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

Good morning, everyone, and thank you for joining us for our interim results. I'm Lyssa McGowan, CEO; and I'm here with Mike Iddon, our CFO. I'm delighted to report that we've enjoyed a strong first half, and I hope you've had the chance to listen to our recorded presentation, which includes my impressions of my first 6 months as CEO and our vision to build a customer-centric, omnichannel pet care ecosystem. Before we begin taking your questions, I just wanted to share a few highlights with you. Our performance over the first half of the year has been strong, and we continue to grow our customer base, to grow our business, and to grow our like-for-likes across all channels. In a difficult environment, we have reported 7% growth in sales with our Q1 performance improving on an already strong Q1. We have welcomed many more pets and pet owners into our ecosystem, and we're seeing record numbers in recent months, averaging 29,000 sign-ups a week to our Puppy and Kitten Club, that's 3x the pre-pandemic average. Our vets have continued to deliver sales momentum with 7% growth in vet practice sales, again fueled by strong new customer recruitment, averaging almost 9,000 registrations a week. Subscriptions continued to grow strongly, increasing the predictability of our revenues, now reaching GBP 135 million in annualized recurring revenue. And good cost control has seen profits land where we expected, albeit with PBT down to GBP 59.2 million due to the already flat increases in energy, freight and our digital expenditure. This is as expected, and we have the confidence to confirm guidance for the full year at GBP 131 million of PBT. Our confidence in the business, together with our strong net cash balance sheet, also allow us to increase the dividend by 5% to 4.5p at the interim stage. Now it's been a busy first half from my perspective as I've taken on the CEO role, and my priorities in the first 6 months have been to spend time really getting to know and understand the business from the bottom up and to build a deep understanding of our customers and to begin to position the business to make the most of the fantastic opportunity we have ahead of us. My only impression is that this is a business with distinctive strength and compelling competitive advantages. We are a clear leader in a structurally growing market with a uniquely strong store portfolio and building digital capabilities, supported and underpinned by passionate and skilled colleagues and partners. Now my track record in building consumer-centric digitally capable platforms and the main change I've made in the first half is to reorganize our team to simplify and streamline the organization and enable the business to better serve and focus on our customers and on the front line. And this includes the creation of a Chief Consumer Officer role to lead to [indiscernible]. As you'd expect, I've also spent time getting in our major projects and strategic initiatives, such as [ spice ] and Polestar, ensuring they have what they need to land well and deliver what we want them to. So to conclude, it's been an eventful first half against a challenging backdrop for many of our customers, but our industry is a defensive one, benefiting from structural growth trends, and our business is well positioned to capitalize on this growth, as you can see in our results. It really is a privilege to lead such a fantastic business, and in my first 6 months, I've reinforced the size of the opportunity we have in front of us. I'm more excited than ever to deliver our goal of a truly customer-centric omnichannel pet care ecosystem. And with that, we're ready to take your questions.

[Operator Instructions] The first question comes from the line of Jonathan Pritchard from Peel Hunt.

Sort of two, if I may. Firstly, lots of inflation about, especially in food bill in general. Where do you think your price position relative to the competition has settled, I don't know any settles for seconds on end, but where do you think you are? Has it improved? Has it stayed the same? You're happy with it? And then looking at second half and into FY '24, are you baking in any form of sort of better consumer outlook, any sort of more confidence in discretionary items? Is that part of your thinking behind those guided forecasts?

Thank you for these questions. I'll take the first one, and I'll let Mike answer the second. So our price position is very important to us. We've always said that we will never let price be a reason for consumers not to shop with us, and we've been able to maintain a competitive price position throughout the first half. And I think you see that reflected in our really strong customer growth. We do also price points right across the architecture. We have over 10,000 products, and it's important to us that we have everything from entry level right up to very Advanced Nutrition and premium accessories. And we've definitely been able to maintain the architecture, and we haven't seen any evidence of customers trading down through that. One area of real strength in that price architecture is our own label, where customers can save up to 25% versus a branded product. And our recent campaign on Switch & Save has been very successful on that. That's a really good outcome because the customer saves money. We make the same, if not slightly better cash margin, and then they're locked into our ecosystem because obviously, those are exclusive brands. And we've got a particularly strong price position at the moment versus Tesco, partly because they are well publicized withdrawal of some products, but we're also quite comparable versus zooplus in Amazon, and we're very comfortable with where we stand on that price. Mike, do you want to take the second question?

