Vet switching trend lifts Pets at Home

Like other UK-listed veterinary firms, Pets at Home Group (PETS) has struggled since the Competition and Markets Authority (CMA) announced an investigation into the sector in September. 

Its shares are down more than 22 per cent across the last six months. However, the company maintains that the regulator’s final verdict won’t have a material impact on its ambitions given “the high quality growth the business is seeing”.

Management reports seeing an increase in the number of new consumers switching to its vet practices with older pets in recent months – and its interim results attest to this. Revenue from its veterinary business was up 19 per cent on the comparable period last year to £78.2mn. Sales accelerated in the second quarter supported by higher average transaction values and increased vet capacity and retention. 

Pets at Home is still confident that it will deliver an underlying profit before tax figure of around £136mn for the full year, despite a drop off in the first half. This was a period of “highest execution risk” according to management – with stores being transitioned to a new Stafford distribution centre (DC), a brand relaunch and the ongoing development of a new digital platform. 

From the early part of Q2, the company saw what it refers to as a “deterioration in our in-store availability from normal levels” as migration to the new DC got underway. Management insists that its teething problems are now a thing of the past, though Peel Hunt analysts noted that the online operation still needs to be transferred over to the Stafford facility. 

“Some risk remains, and with the relaunched website and app a key part of the growth dynamic going forward, perhaps there is a little more jeopardy than PETS feels,” the broker said. 

Current trading remains, as Peel Hunt, describes it, "volatile", especially in Pets at Home’s retail division. Between mid October and mid November, retail sales were up 5.5 per cent, but this figure has since slowed to 2 per cent. Shares currently trade at 14 times forward earnings for the full year, which we’d argue looks perfectly reasonable given the momentum in the veterinary business. 

The stock has deflated on CMA fears, but until the outcome of the review is announced, its impacts on vet practice revenues will remain unknown. We think demand growth bodes well for the future, even if retail doesn’t exceed expectations. Buy.

Last IC view: Buy, 375p, 20 July 2023