Pets at Home Group Plc (PETS) Earnings Call Transcript & Summary

All right. Good morning, everybody, and welcome to our full year results presentation, where Mike and I will take you through another year of progress as we draw a line under a period of major transformation and focus firmly on our exciting growth platform for the future. Today, we have a packed agenda for you. I'll start by taking you through the deep transformation of our business over the last 2 years. Then I'll demonstrate that the pet care market remains attractive and show you how the platform we've built is set up to deliver outperformance in an increasingly omnichannel world. I'll share why our vet business is such a unique and valuable asset, clearly differentiated from corporate models, fundamentally more cash generative and now representing more than half of our group profits and cash flow. And then I'll hand over to Mike, who will take you through our increasing focus on free cash flow, underpinned by predictable revenue streams and normalized levels of investment, which will support shareholder returns in the years ahead. So let's get started by looking at the strategic progress we made in FY '25. In FY '25, we grew Pets Club by another 5% to 8.2 million members. And this was helped by our new digital platform and was especially pleasing in a market where the numbers of puppies and kittens continue to normalize. Linked to that faster growth in members, we did see average consumer value dilute 2% to GBP 175, but we saw strong performance with our retained customer base where average spend continued to grow. Subscriptions were a real bright spot for the business last year, and we grew subscription revenues by 30%. More than half of our vet consumers now have a care plan. And we're also pleased with the strong growth in retail subscriptions, which have now grown to 4% of revenue, and we're excited about the enormous runway ahead. In the vet business, it was another tremendous year with double-digit growth in consumer revenues, and this was high-quality growth as well, driven by more visits, higher average spend, growth in care plans and even higher consumer satisfaction. We made further strides in winning clinical talent as the attractiveness of our JV model continues to gain traction, growing clinical headcount by 6% and ending the year with record low vacancies. We continue to grow our footprint in vets, opening 3 new practices and extending 15 in the year, and I'll come on to how we plan to accelerate this expansion in the future as a key driver of our growth. This progress translated into free cash flow of GBP 84 million in the year, up 22% on FY '24 as we completed our big transformational projects and reduced our non-underlying costs as planned. And we also returned all of that free cash flow to shareholders through ordinary dividends and a GBP 25 million share buyback. And we did all of this while continuing to make progress on our sustainability agenda, supporting our people, pets and planet. So as we exit FY '25, we draw a line under a period of major transformation for pets. Over the last 2 years, we have fully delivered a complete replatforming of our distribution, digital and data capabilities. These were significant undertakings, both in terms of the level of investment required and the resource they consumed within the business. Both are now 100% complete, and we are laser-focused on delivering the benefits for many years to come. It's worth taking a moment to step back and understand the deep transformation that the organization has been through over the last 2 years and the great position that it puts us in today. Two years ago, we had a portfolio of disjointed and outdated brands across Retail, Vets and grooming. We now have a single unified master brand that links everything together, and this is having a significant impact on our consumers with a 9% increase in brand consideration over the last year. Importantly, we've also seen a big uplift in consumers saying they know what we stand for, enabling us to form deeper and stronger connections. We've also completely transformed our digital and data capabilities. Two years ago, we didn't have an app you could transact in. It was purely a loyalty scheme. We had a transactional website on a different close to end-of-life platform, and we had analog subscriptions capability. Today, we have an app, website and colleague device on a single platform, capable of delivering a seamless experience built on best-in-class open source components and integrated in-house, which will enable us to iterate and improve far into the future. And we're starting to see the benefits in consumer engagement with the platform. This is coming through most clearly in subscriptions, where we've built a world-leading omnichannel experience, driving growth of Easy Repeat by 35% last year and with further acceleration in recent weeks as we launched in-store. Two years ago, we operated out of 3 DCs with 0 automation. We now have a single distribution center, fulfilling all of our store and online deliveries. Our Stafford DC is an enterprise-grade operation that will support our ambitions for the next decade. It has structurally improved our in-store availability now at record levels and is driving efficiency in the fulfillment of our online and subscription orders through the use of automation. And lastly, we've been through significant organizational change and capability building over the last 2 years to create a truly integrated business. We've created a consumer function, bringing together and significantly upskilling areas like marketing, format, insight and digital to enable us to get the best out of our platform. We've combined our businesses into a single head office in Handforth, bringing our people closer together to drive innovation and connection. And importantly, we've completed a comprehensive organizational restructuring to tune, simplify and drive performance. Now strategic progress of this magnitude is certainly not easy, but businesses that do hard things thrive because they're difficult to follow or beat. I'm really proud of how our people came together to deliver these multiple complex projects and organizational change. Their passion, energy, connection and drive is now all firmly focused on future growth. And that focus on future growth is guided and inspired by our powerful purpose, to create a better world for pets and the people who love them. It inspires and guides our colleagues every day and runs through everything we do. And this purpose also underpins our strategic vision to continue to build the world's best pet care platform. Our platform is integrated, omnichannel and consumer-centric. Integrated means bringing together a unique blend of products, services and advice across nutrition, accessories, preventative and curative health care, grooming and well-being, so a consumer can access everything that they need to care for their pet through our platform. And by being integrated, we deliver significant economies of scope. We can do business better and cheaper because we operate across multiple verticals. For example, by sharing category expertise and speeding up time to market or by amortizing our digital investment across a large revenue base. Omnichannel means allowing consumers to seamlessly move between physical and digital experiences. Our face-to-face assets, pet care centers, practices, groom rooms remain the bedrock. And around that, we'll increasingly wrap hybrid and virtual experiences such as digital advice and support, seamless click and collect and e-commerce and telemedicine, so our consumers can access the best care for their pets through whichever channel work for them. Being omnichannel also gives us significant economies of scale such as savings from leveraging our physical estate for click and collect or using the Vet Connection to provide 24/7 out-of-hours triage. Consumer-centric means using our data at scale to anticipate consumers' pet care needs and serve up exactly what they need when they need it. This, coupled with our insight into