Pets at Home’s first-half revenue increased by 1.6% on a like-for-like basis to £789.1mn. The Retail business was flat, but the smaller Vets division grew by 18.2% benefitting from growth in appointments, subscriptions and transaction values.
Underlying pre-tax profit was up by 14.1% to £54.5mn helped by the strong trading in Vets and stable operating costs.
Free cash flow increased by £10mn to £33.1mn. Net debt, including lease liabilities, was £373.0mn.
Growth expectations for the remainder of the year have been lowered, with pre-tax profit expected to be up modestly over the full year. Previous guidance was for an increase of 9% to around £144mn.
Pets at Home has proposed a 4.4% increase in the interim dividend to 4.7p per share.
The shares fell 8.7% in early trading.
Our view
The challenging conditions in Pets at Home’s market seen last year have continued longer than expected, leading to a downgrade in the full year outlook.
The pandemic heralded a step-change in pet ownership but people are now thinking twice before making the significant commitment that goes with a new kitten or puppy. Spending on non-essential items for our furry friends also remains subdued.
But sales and profits are still moving in the right direction, and we think the group is making the right moves to benefit from an attractive medium term outlook. A stable but ageing pet population should see average spend trend higher in time. That’s especially true in the Vets division, where the group is winning market share, helped by a strong focus in attracting and retaining skilled practitioners who have been in short supply over recent years.
Enhancements to the group’s pet care proposition have seen strong growth in subscriptions for things like regular flea and worm treatments helping to provide further stability in revenues.
The retail division is proving to be relatively resilient underpinned by investments in the digital platform, new store openings and refits, and strong rates of recruitment to the group’s loyalty schemes. 8.1mn Pets Club members provide a valuable source of data that can help optimise the product range and promotional activity. While discretionary spend has been weak of late, our dogs and cats still need food, and this is one of the last areas people will skimp on when times get tough.
The UK’s Competition & Markets Authority into the UK Veterinary industry is a risk. The group believes that the autonomy its joint-venture model grants practice owners over clinical and pricing decisions is pro-competitive and does not see the enquiry as a threat to its strategy. But it’s a risk worth monitoring.
The shares offer a prospective dividend yield of 5.1%. With a healthy balance sheet and falling internal demands on cash, there’s scope for payouts to improve. However, there can be no guarantees.
Overall we’re comfortable with the group’s expectation that this attractive sector can grow at about 4% per annum over the medium term. The investments made over recent years should allow Pets at Home to keep outperforming its competitors.
The current industry backdrop has put the valuation under pressure, and at well below the long-term average, it doesn’t look too demanding. But just when conditions will pick up again is hard to say. And with a high-profile regulatory probe added into the equation, there's plenty of potential for more ups and downs along the way.
Pets at Home key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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 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.