- Full year guidance downgraded
- Demand slows in retail business
- Returning accessories to growth a ‘key priority’
Britons are famously devoted to their pets but a profit warning from Pets at Home (PETS) demonstrates there are limits to the sums they will spend on their furry friends.
Shares in the UK pet care leader softened 2% to 287.5p after it said third quarter sales ‘didn’t quite hit’ anticipated levels and downgraded its year-to-March 2024 adjusted pre-tax profit guidance to £132 million, below the £135 million consensus estimate.
RETAIL SALES SLOW
Pets at Home reported robust trading for the 12 weeks to 4 January 2024, with group revenue up 4.3% to £362.4 million.
Unfortunately, while like-for-likes rose 13.3% in the veterinary services business, retail like-for-like growth of 3.7% came in below expectations due to the tough backdrop, especially in discretionary accessories, and slowing inflation, although Pets at Home did deliver volume growth and market share gains across food.
The FTSE 250 retailer added that its gross margin performance improved sequentially from the first half, with strong sell-through of seasonal ranges leaving ‘a clean inventory position’, and stressed that returning accessories to growth was a ‘key priority’ for management.
WHAT DID THE CEO SAY?
Chief executive Lyssa McGowan said: ‘Our colleagues came together over our peak trading period to deliver a record sales performance, growing against a very strong performance in the prior year.’
McGowan continued: ‘While a slower market over peak meant our sales growth didn’t quite hit the levels we expected, the business remains well positioned to benefit from long term growth in the sector as we continue to win share and grow volumes across food and deliver differentiated performance through our unique vets business.’
EXPERT VIEWS
Liberum Capital lowered its price target from 330p to 290p following the earnings alert having moved to a ‘Hold’ rating this time last year as it was ‘more concerned around the outlook for retail given the consumer backdrop, continued cost pressures and retail standards in stores’.
‘These factors remain,’ said the broker. ‘The ongoing CMA (Competition and Markets Authority) investigation into the vets sector is also likely to weigh on the share price. On the positive, we like the very strong momentum in vets and the net cash balance sheet supporting a robust dividend and buybacks should also not be overlooked.’
Russ Mould, investment director at AJ Bell, commented: ‘While households are likely to prioritise spending on the basics for their animal companions, spending on little extras is an unnecessary luxury when times are tough.
‘In this respect a slowdown in this category should not come as a surprise and perhaps Pets at Home was wrong to peg profit guidance at a level where it needed to achieve a decent level of discretionary purchases.’
Mould added: ‘What would be more worrying is a sign it was losing sales on core items to the non-specialists, notably the supermarkets. This does not appear to be the case with the company growing share and winning volumes in food.
‘The policy of offering everything under one roof – including veterinary and grooming services – continues to be a winner for the company.
‘The issue clouding the outlook is a probe by the competition authorities into the vet sector. Pets at Home has been quite clear that it doesn’t engage in the sort of practices which the CMA is looking to stamp out but until the review is done – an update should be forthcoming based on the published timeline – investors may well remain wary.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.
