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

Good morning. I hope you're all safe and well, and welcome to Pets at Home FY '22 Preliminary Results Presentation. I'm Peter Pritchard, the Group CEO; and with me today is Mike Iddon, our Group CFO. Despite another period characterized by significant and evolving external challenges, our performance this year has been nothing short of outstanding, delivering record growth in sales, profit and cash flow. We continue to take share across each segment of the market in which we operate. We welcomed over 1.1 million new pet owners across our business, lengthening the runway of growth ahead of us and we improved spend per customer with our aggregate share of customer wallet increasing by 600 basis points to 37%. Simply put, our business has never been in a stronger position than it is today. The ongoing resilience of the pet care market, coupled with our unique omnichannel model and clear strategic priorities to make pet care as affordable, easy and convenient as possible for customers means that we look into the future with the utmost of confidence. We continue to invest in our business to build capability and to drive future growth, outpacing [ their own ] market in which we operate and creating long-term value for all our stakeholders. It has been a year of breaking records. Our new customer acquisition, our Puppy and Kitten Clubs, increased sales by 48% year-on-year with Club members now accounting for approximately 1/5 of our record 7.3 million VIP customers. Over 90% of puppy and kitten customers acquired over the past 2 years remain active today, providing a significant growth opportunity over the next 12 to 15 years as they engage and shop across our full ecosystem of products and services. We already have 2 million VIPs shopping more than 1 channel; that's up 40% in 2 years. We're also successfully retaining these customers, having reduced churn by 400 basis points and maintaining over 95% of active customer spend beyond year 1. The output? Well, that's a record year of sales, profit and cash delivery and growth in our market share to 24% and a record dividend for our shareholders. We have a track record of taking share and demonstrating the advantages of our omnichannel pet care ecosystem are very clear with over 60% of our growth over the last 5 years coming from market share gains. We have a bold clear plan to achieve at least GBP 2.3 billion of customer revenue in the medium term, supported by the strategic investments that we're making. We continue to digitize the business with Project Polestar helping unlock significant opportunities around data, subscription and loyalty. Customers can now access all our products and services through a frictionless single log-in, and a new iteration of our mobile app for a much improved shopping experience is scheduled for launch later this year. Our ongoing store transformation program is improving our customer proposition and driving growth in VIP registrations, subscription sign-ups and service performance improvements. Project Pathfinder is improving practice economics. Our clinical productivity has improved and so has our client engagement and the health of our veterinary estate continues to go from strength to strength, with growth in average practice revenues surpassing GBP 1 million for the first time, and that's accompanied by expanding margins and many additional levers to future growth. Development of our new storage and distribution facility in Stafford remains on track and it's on budget, and it will become fully operational by summer 2023, and that will deliver capacity and efficiency benefits, and it will future-proof our operations for many, many years to come. We are well positioned to accelerate our growth and market share in the year ahead. We have more active customers than ever before, with a prevailing affluent demographic and propensity to prioritize pet care over other categories of spend. Anecdotal evidence tells that over 90% of these customers are not intending to reduce their level of pet care spend in the foreseeable future. We also know these customers better than anyone else with almost 10 years of proprietary data across our VIP club, helping us to provide personalized and convenient solutions throughout the full lifetime of the pet. Our broad range of economically resilient products and services -- well, over 75% of them are nondiscretionary in nature and offers choice, quality and value to all customers. And through offering full price architecture within food and a very strong private label proposition, that can represent up to a 30% of savings to customers versus their branded equivalent. We're helping owners feed their best diet for their pets through the lifetime of the pet. Our Pet Care Plans offer further value and convenience to customers, providing essential pet care for a low fixed monthly cost whilst creating an annuities revenue stream for the group. But above all, we have an unwavering commitment to keep pet care affordable for owners and will never let price be a reason for customers not to shop with us. As a business, we are well positioned to navigate the near-term industry-wide inflation pressures and we continue to work closely with our broad base of suppliers to unlock efficiencies across our supply chain and mitigate volatility in freight rates. We've got a comprehensive program of live initiatives across consumables, packaging, store operations and energy usage to reduce our overall cost to serve. And with declining lease lengths and average rent reductions of up to 25% on negotiation, we're leveraging our nationwide store network as a flexible and cost-effective distribution network. Our financial strength and resilience enables us to invest in strategically important initiatives that support sustainable long-term growth towards GBP 2.3 billion of customer revenue and beyond, having made better-than-expected progress this year. So I'm now going to hand you over to Mike, who will run you through the financial headlines.