the pet owner bond means we can provide an unrivaled experience, fueling consumer and revenue growth and driving share of wallet. By making things easy and seamless, we drive cross-sell, we'll drive upsell, we'll drive subscriptions and we'll drive lifetime value. And we can further leverage our data to underpin adjacent businesses like insurance. So you see how our integrated omnichannel consumer-centric platform will leverage our scale, assets, data, capabilities and intimate understanding of the pet owner bond to deliver a service that no one else can and in doing so, create sustainable competitive advantage. And it's this sustainable competitive advantage that will drive rewards for our shareholders. We expect to deliver mid-single-digit consumer revenue growth with outperformance against the broader pet care market, supported by omnichannel growth and further gains in vets. We'll drive profit growth ahead of sales growth in the medium term as we deliver efficiency and operating leverage throughout the business. Free cash flow remains a key focus for us. With our phase of major investments now behind us, we expect free cash flow conversion of profit after tax to be 90%. And this cash flow will reward shareholders through our consistent capital allocation policy, our robust balance sheet and our track record of returning excess cash to shareholders. As we look forward to FY '26 and beyond, we're very well positioned to deliver against our ambitious strategy. We're the clear market leader with a unique business operating in a very attractive, structurally growing market. Over long periods, the pet care market has grown at attractive rates. The pandemic boom in pet ownership saw a period of rapid growth, but premiumization with consumption shifting towards higher-end products such as advanced nutrition and humanization with our expectations for our pets increasingly converging with those we hold for ourselves were both really well established before the pandemic, and they remain strong today. The lower market growth that we saw in FY '25, which has shown up in our financial results, was due to three clear factors. Two are particular to pet care and all three will phase out over time. First, we saw puppy and kitten numbers decline as the pet boom ended and we returned to a stable, albeit higher pet population. This normalization impact is now largely washed through and will start to become a tailwind as those pets age into the vets. Second, we saw a period of deflation, primarily driven by higher promotional intensity as we came out of a period of hyperinflation. We're now also seeing that ease back. And third, we've been operating against a backdrop of generally subdued consumer confidence. As these factors phase back, we expect that market growth will gradually return to historic norms of 4%. And as that growth comes back, our clear market leadership positions us to outperform the market. We have a truly unique business with scale and credibility across all key verticals. We have unrivaled reach and presence through our 459 pet care centers. We have a differentiated vet model now with 448 practices, giving us a clear #2 position in the primary veterinary care market. We have transformed digital and data capability, market-leading omnichannel subscriptions functionality, building frequency and share of wallet, deep expertise and know-how through our 17,000 highly trained and skilled colleagues and a new business being built in insurance. So you can see how the platform we've built positions us to win share, especially in an increasingly omnichannel world. Growing share of wallet remains our greatest opportunity over and above the already embedded lifetime value of our consumers. We know that as consumers engage with us across more of our products and services, we win more of their share of wallet. So while an average consumer spends GBP 175 a year with us, our most engaged consumers spend closer to GBP 1,000. And there are no trade-offs here. The more deeply and broadly consumers engage, the greater the total spend we consolidate onto our platform. Our integrated omnichannel consumer-centric platform is specifically designed to make it easier, enjoyable and more rewarding for customers to spend more of their wallet with us. We know the key drivers which boost share of wallet through our unrivaled first-party data. For example, being a vet client, buying around food, using our digital channels, using the groom room, having a subscription or buying accessories, all drive strong uplifts in consumer value. And we'll increasingly leverage our data to personalize each consumer's experience focused on winning their spend from other providers. And once we win that spend, it's very sticky. Our consumers' behavior is really predictable with pre- and post-pandemic cohorts demonstrating very similar behavior. Once we win consumers, their behaviors become established and embedded, giving us important visibility of their lifetime value. So we can hone and effectively tailor our investment in consumer acquisition and retention, supported by the leading analytical data capability that we've built. And this is an area we're looking to accelerate. Our subscriptions have grown impressively in recent years, but still only make up 13% of our total consumer revenues, and we have significant opportunity, particularly on the retail side of the business. We'll also look to increase annuity-type revenue streams through building an insurance capability and growing in vets. So taken together, our share of wallet opportunity, combined with the runway to accelerate our sticky and predictable revenue streams is highly compelling. And it's our digital and data platform that's the key to unlock that opportunity. One year in, we're engaging consumers through a significantly improved experience, interface and journeys. Consumer satisfaction is higher, and we're seeing increased share of wallet as they shop the new platform. We now have experienced in-house digital squads that drop new features daily alongside automating and seamlessly integrating with our back-end systems so that the speed, content and functionality for our consumers is improving all the time. We're also plumbing in our incredible wealth of data to deliver machine learning operations at scale using cutting-edge beta technology from Microsoft to enable personalization. And this is already driving promising results in areas such as digital marketing and recommendations. We are now seeing good sales momentum and structurally better availability off the back of a stable and performing e-commerce distribution operation in Stafford, and we're confident that we'll see us return to strong online growth through 2025. Now one of the big areas that our new technology platform unlocked was Easy Repeat, and it was one of the real performance bright spots of the last year. We've totally transformed the proposition to a simple and consistent 10% of everything for click and collect and 5% of everything for home delivery. We've broadened the range to encompass over 5,000 essential pet products and we've completely redesigned the journey so consumers can easily sign up, amend and skip. And in the background, we've automated key previous pain points, including out-of-stock substitutions and discount matching and started to deploy personalization such as suggestions for app to order. And all of this is reflected in our results. Since we launched the new full Easy Repeat proposition in the autumn, we've seen a 35% uplift in subscribers. And those subscribers demonstrate a 50% uplift in frequency and a 53% uplift in ACV. And in the last few weeks, we've also launched Easy Repeat subscriptions in store, and the response has been really pleasing. This is a market-leading capability in Retail. We're at the forefront of leveraging our knowledgeable colleagues to guide consumers on to Easy Repeat alongside leveraging our store assets to drive down fulfillment costs while delivering a fully integrated omnichannel experience. We're seeing well over 1,000 sign-ups every day across our store base and the profile of these customers is really attractive. Over 90% of our in-store sign-ups are opting for click and collect compared to around 45% of those who sign up online. And we're also seeing early signs of better frequency. 