Pets At Home – Sales Growth Impresses But Momentum Set To Slow

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Pets at Home Group PLC (LON:PETS)’s full year revenue rose 6.6% to £1.4bn. In the core retail business, like-for-like growth was up 7.5% with revenue of £1.3bn. Sales were a record for the group. Growth was driven by food, while accessories declined.

Grooming, pet sales and insurance commissions were flat. Vet Group revenue rose 13.3% to £122.8m, reflecting an improvement in joint venture fee income.

Profits rose at a lower rate than revenue, reflecting the lower margins of sales in retail, as customers held back on buying discretionary items. Underlying pre-tax profit of £136.4m was 4.8% up on last year. Overall profit performance was better than the group expected.

Free cash flow was £98.2m, up from £95.0m, and net debt was £366.7m, including leases.

Pets at Home said current trading remained “strong” and highlighted it was investing to make its products as affordable as “possible”. It also acknowledged higher costs, including wages. For the new financial year, the group expects sales to grow in-line with the medium-term target of 7%, and underlying pre-tax profit to be broadly flat with last year.

A final dividend of 8.3p was announced, taking the full year payment to 12.8p per share, an 8.5% improvement. A new £50m buyback was also announced.

The shares were unmoved in early trading.

Pets at Home’s Earnings

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown:

“Pets at Home has put in a remarkably strong performance for the full year, beating expectations in the process. The joy of operating a business in this space is that a certain level of demand is guaranteed, no matter what the economic climate, our dogs and cats still need food, and this is one of the last areas people will skimp on when times get tough.

Pets at Home’s market-leading position hasn’t come by accident and is testament to the strong work that’s been done on product availability and pricing proposition. Free cash flow remains a major benefit, helping to underpin another year of dividends and buybacks.

However, there are some potential clouds gathering. Consumers are tightening their belts, which means they’re more interested in buying the basics than they are more lucrative accessories. As Pets at Home continues to invest in keeping prices low, it means margins are taking a hit.

Spending money to protect existing market share rather than grow it is never ideal, and it’s possible the group’s close to bumping up against the side of the tank. The vet business is an attractive revenue diversifier, but is relatively mature. Stoking further growth is likely going to mean Pets at Home needs to open its own wallet once again.”