Pet pampering retailer Pets at Home (PETS) is in the doghouse as it posts an 11.3% drop in pre-tax profit to £40.8m in the six months to 12 October as online rivals pressure its margins.
Gross margin fell from 53.9% to 51.9%, which was mainly dragged down by the company’s merchandise division. This was due to the impact of competitive pricing, a greater mix of lower margin food products and a foreign currency hit of £3.5m from the weaker pound.
However, like-for-like sales in merchandising accelerated 5.2%, up from a 1.5% rise in the first quarter.
Profit expectations for the year to 30 March 2018 are in line, but gross margin dilution is anticipated to be 200 to 250 basis points as investment plans accelerate. This is worse than previous guidance of 100 and 200 basis points.
Added to the mixed news is chief executive officer Ian Kellett’s decision to leave to pursue his own personal business interests. The head of the retail division Peter Pritchard will take his place.
Shares in Pets at Home are down 6.3% to 167.6p.
PETS AT HOME IN ‘PERIOD OF TRANSITION’
Shore Capital analyst Phil Carroll says Pets at Home is still in a period of transition but that it is taking decisive action to gain traction in the market.
Omnichannel sales grew 81% over the period, with nearly half comprising ‘click and collect’ orders.
‘This level of growth highlights to us how the business is transitioning from a more traditional bricks and mortar business to a more modern full service specialist retailer’ comments Carroll.
The analyst is optimistic that the company’s investment plans will ‘reinvigorate its proposition’ and improve profitability as it matures.
He forecasts pre-tax profit of £85.8m for the year to 30 March 2018, which is 10% down year-on-year.
Numis analyst Andrew Wade says first half pre-tax profit was higher than anticipated, driven by a stronger trading performance through the second quarter.
Despite the expected negative impact on full year gross margins, he sees a ‘significant long-term growth opportunity’ in the roll-out and maturity of the services division which provides grooming and veterinary services.
