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

Good day, and welcome to the Pets at Home Q1 2023 Trading Update Call. At this time, I would like to turn the conference over to Lyssa McGowan. Please go ahead.

Good morning, everyone, and thank you very much for joining the call. I'm Lyssa McGowan, the Group CEO. And with me today is Michael Iddon, our Group CFO. We are pleased to share with you a strong set of results today in our Q1 trading update for the 16 weeks to 21st of July 2022. The performance right across our business through the first quarter has been strong, and that's a testament to both the defensiveness of the U.K. pet care category and the strength of our unique omnichannel model. Our like-for-like growth revenue increased by 6%, up 38% on a 2-year basis, with all of our channels remaining in growth. Our retail like-for-like were at 5.6% or over 36% on a 2-year basis and with over 4% like-for-like growth across our store estate and our omnichannel like-for-like growth of 13%. Within our Vet Group, like-for-like growth was 8.6% or 59% on a 2-year basis. With like-for-like customer sales across our First Opinion practice is up over 4% and a close to 10% increase in our like-for-like joint fee income. Underpinning this strong performance has been continued growth in new customers as well as high levels of retention with our extensive private label offerings and growing the subscription platform, increasing customer stickiness. Sign-ups to our Puppy and Kitten Club averaged 25,000 per week, approximately 3x prepandemic levels. And our VIP membership now stands at a record 7.4 million, up 11% year-on-year. And new client registrations in our vet practices averaged 8,500 per week. And importantly, we continue to deepen our relationship with these customers with 27% of all of our VIPs now shopping across more than one channel, supporting continued growth in spend. Good cost control and proactive management of industry-wide inflation pressures through a planned series of self-help initiatives has underpinned really good conversion of sales growth into profit and cash, and our balance sheet remains robust with net cash of GBP 40.2 million. We also continued to progress on our previously announced GBP 50 million share buyback program. Our guidance for the current year remains unchanged. We continue to expect group underlying pretax profit to be GBP 131 million, in line with current analyst consensus. In conclusion, our performance through the first quarter further demonstrates the enduring strength of both our business and the wider pet care market as well as the hard work of all of our amazing colleagues and partners right across the group. We remain fully committed to our strategy of building a world-leading omnichannel pet care business, and I look forward to giving you a broader update at our interim results in November. But now I'll open up to questions on trading over the past 16 weeks.

[Operator Instructions]. We will now take our first question from Adam Tomlinson from Liberum.

Three questions from me, please. First of all, just on the growth numbers you've reported today, can you just please provide some commentary around the split between price and volume in terms of what's driving that growth? The second question is around customer acquisition and just again, some comments, please, on where you're focused -- the channels you're focused on in terms of acquiring those customers and any trends you're seeing in terms of the cost of acquisition? And the third question is just an update on Project Polestar, the progress of that, where we are with that. And perhaps just slightly wider than that in terms of your data capabilities, where we are now with those and how far we are in terms of the benefits flowing through from that.

Thanks, Adam. I'll let Mike pick up the first 2 of those questions, and then I'll take the third, if that's okay.

Yes. So thanks, Adam, for your questions. I'll pick up the one around the volume inflation question you asked first. And if you look at our like-for-likes that we reported this morning, 6% for the full quarter, within that, we've got our retail like-for-like of 5.6%. And within that, our merchandise part of our retail business grew at 5.8%. If you split that out, that 5.8%, about 5% of that is pricing and about 1% of that is volume. But I think you need to dig a bit deeper through Food and Accessories just to fully understand the story there. So within Food, our like-for-like is 14%, really very, very encouraging. And within that 14%, price is about 8%, and volume is 6%. Within Accessories, which is the other big part of Merchandise, actually, the headline like-for-like in accessories is negative 5%. But drilling into that, the consumables part of Accessories, as you expect to stay very robust, growing at about 10%, of which 7% is volume, 3% is price. And unsurprisingly, the relatively small part of our total, which is discretionary accessories, so I'm talking things like dog toys, cat accessories, leash and collars, that's down about 11%, and that's mainly units. And that builds back to the negative 5% in Accessories. So that's what we're seeing across the business. I think there's one thing that really encourages us is the volume growth we're seeing in Food. That's a really positive as we've acquired more customers. And I think that was your second question around acquisition and the channels we're acquiring from. You can see from the numbers we put out this morning, our acquisition remains really broad-based. We're welcoming in 25,000 new Puppy and Kitten customers a week into our retail business, 8,500 new vet clients a week. And we're very encouraged by that, of course. And that follows on from the 1.1 million new customers we welcomed into the business last year. So just building on Lyssa's opening comments, we're still acquiring new customers, and we're deepening the relationship with our existing customers. And I think it sets something for the continued appeal of the Puppy and Kitten Club and the appeal of what we offer to new pet owners. We are unique that if you're a new pet owner, we are pretty much the only business where you can get all the products and services you need to care for your pet. And I think that counts a lot towards the enduring appeal of our Puppy and Kitten acquisitions.

Sorry, just a follow-up on that. So in terms of the -- in terms of your marketing spend, can you maybe just talk about where that's being focused and whether you're seeing an increase in the -- with the pet ownership increase, whether you've seen a big increase in the natural flow of traffic to the brand?

