A downwards drift at differentiated retailer Pets at Home (PETS) since joining the market in March should interest contrarian investors. The £897 million cap has growth opportunities on many fronts including the veterinary surgeries market, while a return to television advertising should have a positive impact on sales.

The pet shop’s shares are 26.2% below their 245p float price, presenting an opportunity to pocket a cash-generative market leader with good physical store and multi-channel expansion prospects. The shares have been weak due to short selling by hedge funds, investor fatigue over initial public offerings (IPOs) and market concerns about an increase in the cost of servicing the retailer’s debts once interest rates begin to rise.

Pets at Home operates in a UK pet care market with proven resilience, having endured no periods of negative growth between 2006 and 2012. The UK is seeing a growing number of single-person households and couples without children, prepared to lavish disposable income on premium treats and advanced nutrition on beloved feline and canine friends.

Agenda chart - Pets at Home - Aug 14

Not only a pet food and accessories retailer, Pets at Home is now the UK’s biggest small animal veterinary business with 293 surgeries, run predominantly via joint ventures under the Companion Care and Vets4Pets brand names. It has a good platform from which to grow in a highly fragmented market.

The business is also UK leader in pet grooming services. As its vet practices and ‘Groom Rooms’ mature, and Pets grows higher margin advanced nutrition ranges, there is scope to move gross margins higher. Furthermore, growth in its VIP club membership augurs well for like-for-like sales, engendering loyalty and helping to drive up basket sizes.

Following record full-year figures (12 June), showing underlying EBITDA (earnings before interest, tax, depreciation and amortisation) up 12.4% to £110.7 million, chief executive officer Nick Wood flagged positive progress in its first quarter trading statement (30 Jul). Like-for-like sales grew 4.1% , driven by a combination of VIP Club membership momentum, sales of advanced nutrition and health and hygiene products as well as continued services growth.

Bank of America Merrill Lynch reckons earnings per share will double to 14.2p in the new financial year. Additional incremental earnings catalysts include investment in widening the online product range and in expanding the in-store advanced nutrition offering.

Issue Date: 03 Sep 2014