Pets at Home has been in the dog house of late, especially after City broker Morgan Stanley suggested it “faced a bleak future” earlier this month.
Ahead of yesterday’s prelims there were even fears of a profit warning, and the retailer’s sliding share price consequently hit a record low.
But the underdog emerged wagging its tail when quarterly sales returned to growth – over the full year they rose 0.8% – even though pre-exceptional pre-tax profits edged down 1%.
Pets at Home boss Ian Kellett pointed to progress, and the retailer’s share price rallied slightly over the day.
A new ‘leash’ of life?
Far from licking his wounds after being beaten up by the City ahead of the results, Kellett told Retail Week he is taking actions to turn performance around.
Following what he described as “a bit of a blip” in its third quarter, when retail sales slipped 0.5%, the pets specialist has undertaken operational changes – in particular, adjustments to price.
“We will move swiftly to deliver even better value”
Ian Kellett, Pets at Home
In order to claw back sales, Pets has nuzzled closer to its value and online rivals with a new, lower price proposition and a move away from promotions.
Prices of large-bag private-label food, for example, are now 15% to 25% lower.
The repositioning has so far spurred a 1% boost in its like-for-like retail sales since being introduced 16 weeks ago, and Kellett says there’s more to follow.
“We will move swiftly to deliver even better value,” the dog- and horse-owning boss vowed.
Meanwhile, its comparatively junior services division – consisting of 438 veterinary clinics and 290 groom rooms – continued to prove its worth as a long-term investment.
As this proposition matures, its contribution to the group becomes increasingly significant – Pets at Home’s vet practice earnings alone rose 25% in the year.
“We’re still very young into expanding our vets business. The majority of the clinics are less than five years old,” Kellett points out.
“We are moving closer to having a very balanced business – a full omnichannel merchandise business complemented by a strong services offer”
Ian Kellett, Pets at Home
“We are moving closer to having a very balanced business – a full omnichannel merchandise business complemented by a strong services offer.”
If delivered with the same flair as Dixons Carphone’s KnowHow business, Pets at Home could soon reap greater benefits of having numerous strings to its bow, while consumer habits continue to change at pace.
Investment in a multichannel offer is also paying off, with online sales growth of 53% year-on-year, and the potential for more products being offered through a new subscription platform.
Is the City sold?
Some City brokers still have a bee in their bonnet, and will remain cautious until they see that Pets at Home’s strategy pays off.
According to Liberum analyst Adam Tomlinson, the outlook for Pets at Home remains “challenging”. He points out that while lower merchandise prices have wrought “some top-line improvement”, this comes with “a significant negative gross margin impact”.
The retailer has guided to a 100bps to 200bps gross margin decline in the current year, resulting from price investment and the impact of sterling’s slump.
“We believe the scale, quality and visibility of Pets at Home’s long-term growth opportunity should support a higher valuation”
Numis analyst Andy Wade
Liberum’s bearish forecast reflects its view that “significant structural pressures”, including the national living wage, outweigh the immediate benefits of Kellett’s operational changes.
Liberum and counterpart Stifel both also note the risk of increasing competition from rivals such as Amazon or German pet pureplay Zooplus, which has opened a local fulfilment centre in Birmingham.
A more optimistic note from broker Numis, however, describes the retailer’s new price position as “significant” and “enabling the business to get back on the front foot”, despite its near-term challenges.
Numis analyst Andy Wade says: “We believe the scale, quality and visibility of Pets at Home’s long-term growth opportunity should support a higher valuation.” He predicts the group will return to pre-tax profit growth in 2019 as its services division continues to build contribution.
However, there are a few more bumps left to navigate and, according to Wade, the impact on the retailer’s margin, as well as a slower rate of planned superstore openings, will impact next year’s numbers.
But Kellett is resolute.
“We’re focused on getting our strategy right and doing what we believe is right. We have total confidence that this is the right path for success and it will give us a strong platform for sustainable future growth,” he thunders.
“Once we demonstrate a return to profitable growth the market will react favourably. We have total confidence, but, of course, the proof is in the pudding,” he concludes.
So although the City is yet to be seduced, Pets at Home may not have its tail between its legs for much longer.