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

Good morning, and welcome to the Pets at Home Q3 FY '23 Trading Update. [Operator Instructions] Now I would like to turn the call over to Lyssa McGowan, Chief Executive Officer. Please go madam.

Good morning, everyone, and thank you for joining us for our Q3 trading update. So I'm Lyssa McGowan, the CEO; and I'm here with Mike Iddon, our CFO. As you would have seen this morning, we delivered a strong third quarter with acceleration in consumer revenue growth right across the platform. And with volume growth underpinning our sales growth, we're really pleased with the quality as well as the quantum of our growth. In the quarter, we continued to welcome new customers to the platform. We made further progress in our price competitiveness, and we saw strong customer retention underpin the predictability and the stickiness of our revenues. So before we move to taking your questions, I just wanted to share a few highlights with you. Across Q3, we delivered 9% growth in the customer revenues. Vets led the way with 11% growth and Retail grew at 8%. Our Vets Group continued to grow into its embedded potential with average annualized practice revenue now exceeding GBP 1.1 million, and our unique JV model makes them some of the most productive practices in the industry and there's plenty more to go. Across Retail, our growth was strong, with pricing continuing to play a part, but it's important to note that we continue to grow volumes on a like-for-like basis. Our improved momentum was also helped by discretionary sales returning to growth in the quarter as our seasonal ranges resonated with consumers and sold through really well. New customer recruitment eased off recent exceptional levels, but were still really high relative to historic levels, averaging 23,000 Puppy and Kitten sign-ups and 8,000 vet client sign-ups throughout the quarter. So while we remain mindful of the inflationary challenges, sales have come through better than we expected, and our markets remain in growth. With around 2 months left of the year to trade, we feel confident of delivering a better PBT outcome towards the upper end of current range of analyst expectations, an increase from our previous guidance of around GBP 131 million. The business remains in a net cash position, and our confidence in the business, together with this strong balance sheet, enabled us to continue to invest in growing our business. We've made really good progress in the quarter based on the development of our new distribution center, and in the building of our new digital platform, including the successful rollout of our new app. We talked to the half year about our search for a Chief Consumer Officer, a critical role as we move towards a more integrated platform. And I'm absolutely delighted with the appointment of Kathryn Imrie into this role. Kathryn brings a wealth of experience and critical skills to the business, and I'm sure she'll have a big impact in helping us move the business forward towards our strategy of being a consumer-centric, omnichannel pet care platform. Lastly, our values continue to underpin everything we do, and the highlight about Q3 was our Santa Paws collection, which raised over GBP 2 million of charity in our role as the biggest grant-maker to the pet charity sector. And with that, we're ready to take your questions.

[Operator Instructions] Now the first question comes from Manjari Dhar from RBC.

Could you perhaps give a little bit more color on the volume versus the price growth across the [Technical Difficulty]. And secondly, I don't know whether you could give a bit more clarity on whether you'll be maintaining sort of price differentials versus the national living wage within the group next year?

Mike will take both those questions.

Yes. So the color you're asking for volume versus price, and clearly, we saw growth across all of our retail categories in Q3, with discretionary accessories returning to growth, which is obviously reflecting some of the comments that Lyssa started with. But in Food, in quarter 3, overall like-for-like in our food, very much in line where it had been at the half with 12% growth. That splits out 3% volume, 9% on price. And in commodity accessories, you remember, these are things that people typically buy like carpets, small animal bedding, health and hygiene products. That was also a 12% like-for-like growth and broadly similar to Food with 3% volume, 9% price. And our discretionary accessories went into positive growth. That was positive 1%, and we were delighted with that. Your second question is around National Living Wage, and we do maintain a differential, and that would be our plan going forward. We did give an extra [ GBP 15 ] an hour uplift to our pay rates in December, which was on the back of the increase we put through last year as well. And of course, we give all our colleagues the opportunity to earn and learn through a very -- opportunity for them to learn more on the job and get more pay as a consequence. So a lot of our colleagues are currently earning more than National Living Wage, and our intention is to maintain that gap.

Our next question comes from Jonathan Pritchard from Peel Hunt.

One each, I think, here. On the price differential, obviously, you just suggested that inflation was 9%. Is that, do you think, actually increasing your price advantage or your price position against some of the competition or about in line? And then secondly, a strong sort of cross-shopping number in the statement, probably a function of better CRM, but could you just give us a few highlights from that perspective?

Absolutely. So on the price position, we actually made progress, I think, in the quarter. Our scale is obviously a big advantage here. And I'm very happy now with where we benchmark against all of our competition, so grocers, other face-to-face specialists and digital. And yes, I do think it's one of the things that's underpinning our strong growth. And we do envisage that will continue keeping customers, volumes, price position and margin in good balance has been a real focus for us this year, and we've achieved that, and it will continue to be a basis for us in the coming year. In terms of cross shopping and CRM, you're right, of course. We have one of the -- actually the best data sets that spans everything from veterinary data in health care through to shopping habits. So we've been very successful over the last few years within our VIP scheme using that to drive and target customer behavior. We are now starting to use that data more broadly across the business, in fact, back into our supply chain to manage our stock position in terms of understanding the localization and range of clustering in our stores. And I think that is a journey that is right at the heart of our strategy and will continue to be so. And there is a huge amount more opportunity to go. And our strategy around building a pet care platform is absolutely underpinned by that data, that richness in that capability.

Our next question comes from Simon Bowler from Numis.