Thanks, Peter. We are today reporting record financial results and strong progress across all of our key strategic measures. These very positive results prove the strength of our business model, the relevance of our strategy and the resilience of the pet care market. And today, our business has never been stronger. Just before I run through our headline numbers, it's worth pulling out 4 standout highlights from our results. We delivered GBP 144.7 million of profit. That's before the change in the IAS38 accounting policy. This represents year-on-year growth of over 65% and exceeds market expectations. We've gained 1.1 million new customers, a growth of 18%, helping drive our market share from 23% to 24%. And these customers will be a source of sustained growth going forward. Group revenues grew over 15% to GBP 1.32 billion. And that was driven across all product categories and services, including a Vet Group like-for-like revenue growth of over 17%, and we generated cash flow of GBP 95 million, up close to 41% year-on-year, including a step change in the cash results of the Vet Group to over GBP 50 million, helping us exit the year with our strongest ever balance sheet and increased our total dividend by 48%. Turning now to the full year numbers and looking first at our strong revenue performance. Total group like-for-like revenue growth was close to 16% on a 1-year basis and just under 26% on a 2-year basis. And this reflects the sustained strong growth across all channels with 22% more customers shopping across more than 1 channel, helping increase average customer value. In our retail business, like-for-like revenues grew 15.8% with this growth coming from both stores, with a growth of 15%; and omnichannel, with growth of close to 16%. We are increasingly using our stores to fulfill online orders with around 20% of orders now picked in-store. This gives us a competitive advantage with more delivery options for our customers as well as a better economics driving higher contribution per order. Category-wise, food revenue grew by over 21% and accessories revenue, including consumables such as litter and bedding, grew by nearly 14% as more pets came to the market and into our stores. And we saw our Puppy and Kitten Club grow by 23,000 new pets a week, giving us a significant lifetime value opportunity as we retain and deepen the relationships with these new customers. In our Vet Group, full year like-for-like revenue growth was over 17%, driven by a significant step-up in practice revenue, with the number of practices generating more than GBP 1 million in revenues doubling during the year. Overall, across the whole group, both Retail and Vet, our customer revenues grew by more than 16% to over GBP 1.67 billion as we continue to make great progress towards our medium-term customer revenue target of GBP 2.3 billion. Turning now to our full year profit result. Like many other companies, we have updated our accounting policy in relation to IAS38 Intangible Assets. As a result, a number of software and related implementation costs, which were previously capitalized are now required to be expensed and the associated amortization charge reversed. This applies looking backwards in the current year and looking forward. This change in policy coincides with our peak investment as we build capabilities to drive future growth, including Project Polestar, supply chain capacity investments and as we enhance our in-house data capabilities. Group underlying pretax profit of GBP 144.7 million is stated on a previous IAS38 accounting basis and was driven by strong revenue and expansion in gross margin and robust underlying cost control. The net impact of the revised accounting policy on our FY '22 PBT is GBP 14.6 million. So after taking this into account, under the new policy, our underlying profit is GBP 130.1 million. It's important to understand there is no impact on the group cash position or free cash flow. And overall, there's no net profit impact over the full asset life. More importantly, the accounting change has no impact on our planned investment schedule, future cash generation or our ambitious growth plans. We continue to be strongly cash generative. Group underlying free cash flow was GBP 95 million, and that includes a year-on-year benefit in working capital of GBP 26.4 million with better efficiency in retail and a GBP 6.5 million reduction in operating loans to our joint venture practices as both profitability and cash generation stepped up across our veterinary estate. Capital investment was GBP 73.1 million, reflecting investment in strategically important areas, including our distribution network, our store transformation program and data analytics and systems. The impact of the IAS38 policy change reduces our reported capital investment to GBP 49.1 million, although the cash investment stays the same. We've also successfully refinanced our revolving credit facility on market-leading terms and increased the facility to GBP 300 million. This, taken together with our strong ongoing cash generation, gives us significant capacity to invest organically and inorganically to drive future profitable growth. Taking everything together, we ended the year with a net cash position of GBP 66 million, and that includes nearly GBP 20 million of final proceeds from the disposal of our Specialist Hospitals, which we received ahead of schedule during the year. All of this means that our balance sheet is the strongest it's ever been with net debt on a post-IFRS 16 basis reduced by over GBP 90 million to GBP 317 million, giving us leverage of 1.3x, and that's down from 1.9x in the prior year. And the strong cash generation in the year has enabled us to pay a 48% increase in the full year dividend to shareholders. So in summary, Pets at Home continues to go from strength to strength and the prospects for the business are the strongest they have ever been. We've had a record year of sales, profit and cash and made significant progress across all of our strategic measures. The resilience of the pet care sector, taken together with the strong tailwind of over 1 million more customers and our robust self-help plans will help us navigate the near-term economic challenges. And the investments we are making in the business will help us both build and entrench our competitive advantages and continue to grow our market share. I'll now hand back to Peter.

Thanks, Mike. I'm incredibly proud of what we've achieved in the past year and that we continue to run a responsible business as well as a successful one. We could not have achieved this success without the support and dedication of all of our colleagues and partners across the group who have helped make Pets at Home a bigger, stronger and more efficient business. We have a truly unique business and by leveraging our strengths and continuing to put the customer first, we will continue to grow our share of this resilient market in which we operate. As I hand over the leadership of this great business to Lyssa McGowan, I have the utmost confidence our Pets at Home will continue to deliver sustainable, profitable growth as we build the best pet care business in the world. Thanks for watching. Stay safe and take care. [Break]