Yes. I think the second question, Jonathan, was about how we saw second half sales, particularly discretionary and then thinking on how that might shape up in FY '24. So I mean -- yes. Just to look back first, I mean, across the half, we saw really good growth in our food business, 14%. And we did see a decline in our accessories business, which we planned at minus 4%. If you dig into that, the second quarter for us was better than the first quarter. Our like-for-like has picked up. But actually, the last period of the half was our best growth period of the entire half. So we've got a strong tailwind going into the second half of the year. Big changes actually. Between the first half and second half, accessories did pick up and discretionary accessories did pick up. So we've always seen growth in what we call commodity accessories. That's about 1/3 of what we sell, particularly nondiscretionary things like cat litters, things like health and hygiene, and we saw volume growth there as well. But the discretionary side did pick up in the second quarter. And since the end of the half, which was 13th of October, we've had Halloween and then we've had Christmas. And those ranges, which are clearly discretionary, are selling really well. So I think we know we've got affordable products. They're well priced, good availability that customers engage in. We'll sell the product regardless whether it's discretionary or not. But clearly, as we head into next year, as Lyssa has just been saying, we've got a big focus on affordability and making pet care affordable. And therefore, our own labels, in particular, will be really important to us as we head into next year. In our own label food, typically 25% cheaper than the primary equivalents, and likewise, a big focus on making our accessories affordable for customers. So we're not -- we recognize there is going to be a significant tightening of the consumer belt. But we do think pet care in particular is very resilient. And I remember 75% of what we sell in total across pet and retail is nondiscretionary. So we're well set out to deal with that, but we will continue to make sure we're competitive across everything we sell.

The next question comes from the line of Wayne Brown from Liberum.

Just following on from that last question. It's quite difficult to understand the defensive comments or the defensive nature of the business, if we don't put like-for-like sales into the context of price and volume. So obviously, accessories versus food. If you can just give us what inflation you're seeing within those subcategories and then how volumes actually compared because if pricing was obviously put through during the period, and one would expect like-for-like sales to have been better in the latter period rather than the former. Just trying to understand that dynamic better. And then with regards to inflation in the food chain, how long do you think does it take for inflation to feed through into your end products from feed inflation and the raw materials at source?

Mike, do you want to take that?

Yes. Yes. Thanks, Wayne. So yes, the splits out similar to what we did actually explained on quarter 1. For the half, our 14% like-for-like growth in food split 9% pricing, 5% volume growth. So very pleasing to see volume growth pretty consistent what you saw in the first quarter. Commodity accessories, that's about 1/3 of our accessories. The total like-for-like there was 7%, 4% is volume, 3% is pricing. Adding our discretionary accessories, which were minus 8.8%, pretty much all of that actually is volume.

The next question comes from the line of Michael Benedict from Berenberg.

What happened to the second question?

Sorry, please go ahead. Sorry, do you have another question?

Second question about...

Sorry, yes. Yes, just from a cost inflation perspective of when feed cost inflation feeds through, what's the lag that you see in the end pricing of the products?

Mike, do you wanna take that?

Well, pretty much straight away. Manufacturers are pretty keen to [ methodology ]. So that's pretty much the new negotiation we have with our supplier base. And I think while we've got volume growth, obviously, we've got a good leader there because volume growth is very helpful to suppliers, creates value in their supply chains through operational leverage. So part of that negotiation is, we get growth in our volume, we go back, capture the value we create in the supplier base, which helps us negate the cost price increases that they wish to put through. So that's the virtuous circle that we're trying to create there, but yes, manufacturers are very keen, as you imagine, to pass on cost prices really quick.

And then, sorry, one last follow-up. And are there any concerns around security of supply for next year or that the cost of supply is going to increase materially from what you can see in the market at the moment, certainly considering what's going on in Europe with the pressures on farmers by new climate change regulations.

Don't really see much change there, Wayne, from this year to next. Something we're looking at all the time. Securing both our own label and with the brands, but it's something on our watch list, clearly. But so far, actually, availability or product in the -- certainly, in the second quarter year-on-year is actually better for us. You remember this time last year, there's quite a lot of supply chain disruption mainly caused by the availability of the truck drivers for suppliers actually as much as the product. But we certainly got a little bit more stock year-on-year, and that's helping us through to see better availability, which is helping drive better sales.

The next question comes from the line of Michael Benedict from Berenberg.

