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Pets at Home - enjoying benefits of increased pet ownership

Sophie Lund-Yates, Equity Analyst | 23 November 2021 | A A A
Pets at Home - enjoying benefits of increased pet ownership

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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: 352.40 | Buy: 353.20 | Change 0.40 (0.11%)
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Half year revenue rose 18% to £677.6m, reflecting rising pet ownership and a positive performance across retail and the vet businesses. Compared to pre-pandemic levels, like-for-like revenue is up 28.6%.

Underlying pre-tax profit rose 77.2% to £70.2m, and Pets at Home expects full year profits to be at the top end of analyst expectations.

An interim dividend of 4.3p was announced, up 72% year-on-year.

The shares rose 2.2% following the announcement.

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

Our view

With Peter Pritchard stepping down, any incoming CEO is being handed a thriving business.

Pets at Home's like-for-like retail sales have been impressive, 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.

The overall model is attractive. 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, and a factor that no doubt drove the decision to acquire a telehealth provider.

The group has an enviable hoard of customer data too, with 6.8m ''VIP'' members, and increasing Puppy and Kitten Club membership. These will help Pets hone their proposition, driving higher sales. But crucially, they're 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 are incredibly useful. UK pet ownership continues to climb, when a severe slowdown had been feared after the lockdown-induced tidal wave of new puppies and kittens. It seems flexible working, and perhaps the renewed popularity of rural living, have culminated in the trend having more room to run than initially thought. That will have a positive effect on demand for a while to come. What's more, we've started to see demand shift towards more expensive (read: lucrative) items like accessories, which helps offset lower margin items like food.

Coronavirus has also accelerated the shift to online shopping. Pets has invested heavily and ramped up its digital capacity, with another £20m earmarked for digital expansion, 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.

The group is perhaps better placed than other retailers, because pet goods, especially for first time animal-owners, are the kind of thing you're more likely to seek out face-to-face advice for. In theory that should help keep the in-store tills ringing, because despite the top-notch online efforts, Pets is still very much a physical retail operation.

We're genuinely impressed by the legwork being put into marketing and online infrastructure, and increased pet ownership provides a structural growth opportunity. But we should mention valuation. The shares trade on a premium to their long run average. While we can't knock progress, we wonder if the valuation can be sustained.

Pets at Home key facts

  • Price/earnings ratio: 20.4
  • Ten year average Price/earnings ratio: 16.0
  • Prospective dividend yield (next 12 months): 2.5%

All ratios are sourced from Refinitiv. 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.

Half year results

The group said it's ''not immune'' to industry wide supply chain and logistics challenges. However, many of its products are sourced domestically and that has minimised disruption so far.

Retail revenue rose 22% to £619.6m, within which online sales rose 21.5% - these have more than doubled on a two year basis. Online sales now make up just over 15% of total retail sales. There was a strong performance across both food and accessory items, including dog toys. The division made a pre-tax profit of £53.1m, compared to £32.3m last year.

''VIP'' memberships increased 13% in the period to 6.8m, and 27% of these now shop across more than one channel - that's a 19% improvement on last year.

Across the Vet Group like-for-like (LFL) revenue rose 26.2%, but total revenue fell 14.7% to £56.8m. That reflects the sale of the Specialist Group at the beginning of the year. Fee income from joint venture practices rose 29.1% to £36.9m. Pre-tax profits rose from £15.7m to £24.9m. The number of Puppy and Kitten Club memberships more than doubled, with these members spending about a third more than non-members every year. Pet care plan subscriptions rose 45% to 1.4m, and now equates to about £110m in recurring annual revenue.

Overall the group said ''the stronger than expected and continuing growth in the pet population over the past eighteen months is materially increasing the size of our addressable market''.

Free cashflow rose to £91.6m from £60.5m, while there was net cash of £64.7m. Including lease obligations, there was net debt of £333.2m.

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 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.

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