Pets at Home profit drops on price reductions but revenues rise

Pets at Home posted a 12% drop in underlying pre-tax profit on Tuesday as it lowered prices, but revenues were up and the company hailed a "bright future".

In the year to 29 March, underlying pre-tax profit declined to £84.5m from £96.4m, as the group gross margin fell to 51.7% from 54.2% the year before. Revenues were up 7.8% to £898.9m, however, while like-for-like revenues were 5.5% higher.

Merchandise revenue grew 6.8% to £765.4m and services and other revenue was 13.7% higher at £133.5m, while the full-year dividend was maintained at 7.5p per share.

The group invested around £13m on lowering prices in the year, first in its private label advanced nutrition and then across branded advanced nutrition, more food categories and pet essentials.

Pets expressed confidence that cutting prices is driving a positive reaction with customers following a "strong" rebound in merchandise trade during the year, while advanced nutrition performed "very well", with 12.7% volume growth and significantly increased private label participation.

"Looking forward, maintaining a competitive price position will always be part of everyday strategy but this will not be to the same scale as the prior financial year," it said.

Pets said FY19 will be the second of its three year "financial transition" back to sustainable profit growth. In the coming year, it is targeting like-for-like revenue growth ahead of the market in both retail and the vet group, and a transition back to low single-digit underlying group profit growth.

Chief executive officer Peter Pritchard said: "Our plans to reposition retail are working, more customers are coming back to shop with us, and we are committed to returning the business to profit growth. But it hasn't been easy. We took decisive action, threw passion and energy into it, and delivered targeted pricing changes to give customers the products that mattered most to them, with the service and value they expect from us.

"We have a bright future. Year one of our three-year strategy has delivered, and as a business we are on a stronger competitive footing to return to sustainable profit growth. But the job isn't done yet. As our new CEO, my plan has a bigger focus on digital, tapping into the vast potential of our customer and pet data, and taking action to ensure our vet business reaches its potential. Our market has a track record of resilience in a downturn and as we adapt to a changing environment, we will emphasise the things that make Pets at Home unique and best placed to serve the UK's pet loving owners."

The company said the pet care market remains resilient, with growth in pet products estimated at around 2% in 2017, and veterinary services at around 5%. Pets grew its market share in the vet segment and won back share in the food and accessories markets.

George Salmon, equity analyst at Hargreaves Lansdown, said: "Pets at Home is seeking to hold the dividend steady while it repositions itself, but there’s plenty of challenges around. The top line growth is impressive, but the fly in the ointment is it’s being driven by price cuts, so profits are actually falling.

"Having previously had more lofty ambitions, Pets has bumped up against the side of the tank a bit earlier than it expected, and is only adding the odd new superstore here and there. We suspect online competition is proving a bigger factor than the group originally thought.

"Regular flea treatment sales are jumping, and Pets will likely try and shift more sales onto similar subscription models. This kind of revenue is more valuable as it’s likely to recur year-on-year, but recent changes to rules around customer data mean running targeted marketing campaigns to get customers signed up could prove more challenging. With grooming sales losing momentum and new veterinary partners harder to find, recently appointed CEO Peter Pritchard has his hands full."

At 1110 BST, the shares were down 5.2% to 149.80p.