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Pets at Home - profits fall in-line with expectations

Pets at Home's first half revenue rose 7.3% to £727.2m, with like-for-like growth up 6.4%.

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Pets at Home's first half revenue rose 7.3% to £727.2m, with like-for-like growth up 6.4%. There was growth across both Vet Groups and Retail, with online up 16.2% bringing it to 16.5% of Retail revenue. Store revenue rose 5% to £535m. Overall, sales of food increased but customers are reining in spending on accessories.

The number of "VIP" members rose 9% to 7.6m, and sign ups to the Puppy and Kitten Club averaged 29,000 a week towards the end of the period.

Despite the better revenue, underlying pre-tax profit fell 9.3%, in-line with expectations, because of higher freight and energy costs, as well as increased investment in technology. The group acknowledged the difficult economic environment, and the effects of inflation on its customers and its own costs. Overall, full year guidance is unchanged, with underlying profits expected to be in-line with analyst expectations of £131m.

Pets at Home generated free cash flow of £41.4m, which was 54.8% lower than last year, because of the higher spending and lower profits. There was net cash, excluding lease liabilities, of £43.1m at the end of the half.

An interim dividend of 4.5p per share was announced, a 4.7% increase on last year.

The shares fell 3.6% following the announcement.

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

Our view

It might have been a while ago, but Pets at Home is still feeling the benefits of the pet boom brought on by the pandemic. All those cats and dogs will need looking after long into the future.

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 7.6m ''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.

UK pet ownership continues to look robust. Our new ways of life 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.

The group is perhaps better placed than other physical 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.

However, in the shorter term there are some challenges. Inflation and the cost-of-living crisis means customers are reining in spending on accessories, which tend to be more lucrative. There'll always be some level of demand for Pets' products- our dogs have to eat- but supercharged profits won't happen while customers are tightening their belts. The group's own costs are mushrooming too, especially around higher energy and labour costs.

Pets has invested heavily in its online offering and continues to ramp up its digital capacity. The new infrastructure will need to be leveraged with a long-term sustained increase in demand to drive profits, but progress is promising.

We're genuinely impressed by the legwork being put into marketing and online infrastructure, and increased pet ownership provides a structural growth opportunity. But the group isn't immune to a widespread pullback in consumer spending and soaring inflation.

Pets at Home key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 23rd November 2022