I have 3, if that's okay. So firstly, on the gross margin. I wondered if you could break down the moving -- the various moving parts over H2 and broadly, where you expect it to land for the full year? And inventory is my second question. That's well up year-on-year, but I appreciate there were supply chain issues in the prior year. Just wanted to check in on how happy you are with the quality of that inventory position. And then lastly, I think you mentioned in the presentation that you expect GBP 30 million of investment to the expense this year. I wondered directionally where you think that will be next year?

Thank you. So I'll take the second of those, and I'll let Mike answer on the gross margin and the expense of the investment. So yes, as Mike said, we're happy with our inventory position. Availability is a really strong and important KPI in our business because where we've got product on the shelves, we're able to sell it. And so I think we're very happy, both with the quality and the quantity of the inventory we're holding. One change in investment that we've made in the business is a demand and forecasting tool, which is now live in most -- or some of our state, we're rolling out to the rest and that will enable us to even more precisely kind of pinpoint stock from our DCs into our stores. So happy with the inventory position and in fact, much better improvement year-on-year. Mike, do you want to take the gross margin and the investment question?

Yes. Yes. On the gross margin, we actually have a bridge in the investor deck, which we posted up on the website this morning. And that does show gross margin in the first half, year-on-year. Last year, 48.7%, drops 123 basis points to 47.5%. And the sort of 2 -- we split it between Retail and Vet Group. Quickly on the Vet Group, what we see there is expanding gross margin completely consistent with the structural growth we see in revenues on a fairly fixed cost base. So that, we'll expect that to continue and that should continue into next year. In retail, we pulled out 3 impacts. The biggest one of which is product mix. So product mix is 147 basis points. And there's 2 or 3 things happening there. The first is, we've got a really fast-growing food business. So participation of food in total sales mix about 4 percentage points higher year-on-year. And that in itself because food has a slightly lower gross margin than accessories, will drive in a mix impact. It will be obviously more cash mix impact if you look at percentage. And then within our products, a couple of things I've called out already in accessories. Our commodities accessories is the single growth discretion, which has a high percentage margin is in decline. So that also goes into product mix. And in food, whilst all of our food categories have been growing significantly, contributing to about 14% growth, grocery as we welcome some new customers into the business, it's been growing slightly faster and that's got a slightly lower gross margin. So all of those feed into product mix. And the other 2 points we've got in there is freight. We pull that out on the front page of the RNS. Freight costs year-on-year GBP 4 million, that's 49 basis points. We expect going into next year that freight to come back quite a lot actually, so the freight rates have really come off their peaks. So that's very much in this year's impact as we go into next year, although it will still hit us in the second half. And then finally, foreign exchange on there, which is a positive for us. We've hedged out all of this year's FX. As we look into next year, clearly, cables weakened. We pull out in the RNS. We've got about 50% of our next year's requirement at about 117 -- $1.17, that compares to $1.34 this year. So going into next, we'd expect the FX to come back or mitigated, and we look to see how we can mitigate some of that, but that would impact our gross margin. So as we look at the second half, mix will continue. Freight will have an impact into next year. Freight will drop away. Mix will probably even itself out. FX will be a bigger feature. We'd expect gross margins in the back group to continue to expand as we grow revenues. And then I think the third question was around digital and the -- what we're expensing. And obviously, we fully embraced now the clarification on the accounting standard that requires us to expense digital investment. Even though that digital investment has got an enduring benefit to the business, we're building real capability. We're probably at peak build at the moment. In Polestar, this year is peak investment, but the accounting standard requires us to expense that. So yes, so this year, GDP 30 million. Next year will be lower. It will go down as we're going through the peak this year. We will continue to expense through the P&L in line with the accounting requirements, the investments we're making in digital as we build our capability, but it will go down next year.

The next question comes from the line of Adam Tomlinson from Liberum.

Three follow-ups from me, please. First of all, just in terms of customer behavior, you've covered a few points there. But when you talk about particularly new customers coming in and spending more on grocery, can you maybe just talk about where you think you might be acquiring those customers from? And as they come in and spend on grocery, you mentioned no trading down, but are you seeing the new customers? Is there a greater percentage of those now spending on grocery versus Advanced Nutrition, for example, that you might have seen in the past given the tough conditions for the consumer? Second question is, you talk about structural growth drivers. And I think the consensus was the pet population over COVID increased about 8% to 10%. And I think within the market, it's often talked about that sort of barbell spend, people overspend in the early years and then that sort of passes down until the later years. So just how much of a tailwind do you think there still is from that pet population increase that you saw during COVID? And how much of that has sort of fallen off? And then the third question is around the cost base. I'm thinking a bit more on the retail side here. You mentioned the FX headwinds, energy going up, labor as well. We're seeing some big increases there. Perhaps, freight coming back and other efficiencies, perhaps helping to mitigate some of that. But just in terms of the overall retail cost base, how that sort of compares when you look to FY '24 versus the current year?

