Long in the doghouse with investors, pet care specialist Pets at Home (PETS) perks up 8.1% to 135.7p on news of a solid Christmas and confirmation the retailer is on track to meet full year guidance, assuaging fears over a potential profit warning.

Despite wider retail sector doom and gloom, today’s update demonstrates there are resilient retail niches such as the pet care market, and also shows Pets at Home’s new senior management team is making progress with the turnaround.

PETS, VETS & COMPETITIVE THREATS

Pets at Home is the UK’s number one pet care business, selling pet products online and via 451 stores, many of which boast vet practices and grooming salons. The Wilmslow-headquartered company also operates a leading small animal veterinary business with ‘First Opinion’ practices located in stores and in standalone locations, and also runs four specialist referral centres.

Yet as we explained in our recent article on unloved stocks, short-sellers’ paws have been all over the pet food-to-veterinary services specialist amid competitive threats from online players and discount supermarkets, with the substantial lease commitments on the balance sheet only bolstering the bear case.

A number of management changes since Pets at Home’s 2014 stock market debut haven’t helped to foster bullish sentiment either.

LIKE-FOR-LIKE GROWTH IMPRESSES

However, short-sellers are being squeezed as Pets at Home reports 6.3% growth in group sales to £237.2m for the third quarter to 3 January, up 5.1% on a like-for-like basis and with online sales on a growth tear.

Like-for-like sales in the core retail business rose 4.7%, whereas like-for-like sales in the ‘Vet Group’ arm leapt 9.1% higher in the quarter.

Relatively new CEO Peter Pritchard comments: ‘Momentum in retail accelerated over the festive period, culminating in the biggest trading day of our entire history on the Saturday before Christmas. Our omnichannel business delivered exceptional performance, benefitting from investments made earlier in the year, including a new mobile website.’

Pritchard is also sinking his teeth into the turnaround of the vet business. He flags solid customer revenue growth across all joint venture practices in the quarter and insists ‘mature practices continue to grow ahead of the market’.

REITERATING GUIDANCE

At a time when other retailers are coughing up profit warnings, Pets at Home reiterates full year guidance for underlying pre-tax profits of £80m-to-£85m, albeit representing a 2% year-on-year decline, as well as underlying free cash flow ‘of at least £55m’.

And as he monitors the Brexit process, Pritchard says he may consider increasing the company’s inventory holding ‘by up to £8m’ to help mitigate the risks.

Nevertheless, Liberum Capital is lukewarm on the stock, pointing out: ‘Top line momentum continues, but margin pressure remains and the business could be some way from a return to sustainable profit and cash flow growth. Merchandise remains a highly competitive space, while the Vet Group turnaround is not without some clear risks.’

The broker also argues ‘talk of a “fixed” retail business is premature’. Price-cutting action has led to six consecutive quarters of like-for-like growth, but ‘this has come at the expense of a 280 basis points gross margin fall in full year 2018 (versus initial guidance of -100 basis points to -200 basis points) and a 120 basis points fall in the first half of 2019.’

Liberum also contends that ‘Pet food (and accessories) remains a highly commoditised and competitive marketplace with specialists (online and store-based), general merchandisers, discounters and supermarkets all participating. Management previously noted that it has not seen a significant price reaction by its competitors and that it believes the group’s price investment is largely complete. However, future pricing pressure and the need for further investment cannot be ruled out.'

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Issue Date: 22 Jan 2019