While the outlook for retailers has deteriorated over recent months, not all consumer-focused firms are struggling. Indeed, Pets at Home’s [LON:PETS] share price has soared by 12% since the pet shop and veterinary services business released an impressive third-quarter trading update at the end of January.
The update showed that the firm’s top line increased by 9%, with like-for-like sales up 8%. Customer numbers were at a record high and its gross margin was “resilient” according to the latest market update. This led it to upgrade guidance for the full year, with underlying pre-tax profit now expected to be at the upper end of a consensus range of GBP126m to GBP136m, versus previous expectations of GBP131m.
Of course, a robust performance in an era where consumer confidence is close to a record low and the economy is widely expected to experience a recession is somewhat unsurprising. Pets at Home is a relatively defensive business, as The Armchair Trader highlighted last summer, due to the resilient nature of demand for pet food and services.
Moreover, the relative price inelasticity of demand for such goods and services means that the firm is unlikely to face major challenges when raising prices in response to higher input costs during a period of rampant inflation.
As such, it is well placed to combine sales growth with margin expansion over the coming months. Indeed, its new distribution centre is on track to become operational by the summer. It is set to reduce the firm’s overall costs, thereby boosting margins, while improving product availability and flexibility.
Pets at Home’s financial standing also means it is in a strong position to thrive in an era of normalised interest rates. It expects to finish the current financial year with a net cash position, while net finance costs were covered over eight times by operating profit in the first half of the year.
In terms of growth potential, the company’s cross-selling opportunities are set to catalyse its top and bottom lines. In its most recent financial year, just over a quarter of its loyalty scheme members used services such as veterinary or grooming in addition to purchasing food and/or accessories. This provides scope to introduce a large proportion of its core customers to a broader range of products and services over time.
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The firm continues to grow its subscription revenue, which provides greater stability and visibility in what remains a tough economic period. The number of subscription plans grew by 9% to reach 1.6 million in the third quarter of the year, with them now accounting for approximately 10% of annual company revenue.
And with around 40% of its products being lower-priced private label goods, it is well placed to accommodate increasingly price conscious consumers who may trade down to cheaper substitutes as the cost-of-living crisis persists.
Long-term investment appeal
Clearly, Pets at Home’s share price is unlikely to maintain the pace of its recent rapid rise over the long run. However, it is in a strong position to overcome a weaker period for the retail sector due to its sound business model and solid finances. It also has clear growth potential as it shifts towards a subscription business and cross-sells products and services to existing customers.
Trading on a price-to-earnings ratio of 17.5, the FTSE250 stock is by no means cheap on an absolute or relative basis. But its top and bottom-line growth potential mean it is worthy of its current market value and offers long-term investment appeal.
Pets at Home opened trading on 9th February at 377.8p, and has offered a year-to-date return of 31.9%, a one-year return of -7.7% with its shares ranging between 254.8p to 419p over a 52-week period.
The company has a market cap of GBP1.8bn.
Deshe Analytics, by contrast, rates Pets at Home as an ‘Underperform’. The research agency said: “Pets at Home Group financial reports for 3Q22 showed some underwhelming results. Their negative income, growth, and value factors indicate that the company is finding it increasingly difficult to produce impressive numbers. Typically, results like these translate into sustained negative momentum and strong downward pressure on stock price.”
Liberum Capital reiterated its ‘Hold’ rating for Pets at Home at the start of February, with a target price of 390p. Shore Capital and Berenburg Bank both rated Pets at Home as a ‘Buy’ in January and December respectively.