Thanks, Adam. So I'll take the first 2 and then Mike pick up on the third. So generally -- and I'll come to grocery, but generally, customer behavior is robust. We've seen no material change from what we talked about at the end of Q1. And in fact, probably a sort of a bit of an acceleration through accessories through Christmas and Halloween. I just talk to the vets because the customer behavior there is really solid. There's a few leading indicators within the cap for changes in their behavior, a mix of security versus preventive where customers are leaving longer to take their pet to the vet. An increase, unfortunately, in [ Eastern Asia ], a decrease in vaccination rates sort of cancellation of care plans. We're not seeing any of those. So I think the customer behavior in the best part of the business is absolutely rock solid. In terms of retail, again, I mean Mike outlined the trading shape. We are seeing those. That is a really sort of strong solid set of trends. We are attracting more customers into grocery, particularly in the last kind of couple of quarters where Tesco in particular have been in dispute with some suppliers and that's definitely been a tailwind, but that's always been where we've attracted new customers into the business. We've always had a strong track record of laddering customers up through grocery, through step-up and bridging brands, which are growing very well. And then into Advanced Nutrition, which continues to grow well, particularly in scientific and particularly, in our own brands versus the branded suppliers. So we see the attraction of customers into the grocery -- from the grocery sector as a real future tailwind in our business as we're able to trade them up. And we're seeing signs already that that's the case, and we're not seeing signs in the other direction where our Advanced Nutrition customers are trading down into grocery, all of that growth is fueled by -- largely by new customers. So a really strong set of trends there. In terms of the structural growth, we've talked in the past about premiumization and humanization has been 2 really strong tailwinds. And we've also talked about a COVID boom in terms of pet penetration and the 12- to 15-year life cycle that sits off the back of that. I think we are now confident to say that that's no longer a moment in time in a COVID tailwind, it's actually a new third trend joining premiumization, humanization, and we're calling it penetration, which is just the propensity of households to take on a pet. And if they've already got a pet to take on a second, third or fourth pet, and we're definitely seeing evidence of that. It's across a number of demographics. It's particularly, younger people, you may be delaying families and having a pet before instead of children. It's -- families that maybe couldn't afford a pet during COVID because the prices were significantly elevated, but largely, we attributed to changes in lifestyles as people are working from home more and where is the pet may have been something that they could have considered previously is something they're now considering. So -- and a pet is actually a pretty considered decision of most households. It's not something that they do lightly. And the fact that we're still seeing puppy and kitten numbers at 29,000, that's higher than during the peak of a pandemic. And it's a 3x higher than pre-COVID, suggests that while we talked a lot about this 12 to 15 year timeline on the COVID boom, it wasn't the COVID boom at all. It was a structural step-up in penetration into households in the U.K., and we don't see that changing at all. We think that relates to tailwind now powering our business. Mike, do you want to talk about our retail cost base?

