Pets at Home

Pets at Home is the largest specialist pet care retailer in the UK. It operates two main divisions: retail, selling pet products including food and accessories; and The Vet group, operating under a unique joint venture model. The business has an excellent track record of growth, scaling the business since listing out of Private Equity ownership in 2014 to deliver a seven year revenue compound annual growth rate (“CAGR”) of 8% and earnings CAGR of 7% over the period. More recently the pet care market has structurally increased thanks to the growing pet population and the increase in spend per pet. Despite this rapid progress, the Manager still views the business as being in the early stages of capitalising on this structural and sustaining trend to become the most comprehensive provider in the UK pet space. Thanks to its services (vets and grooming), non-food and private label nutrition business, Pets at Home has the highest profitability in its peer group of domestic and international players.

Pets at Home was clearly a ‘pandemic winner’ and is one of the few retailers continuing to outperform postpandemic. The industry market leader with a multichannel presence is supported by a structural increase in the pet population as well as spending patterns of Millennials and Generation Z. With extra investment in data analytics and subscription revenues, the business is well positioned to leverage this growth which should continue in the medium to long-term.

The company has had a series of upgrades to guidance over the recent past, demonstrating the momentum in the business and it is generating a number of its own tailwinds, allowing it to take share of profits within an enlarged market. The company is also undergoing a transformation of the vet business, with growth and significant margin expansion potential ahead, and there is upside from subscription revenues, which is small but increasing. Management guide that the subscription business will be significantly larger in size over the medium-term which will drive customer retention and increase revenue visibility.With eight years of customer data and investment in their in-house technology ‘Polestar’ the Manager expects the company to capitalise on the subscription trend.

The Manager acknowledges the challenging environment for consumer-facing businesses; however, the pet care market has historically been resilient. Pets at Home is well positioned to mitigate cost inflation and pass it on  strategically on less purchased lines so as not to impact customer demand in the short-term. Premiumisation should also help offset some volume decline. Management are committed to matching prices with competitors within a 5% limit, leveraging its warehouse and stores with a cost efficient next day delivery. Pets at Home has a House ESG Q Score 2, putting it in the ‘leader  category’, and it has a AA MSCI rating.

The shares have an attractive free cashflow yield of 5.5%, giving a 3% dividend yield. The balance sheet is net cash, providing optionality for M&A activity.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.