Shares in pet care specialist Pets at Home (PETS) plunged 8% to 385.4p on Tuesday after the pet food-to-veterinary services provider guided towards flat full-year pre-tax profits of £93.5 million, citing tough fourth quarter comparatives as well as coronavirus-related uncertainty in a cautious outlook.

This overshadowed the positive news that the ‘sustained strength in performance’ seen in the group’s retail and veterinary businesses during the second quarter has continued into the third quarter, with the ‘essential’ retailer of everything from dog food to cat litter continuing to take market share ‘across all channels’.

PET PRIORITIES

Results for the first half to 8 October 2020 revealed 5.1% year-on-year growth in group revenues to £574.4 million, although pre-tax profit fell 5% to £39.6 million due to the lockdown of services in the first quarter; Pets at Home’s groom rooms were temporarily closed and veterinary practice services were restricted.

Thankfully, Pets at Home’s ‘essential status’ provided a boost for its retail stores during the first national lockdown, with like-for-like sales rising by 5.8% in the first half as UK consumers prioritised spending on the health and wellbeing of their canine and feline friends during the pandemic.

PROFIT GUIDANCE FALLS FLAT

Yet investors were unnerved by a cautious outlook statement in which Pets at Home highlighted the significant pull forward in sales in March 2020 which it will be cycling in the fourth quarter.

The retailer also warned that Covid-19 is creating ‘material uncertainties around the near-term trading environment. At this stage, absent any escalation of restrictions, or other significant disruption to our operations, we now anticipate full-year underlying pre-tax profit to be in line with the prior year, with the estimated financial impact of the pandemic not fully offset by this year’s business rates relief,’ warned the company.

The alert prompted broker Shore Capital to place its ‘buy’ recommendation under review, pointing out that the retailer trades on ‘relatively fulsome’ multiples.

Nevertheless, Shore Capital believes ‘this is time for Pets to shine being the right business in the right market, given the current trading environment. We like the self-help levers available to the company but with the outlook statement believe that the share price has already arrived at its destination.’

Elsewhere Ross Hindle, analyst at research firm Third Bridge, commented: ‘Pets at Home is benefiting from a rise in pet ownership during lockdown and a growing trend of pet food premiumisation. This means a growth in pet accessories as well as increased demand for higher-margin pet foods. The retailer’s online sales are now nudging close to 20% penetration.

‘Collectively this means Pets at Home is expected to outperform the market, with margin expansion aided by a strong private label offering. The big questions are, how much did social distancing and other safety measures impact margins and how sustainable will their success be in 2021?’

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Issue Date: 24 Nov 2020