Yes. And I think, Jonathan -- sorry, Adam. I think the thing to think about on retail cost base is, we've always had a really tight operational grip on our costs. And that's been the case looking back. It will be the case as we go forward. I look at sort of 3 or 4 components of our costs. Rents, it's second biggest cost in the retail cost base. Our rent bill is GBP 80 million. We've had a really good program of success by getting our rents down, typically 45 to 50 leases a year. And we've been getting where we've got rent reductions there, 20% to 25%. So that's continuing, and we expect that to continue into the future. And store payroll is our biggest cost in the P&L. And clearly, national living wage increases going into next year, that will be GBP 10.42, as in the autumn statement. We actually pay slightly higher than the national living wage, which is a good thing, plus give our colleagues the opportunity to earn above as they train through. But we've got a big focus on store labor productivity. We put a lot of technology into our stores to enable our colleagues to spend less time on noncustomer-facing task and removed quite a bit of admin tasks out of stores as increasingly, we want to free our colleagues to serve customers. So that will make our payroll more efficient. If you look at our this year revenue per payroll hour, actually in stores, that's actually stepped up, as you'd expect, with the investment we made in technology. I think the third one to pick on is distribution. At the moment, we're managing our distribution out of 3 DCs. Northampton Stock and we've got a satellite DC for Stock. [ Spice ] will transform that. The new stuff at DC comes on spring -- spring/summer next year delivering to stores and then we'll get all of our online business in there as we go through next year. That's going to really step-change operational costs in terms of distribution, create a lot more efficiency, but also, of course, reduce our working capital as well. So that's coming through. And I guess the fourth one to look at is energy. I mean energy costs not unique to us, but our energy cost this year will be GBP 22 million. It was GBP 18.5 million last year on an apple-to-apple basis. So we put a big focus on trying to reduce the amount of energy we use. Great example will be -- and it's in our capital plan. We're going to spend $3 million putting solar panels on the roof of our new DC. Effectively, they'll make that DC self-sufficient in energy. So really good payback there as well. But those are the things we can do to manage energy costs. So hopefully, that was helpful.

Yes. Just to follow up on a couple of points you made there. On the vet side of things, you mentioned almost 9,000 new customers a week there. How much do you think your -- can you just remind us what that compares to versus prepandemic? And how much do you think you might be benefiting from potentially the independent sector they're struggling? And then just on -- you made the point about you think that the propensity for people to buy a new pet or add a third or fourth pet, it's now a sort of permanent feature. Is that from your data or anything you're seeing in terms of market data you've been able to -- you've been able to look out?

Mike, do you want to take that question and I'll take...

Yes. So you're quite right to highlight, we've got a step up in new client registration, so 8,800 a week. That is up from pre-pandemic levels. It's actually up from last year. Last year, we did 8,500 a week. I think to remember about that business is, we still got capacity in there to take on new clients. We still have over 60% as a helpful slide in our presentation deck that breaks that. We still have over 60% of our practices still building, establishing themselves. So still less than 8 years, 9 years old with the capacity to take on new clients. And I guess the other feature of that business was that mainly through the pandemic, we stayed open, and then able to take on more clients. So I think that combination of capacity, the joint venture model, the owner driver makes our business capable of taking on more clients. So we see that trend obviously continuing. Over to Lyssa.

Yes. And just on that as well, it sort of supports the penetration trends. We talk about new client registrations, which is humans. But if an existing human takes on new pets, that house doesn't count in that number. So actually, we're seeing a new head registration in our vet accelerate ahead of our new client registrations, which is one of the date points that gives confidence that the penetration is going up, and particularly, amongst our engaged customers. And so yes, our view that this is a permanent trend. It's a combination of our own data, of course and our own trading, but also the customer research. We do the insights into our customers and segmentation, which suggests that these are underlying trends that are going to continue.

The next question comes from the line of Simon Bowler from Numis.

2 or maybe 3 for myself. I'll take one at a time. Firstly, can you comment on what you're seeing and perhaps, expecting in terms of kind of pricing both in food and accessories as we kind of look into 2023? I'm not kind of perhaps within that. How you think about kind of managing any FX headwind? Do you typically look to hold percentage gross margin? Or would you take that on the chin?

Okay. So thanks for that. I think to your question on gross margin, there's been a -- there's a real focus obviously on gross margin percentage and in a noninflationary environment, that makes sense. I think as we move forward in a very high inflationary environment, we have the ability to pass on sort of cash increases, and we're pleased that we've been able to do that over the last year and 1.5 years quite successfully, particularly in feed without taking a margin as it were on the increase. So I wouldn't focus too heavily on our gross margin percentage going forward. I think our cash margin, which we will hold firm on, is a better indicator. And so far, we have a good track record of being able to pass through that pricing that we expect to be able to continue to do so. But as Mike said earlier, our growth, our scale, our relationships with suppliers mean that we are definitely in a good position on all of that, including actually our sourcing office in China or in Hong Kong, which enabled us to source very effectively from the Far East as well. Mike, do you want to comment specifically on the FX, please?

