Interactive Investor

Pets at Home's impressive recovery continues

8th August 2017 11:27

Graeme Evans from interactive investor

Food, bedding, toys, equipment, insurance, vets bills. According to one recent survey, the first year of owning a dog typically amounts to an eye-watering £4,700, a figure including the cost of buying the pet in the first place.

So it's little surprise that in this period of slower wage growth and rising inflation, owners are becoming more savvy with their pet-related purchases. It's this behaviour that has also contributed to the disappointing recent performance of Pets at Home shares over the past year.

The FTSE 250 company was recently named one of the worst-performing shares in the year since the Brexit vote, with the stock down 41% up to 22 June 2017. Other casualties from the high street included DFS Furniture, Dunelm and Next.

But there are signs that Pets at Home is fighting back against the trend that has seen pets owners increasingly turn to online competitors for food and other necessities.

The company, which has 447 stores, responded earlier this year by scrapping its reliance on short-term promotional discounts, and has replaced these with a new and more consistent lower pricing strategy.

A trading update published Tuesday appears to suggest the repositioning was paying off, with chief executive Ian Kellett encouraged by the "number of both new customers and those we have welcomed back".

Like-for-like revenues in merchandise rose 1.5% in the 16 weeks to 20 July, with the total figure, including changes in store space, up 2.8% to £216 million.

Pets shares enjoyed a much-needed spurt of 6% following the update, which showed underlying sales from services such as grooming and veterinary practices rose 10.5%.

Overall, like-for-like sales growth of 2.7% for the quarter was ahead of the 1.7% full-year consensus forecast.

Liberum analyst Adam Tomlinson said the figures represented a solid start to the financial year, but cautioned that it was too early to make any material changes to forecasts.

Despite the positive outlook of management and no changes to guidance, he has retained Liberum's 'sell' rating and price target of 145p.

He said the shares were not cheap based on the company's current risk profile, with a price/earnings (PE) ratio of 13 times for a three-year consensus EPS forecast showing a compound decline of 3.3%.

Tomlinson said: "We believe the interims in late November will present a better opportunity to assess whether this improved momentum can be sustained."

He also highlighted concern about the slower rate of vet and Groom Room openings.

The company added five new Pets at Home superstores, two Vets4Pets practices and six Groom Room salons in the period and said it was on track to meet full year opening targets of around 10 superstores, 40-50 vet practices and 40-50 grooming salons.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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