct a new 670,000 sq.ft. distribution centre in Stafford.

Vet Group revenue and LFL revenue was down 10.9% and 9.3% respectively. Performance was hindered by lockdown regulations which limited the amount of procedures allowed to be carried out. In the joint venture First Opinion practices LFL growth was 4.6% in the last eight weeks.

The number of VIP subscriptions has risen to 5.7m, with the amount of these subscribers buying both a product and a service rising 8.5%. Pets at Home is continuing to improve its marketing offer, and plans to use customer data to help generate better client insights.

The group had access to cash and undrawn credit facilities of £267m at the end of the quarter.

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

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.

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