ShoreCap downgrades Pets at Home to 'hold'

In its second quarter, the company experienced operational issues related to the implementation of its new distribution centre.

Shore Capital said: “This led to lower product availability in stores for a six-week period from early August to mid-September, resulting in noticeable gaps on retail shelves. Although these challenges did not impact online sales, they did suppress the quarter's like-for-like growth.”

Meanwhile, the Competition and Markets Authority (CMA) announced in September that it was looking into “how veterinary services are bought and sold amid concerns that pet owners may not be getting a good deal or receiving the information they need to make good choices”.

Pets at Home is confident of its business model and is actively engaged with the CMA, already implementing many of the possible measures such as transparency in pricing. “However, the ongoing CMA investigation has created some uncertainty among investors, affecting the Company's share price (down 20% since the launch of the review),” said Shore Capital.

While both issues may not have a material impact on the company, they do “exacerbate” valuation concerns that the broker has on the stock.

The shares trade at 15 times earnings, which is the top end of the UK retail sector.

“This valuation suggests that the market is pricing in flawless execution, an assumption we find increasingly difficult to justify given the recent operational issues in Q2. Furthermore, the ongoing review by the CMA concerning the vet business introduces an additional layer of uncertainty to the stock's outlook.”

The stock was down nearly 3% at 296.2p on Tuesday morning.