75% of in-store sign-ups select between a 2- and a 4-week frequency comparing really favorably to online sign-ups where 80% are selecting a 4- to 12-week frequency. And the runway here is enormous. Since the year-end, we've increased Easy Repeat penetration from 3% to 4% of our Pets Club members, and we have a huge opportunity ahead. And Easy repeat is far from the only way in which our stores and online capability work together to create a differentiated omnichannel experience. Now pet care centers clearly benefit from online through our long-established and highly successful click and collect channel, but it also works the other way around, too. We see a clear halo from our pet care centers back into online performance, as illustrated here by the data showing that when Brighton opened, we saw a marked pickup in online sales in the catchment. And we see this pattern repeated across all of our new center openings, delivering a 25% improvement in online sales in each catchment over time. And we've also had real success with our 4 recently opened concept format stores. Consumers were delighted by our delivery of a more connected cohesive experience and a frictionless omnichannel journey. And we've seen good uplifts, especially in key strategic priority areas such as nutrition and health and well-being. So we're now busy rolling key elements through our ongoing store refit program. And now moving on to insurance, a vertical in which we believe we can use our omnichannel platform to better meet consumer needs and create a capital-light profit stream. Insurance is our largest adjacent vertical, and it represents a GBP 2 billion market opportunity and one that is expected to grow at 4% a year. We have a number of assets and capabilities that will enable us to create value here. We have a trusted brand, unrivaled data, a very large consumer base and an omnichannel distribution capability, which will support low-cost customer acquisition. While leveraging these existing capabilities, we recognize that this is a new area of expertise. We've brought in a skilled team with experience across the pet insurance space and we'll partner with a carrier using their balance sheet. As we move towards launch in 2026, we expect to incur start-up losses both this year and next before hitting breakeven point during FY '28 as we build our book of business. And that investment is being made in the context of this being a material opportunity for the group in the future, potentially contributing around 10% of group profits in time. Now I'll move on to our vet business, which now contributes more than half of our profits and cash flow. Reflecting that prominence, we've given it the disclosure it really deserves. Our vets delivered another year of double-digit growth. At practice level, we grew our consumer revenues by 13% to GBP 655 million. Our PBT grew to GBP 76 million, up 23%. And the capital-light nature of our vet business meant that dropped through to GBP 67 million of free cash flow. Importantly, all our KPIs are looking healthy. Our growth is high quality with visits up and increased sales from care plans. We grew clinical talent again, and our vets continue to reduce indebtedness. The successful performance of our vet business is underpinned by our unique joint venture model, which brings together the best our partners have to offer with the support, expertise and broader platform of pets to deliver superior consumer and financial outcomes. Our vets operate with clinical and operational freedom with their time focused on delivering great client and pet outcomes in practice within a structure that incentivizes them to run their businesses with a focus on long-term value creation. They benefit from a trusted brand, scaled support services, access to capital, clinical development and the growing benefits of a broader pet platform to drive consumer acquisition and retention. Together, our model drives differentiated productivity and sector-leading outcomes. The recent CMA papers showed that we operate in the most competitive catchments. So our vets win share by delivering better value and better service. Consumer satisfaction increased again and now stands at almost 90%. And our nation's local vet positioning is increasingly cutting through with 85% of consumers aware of the Vets for Pets brand and strong increases in consideration. By putting customers at the heart of our business and maintaining a long-term independent focus, we drive differentiated economics for our partners. Our practices are some of the most productive and efficient in the industry. The average debt-free practice now delivers GBP 1.6 million of revenues and GBP 430,000 of EBITDA on a comparable basis, double that of our corporate competitors. The average dividend paid to our partners last year was over GBP 150,000. And around 60% of our partners are now debt-free and eligible for those dividends. As well as delivering great outcomes for consumers, pets and our partners, our JV model delivers a sustainable, predictable and capital-light stream for us. Compared to fully owned corporate models, our model delivers steadier profit given it's based on a share of revenues, better contribution margins, less exposure to cost volatility, all while requiring little of our capital to grow, resulting in excellent free cash flow conversion. The attractive nature of this model, combined with the sustained growth that we've delivered over the last few years means that the Vet Group now delivers the majority of free cash flow, and we will continue to push for growth in our Vet Group, leveraging multiple proven growth levers. Now 40% of that growth will come from the embedded maturity of our existing practices. Average practice now turns over GBP 1.4 million a year and each will in time, mature towards the GBP 1.6 million in revenue our established debt-free practices currently achieve. The remaining 60% of our growth will come from proven growth levers of practice rollout, extensions and advanced capabilities. So let's first take a closer look at the rollout opportunity. The chart on the left shows the consistency of cohort maturity over time, underpinning the predictability of our revenue stream. When we open practices, we're careful to select the right partner. These increase the capacity of our practices and open new revenue streams for our partners as well as providing growth opportunities for clinical talent. They allow practices to retain high-value work in-house rather than referring it out. It's better for the pet because they can access the expert care they need in a practice they're familiar with without having to travel long distances that often incur an overnight stay, and it also provides a far more cost-effective and less stressful option for the client. So some of our most advanced practices are now attracting high-value work in from other local primary care practices. Those practices where we've extended and added advanced capabilities have grown consumer sales by over 20% and delivered a return on investment for our partners of 20% as well as improving colleague well-being. We plan to do another 15 extensions in FY '26, alongside continuing to support our partners in developing advanced capabilities such as imaging, cardiology, orthopedics and laparoscopy. So the stage is set for further growth in our Vet Group. Our model is unique, delivering highly compelling consumer proposition and continuing to grow strongly. By combining the best aspects of what we can offer with the best of what our partners bring, we unlock superior returns for our partners and shareholders. We still have significant potential to grow from here through embedded maturity, rollout, extensions and advanced capabilities. And that growth, given the capital-light nature of the model, is highly cash generative. And with that, over to you, Mike.