Yes, you're right to call that out side because this year, as we say, the RNS. We've got our exchange rate of $1.34. Next year, we secured 50% at $1.17. Unmitigated every cent based on us buying $100 million is about GBP 600,000. So clearly, in the past, we have done things to try to mitigate that. We can do things on pricing to some extent, and we can look at where we source from and move to more near-shore sourcing. However, I think the overriding thing we're trying to achieve is affordability and price competitiveness, including in the market we're in, that's really important as we head into next year, particularly those accessory lines where we know that those price points basically difference to customers. So we will not try and pass on price, if it -- risks has been uncompetitive. But clearly, we'll be looking to see what we can do to mitigate some of that foreign exchange. But it's right to call out -- look, if we do end up at $1.17 full year versus $1.34, that gap for us is worth, what, GBP 10 million, GBP 11 million, GBP 12 million.

Okay. And then -- so I was going to say, anything kind of in terms of kind of expectations on kind of pricing for next year on food or accessories?

Mike, do you want to take that one?

Yes. I mean overriding things, Simon, across all of this is the price competitive. So we're trying to keep 3 KPIs sort of an attention there. First of all, it's our gross margin percent. Clearly, our commercial team very focused on gross margin percent. But notwithstanding Lyssa's point around, actually, cash margin matters more, but percentages is clearly one of the KPIs our commercial team managed to. Second obviously is like-for-like sales growth, keeping our business in growth. We know that makes good sense to us in terms of the efficiency of the business, operational leverage, like-for-like sales growth and taking market share. But obviously, the third one is being price competitive. Those -- our trading meetings each week, our price position, our like-for-like growth or our gross margin percent are those 3 KPIs that we've got to keep in the right place. So far this year, we made good progress there, but we won't become uncompetitive on price at the risk of chasing a higher percentage margin. That's the key point.

Okay. And then the second one, I just wanted to touch on was, you mentioned kind of the sequential improvement in discretionary accessories. It kind of feel like consumers sequentially kind of got better. So just wondering what do you think has kind of driven or has been kind of changing your trading standards? Is there kind of some self-help efforts that have gone into supporting that? And then kind of on similar lines, just on the grocery side of the food, are you kind of leaning into that opportunity through kind of range expansion and working closer with some of these third-party brands in that part of their business?

Okay. Thanks, Simon. So on the discretionary accessories, I think there's a few things. One is, we've traded well and our traders are on top of that day in day out. Secondly, availability has been stronger. I talked earlier in the call about how availability is a big driver for our business and on certain elements, more in our consumables actually, so things like Puppy pads and [ Hay ] and [ CapEx ] so we've had better availability in the second quarter. But mostly, actually, it's the quality of our accessories range, and we're not a particularly seasonal business, but Halloween was really strong. We did a big push on Halloween this year, and my dog, Fred definitely enjoyed his pumpkin costume, but over the kind of general and all of our stores get a really good response to Halloween and great ranges. And then Christmas has started really strongly. We're slightly ahead on our sell-through of Christmas. And if I told you that we have sold almost 100,000 purple spotted dinosaurs dog toys, I think you might be surprised, but we're definitely seeing customers respond really well to Christmas. It's not a particularly expensive thing to buy a dog toy of GBP 5 or GBP 10. And when times are tough and the press is reporting all sorts of bad news, I think just that ability to walk into a pets home and treat the companion that loves you more than anyone is definitely something that our customers are responding to. In terms of feed, yes, we're always looking at range expansion, customer needs, humanization, premiumization, continues to evolve. As I said, our bridging, we've got our own brand in our bridging area, that's doing really strongly. Our own brands in Advanced Nutrition are performing really, really well. Our own brands in Accessories continue to grow, and we expand and innovate in that area as well. And then lastly, areas such as frozen and fresh areas that we think are about to take off, and that's something that we'll be very well placed to compete it. So overall, strong trading, strong availability, but mostly, really good product.

The next question comes from the line of Manjari Dhar from RBC.

I just had 2, if I may. The first is on Pathfinder in the Vet business. Can you give a bit more color on what you're seeing from this initiative where you have rolled it out? And I suppose how you're thinking about the rollout to joint venture practices in fiscal '24? And then secondly, on customer churn for the VIP club, what -- can you give a bit more color on activities that you're doing to mitigate customer churn and anything else you might have planned in the pipeline?

