Pets at Home reported that like-for-like (LFL) revenue fell 1.0% to £361.6mn in the third quarter.
A “challenging UK consumer backdrop” and particularly weak footfall from October saw the Retail segment decline by 2.8%. This was only partially offset by 19.9% growth in the Vet division where its practices saw growth in subscriptions, visits and average transaction values.
Recently lowered full-year guidance has been reiterated, with the group expecting “modest growth” in underlying pre-tax profits.
The group plans to return £85mn to shareholders this year, through a combination of dividends and share buybacks.
The shares broadly flat in early trading.
Our view
Pets at Home experienced a decline in the third quarter due to weak demand in its retail arm, which sells pet accessories like collars and bedding. But a surge in visits to its vet practices fuelled double-digit growth in the division, helping to keep the group’s recently lowered profit targets on track.
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 was winning market share last we heard, helped by a strong focus on 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 showing some slight signs of weakness, 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. 8.2mn Pets Club members provide a valuable source of data that can help optimise the product range and promotional activity.
The UK’s Competition & Markets Authority probe 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 6.6%. 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.
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.
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.
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