Thank you, Lyssa. I'm now going to give you an update on a resilient set of financial results, which we delivered through a year of transition to the new digital platform. Group consumer revenue grew by just under 3% to GBP 2 billion. And although our Retail revenues declined by 2%, our Vet Group revenues had outstanding growth of 13%. Underlying profits of GBP 133 million were in line with our guidance. And for the first time, Vet Group profits exceed Retail profits, Vet Group delivering GBP 76 million last year. Cash flow remained really strong at GBP 84 million, 22% growth year-on-year. And here again, we had a great result from the Vet Group with GBP 67 million of cash, and that surpasses the target we announced just a few years ago. We also made progress across our strategic KPIs. We now have 8.2 million active Pets Club members. That's up 5% year-on-year. We did see a small drop of 2% in the total average consumer value of our Pets Club members, largely driven because we drove so many new active members towards the second half of the year. We had very strong growth, 30% in subscriptions from Easy Repeat and Care Plans and driving reliable, high-quality subscription revenue is a key pillar of our strategy. As you can see from this slide, we now have 13% of our total consumer revenues on subscription. We also maintained our focus on recruitment and retention of clinical headcount, and we now have 3,500 vets and nurses, up 6% year-on-year. So turning now to give you a bit more detail on those revenues and our vet business continued to perform really strongly, and that helped offset a weaker-than-normal Retail performance. Group consumer revenue grew 2.7%, just under GBP 2 billion. On a statutory basis, revenue growth was flat year-on-year. But in our vet business, we had really strong like-for-like growth of just over 16% with both joint venture and our company-managed practices delivering high teens like-for-like growth. We have really strong momentum in the vet business and several well-proven growth drivers. And these have helped grow average established practice revenues to an industry-leading GBP 1.6 million a year. We updated last November when we did our interim results, a necessary revision to how we recognize revenue from the sale of Care Plans. We've actually used our customer data to help more closely align the cash receipts from the Care Plans to the revenues we recognize as the customers use those Care Plans. And the full year benefit of making that change added GBP 20 million to our revenues and GBP 4.9 million to our profits, and that was across both joint venture and group managed practices. As we look ahead, those highly successful Care Plans will continue to support our growth alongside the focus on recruitment and retention of vet talent, and we'll continue to build capacity. We're planning 10 new practices in the year ahead and a further 15 extensions. And these levers will help drive the embedded maturity of our still relatively young practice portfolio as well as our older practices, as Lyssa was saying, practices over 10 years old did over 11% like-for-like last year. We did see a drop in Retail revenues of 2%. Deflation, normalization of the pet care market weighed on growth together with the impact of disruption as we transition to the new online platform. If you break that Retail like-for-like down, stores performed more strongly than online. Online did feel the impact of that transition, particularly in quarter 4, but it's now complete. And we've got a powerful omnichannel platform from which to grow future Retail revenues. As Lyssa was saying, we recently launched Easy Repeat sign up in store, and we're already signing up 1,000 customers a day on Easy Repeat. We're starting from a low base, but we now have 4% of Pets Club members having an Easy Repeat subscription. We've got a long runway of growth, and we know that those customers spend more and shop more frequently. For every 1% increase in the subscription base, we expect revenues to increase by around GBP 10 million. Turning now to our profit result. We delivered profits of GBP 133 million. That was in line with our guidance, and that was supported by stable margins and strong cost control. Gross margin grew 17 basis points year-on-year, flat gross margins in Retail and 105 basis points improvement in Vet Group margins. We continue to have a really tight grip on operating costs, got robust plans across procurement, occupancy, support office costs, all helping keep these costs flat year-on-year, and that's despite the external headwinds of national living wage increases and business rates, which added together was around GBP 18 million of cost headwind in the year. So gross margin performance, together with keeping flat operating costs helped us improve group underlying EBIT margin to 9%, and that's 5 basis points improvement year-on-year. Statutory profit was up over GBP 120 million. That's 14% growth year-on-year. Big reduction there in non-underlying costs as we completed those two very significant transformation programs. And that's an important milestone now passed, and we're planning for no further non-underlying costs in the year ahead. On Vet Group profits, GBP 76 million, exceeded Retail profits for the first time, growing 23% year-on-year. Now turning to cash flow. We grew our cash flow by over 20% with a really strong result from the vet business. Total group cash flow was just under GBP 84 million. That's plus GBP 15 million year-on-year with GBP 67 million just over generated by the vet business. And there's significant growth here still to come. That's from a combination of the embedded maturity in our younger practices, the rollout of new practices and the investments we're making in advanced capabilities and extensions. We also finished the year in a net cash positive position, and that's after returning over GBP 84 million to shareholders. The balance sheet is strong, it's robust with no leverage and only 1.4x leverage on a lease-adjusted basis. Our capital investment remains closely aligned to our strategic priorities. We opened two pet care centers last year, relocated one and rebuilt Chesterfield, and we've seen good performance versus the business case targets for those new stores. Ours is a truly omnichannel approach. And typically, we see a digital halo of 25% revenue uplifts in the online sales in the catchments where we open a new pet care center. We're also making great progress with our refit program, completing 32 refits in the year. That included 4 refits in the new format. And looking ahead, we plan to do around 30 to 35 refits a year. And where possible, we'll always extend the existing vet practice and where we can retrofit a brand-new vet practice. Here, we've got no shortage of new locations for practices. We've got over 140 stores still without a vet practice, and we've got a very well-proven stand-alone model with 140 stand-alone vet practices. We plan to open a further 10 in FY '26 and see space for a further 100 new vet practices over the medium term. We've now completed our multiyear plan to optimize our distribution network. That involved closing three existing legacy distribution centers, opening a brand-new future-facing enterprise-grade distribution center at Stafford. That has inevitably disrupted sales over the last couple of years, but we're now through this period. The benefits now to come from the improved availability, which is now currently at some of the record levels we're seeing in our stores, better productivity and more online fulfillment capacity as we grow our online business. That peak of investment is now well behind us. And looking forward, we're planning for capital to be normalized at around GBP 50 million a year. And that capital investment is a key component of our balanced capital allocation, which enables us to grow the business and reward our shareholders. We have been very consistent and clear on the four parts to our capital allocation, and we followed it in a disciplined way now for a number of years. We've returned over GBP 390 million to shareholders over the last 5 years. And today, we're announcing a further GBP 25 million share buyback for the year ahead, which is the excess cash we're planning to generate in FY '26. Our Vet Group increasingly underpins the predictability of both the quality of our profits and cash flow. We are a clear #1 in the -- clear #2 in the U.K. First Opinion sector and have just delivered another year of double-digit growth and market share gains. The unique joint venture model drives differentiated economics for both ourselves and equally important, our vet partners who earned in total GBP 46 million of dividends last year. The Vet Group now contributes 1/3 of our consumer revenues, well over half of group cash flow. As you can see from the chart, it's progressively grown profits over the last few years and now contributes more than half of group profits. We've got a clear runway of future growth in the Vet business, and that's powered by those proven value drivers, yet the valuation of the business still continues to trade only in line with retail peers. Looking ahead into FY '26, we are facing into some significant cost headwinds. And whilst we have a robust plan to mitigate a lot of those headwinds, our group profits, as previously announced when we did the pre-close update at the end of March will be in the range of GBP 115 million to GBP 125 million. This waterfall chart tries to set out the shape of that profit growth and splits it between trading growth, cost inflation, the productivity initiatives we've got in place and the key investment choices that shape that FY '26 profit target. We're planning for continued profit growth in our vet business, but at more moderate levels than last year. In Retail, we're planning for lower profits with a gradual return to a more normalized market growth rate as we go through the year. The cost wins are significant. We've got around GBP 20 million of externally imposed costs, which together with underlying cost inflation does weigh on profit growth in Retail in the year ahead. We will continue with our rigorous and robust productivity plans to improve productivity and efficiency right across the business. That's everything from our support office costs, simplification, occupancy costs, store operating costs, procurement costs and driving out productivity out of our brand-new distribution center. We're also planning to put GBP 3 million further investment into our marketing and around GBP 3 million of setup costs to fund the growth of our new insurance business. And we're going to have to rebuild variable colleague pay, and that's GBP 10 million. So taking all that together, we're planning for group profits to be in the range of GBP 115 million to GBP 125 million in the year ahead. So in summary, we are well positioned to create value for all our customers and our shareholders. The benefits from our two-scale transformation projects are all ahead of us and the costs and disruption are all behind us. The Vet business has genuine momentum with well-proven growth drivers and a long runway of high-quality and reliable cash flow growth ahead. We've got a brand-new digital platform, which will deliver a return to online growth, and we've already seen a significant step-up in our subscriptions. Capital allocation is consistent and disciplined, and we will continue to return excess cash to shareholders. Strategy is on track. Our conviction is strong, and the outlook remains positive. Thank you for listening. I'll now hand back to Lyssa.