Good morning, everyone, and thank you for joining our call. I hope you're keeping safe and well. I'm Peter Pritchard, the Group CEO, and with me today is Mike Iddon, our Group CFO, and we're really pleased to share with you our preliminary results for our financial year 2022. In a period characterized by significant and evolving external challenges, our performance this year has been incredibly strong. And today, our business has never been stronger. This is clear in the results that we're reporting today, demonstrating the ongoing success of our pet care strategy, the advantages of our unique omnichannel model and the ongoing resilience of the pet care market. Our strong financial position means that today, we're also pleased to announce a 12-month share buyback program of up to GBP 50 million as we continue to create value for our shareholders. There are 3 messages to take away from today's presentation. First, we have delivered a record set of growth across the business. We have more customers than before, having welcomed over 1.1 million new pet owners to the group. Our puppy and kitten sign-ups increased by 48% year-on-year with club members now representing approximately 1/5 of our record 7.3 million VIP customers. We've broken records across all of our key financial measures, delivering our strongest ever sales, profit and cash flow. Group 2-year like-for-like was 25.9%, Group PBT grew over 65% to GBP 144.7 million, and free cash flow was up over 40% to GBP 95 million, supporting payment of a record 11.8p per share dividend to our shareholders. All parts of the group are in growth. Our retail 2-year like-for-like grew by 22%, with a broad-based growth across all channels, both stores and online. And our Vet Group 2-year like-for-like grew by 24.5%, underpinned by the strength of our practice estate with the first -- sorry, for the first time that our average practice revenue surpassing the GBP 1 million mark, again, for the very first time. So we continue to outpace the market in which we operate, and we're taking share across all segments, and we're growing our market share to 24%. We also continue to make excellent progress on our social and value strategy aligned to our 3 pillars of planet, pets and people. Secondly, our long-term prospects have never been stronger. We have a clear and ambitious plan to achieve at least GBP 2.3 billion of customer revenues in the medium term and are supported by the strategic investments that we are making. We continue to digitize our business with the first element of Project Polestar now live, and that's helping unlock significant opportunities around data, subscription and loyalty. Our ongoing store transformation program is improving the customer experience and driving elevated levels of VIP registrations, subscription sign-ups and service performance. And in investing in our pick from store capability, we're successfully leveraging our nationwide store portfolio as a flexible and cost-effective distribution network with 2-hour home delivery now live in 120 locations. Project Pathfinder is improving practice economics and improving clinical productivity and client engagement. And that's true with a 15% uplift in health care plan penetration versus the wider estate. And of course, is supporting our ongoing growth for every business. And we continue with the development of our new storage and distribution facility in Stafford. It remains on track and on budget and will come online by summer 2023, delivering capacity and efficiency benefits and, of course, future-proofing our operations for many years to come. And third, we are primed to accelerate growth in market share for the year ahead. We've got a record number of active loyal customers with favorable demographics. And, of course, we have 10 years' worth of proprietary data across our VIP Club. So we are uniquely positioned to provide personalized and convenient solutions throughout the full lifetime of the pet. Our broad range of economically resilient products and services, over 75% of which are nondiscretionary in nature, offers choice, quality and value to customers. And of course, because we offer such a full price architecture within food and have a very strong private label proposition, we can represent significant savings to our customers too, and we're helping owners feed their pet the best possible diet for their budget. Our pet care plans offer further value and convenience for customers, providing essential pet care for a low fixed monthly cost whilst creating an annuity revenue stream for the group. Above all, we have an unwavering commitment to keep pet care affordable for customers and we'll never let price be a reason for customers not to shop with us. As a business, we are well positioned to navigate near-term industry-wide inflationary pressures and have clear plans in place to drive efficiencies across the business to help offset those cost headwinds. So in conclusion, our performance in the past year further demonstrated the strength of our unique pet care strategy, the benefits of the investments that we've been making and the robustness of the U.K. pet care market. We stand here today a far stronger pet care business, and we look to the future with a lot of excitement and confidence and continue to put the customer first by making pet care as convenient, affordable and rewarding as possible, and doing the right thing by all our stakeholders. We ensure we continue to run a responsible business as well as a successful one. And finally and most importantly, I'd really like to express my sincere thanks to all my amazing colleagues and partners across the group. I remain incredibly grateful for their ongoing hard work and commitment as we continue to build the best pet care business in the world. So I'll stop there now because I'm sure you have questions, which Mike and I will only be too delighted to answer. So I'll hand the call back to Tracy.

[Operator Instructions] We will now take our first question from Eleonora Dani from Shore Capital.

Two questions for me, please. First of all, I appreciate it might be a bit difficult to call it out, but what kind of pet population growth are you assuming going forward? Secondly, I was wondering if you could provide a bit more color around customers not trading down to cheaper products. And if they decide to do so, how do they receive guidance on which own label product is best for their pet?

