Pets At Home Group PLC (PETS) Ordinary shares GBP0.01

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Pets at Home’s full-year revenue was flat at £1.5bn with a 1.8% decline in retail being offset by 16.8% growth in the Vet Group.

Underlying Profit before Tax (PBT) was also flat, landing in line with guidance of £133mn.

Cash generation has improved, helping to push free cash flow up by £14.8mn to £83.8mn, and leaving the company with an underlying net cash position of £6.2mn, before lease liabilities of £348.3mn.

Underlying PBT is expected to decline this year to a range of £115mn-£125mn, a 10% drop at the mid-point.

The final dividend was unchanged at 8.3p per share, and Pets at Home has launched a £25mn share buyback.

The shares were down 2.5% in early trading.

Our view

Pets at Home has battled through a tough year, but after a recent recovery in the valuation, results weren’t enough to provide a further boost to market sentiment. A subdued retail market, tougher comparisons in the vet division, and rising labour costs are expected to lead to a drop in profit for the coming year

Initial proposals from the UK’s Competition & Markets Authority probe into the UK Veterinary industry don’t look too challenging. And the group believes that the autonomy in its joint-venture model should leave it relatively unscathed.

A more immediate concern is weakness in the retail division, largely due to a challenging macroeconomic backdrop that means pet owners have less disposable cash to spend on their furry friends.

Despite this, investments in the digital platform, new store openings and refits, and strong recruitment rates to the group’s loyalty schemes should stand the group in good stead when things pick back up. Pets Club membership grew by 5% last year to 8.2mn, providing a valuable source of data that can help optimise the product range and promotional activity. Subscriptions for things like regular flea and worm treatments help to provide a further element of revenue visibility.

With an eye on the future, we think the investments made in recent years should help the group benefit from an attractive medium-term outlook. A stable but ageing pet population should see average spend trend higher over time. That’s especially true in the Vets division, where the group has been winning market share, helped by a strong focus on attracting and retaining skilled practitioners who have been in short supply over recent years.

The shares offer a prospective dividend yield of 5.1%. With a healthy balance sheet and strong cash generation, there’s scope for payouts to improve. Share buybacks remain on the table too. However, with profitability under pressure, there can be no guarantees

Overall we’re comfortable with the group’s expectation that it can continue growing market share and improve profitability over the medium-term, but it may be a while before conditions improve. However, the investments made over recent years should allow Pets at Home to keep outperforming its competitors.

With a valuation trending back towards the long-run average, investors have recognised ongoing strategic progress and the receding regulatory risks. But challenging market conditions are putting the brakes on the company’s immediate growth prospects, meaning investor confidence is likely to remain fragile.

Environmental, social and governance (ESG) risk

The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.

According to Sustainalytics, Pets at Home’s management of ESG risk is strong.

The company's ESG reporting doesn't meet leading standards, and its whistleblower program is weak. However, it has board-level oversight of ESG issues. Its environmental policy is strong, and executive remuneration is linked to sustainability targets. Overall, its management of material ESG issues is rated as average.

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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