Thanks, Mike. So in summary, we've shared the really deep transformation our business has undergone over the last 2 years. We've demonstrated that we continue to operate in an attractive market and one in which we're the clear leader positioned to win. We've unpacked the ways in which our differentiated platform will allow us to take share and grow in an increasingly omnichannel world. We've explained the centrality of our unique and attractive vets business to our future growth. And Mike has just taken you through how we'll deliver increasing free cash flow underpinned by predictable revenue streams that will enable us to reward shareholders. So taking all this together, we look to the future with confidence. And now Mike and I are happy to take your questions.

Jonathan Pritchard at Peel Hunt. Two or three, if I may. Just could you -- I know you've alluded to some of the constituents, but within the vets like-for-like, could you just perhaps numerically break down how we got to 13% and what contributed what? I note in the Retail growth numbers, food actually slipped into negative territory. Just a few comments on that market, please? And then I think you've had a bit of change at the top in Retail and in Vets. Could you just talk us through what the new executives bring to the party and perhaps what's on their must do better list at the annual review?

Great. Thanks for those questions. I'll unpack Retail, and I'll let Mike unpack the vet growth. So in Retail, the trends in food aren't meaningfully different than the trends that we saw all of last year. As we went through Q4, our growth wasn't where we wanted it to be. But as we come into current trading now, we're on plan. Our vets are providing really strong and consistent growth as we've laid out. And in Retail, we had a progressive plan through this year, through Q1 and through the rest of the year, which we're seeing come through. So our availability is at record levels, our consumer satisfaction is at record levels, Easy Repeat is providing a really strong momentum. And online, as we've come through that last piece of disruption from Stafford where we pushed out our delivery promises in order to protect the consumer experience, we're now back there and onetime purchases recovered. So the build is coming through in current trading, as expected, much better than in Q4. And food, in particular, actually is going strongly as we trade through the current quarter. Mike, do you want to unpack that?

So Jonathan, you asked a question on what's driving the 13% Vet Group customer revenue. And I think that growth is pretty broad-based. It's across practices that are both less than 10 years old and over 10 years old. And of course, we've been seeing those levels of growth now for some time. If you break down that 13%, it's a combination of things. We've got really good Care Plan growth. That's about half of it. And we've got growth in -- some pricing is in there, and we've also got growth in overall visits. So it's a combination of visits, some pricing, but a really strong, very successful Care Plan.

And on the question about executives, we've got, I think you're referring to our two new executives running, COO of Retail and COO of Vets. Anja has come in COO of Retail, doing a really magnificent job, background in both Tesco and Sainsbury's and a Danish supermarket. So a really strong background, not just in the commercial side, but actually has run stores before. And I think we're seeing the benefit of that if you go into our stores today in terms of colleague motivation, store engagement, record consumer satisfaction. She's led the transition into our Stafford distribution center, which we're now through. And now will be working closely with our Chief Consumer Officer to really drive the benefits of our omnichannel proposition. And I think you're seeing all that already come through in our subscriptions. So a really strong year there from Anja and plenty more to come. In Richard in vets and our COO in vets, we have somebody who has a really strong background in franchises, actually. So British Military sports, fast food franchises, a pretty varied career. But the franchise experiences, if you look at our vet business is much more of a B2B franchise model and his ability to drive those relationships with partners and drive the benefits of our platform into the vets is really strong. And I think, again, you're seeing that coming through in sustained growth. So really excited actually about the executive team that we've put together, the digital skills, the different capabilities, the sum of the parts being greater than the whole. And I think we're really set there.

