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Pets at Home - upgraded guidance reiterated

Sophie Lund-Yates, Equity Analyst | 21 January 2021 | A A A
Pets at Home - upgraded guidance reiterated

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Pets At Home Group PLC Ordinary GBP0.01

Sell: 356.60 | Buy: 357.20 | Change -8.40 (-2.30%)
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Total group revenue rose 18.0% to £302.0m in the third quarter, with like-for-like revenue up 17.6%. That reflects retail growth both in store and online, and strong trading in December.

Guidance from 8 January 2021 is unchanged. New Covid related restrictions could affect trade,Pets' designation as an essential retailer and recent trading, means full year underlying pre-tax profit is expected to be ahead of previous guidance at £77m. That's after the repayment of £28.9m in business rate relief.

The shares were broadly unchanged following the announcement.

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

Our view

Once again, Pets at Home's position as an "essential" retailer is in the spotlight. Being able to trade when others can't is an obvious advantage. But Pets' success runs deeper than simply being the only open shop on the block.

Most eye-catching is growth in like-for-like retail sales, despite the continued rise of online competitors. Add to that the group's sterling effort on cost control, which has seen rents reduced along with lower staff costs, and there's a stronger foundation for future profit growth.

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. The cross selling of services is Pets' biggest unique selling point. A factor that no doubt drove the decision to acquire a telehealth provider. Giving the vet business an online presence should make it more attractive.

The group has an enviable hoard of customer data too, with over 6m "VIP" members, and increasing Puppy and Kitten Club membership. These factors will help Pets hone their proposition, driving higher sales. But crucially, it's also boosting the number of customers who buy both a product and a service from the group - a leap which massively increases the average annual spend of these customers and should make them stickier. Pets at Home has only just started to crack this nut, so there's significant potential here.

Current conditions have actually proved somewhat useful, with pet ownership in the UK skyrocketing over lockdown. That will have a positive effect on demand for a while to come. Ideally, we'll start to see demand shift towards more expensive (read: lucrative) items like supplements, and away from lower margin things like cat litter . At the moment higher volumes are limiting the damage to margins, but it's something to keep in mind.

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. The new infrastructure will need to be leveraged with a long-term sustained increase in demand to drive profits. Achieving that will require near perfect execution, or there's the risk customers switch allegiance to rivals.

We continue to think there's potential at Pets at Home. We're genuinely impressed by the legwork being put into marketing and online infrastructure, and lockdown pet ownership provides a structural growth opportunity. But we should mention valuation. The shares trade on a significant premium to their long run average. The group has to come good on its plans for rapid growth, or the market could reassess its opinion of Pets.

Pets at Home key facts

  • 12m forward Price/Earnings ratio: 25.0
  • Average 12m forward Price/Earnings ratio since listing (2014): 15.0
  • Prospective yield: 2.1%

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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Q3 trading details

Retail revenue rose 17.5%, with like-for-like (LFL) revenue rising the same amount. In store, LFLs were up 12.3%, and rose to 19.3% in December. Online revenue benefited from Pets at Home's one hour Click & Collect service, which fed into a 70.7% increase in digital sales.

The vet business saw revenue rise 22.1%, and LFLs were up 17.8%. LFL fee income from the joint venture clinics rose 17.3%, boosted by new client registrations.

The number of "VIP" members has now reached 6.2m, a 12.0% increase. 26% of these members shopped both in store and online in the quarter, which is a 20% improvement on this time last year. The number of Puppy and Kitten Club members grew 47.2%. Puppy and Kitten Club members typically spend around 25% more than non-members across the group.

The number of customers signed up to a Vet Group health plan, or online subscription has reached 1.0m, and equate to £85m of recurring sales per year.

Pets at Home acquired The Vet Connection in November 2020, a provider of on demand, veterinary telehealth advice, triage and ancillary services for £15m in cash. As previously announced, the group sold its Specialist Hospital Division in December 2020 for a total consideration of £100m, £80m has been received in cash and £20m is deferred and contingent on certain conditions.

Including these proceeds, undrawn credit and existing cash balances, Pets at Home has total liquidity of £391.7m.

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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 Refinitiv. 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.