Thank you for this question, it's really helpful. Look, I think on the pet population, it's always been a very difficult thing to try and measure and correlate. So we typically do that exercise once a year, but what we do, do is we look at the sort of some leading measures for us, and they tend to be sign-ups to our Puppy and Kitten Club and new client registrations. So you remember through COVID, we actually saw elevated levels. We're typically seeing puppy and kitten registration sort of in the order of about 20,000 a week. Now we have to remind ourselves, of course, is -- there is a natural churn that takes place in pets because they only live between 12 and 15 years. But we believe they're still at elevated levels versus what we saw pre-COVID. If we look at customers, at this point in time, it's really hard to see yet any concrete evidence of customers doing anything radically different. So we recognize that. We've got 7.3 million customers. We tend to have a slightly more affluent shopper base, and we certainly have a much more engaged shopper base. So in the main, we expect most pet owners will continue to do what they normally do. Circa 75% of their spend is very, very habitual. So we know that customers, once they start feeding the diet, for example, they continue to do that without change. And it's only normally when something happens to the pet that they engage in conversation, but we do recognize that cost of living pressures may well be a factor for customers to come and talk to us. Now this is where we think we have a distinct advantage. Because we invest so heavily in our colleagues, and we have trained colleagues in every single one of our stores, particularly around nutrition, we're able to help guide colleague -- we're able to help guide customers to try and meet their needs. So in the case where they do speak to us about that challenge, and I have to say, currently, they're not, but that could well be the case that they might do, we think own label here is a real opportunity. Because typically, on a bag of dog food, you can save -- if it's all cash, typically between GBP 5 and GBP 7 per bag by buying private label. Now while some might represent a potential down trade in terms of that transaction, what we can see is customers who buy private labels, 2 things happen. They spend more money with us overall. So we know our private label food shoppers are amongst our most loyal and bigger spenders because they obviously then get locked into food in your store. The second thing, of course, for us, is we make more margin. So whilst I think this may well be a challenge for customers, we actually recognize that we think private label has got a really important role to play as we move forward. I think as we look across the rest of our organization within vet, we're not yet seeing any change to customer behavior, and I don't think that's surprising because a lot of what we do is responding to a pet issue. So obviously, it's often much more about being responsive. And in our grooming business, in this year, we'll probably groom over 1 million dogs and the boom we saw in the new pet ownership means actually our practices or our grooming salons are actually running near capacity. So actually, I think what that means is the current waiting list for our grooming salons is typically 4 to 5 weeks. So I think we've probably got a lot still of pent up demand with the platform capacity so I don't think we're going to see any material changes there in the short term. Hope that answers your questions.

We will now take our next question from Andrew Porteous from HSBC.

Yes. I guess, Peter, this is the last time we will hear from you as a CEO of Pets at Home. So just a quick word to say sort of congrats on your tenure as CEO. I think you leave the business in a very different and much better shape than you inherited it in and best of luck with whatever comes next. A couple of questions from my end. Some of these questions asked already. Just -- I mean, the share of wallet increase is impressive, I mean, 600 bps increase in share of wallet. Can you perhaps just talk through where you're seeing that come through? And what spend is it that you're winning back from customers? And then perhaps one for Mike as well. I mean, obviously, we've got the increased dividends. We've got the buyback coming through this year. We've also got higher CapEx. Can you just talk perhaps about how you see the shape of cash flow in the year ahead? And do you think you'll finish the year to deliver the net cash position?

Okay. That's great. Thank you, Andrew. Thank you for 2 great questions, and thank you for your kind words. I appreciate that. Look, I think on share of wallet, our whole strategy has been based around how we build out our share of wallet. And I think that people have been asking us to really evidence where data has made a difference. And actually, this is exactly where data has made a difference, because our ability to be able to personalize our messages to customers based on their next best action. So what we've being able to do through really effective CRM, we've been able to help drive both frequency and spend amongst those customers. And also, at the same time, you'll see in our results, we've also been able to reduce churn which actually has been a really effective program for us this year. Of course, a lot of the mechanisms we've been putting in place really do drive a repetitive nature to shopping. So the work we've done on subscriptions -- and we've hit a benchmark of more on 1.5 million subscriptions. I remember when I did our first one, we're talking a couple hundred of hours and so we've made enormous progress in a short period of time. They, of course, lock spending. So I think it's been a combination of all the things that I've been talking about actually really just coming through and evidencing, I think why in part, bringing everything together and making it easy really works for customers because you remove friction and barriers. And I think it really sets us up well as we move forward. Actually, for us, the agenda is a continuation of just to doing more of the same. And as we've learned [ several opportunities ] the last 18 months as we build out our capability, we're really starting to understand the pools where we can really drain share of wallet. And actually, that's really where we'd be going to next, as we continue to activate our share and -- even more effectively. So I'm really pleased to see those results. I have to say, there's so much still for us to come. I keep on reminding ourselves, in order to get to that GBP 2.3 billion, I don't have to win any more new customers at all. I just have to grow my share of wallet with existing customer. So I think for us, that's why we feel so confident about the future. Even with the short-term turbulence, we've got a really clear plan and we know how to act upon it, which is probably a good time for me to hand over to Mike to talk about cash.

Yes. Thanks for those questions, Andrew. I'll deal with the buyback, and then I'll talk about the cash flow for the year ahead. So yes, today, as well as the 48% increase in the ordinary dividend -- so total for the year just short of GBP 49 million -- we're announcing a GBP 50 million buyback over the next 12 months. And the facts supporting that buyback are really strong. We've got a balance sheet that, as Peter said in his introduction, is as strong as it's ever been. We've got no debt, and we've got GBP 66 million of cash on the balance sheet. The business is very cash generative. The year just gone, free cash flow was GBP 95 million. That was a step-up of just under 41%. And in particular, you point to the Vet Group as a step change in the cash performance of the Vet Group over the last 12 months, and the Vet Group alone contributed GBP 50 million to that free cash flow. Our capital allocation policy, of course, has always been consistent and clear and provides for us to return buyback of shares. So that's what we're announcing today in addition to the big step-up in the ordinary dividend. We are looking ahead in the year ahead. We've got -- very clear about the prospects of the business. The business will remain very strongly cash generative. We've fully funded our investment plan around Polestar, open the DC. Both those projects remain on plan, on track, on budget. And to answer your specific question about where we'll close the year, yes, even with the GBP 50 million buyback we announced today, we'll finish the year net cash positive. So I hope that's dealt with those 2 questions, Andrew.