Alison from Deutsche Numis. Three for me, if that's okay, please. Firstly, could you talk a bit about how you're thinking about price positioning as we head into the year, both in terms of where you feel like you need to kind of beat or be sharp and where potentially there's a bit of opportunity to kind of take a bit more in terms of pricing? And then the second one is just around wallet share. So interested as to which sort of part of the wallet you think perhaps the average consumer is directing elsewhere and kind of why you think that is and what really kind of goes into that strategy to win it? And then the final one is just on the subscriptions and kind of the sign-up that you're seeing around that. So I imagine you've got a very strong base in terms of the food and the medicine. But what are your expectations and kind of what are you seeing early days in terms of particularly now it's in stores, adding those kind of incremental extra items?

Great questions. Thank you. So look, on price, it's something we monitor really closely and keep in balance price position, competitive price position and we benchmark against key competitors and market growth and margin. And in Q4, in particular, the market was really deflationary and very noisy and promotional, and we were a bit more rational, which did phase into our growth there. As we've come into Q1, we're sharp on promotion. And obviously, with Easy Repeat launching, you can get 10% off click and collect and 5% off home delivery, and that's really powerful. And our own brand foods as well showed growth through last year, again, because they are really sharp on price and you get a great quality food for the same price. So while price comparison is important, I mean, it's something that we really keep an eye on and stay within clear guardrails, particularly versus the grocers and Amazon, which are the two big competitors we benchmark to. Actually, there's a number of elements of our business that I think are delivering real value, more value to the consumer for a lower price, in particular, subscriptions pushed and own brand, which constitutes a really high percentage of our sales, about 60%, 70% of accessories are own brand and around 30% are food. So that's important and growing. And obviously, in the vets, while we compete in the most competitive parts of the market, our price position is really strong and one of the reasons that the customer choose us, they're not just getting a better value -- better service, but they're getting better value. So that's sort of where we think and how we think about price. On wallet share, I think we laid out some of the levers there. We've got a number of ways in which we can drive wallet share. And I think what the benefit of our digital platform and our data is that we know for each consumer what the next best action is actually to drive that wallet share. So we don't have to sort of be all things to all people. We can actually be quite targeted in knowing what we need to do to drive that wallet share. And I think increasingly, you'll see us do those things in a much more personalized way, enabled by our platform. Your third question was around subs. So we broadened our range. And one of the big drivers of subscriptions growth is broadening the range from around less than 1,000 pet products to 5,000 essentials. So it was very much focused on food lines, and we've expanded that. You can now get health and well-being, you can get puppy pads, salmon oil, all sorts of things that you might need on a regular basis. And we've worked with our suppliers to make sure those discounts are aligned and backed off. So actually, what we're seeing in store is really interesting. It's not just the things that people need regularly, but it's the things that are quite specific and where they really want to guarantee availability. So the price discount is one thing, but knowing it's going to be there is something else. So vet food lines, sensitive stomach lines, wooden cat litter, which is something that people would say, like wood cat litter, they like wood cat litter. So it's actually an availability play as well as a price play. So I think that's quite interesting. And then we're using our data now to target in add to order, for example, so 4 days before you get your Easy Repeat, we'll send you an e-mail or a text notification to say, would you like to add something to your order, you'll get your 10% or 5% off, we'll put it in the same box, completely seamless. And we're seeing really good uplift from that because we've personalized those using our data. And so we're seeing a really strong uplift. So that's where things like on-trend accessories, kind of fashion, seasonal, that's where we can really drive those one-off pickup lines in with the order and consolidate share onto our platform there, just in the foothills of that, to be honest, but a huge runway ahead. And then obviously, with 95% of our in-store sign-ups being click and collect and 45% of our online sign-ups being click and collect, that's people coming into our store, that's footfall. Our colleagues will talk to them as they're getting the parcel and say, is there anything else you'd like. So we should see that halo spend come through as well. Anything to add, Mike?

Yes. Just -- I think share of wallet is the biggest single opportunity. Average consumer value of our 8.2 million Pets Club members is only GBP 175. We know they spend a lot more money than that elsewhere. The data we have on those Pets Club members, proprietary data, actually, to date, we've not really been able to fully deploy that. And as Lyssa is saying, the digital platform is the big unlock for us. Having launched that now and got it working, that is the big unlock that will allow us to use that data, communicate with those customers, build those relationships and increase that share of wallet. So we're quite excited about that opportunity.

Andy Wade from Jefferies. I want to ask a couple of areas. First around that digital element and sort of completion of projects and so on. And the second one, going back to the pricing environment. We'll start with the digital one first. You sort of -- I think you used the phrase that we're -- is 100% complete now during the presentation during one of the slides. Whether you -- how do you draw the line in the sand on that in the sense that we still got the practice management system to come, haven't we? And what functionality do you not have that you will be able to have when you've got the practice management system in place? Just trying to really understand how much is fully unlocked now in terms of getting after that share of wallet and how much do we have to wait for a little bit more of that to be done? I guess that's the first one.

