Write up today (extract)28 Jan 2025 14:46
Recently lowered full-year guidance has been reiterated, with the group expecting “modest growth” in underlying pre-tax profits.
The group plans to return £85mn to shareholders this year, through a combination of dividends and share buybacks.
The shares broadly flat in early trading.
Our view
Pets at Home experienced a decline in the third quarter due to weak demand in its retail arm, which sells pet accessories like collars and bedding. But a surge in visits to its vet practices fuelled double-digit growth in the division, helping to keep the group’s recently lowered profit targets on track.
We think the group is making the right moves to benefit from an attractive medium-term outlook. A stable but ageing pet population should see average spend trend higher in time. That’s especially true in the Vets division, where the group was winning market share last we heard, helped by a strong focus on attracting and retaining skilled practitioners who have been in short supply over recent years.
Enhancements to the group’s pet care proposition have seen strong growth in subscriptions for things like regular flea and worm treatments, helping to provide further stability in revenues.
The retail division is showing some slight signs of weakness, largely due to a challenging macroeconomic backdrop that means pet owners have less disposable cash to spend on their furry friends.
Despite this, investments in the digital platform, new store openings and refits, and strong recruitment rates to the group’s loyalty schemes should stand the group in good stead when things pick back up. 8.2mn Pets Club members provide a valuable source of data that can help optimise the product range and promotional activity.
The UK’s Competition & Markets Authority probe into the UK Veterinary industry is a risk. The group believes that the autonomy its joint-venture model grants practice owners over clinical and pricing decisions is pro-competitive and does not see the enquiry as a threat to its strategy. But it’s a risk worth monitoring.
The shares offer a prospective dividend yield of 6.6%. With a healthy balance sheet and falling internal demands on cash, there’s scope for payouts to improve. However, there can be no guarantees.
Overall we’re comfortable with the group’s expectation that this attractive sector can grow at about 4% per annum over the medium term. The investments made over recent years should allow Pets at Home to keep outperforming its competitors.
The current industry backdrop has put the valuation under pressure, and at well below the long-term average, it doesn’t look too demanding. But just when conditions will pick up again is hard to say. And with a high-profile regulatory probe added into the equation, there's plenty of potential for more ups and downs along the way.
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