Inevitably, the brand itself has got high awareness and as the Puppy and Kitten gains traction and scale, it becomes more widely known. We're pretty much flat quarter-on-quarter in terms of marketing spend. We were on TV again in quarter 1, advertising our Puppy and Kitten Club. We know that works really effectively for us. We're very pleased with the results we've seen from the marketing we've done.

I'll talk a bit about data and digital. We've made really strong progress in data and digital. And I think both of those reflect the strength and ongoing commitment to our omnichannel model. In digital, in particular, we've launched a number of initiatives. We've launched single sign-on, bringing together in-store, online, VIP and e-commerce into a single sign-in for customers, which has made it much easier for them to shop with us and leads towards our objective, increasing share of wallet. We've replaced all of the [ clinic ] devices in stores to one digital device. And that's had benefits both for customers and also for our colleagues, who really enjoy the new digital device and everything that they can do on it. We very recently launched something called Pet Expert Live, which is an exciting new initiative where we're able to launch [ customers ] online and link them up with an expert live in store on their particular issue. Customers are really loving that, and our colleagues are really loving it as it gets them the ability to share their brilliant expertise more widely. And then in the coming months, we're going to launch our new combined shopping and VIP app, which I think will be a particular benefit to customers and the ability to sign up and manage Easy Repeat, our Food subscriptions, in-store as well as online, which will be great again in allowing us to bring our customers up the pricing architecture, particularly in Food, and save some money in the current environment. So lots of good progress in digital. In data, again, very good progress. We have brilliant data on all of our VIPs, and we're increasingly finding ways to use that base in terms of direct marketing to customers. We've talked about the Puppy and Kitten Club and increasing share of wallet. We've actually had the highest-ever response to our latest VIP marketing in August. And we continue to find other ways to use that in the business that aren't directly customer related in terms of things, like store ranging, store location, those kind of things. So really strong capabilities, really strong progress. Having said that, I think we're still at the -- in the foothills of what we can do with the best data set in the U.K. across both vets and retail and online, and what we can do with that and unlock in the coming months and years. And I'm excited to come back in November and talk to you about our plans going forward.

We will now take our next question from Simon Bowler from Numis.

I was wondering if you could kind of dive in a little bit more on some of the inflation trends that are coming through. You kind of spoke kind of 8% pricing within the Food part of the business. Your COGS also up 8%, i.e., you're kind of holding and managing to a stable percentage margin. And is that how -- what you're seeing kind of the industry do more broadly? And then the second question was, I guess, on the acceleration in the kind of new Puppy and Kitten sign-ups was kind of particularly encouraging. Do you think you're taking even more share of the market within there or kind of just growth in the Puppy and Kitten population continuing? And is there any things you're noticing in terms of split, dog, cats or by breed, that may give us extra color on what's happening there?

Okay. Mike, do you want to take the first one, and I'll pick up on the second?

Yes. So yes, Simon, yes, that's -- thanks for the question. Inflation, I reported seeing in Food about 8%. That pretty much reflects what we're seeing in our COGS between 7% and 8% suppliers' cost price increases. So we're able to pass those on after, of course, some pretty intense negotiation with our suppliers, where we are benefiting, by the way, with the sort of 30% growth given the supply base over the last couple of years. That does -- leveraging the growth is supplied, given the suppliers does help with those negotiations. But I think that's good that we're able to pass it on. But clearly, being competitive on price remains our really important guide rail, and we're not going to take our eye off the importance of being competitive on pricing.

And in terms of the new sign-ups, it's a notoriously difficult market to size. Our belief is that we are continuing to work to gain a very good share of the new Puppy and Kitten market. And I think our digital and data capabilities are coming to the fore here. In terms of the split, a slight move towards kitten from puppy, but really no material change. And I think the interesting thing is pre COVID, we were at 9,000 Puppy and Kitten sign-ups a week, peaks between 25,000 and 30,000 and are now still at 25,000. So in terms of ongoing COVID with us, the pet care market is showing no signs of returning to anything like pre-pandemic levels. And we're seeing ongoing sustained growth, which we think reflects people's changes in lifestyle, much more working from home, making reconsideration of importance of various life goals during COVID. So no slowing down. And actually, that's also translating to our vet business with strong new client registrations of 8,500 in the last 16 weeks, which is very similar to what we've seen over the last year or 2. And I think one important thing to remember is that is the new human sign-up to vets. If a family takes on an additional pet and registers with the vet, that doesn't show up in that number either. So really delighted with how we're doing in terms of new customers.

The second point you made though explains the next follow-up question I was going to have. One other quick follow-up on the third part, is it similar level of inflation and, therefore, pricing you're passing on, on both your own brand and third party, i.e. that kind of pricing gap you look to maintain been pretty stable through the period?

It is, Simon, yes. So we still have a very strong price gap actually between own label and brands. You take product like our Wainwright's [indiscernible] 15 kilograms, that's about GBP 8 a bag cheaper than the equivalent mass product, say, James Wellbeloved, the premium brand in the market. So [indiscernible] shares a lot of the features and benefits, by the way. So that range of own label, I think, give us a broad appeal to customers make pet care very affordable. And a customer that trades out of James Wellbeloved into own label would welcome them. And of course, we make more -- not only do they get a better price point, we get more margin -- cash margin as a consequence. So maintaining that price architecture between own label and premium is -- we've always done that, and it remains as strong as ever.

[Operator Instructions]. We will now take our next question from Manjari Dhar from RBC.