We will now take our next question from Charlotte Barrie from Berenberg.

I have 2 please. You've already mentioned the customer churn. I was just wondering if you could be a bit more specific about how you're defining this? And also, if possible, the base that, that 400 bp reduction is coming off? And then secondly, a bit of a longer one on the vet. It's obviously really promising that average vet practice revenue has surpassed GBP 1 million. How much of this is a reflection of practices that were already considered mature, continuing to grow and reaching a much higher steady-state level as opposed to just a function of the average age maturing and those younger practices maturing faster? I guess the difference being that if it's the former, then our assumptions for the value of your existing estate at maturity will start to look quite conservative.

Okay. They're 2 great questions. Let me talk about customer churn, it's -- I actually will tail back to over a year ago when we talked about some of the work we're doing to anticipate when a customer was going to leave us. That was based upon doing some pretty deep analysis on looking at customer patterns that indicated that a customer was likely to leave. Now there's also a very good reason why a customer would leave us, and that's obviously the death of their pet. And obviously, we're able to see that. So you can take those customers out of that equation, because there's nothing we can do to change that. But we did a lot of test work last year understanding the patterns, particularly those patterns and then -- we then trialed a whole series of mechanics to see what would drive a difference in behavior. So we did that across a whole series of subgroups. And in any work we ever do, we always have a control group that gives you a sense of what happens if you did nothing. Those trials were incredibly successful for us. So as we started last year, as we moved our way through at the end of quarter 1, we've defined enough to help us be able to predict and understand what the mechanics were to engage customers, and they are now always on. So in fact, in answer to your question, the 7.3 million base actually is the entire audience that we look at. And we do this incredibly dynamically. So using artificial intelligence and using the capability to build, that is now always on running in the background. And each period, we have a specific churn activity, which I define as customers who we think are likely to leave us, and then we time from the specific activity. I have to say, against all those groups, we then have the control group. It actually gives us a sense of, is it successful or not. And then 1 of the beauties about what we developed is as we're working our way through, those algorithms learn and we become more and more sophisticated as we've worked our way though. So as we stand here now, I think our churn campaign is probably the most sophisticated we've ever been, but it continues to learn, and it's a real opportunity. And of course, in any business, you're always acquiring and you're always losing. And if you can win more and lose less, it's a fantastic place to be, and that's what we seem to achieve within the last year. Mike, should I hand over to you to talk about practice maturity?

Yes. Let me pick that point up. So I think your question was around growth rates in our -- that estate and overall, of course, in last year, we achieved 17% like-for-like growth in our vet business, and we're welcoming 9,000 new clients a week. So we closed the year with 1.7 million active clients. Our vet estate, of course, is still relatively young. We still got more than half of our practices are less than 8 years old. And we're still going to see a maturity kicker coming in from those practices. However, even practices that are 10 years old are still growing 7% and 8%. So a practice that is more than 10 years old, there, our group sales are over GBP 1.4 million. In fact, we've got some practices with revenues of GBP 3 million to GBP 4 million at practice level. We've got a number of drivers of growth going forward. Clearly, we'll continue to see the kicker from maturity coming through as those practices become more established. But in addition to that, we've got a number of initiatives that will grow out of practice revenues. One of those is an initiative called Pathfinder found in our stores -- in our practices today. That releases vet time and improves productivity for our vets. And we know that it's generating higher revenues in the practices that so far have received it. Second thing is we have a plan to extend a number of our practices in our stores. A lot of our practices still have the same footprint that they had when they were set up and we've got the capacity in our store network to extend practices. And we've got 30 in the pipeline coming forward. Third thing I'd point to is that as our practices get established, we'll be putting in more advanced procedures for pets in those practices and carrying out procedures that otherwise would be done in referral centers. So that's another avenue of growth. And the fourth thing I'd point to is that we're opening more practices. Quarter 4 saw us open the most practices we've done for a while, with 4 practices. We're signaling between 5 and 15 a year going forward. Our pipeline of joint venture partners is looking very positive, I think. Demonstrably, our vet model has proven itself really well across the last 2 years. And there's great appeal for vets. So we're very encouraged by that. And as I say, we've got multiple levers of growth going forward over and above the kicker we're going to continue to see through practice maturity.

We will now take the next question from Jonathan Pritchard from Peel Hunt.

Good luck, Peter, on the next chapter. Great career at Pets and good luck in the future. Two for me. Just more on the bricks and mortar side actually. The refit program, how is that evolving? I think it's probably 3 or 4 years ago since the sort of Stockports and the Hemel Hempsteads and the Milton Keynes. Where are we now in terms of the changing mix in space and new innovations on refits? What's the sort of new news there? And then secondly, just on conversion. Is the latest cohort of customers any different in terms of their frequency of spend? Or is there anything in conversion in general? Because obviously, general retail traffic is pretty weak. But are people just not really changing their pet shopping habits?