Yes. No, great question. Thank you. So Pathfinder is our initiative to use our in-store colleagues to take some of the tasks away from the vets and the nurses and create better sign posting into our retail offer. So they replaced the reception and work with the client through the journey, and we've seen that be very successful. It's one of the productivity improvements that Mike referred to you earlier. And we're seeing a stronger sign-up into cross-sell into the retail offer, stronger sign-ups into preventative medicine. We're seeing stronger sign-ups into Advanced Nutrition as well as freeing up more vet times to focus on the things that vet should be doing in deteriorated care and treating animals. So very pleased with that initiative. Two thoughts on that. One is, I think we can go further. The fact that we have vets and Retail and roaming within 4 walls means that we are much more able than any competitor to get the right task to the right person with the best customer outcome, the best revenue at the lowest cost. And we will take the learnings from Pathfinder and potentially led more broadly at the 4 walls and -- within the 4 walls at Tesco and where it's best done. So in terms of plans to roll out to our JV practices, a number of our JV practices have seen the results of our remanaged practices are very excited. I'm very keen to do that. It isn't something that costs a lot of money, obviously, to do. It's just a change in the current role, it's a responsibility is something that we can roll out quite fast and quite effectively. I think this is one of the strengths actually of having a small group manager state within our ecosystem and that we can test and trial things and then figure out the best way to get them through to the joint venture practices. But because this one in particular creates a bigger pie, then it's sort of a win-win, and we will proceed with that. In terms of churn, feed that we've made a real strategy on year in reducing churn, a lot of that is down to our data platform and our ability to target offers, relevant offers and relevant products to customers that we think are at risk of churning. We've made good steps in figuring out the signals that main customer is at risk of churning and by doing that now more cost effectively and to greater effect, which is one of the things as well as the attraction of new customers that's increased our active VIP year-on-year by 9%. So thanks for your questions, and I think both of those things are both really good things that's showing up in our H1 results, but also have lots of legs in the future.

The next question comes from the line of Andrew Wade from Jefferies.

A couple of questions from me. The first one, I think, probably for Lyssa. You talked about in the statement and you mentioned, indeed, your insights about reorganization to delayer, simplify and speed things up. Sort of interested in that, that sounds like the language we normally hear in businesses aren't working well, but this one obviously is. So just sort of a little bit more color on what changes you've made there? And what needed to change? And why it needed to change?

Yes. No problem at all. Thank you, and actually, this is very much what it says on the tin. It's about streamlining and flattening and speeding things up. It's not sort of code for restructuring or cost-cutting. In fact, the whole thing is cost neutral. It's just about paying our resources where they're needed and closer to the front line. So -- and one major change as part the reorganization was to remove layers, layers of exact to create one single exact. And that's important because the strategy of the business is very much about creating an integrated ecosystem and therefore, wanting to remove all sides and divisions between or as many sides and divisions as possible to be between that Retail and bringing those businesses together as well as taking out a layer between the executive and both the front line and our customers. So a treat sort of streamlining and flattening also as part of that created a consumer function, responsible for digital, for marketing, for brands, the consumer value proposition. And while this business has always been incredibly pet-centric and it's a huge source of strength, we're not going to step away from that. Our #1 value is that we put pet right at the heart of what we do. It's important to every single one of our colleagues and partners. But we have an opportunity both through offering our expertise and bringing together our data to really step up our customer-centricity. Well, our real insight is, is into the bond between the owner and the pet. A pet is just an animal until it has an owner. So putting our customers more at the heart of our thinking is a real opportunity for us. And so as part of the change created a Chief Consumer Officer role, which will be filling in the new year. We've also been able to bring in some external talent. So Rachel Mooney joins us as CPO. She comes from a background of data, digital services, which will be a really strong addition and she started off brilliantly. And then we've been able to sort of retain and promote some of our top talent to ensure continuity. So Lisa Miao takes on the retail role. She's been with the business a number of years and deep expertise in retail. Louise is here for a long time was our GC and took us through the IPO. In fact, she has been with the business almost 2 decades. She's gone over to run the Vet, which is a fantastic move, and we're really pleased with that. And then Lucy, our General Counsel has been promoted to Chief Legal Officer and has taken on a number of other corporate function. So all in all, not code for cost cutting. It's come out post neutral, which was the intention. But I think we've got a simplist, more streamlined, more integrated structure that will service us better going forward.

Very helpful. And you sort of segued into my second question, which was around customer centricity or specifically or you're talking about step-changing customer centricity. You've talked about the importance of it there. But just interested as to what that could/will look like to customers? How is it going to look and feel different for them you being customer-centric?

