Pets At Home Group PLC (PETS) Ordinary shares GBP0.01
HL comment (25 May 2022)
Pets at Home's full year revenue rose 15.8% on a like-for-like basis to £1.3bn. That reflects market share gains across all business areas and record numbers of new customers. Underlying pre-tax profit of £144.7m, before certain accounting changes, was ahead of expectations and 65.3% up year-on-year.
Industry wide inflation is being managed 'proactively', and the group expects full year underlying pre-tax profit of £146m-£157m.
A final dividend of 7.5p was announced, up 36% on last year, taking the total annual dividend to 11.8p. The group also intends to launch a 12-month share buyback programme of up to £50m.
The shares rose 6.0% following the announcement.
As new CEO Lyssa McGowan prepares to take over at the end of May, Pets at Home is a business firing on all cylinders.
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 controls, allowing revenue growth to outpace rising 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 7.3m ''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, 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're continuing to see demand shift to more premium products and accessories as 'pet humanisation' continues, which gives margins a boost.
We must mention cost inflation, as it's a headwind for the group and one that can hurt margins. Crucially though, it's being managed well so far with a range of pre-emptive cost cutting initiatives.
Pets has invested heavily in its online offering and continues to ramp up its digital capacity. Single login allowing customers to access all products and services in one place is soon to launch, that'll offer a lot more opportunity to cross sell. The new infrastructure will need to be leveraged with a long-term sustained increase in demand to drive profits, but progress is promising.
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. The valuation has come down as fears of worsening economic conditions weigh on broader sentiment. We think this development is worth attention, but investors should remember the group wouldn't be immune to a widespread pullback in consumer spending.
Pets at Home key facts
- Price/earnings ratio: 12.2
- Average Price/earnings ratio since listing: 16.0
- Prospective dividend yield (next 12 months): 4.3%
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.
Full Year Results (profit figures before accounting changes)
In Retail, revenue grew 15.8% on a like-for-like (LFL) basis to £1.2bn. Within that, both online and store revenue grew mid double digits. Online sales represent 15.8% of total revenue, flat on the previous year. An increase in advanced nutrition take-up and growth in dog toys and training accessories helped Food and Accessories revenue grow 21.3% and 13.7% respectfully. Despite operating costs rising 11.9%, underlying pre-tax profit rose from £67.5m to £114.6m.
Vet Group LFL sales grew by 17.1%, but overall revenue declined from £123.2m to £108.4m, given the disposal of the Specialist Group. LFL fee income from joint venture practices rose 20.9% to £69.9m. Underlying pre-tax profit grew from £35.5m to £44.5m, as cost efficiencies helped margins.
The number of active VIP club members grew 1.1m to a record 7.3m, 27% of VIPs shopped across more than one channel over the year. Puppy and Kitten club members grew 36%, with an average of 23,000 registrations per week. The number of pet care plan subscribers was up 23% to 1.5m, generating over £120m in recurring revenue.
Group free cash flow was up 40.9% to £95.0m. Net cash, excluding lease liabilities, increased from £1.4m to £66.0m.
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.
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