Yes. Thank you, Jon. Thanks for those kind words as well. I appreciate it. I'll take the question on conversion. I'll hand it over to Mike to talk about our estate. Look, as we sit here today, we're not seeing any dramatic changes in customer behavior. I think what's interesting to look at our new customer base, 1 thing which definitely changed in the last 2 years, our new customers typically are younger. And I think that really is reflecting people who have recognized they've got [ response ] -- flexibility in their lives based upon flexible working and therefore, require a pet. What's really interesting about that cohort, they are amongst our most valuable. They -- they're much more likely to be a vet client. And actually, you can see that they're the single biggest drivers of new client registrations and are valuable. They're significantly more likely to have a subscription and they are definitely more interested in nutrition. So they've actually -- not only have we gained a lot of them, they're very, very engaged customers. And as we look at our core customer base -- and this is why I always have to say, look, this is where Pets is a little bit different to sort of general retail. Because I think the first thing is we recognize that the pet is a member of the family. And we recognize often the pet is placed up there alongside children in terms of the priority of the household. The spend on pet is still relatively small in the context of the overall family spend and is very, very habitual. So anybody who's a pet owner on this call recognizes you feed your pet pretty much the same thing day in, day out, same quantity, often same brand, so it's very habitual. So we don't expect that's going to change. Although we think for some customers, they may well seek out better value. And over 75% of our business behaves like that. They require cat litter or hay straw. And a lot of our services, again, are demand driven. So I think we will see moving sums, but I don't think we're expecting to see seismic shifts. And because we know our customer base tends to be slightly more affluent and is definitely significantly more engaged in their pet, and that really defines us versus our broader-based competition, we think that we -- they are real points of confidence in those in terms of how customers behave. I was here in 2010 when we saw the last major financial crisis, which was a different -- slightly different shape and makeup -- and tells us about customers who are under pressure. And we saw 2 things happen. We saw overall spend on pet go up and interestingly enough, it was our fastest acceleration into Advanced Nutrition, which I think is also quite interesting in terms of often that can give you better value overall in terms of the quality of the food that you feed and then you feed less food. So we're anticipating a consistency of measures as we move through, although we'll be working around the edges to make sure we identify those customers where value will be more important because we know them and we can speak to the individual. We can be much more targeted in our ability to influence them. So I'll turn it over to talk about our pet care center program.

Of course, yes, thanks for that question, Jonathan. I think I'll headline it just by giving the overall like-for-like for our stores, actually. So year just gone, store like-for-like was 15%. And on a 2-year basis, store like-for-like was 18.6%. So I mean overall, I mean our 450-odd stores are in very, very healthy growth. So in terms of the transformation program -- and you'll have seen some of those, I know you -- heard you reference Hemel and Milton Keynes. So far, including new openings, there's 52 stores now that are in that pet care format that you referenced. And it is not a cookie-cutter approach. What we do in each one is very much tailored to the store. So we look carefully at extending the vet, for example, to give them more space back to that earlier answer going to the vet question. We'll put more services in the stores where possible. So grooming salons, we put 17 new grooming salons in our stores in the year ahead. We'll introduce the delivery from store stock initiative, roll that out as we go, create more space in those stores for colleagues and customers to interact to give advice, to sell subscriptions. But by no means is it a cookie-cutter approach. Each one in terms of its capital, the investments are tailored for that particular store in this particular market. In the year ahead, we'll plan sort of 40 to 50. I mean that will be our sort of normalized cycle of refurbishment. I would plan pretty much at that level going forward for 40 to 50 a year. We're delighted with the results. We've got much better customer engagement in those stores. We've been very successful in subscriptions, even more successful in those stores. So the things we know we're doing there are now showing through in our results, and we're going to continue to roll that program out in the year ahead.

We will now take our next question from Tony Shiret from Panmure Gordon.

Just, as it seems to be the habit on this call, well done, Peter for this really long time. And you don't know how rare it is to be able to celebrate a CEO in U.K. retail that has actually done a good job. Very rare. Moving off the groveling part onto the questions. Yes, on the pet cohort sort of debate, I just wonder if the boost that we saw during COVID is a sort of onetime lump in the cohort as it were. And subsequently, there is no sort of follow-through in terms of the volume of pets. I mean, presumably, they're all spayed and basically it's down to how many breeding animals there are and how often they breed. So I wonder if you've got any sense of that. And also on that sort of line generally, as the owner of some pretty old and expensive cats, I just wonder at what point people start spending on veterinary care for their pets because presumably the young ones don't really need much. So your vet practices have presumably got a [ bunch ] coming down the line in terms of animals getting older and getting sicker. And just on 1 last thing. I just wondered if you could give us an update on your marketing costs and where you see those going? Because I presume a lot of the stuff you're doing at the moment is sort of like you say, capitalizing on your existing customer base. And presumably, moving forward, there will be a greater emphasis on new customer acquisition, and that will cost you something. Those are the questions.