Well, I suppose digital platform is a bit like fourth bridge, right? I mean they're never really complete. And actually, what we have done is 100% cut over now. So we are 100% on our new platform, our new app, our new colleague device, and we have 100% of our deliveries coming out of Stafford fully transitioned. So the project elements are done. We now have this incredible engine, this incredible capability, and as I alluded to in the presentation, we have in-house digital squads. We chose not to just transition to another third-party digital platform. We chose to take best-in-class platforms and components and integrate them in-house. So we now have many developers, back end, front end, UI, UX in-house so that we can continue to develop that platform. We're in the foothills of really plugging our data in, as Mike said. So we've got data architects and data engineers. We're working with beta technology from Microsoft around MLOps but all of this, we're literally releasing functionality now daily. It's getting better all day, every day. And that will just continue to happen, right? So subs has been the big breakthrough. It's one of the things that we completely changed onto the new platform. But onetime purchase using our first-party data for marketing, incorporating AI search, using personalization, that is all now in our future, and we'll just continue on. And we have a road map that goes out for at least the next 18 months of things and features that we want to drop. We want to incorporate much more advice, more personalization. The list is pretty much endless. And that's all business case, and it's all kind of working. It's all in progress. So it's really exciting. We are now a truly in-house digital business with the data really starting to fuel every interaction. Our vision is that every interaction a customer has is personalized and fueled by data. And we really are, like many companies, in fact, probably most companies, really in the foothills of that, but we have built this capability that we can use and pet care obviously lends itself so brilliantly to that because it's so specific to your pet, your pet type and the rest. There is one extra kind of project we want to do. It doesn't get in the way of any of that. So for our 8.2 million Pets Club members and growing, who all more or less use Retail or grooming, that capability is relevant to all of them, and we will improve and personalize their experience. For our 2 million vet customers, there's another piece to go, which is the practice management system, which will improve the productivity of our vets again. So there'll be a material payback in practice. And it will also allow us to supercharge the kind of medical element or the clinical elements of the experience. We can already actually use the data, but actually, it will help us do things like book appointments, do postsurgical consults through the same platform. So that will be the icing on the cake, and it will work for the 2 million customers that use our vets and potentially allow us to serve more customers with veterinary type services because they'll be virtual and not tied to practice. That's coming. But actually, for the 8.2 million customers in our vets club, the runway is now. We're not waiting.

Okay. So just to follow up on that then, just to -- the cross-selling element as in between vet and Retail will be sort of enabled further by the practice management software being completed.

Yes, it will be enabled further, but we already have some data out of our existing practice management system, which we can use.

Okay. And so we should be, I guess, looking at that GBP 175 to be really starting to move forward in the next year or 18 months?

Yes, exactly because we know the levers that drive that, and that's what we're going to be driving, particularly using omnichannel and online.

Cool. Very helpful. And then the second one around price and price positioning and so on. Two little bits on that, I suppose. The first one, you talked to Q4, the market, deflationary, noisy, promotional, and you did chose not to follow that. So I'm sort of interested how -- and you did allude to it already by talking about the balancing factors, but having guardrails in place where you have to be within a certain percentage of, I think, historically, you talked to Zooplus and yet not doing that when the market is going through a bit more of a promotional period, that must be a challenging, especially if that promotional environment drags on for 2, 3, 4 quarters, when do you decide that that's the new normal and not just a promotional period? I'm just interested in some color around how you manage that.

Yes. Well, that's an art, right, not a science, guardrails are guardrails, but we need to look at our -- in the end, our shareholder returns. There's a number of factors that balance into that. Clearly, our performance in Q4, the like-for-like performance was impacted by a very deflationary promotional market where we did -- we were more rational. It was also impacted, though, by this last bit of the transition into Stafford, where we pushed out our customer promises in order to protect the customer experience. That didn't affect our subscriptions growth because, obviously, we have 4 days' notice of shipping that, but it did affect our onetime purchase. Now we have seen in Q1 that, that has eased back. So we're fully through the Stafford. We're back on and growing well, in line with our plan. And we have seen a much more rational market with some inflation coming back. We're still sharp on promo, by the way. We're not pulling back, but the market has got a lot less noisy, a lot more rational, and we're seeing -- we're happy with where we are now in that market, and we're on our plan for Q1.

Okay. And so -- and you mentioned Amazon and supermarkets. I think historically, it was Zooplus. Have you changed that? Or is it still Zooplus as well?

Look, we have got a lot of competitors. We're a big business. We operate across many verticals. On the vet side, we will look at independents, we'll look at the big vet groups. On the Retail side, we would look at supermarkets, we'd look at generalists like Amazon, we'd look at specialists like Zooplus. We look at our D2C competitors, we look at our store-based competitors like The Range and Jollyes. And for different parts of our business, we would look at different primary competitors. At a macro level, probably Amazon and the grocers are the two big in food, but actually, we would look at a range. And we've got some quite sophisticated price scraping and price tools from our huge amount of data. And so we will make different decisions on different SKUs, different parts of our business.

And historically, I think the guardrail was around being 4% to 5% within the price of what was, as I understood, it was Zooplus, but you're 4% to 5% off whoever you -- that still stands, right?

That would be a sensible guardrail, 5%. But as I said, subscriptions will -- that's 10% off, and that's a growing part of our business. And in own brand, we'd be substantially below the branded equivalent.

Kane Slutzkin from Deutsche Numis. Just a quick one on the Vet Group. You obviously pushed a good narrative today about the quality of the business, 10 openings this coming year, but more than 100 over a medium term. Now I'm assuming medium term is 5 years, somewhere around there. So just wondering sort of the 10 versus the 100-odd. Are you -- could you be a bit more aggressive on those openings given the capital-light nature, given you're kind of really pushing the narrative around the Vet Grouping?

Yes. So 10 openings, 100 in the medium term. Could we push that harder? Answer, of course, we could. What we don't want to do is compromise the quality of the opening. So we've got no shortage of locations. We've got all the stores, 140 stores without a vet practice. And we've got the stand-alone model, which we've got just short of 140 as well. That works really well. So no shortage of locations. But we know that the key ingredient is a successful practice is a good joint venture partner. Now we're in a great position in that the model is well understood, it's endorsed by all our existing partners, and we've got a really strong pipeline. So yes, is the answer to your question. If we see more than 10 high-quality suitable partners, we will go with more openings. But we don't want to set and chase an openings target and compromise quality. If you went back in time, 2017, '16, '15, we're opening 60 practices a year. If anything, probably we overextended. Some of those were poor quality partners. Then, of course, in 2018, we had to make a big adjustment. So we're wary of that. We've learned the lessons. So it's about the quality. But yes, we find good quality partners, we will go faster than 10.

And last one, just on the components of the like-for-like, the 13% which you mentioned, half being the Pet plan and then obviously pricing visits. In the new norm of sort of high single-digit growth, how does that look in terms of those components?

The split?

Yes.