Yes. No, thanks. So it creates to consumer function to bring together. We've got a lot of data. We've got a lot of insight across the business into customers, but it's -- we've not potentially been using it to its full capability. So I think -- if I can just give you a little example of what a future kind of customer journey might look and feel like, which might help bring it to life for you. So my dog Fred is a little bit overweight, let's say. And so in the future, I would go on to pet staff to try and look at vet appointment for Freddie as to talk about his weight loss. And we would have the data and insight from all of his vet visits to know with use of couple of AI questions to know that this isn't an issue with Fred. He's not unwell. He just needs to be on a different diet. So we would offer a obviously a better point for which the customers has asked for a cost, but we offer free nutrition consult. And we've used all of our data to know what breed he was, therefore, who's the right expert, where that customer -- where I live and therefore, what's the right pet center for me to go to. And we would find a match with Sharon in Staines, who is an expert on Labradors and nutrition. And now she would be offering virtual or a face-to-face consult, but I'm choosing a face-to-face. So often go down to Staines a week later at the time that's convenient for me. Sharon's there. She talks to me all about Fred. She does a weight check. She does a health check, coat check, puts Fred onto a particular way of diet. She knows he's an older dog, so she gives us a supplement in there as well for his bones. All of that packaged up into an easy repeat, which is then every 3 weeks because that's the pattern that suits me and to my house, all of that's been written to the vet record, which is in our ecosystem. And then I have an ongoing chat relationship with Sharon, telling how Fred's going, putting in its weight records. And 3 months later, I go in with my now slim felt Labrador, and she put them on to a new diet and that's now a way easy repeat. So we can bring together all of our data online, digital, hybrid. We can bring together the expertise in store, all of our product in a way that is so customer centric that we know what the customer needs. We deliver it, how they need at brilliant cost and that powers the business. So hopefully, that just brings to life a little bit what I mean by both customer-centric, but also omnichannel and an ecosystem.

Got you. Yes, absolutely. And then just a final one for me. The store transformation program, just interested as any additional information or data points or returns or anything like that you can give us on how that's performing?

Yes. Let me take that. So it's ongoing, Andy, so ongoing. Store refurbishment program, we're making good progress cumulatively now. We've got around 60 -- just over 60 stores now that sits in the format. I think you may have seen a couple of those we've been out on visits. So we'll go -- we'll continue that program. We're refining it all the time. So there are some features we now are particularly appealing and are particularly good for customers. So the service desk, for example, has proved universally appealing for customers. And then we're also looking to see how that can work in a much smaller format. So for example, the store opening in [ southgate ], store opening Balham, the way we've transformed our store in Camden. So you'll continue to see us looking at opportunities for new pet care centers in the M25 in particular, but also continuing to refurb our -- rest of our estate. We'll do it at a sensible pace. We think about 40 a year, 45 year. But clearly, that's part of our capital investment program. We can dial up, dial down. We've got choices to make on the pace we go. But as we move forward, we've definitely now hone down on what actually is working for us, and we're really enthusiastic because putting a window and Lyssa talked about customer -- dealing with the customers and putting customers at the center. That's basically what we're trying to do in one of our new pet care centers, and we're quite excited about it. And happy to take people around, by the way. Anybody on this call who wants to neither challenge to take [indiscernible] of our pet care centers, very happy to organize that and show what we're achieving there.

And just to add to that, one of the main things we do when we refurbish a pet care center is, we've put a vet in if there isn't a vet, and we've still got real opportunity in that space as well as where stores already have a vet. We've got good opportunity to provide extensions as our vets are the ones that are getting to a 7- to 10-year old or even earlier actually filling up and consuming more space and open advanced practices as well within our stores. So I wouldn't think of it as just a Retail investment and it is, in fact, an investment across our ecosystem.

We probably have time for one more question.

The next question comes from the line of Matthew Garland from Deutsche Bank.

I guess in terms the underlying debt practices, how are you seeing sort of the growth [indiscernible] stores are basically from then. Is this any up there? Or is that kind of...

Matthew, your line is really bad. Can you maybe start again?

Sorry. Two quick questions. First, on the vet practices [indiscernible]. Are you seeing increases in underlying...

Matthew, we're struggling to hear you. Maybe we can pick this up after the call?

We can't hear the question at all. It's all badly broken up at our end at least.

Yes, I think we -- No, I'm afraid not. We can always speak after the call, if you want to pick up question, I'm very happy to do that.

I will now hand you over to your host for closing remarks now.

Thanks very much. So thank you all for your time today. I hope you can understand the confidence we have in the business, and in its growth and in the future. Thanks very much.