Great. Thank you, Tony. Look, I'm going to take that as a compliment from you, Tony, because I know you've always been really tough on these calls. Thank you for saying such a nice thing. Look, I think the way we think about the pet market is -- without question, these last couple of years have been very unique and we've seen a boost. Because we always know this sort of -- in the nicer sense, this churn element of pets dying, pets are born and the pet market has been in terms of numbers, incredibly flat actually in cats and dogs. And that's why this has been such a big structural change. So we think of it more like a baby boom where the incremental amount of pets we've seen in the last 2 years, we expect will then move through as you described, like a big lump, but the overall market is bigger. I really read -- as we sort of maybe get back to more normalized times, we've got more people still registering for puppy and kitten program than we did prior to COVID. That may be in part because it's now much more recognized amongst customers. So I think as we get closer to the summer, we do our annual sort of read of the pet population, I think it would be a fair planning assumption to expect sort of that boost is going to normalize and actually, the overall pet population remains at a higher level, but won't continue to elevate if that makes sense, which means you've still got 10 to 15 years' worth of spend ahead from those customers. And it sort of leads into to that sort of second part we talked about, which is where cash is spent. And you're absolutely right, the way this plays out is typically, your spend in retail is initially elevated slightly as you buy things that you need first time around for your pet. And then it normalizes into consumables, food, cat litter, bedding, those sort of things. And your vet spend typically is very low. Typically, you get your annual boosters and you shouldn't really be going to the vet in the early years of your lives. And your assumption I think is absolutely right. We have more young customers and young pets in our vet business, which is a really interesting proxy for the future because you're absolutely right: as the pet matures, their spend increases. And typically, 60% to 70% of the spend on a pet happens in the latter part of its life. And sadly, putting a pet to sleep, which every pet will ultimately be put to sleep, is one of the more expensive things that you often spend your cash on. So you're absolutely right in terms of I think the prospects for our vet business are incredibly strong. I also think when you're looking -- we always talk about maturity in our vet and why it takes 10 years. Well, it's exactly that factor. We recruit lots and lots and lots of new pets and they take time for that spend start to multiply. So I'm with you, I think the future revenue opportunities at vet is probably still one of the most exciting opportunities that we have in our business. So marketing, our marketing costs are actually incredibly low, typically less than 2% of our revenue, which is very low. In part because we benefit by having such strong [ fee ] that our lowest point for cost acquisition has, and I suspect will always be, through stores. And with the volume of growth we've seen in footfall, that for us, I think, is a distinct advantage because we can recognize that cost of marketing and acquisition actually have been going up. So if you're a pure play, that's pretty bad news. For us, it's really good news because we continue to leverage our store estate. As we're moving forward, we're not assuming, by the way, any significant increase in marketing costs at all, because we recognize that new pet ownership, we still know the most successful channel of acquisition is customer gets pet and actually comes in store first. We can pretrail that with some digital marketing, and we know where to do that and how to do that. But it gives us a distinctive advantage rather than trying to spend GBP 25 cost of acquisition per customer to get them to change provider. And we think that's a distinctive advantage, don't we Mike?

Absolutely.

We will now take our next question from Manjari Dhar from RBC.

I just had on pricing. I think we've been seeing that the branded goods in supermarkets have sort of risen quite materially over the last few months. How are you thinking about pricing in the own brand? Are you looking to widen your price differential there? And then secondly, maybe on rentals, have you seen your more recent rent renegotiations continuing at the average 25% reduction rate?

Two great questions, actually, so I'll take the first one on pricing. So we have seen some inflation from the brand and actually, that pricing, we actually passed through into the market as a whole. So that is actually now fully reflected in our base. We've been keeping own brand pricing particularly competitive. So I think the thing for us is, even if you maintain the percentage difference, by default you expand the cash difference. And as we move forward into this year because we have much more control over own brand pricing than we do potentially brands in terms of inbound costing, we actually reflect that we think this is a significant opportunity. I think the biggest opportunity of all, though, is our ability to really double down on subscribe and save or auto ship because typically, a customer can save up to 10% on the things that they buy habitually. So whilst we'll keep a really competitive position on pricing so we will not be able to [ kill ] through it all, I think what you will see from us is an acceleration in really driving subscribe and save to customers because it's a way of getting the food that you want anyway on a timetable that you choose with no contract or commitment and you can save money. And you'll see us be particularly focused on private label because we think there is a real opportunity to lock in loyalty. Mike, do you want to talk about where we are in rent?

Yes, of course. So our rent reduction program, which has been underway now for a couple of years, is one of our many self-help initiatives we're taking a very proactive stance on that helps us push back actually on a lot of cost inflation. Talking specifically about the rent reduction program, yes, in our most recent rent reviews, we're still seeing average rent reductions of between 20% and 25%. So pretty much on the same levels that we've seen in the last couple of years. We're planning to do about 40 to 50 of those in the year ahead, so about 10% of the estate, probably at the same level we've done in the last couple of years. And as we look beyond this year, over the next 5 years, we have about 300 lease events coming up. So that's either a lease coming to an end or a break clause coming up in the lease. So all of that gives us quite a lot of operational flexibility on our rent roll. And we're going to continue to be very focused on getting our rents to be lower. As I say, it's one of our several initiatives that we have got in place that helps us push back on cost price inflation we're seeing elsewhere.

Great. And all the best for the future, Peter.

Very much appreciate it.

[Operator Instructions] We will now take our next question from Simon Bowler from Numis.