Yes. I think there's always going to be a bit of pricing in there, but we'll always be competitive. If anything, the data we've got access to says that -- I know we've been talking about Retail pricing, but in Vets, our pricing is very competitive. Our Care Plan pricing is really competitive, and it's a very attractive Care Plan. So pretty much those components going forward, more visits, Lyssa's point that we're actually going to see a tailwind now as the sort of COVID generation of pets age. Visits, a bit of ATV, curative as well as -- curative mix going up. Those advanced procedures driving a slightly higher ticket. But our average transaction value is still less than GBP 100 in our practices. And of course, adding on extensions enables us to develop more of those advanced capabilities. So it will be a combination of those going forward.

Charlie Perkins from RBC. So just two questions, if I may. So firstly, please, can you just give us a little bit more color on the building blocks or sort of underlying assumptions behind the upper and lower end of the fiscal '26 PBT guidance range? And secondly, I just wondered if you guys could share anything in particular that you've been doing to get the accessories moving, particularly on the sort of more discretionary side of things. Anything you can share on that would be great.

Yes. I'll take accessories and then Mike can unpack the building blocks. And accessories is a really important part of our business, obviously, and a key profit driver. And honestly, we're not happy with the last couple of years. We've seen an accelerated shift in the market to accessories online, something like almost half of the market of accessories is now online. And clearly, with our online transition, we haven't participated in that market to the extent that we would have wanted to. In fact, it was one of the reasons that we chose to do such a complete replatforming because our old website was just a grocery website. It really didn't lend itself to selling accessories. We now have a website that allows us to do that. And we have today something like 10% participation of online is accessories. So we know we've got the product. We've got our sourcing office in China. We've got great quality. We've got great pricing. We know how to do it at Christmas with bang on trends, with seasonal, Halloween is up. So we know how to do accessories. And we just -- the opportunity now to use our data and to use our online platform to participate in that part of the accessories market, which we haven't really historically done in online, is really significant. Now not to forget stores, and we talked a bit about how Easy Repeat and add to order can help with those pickup items as footfall comes in on the back of Easy Repeat click and collect, that will drive accessory sales. So we won't forget about stores and there's innovation coming through, but really the big play to drive that harder is to get access to that online market where historically, we really haven't -- we haven't had it. Mike, do you want to?

Yes. So we set this guidance for the year ahead. Profit guidance, GBP 115 million to GBP 125 million. That's not about the predictability of our vet profits, by the way. I think that is more -- it's more around what's happening in Retail. As we came into this year, we're coming off a year where we had a very subdued consumer. In fact, the data we've got shows there's no growth in pet product market last year and quite a deflationary environment. So a strong U.K. consumer and inflation coming back, and there's every sign that it's starting to come back, will take us towards the top end of that guidance, but a weaker U.K. consumer and a continued deflationary environment would take us towards the bottom end of that guidance. So it's all about external factors rather than anything. The things we can drive that shape that, so the productivity, the grip on the cost base, those are either initiatives we've already done. So we've done a lot of work on our operating cost in store, Anja has led that in terms of getting the right structures in store, the new distribution center online now driving more productivity and the year-on-year benefit we get from a lot of simplification we did in our support center last year. That's all sort of never a given, but we can probably lean very heavily on that. So it is all around those external factors. It's the U.K. consumer and inflation, which will take us towards the top end. Absent that, will be towards the bottom end.

All right. We just have a couple online from the webcast. So firstly, from Richard Taylor at Barclays. Can you help us understand the outlook for profit margins in Retail in your medium-term financial framework? We can see you are targeting profit growth ahead of revenue growth, but are you targeting margin progression post FY '26 in Retail? If so, how do you believe we can achieve this given price competition and potential ongoing wage headwinds?

Yes, yes. So we've had to set the right cost base in our Retail business. And we had to put back in the variable cost pay, and we've had to put in the imposed costs on us, more payroll costs, national insurance and rates what I call the plastic tax that's gone in as well. So we dealt with those through mitigations. We have got the right cost base now in our Retail business. So as we look forward, we've got productivity to come out of our distribution center with those three old distribution centers now closed. We've got the right operating cost base in our Retail business. We will continue to really grip our support center costs, and we've got a lot to do there in automation and simplification. So we've got a good line of sight on that part of the cost base. And of course, our rents have been held pretty flat now. Total occupancy costs of the Retail business is about GBP 120 million, that's held pretty flat. So we'd expect costs to not grow at the rate they've been growing. Look at the plan the year ahead, it's 5% growth in costs in Retail as we've rebuilt that cost base. But we would expect, especially on our online business, great opportunity to start to really move our margins up. So we've talked today a lot about accessories, discretionary accessories, that's still only 10% of our online sales. Our online sales historically have been more branded grocery product. So own label, Advanced Nutrition food, we think there's a big opportunity online there. So I think product mix online, I think, will be a big component of it. And then those -- driving our online business and building back accessories into our store base, I think will also be drivers of the gross margin. So I think we'll see that volume growth we're planning flowing through into better Retail profitability. But the cost base, I think, is now going to be -- is in the right place. So margins moving up, costs well controlled, getting growth back on the top line. And we'll see that operational leverage flow through.

Thank you. And there's time for one more from Alex Campbell from Phoenix Asset Management Partners. Is the priority to return company-managed practices to JV partners or new sites?

Yes, great question. Our preferred model is the JV model for all the reasons that we've outlined in the presentation today. We think it's the best model for driving client outcomes, client satisfaction and shareholder returns. So we will prioritize flipping company-owned practices into JV ownership wherever we can. And we've had a really good successful track record of doing that. Having said that, though, we do have around 50 group managed practices, and they're performing really well. Actually, we've put a different lens and focus in the last couple of years around managing those, and we've seen good returns and outcomes. So it is a model that works, and it's a model where we can potentially trial some stuff because they're in-house. But actually, our focus is where we can find joint venture partners. And quite often, they do come internally. We would much rather have them under joint venture ownership because that's our preferred model.

Thank you. If there's nothing further in the room, Lyssa, I'll hand it back to you for closing remarks.

Great. Well, thank you for coming today, and thank you for your really thoughtful questions. I hope you can see how excited Mike and I and the whole team at Pets at Home, all 17,000 of us are about the future, about the platform we've built and about how we can continue to create a better world every day for pets and the people who love them. Thank you.