Specialist retailer Pets at Home’s (PETS) first quarter like-for-like sales grew by 2.7%, comfortably ahead of the 1.7% forecast by consensus and sending shares in the pet food-to-veterinary services play 7.7% higher to 185.6p this morning.
Shares in Pets at Home have been in a negative trend since last summer, a series of disappointing updates and downgrades leaving the equity in the doghouse and concerns over the squeezed UK consumer and increased competition also weighing on sentiment.
This is why there’s palpable relief as the dog food, veterinary practices and grooming salons play today leaves 2018 profits guidance unchanged with cost savings on track.
However broker Liberum Capital is sticking doggedly to its ‘sell’ rating with a 145p target price, arguing Pets is more value trap than compelling turnaround tale.
FINALLY OUT OF THE DOGHOUSE?
Click here to read today’s update from the UK’s leading pet business, covering the 16 weeks to 20 July, which shows group-level like-for-likes up 2.7% and better-than-expected performances from both divisions (Merchandise & Services).
Investors were waiting for confirmation of a continuing recovery in Merchandise revenue, which had returned to growth in last year’s fourth quarter.
Pets at Home has duly delivered, Merchandise sales 1.5% ahead on a like-for-like basis, versus consensus expectations of a 0.7% advance, reflecting reduced reliance on short term discounts and positive momentum from investment in lowering prices. This is proving successful in winning back customers, albeit at the expense of margins.
Pets at Home also reports 10.5% like-for-like sales growth in Services, comfortably north of the 7% consensus estimate and driven by the resilient veterinary business.
CEO Ian Kellett is ‘pleased with our positive start to the year, delivered through another period of strong growth in our Vet Group and further momentum in Merchandise trading.’ He explains that ‘we have continued our everyday lower price repositioning and reduced the reliance on short term promotional discounts. We remain encouraged by the overall response to our pricing changes and by the number of both new customers and those we have welcomed back.’
DOWNSIDE RISKS REMAIN
Liberum acknowledges ‘this appears to be a solid start to full year 2018’ and leaves its year to March 2018 profit before tax forecast mired at a bottom-of-the-consensus-range £79m, with a decline to £77.2m shaded in for full year 2019.
The broker believes ‘the interims in late November will present a better opportunity to assess whether this improved momentum can be sustained.’
‘The story has evolved as we expected, with significant price investment into Pets' food/accessories offering now required to establish its competitiveness. Competition is intensifying across the UK pet care space.
In particular, we highlight Zooplus (the Germany-based competitor) which continues its double-digit sales growth, has now opened a UK fulfilment centre and remains 20-30% cheaper on third party brand food. The pure-play online pet care retailer's strategy prioritises top line and market share growth over short-term profits.'