Peter, I saw you this morning. So you will not get any more niceties out of me at this point in time. But 3 questions for myself, if it's okay. First one, can you just talk about kind of any supply challenges or lack thereof I guess, particularly on kind of the food side of the business or if everything continues to be quite smooth from that perspective. Secondly, the stat you've called out in terms of the 40% share of new puppies and kittens. Just want to kind of think about and reconcile that with your kind of overall market share of the pet care market. You got a sense of kind of what that share of new puppies and kittens would have been in kind of previous years? And then third and final question was just kind of touch on a piece on the vet side of the business, where as you say, kind of we saw 17% like-for-like across the group. I think there was a start in your presentation saying that those practices over 10 years old saw 16%, which is kind of quite a narrow gap between those over 10 and those sub 10 versus what we've seen before. I'm just wondering whether that in any way was kind of reflecting capacity challenges of some of your vet practices to scale any faster than that in a market that probably is growing quite fast.

Yes, sure. Thank you, Simon. 3 great questions. I'll talk supply and I'll talk back -- actually, I'll hand over to Mike to talk about puppies and kittens. So on supply challenges, I think when we did the last review, we talked about actually, we have seen supply challenges, particularly on food at the back end of last year and availability was challenging. And we think we left a bit of money on the table in terms of availability to customers. As we sit here today, our availability actually is in really fine shape. So we're certainly less exposed to international freight challenges because 80% of what we buy comes from the U.K. Our challenge last year was more about raw ingredients availability and manufacturing capacity in the U.K. and that's sort of now caught back up. So we're in really good shape on food. We're in really good shape on accessories. One of our distinct advantages, and it wasn't planned that way, it's just the way it is, is we actually see quite a slow-moving business where we hold stock. And therefore, we're not one of those just-in-time supply chains but actually seize immediate booms and pass it through to customers. So we're able to -- we've been able to mitigate a lot of things from customers by just using the stock in the system to field -- to navigate our way around. So it's not something I'm worrying about. But I actually think, that it looks like this year, that our availability this year is definitely better than it was at the back end of last year. I think that point on vet is a great one, actually, because you're right. I think if you look at the total growth of our Vet Group and look at the performance out of our 10-year plus practices -- we use this word maturity, and actually, it's just the wrong word for us to think about because it always suggests we're capacity constrained. But without question, those practices are now getting into a stage where they are full, actually. They've got clients waiting to sign on to register. And actually, part of the challenge often is space. So we know our typical model typically starts off with a 2, 3 consult room. And the consult room is really important by the way because it feeds your main practice. And this is why our store refurbishment program is actually really important because we've now got a series of partners who paid off their debt, they've been taking the dividends. And they now recognize actually the best thing for them to do in terms of driving returns is now invest back in their practices. So we've got really exciting opportunities ahead not from just new but from really driving the maturity out of our older practices. And just a really good example of this is Stockport, which is 20 years old. It's one of our oldest practices, has just doubled in size. The practice takes more money in than the store, and the store is our second highest grossing store in the estate. And their challenge is space because the demand is there. Their issue is a space capacity issue. And for me, this is the second wind of opportunity that sits in our vet business, which is a highly engaged partner with cash to invest and need space and support, and that really comes into our own. And for us, we also take our fee straight away from the increased revenue. So I'm really excited about this, and we're working with a number of partners now to look at second practices in town, expansion in store and how we really help them build the second wave that they grow. So it's not a problem, by the way. It's an opportunity. And I think that's something that our group are really tuned into, and we're excited about. Mike, do you want to talk about...

Yes. On the answer to your question, Simon, on puppy and kitten, yes, we're clearly over-indexed in terms of puppy and kitten. We've looked at our total market share having grown in the year to about 24%. So the 40% of all puppies and kittens coming into the business. Obviously, we nearly double indexed on that. I think why would they -- why we've done so well? I think one is the attractions of the Puppy and Kitten Club offering the range of discounts and initiatives that it does. But also, don't forget, as a new pet owner, we are the only pet care business in the U.K. where you can buy into a full range of products and services to take care of your pet. And unsurprisingly, those new pet owners are spending something like 24% more than existing customers. And the reason for that, of course, is through that Puppy and Kitten Club, we've got a deeper propensity to use the vets. Those new customers are also more inclined to have a subscription; they're buying into Advanced Nutrition. So for us, it's been a tremendous boost to the business in the year just gone. But of course, those puppies and kittens are going to last -- going to live for 10 to 15 years. So that lifetime value we've created and that tailwind of customers coming into the next couple of years is incredibly encouraging for us. And that's why we're so positive and confident about the future prospects of the business.

It appears there are no further questions. I would like to turn the conference back to Mr. Pritchard for any additional or closing remarks.

Great. Thank you, Tracy. Look, what a pleasure to deliver that set of results and I leave the business, really, in the strongest position it's ever been. But I also leave as a significant shareholder of the business. And I've got to say, I'm still so excited about the prospects to this business ahead and I've got every confidence in Lyssa, Mike, and this most amazing team of people and I wish them every success for the future. And I'd like to thank everyone on the call for all your support and questions over the years and the grief that you've given us and helping us make a better business. So good luck, everyone, and I'll see you around soon. Thank you.