I was just wondering if you could give a quick update on some of the kind of SaaS costs that you were expensed. I think you started this year kind of guiding for GBP 3 million in this year's numbers. Is that where about do you expect to fall? And how should we think about that looking into out years? And then kind of linked into that in terms of what that's kind of delivering. Just any kind of updates on specific pieces of Polestar that have been delivered or we should be looking out for over the coming months?

Yes. Thanks, Simon. I'll take your second question first, and then Mike can update on the cost. So I'm really pleased with steady Polestar progress. This is the program by which we are in-housing our digital and data capability and bringing it all together to put it to really enhance what we deliver for customers in our platform. In the quarter, we started the rollout of our new app, which brings together our VIP with our shopping, and that continued through January. It's now almost fully done. We're really pleased with how seamless that was, how well consumers reacted. It's always difficult to roll out an app that customers use at the till point all the time to get their VIP benefits. You don't want that to be [indiscernible], it was very seamless. And actually, that was really, although it was an app, the first deliverable of our Polestar platform where we actually did single sign on and brought together our data and our customer identities as well as bringing shopping and VIP together. You won't see it in the numbers yet because that was set December was the rollout, but we are seeing some uplift, commercial uplift from that. But more importantly, it was the first deliverable from our Polestar platform and progress continues at pace in that area. Mike, do you want to talk to the SaaS cost?

I will. So Software-as-a-Service cost, Simon, SaaS costs, in our guidance for this full year includes around GBP 30 million of costs, which we are investing to build out our -- empower our digital platform, which are expensed. Of course, what we must remember there is that, whilst we are expensing them in the year we're incurring them, we are actually building assets of enduring benefit for the business. So in future years, no depreciation charge on that investment and clearly benefits from that investment yet to flow, but it's around GBP 30 million in the current financial year.

Great. I appreciate this isn't a kind of -- any way kind of fiscal '24 call. But in terms of where is your thinking in terms of how those costs can develop? Is this the peak year for development...

We have always said -- sorry, Simon. Yes, we always said FY '23 is a peak investment year both in terms of our new distribution center, which is already up and running in the sense we started to take pellets into there, and we're actually going to do our first delivery to a store from that distribution center. So we're delighted with that. That's a big project for us. So this year is peak, and next year, it drops. But clearly, we are investing behind the growth agenda of the business. Our digital platform, our new DC, and of course, our stores are increasingly looking to invest behind the growth of our -- that business by extending in-store practices. So not only have we got all other things to invest behind, we're pretty confident that they are the right choices.

Our next question comes from Tony Shiret from Panmure Gordon.

I just wondered if you could give us any sort of insights from your VIP data, sort of cohort type of analysis, and whose -- which customers groupings sort of spending more or less, any sort of color on that? Secondly, could you give us an indication of the percentage of own label in retail sales year-on-year? And lastly, just maybe as a thought for the finals. Can you sort of think about how the in-housing of the data and digitization is going to impact your marketing spend going forward with it? Result in you spending more or being more efficient with what you spend now?

Thanks. Mike, I'll let you take the one on VIP cohort [indiscernible].

Okay. One of the things we always [indiscernible] VIP is the attachment rates of our Puppy and Kitten customers. Those customers continue to grow, 23,000 a week in the quarter. And we do know that the propensity of those customers to engage across a broader range of product services is more likely to be vet clients, more likely to have a subscription and typically spend 20% more than our average VIPs. And that's the trend we've continued to see in the quarter. The Puppy and Kitten Club not only is a source of new customer acquisition, but those customers are spending more.

Absolutely. In terms of own label, I think this is a huge strength of the business, actually. And we've made really good progress in the quarter on own label. We ran a Switch & Save campaign through the back end of the year. And we have a really strong price advantage on our own label. Our own labels would typically retail with 25% less, 20% to 25% or a little bit higher actually at the moment next to the branded product. And of course, all of our colleagues are fully trained on nutrition and will help customers find the right food. So really good results from that. And once customers are switched to one of our own label brands, they tend to be very sticky and also they can only purchase from us. So our own label is a really core part of our strategy, both across food and accessories, and we're making really good progress there. In terms of marketing spend, you're right to point out that our VIP data gives us a really good advantage in targeting discounting, targeting marketing. And through every single month of the last year, we have seen improvements in that in efficiency and effectiveness. And I expect that to continue as we move through the coming years as we get even better at using that data to hone and target our marketing.

Our next question comes from Adam Tomlinson from Liberum.

Can I -- 3 questions from me, please. The first is if you could give a little bit more color perhaps around store versus online performance over the period and over Christmas, that will be helpful. The second question is just in terms of customer behavior, whether you're seeing any signs of any trading down in any of the categories? And the third question is, looking into FY '24, just given the cost headwinds that you mentioned in the statement, I'm just wondering how confident you are of delivering profit growth in FY '24?

I'll take the first one and then Mike take the second, two of those. In terms of store versus online, we've seen very similar trends actually to the rest of the market, where we saw growth in both channels, and just to reiterate both channels are profitable for us. But we saw faster growth in our store estate than we did in online through the quarter. That's actually a benefit because we -- it's one of the things that's driving our profit increase because, obviously, stores are somewhat more profitable than online, although both are profitable. So I think that's a tailwind for us. We're very happy though to respond to consumer demand. We've got a strong store business and a strong online business, and we're very happy that customers decide how and when they want to consume their services through which channel. So definitely stores were the star performer this quarter, but we continue to have a good business in online. Mike, do you want to take the other two?

Yes. So Adam, you asked about customers trading down. I guess our indicators of that would be things like subscriptions, which remain really strong. We've got 1.6 million subscriptions. That's up 9% year-over-year. So the cancellations are -- we're still managing those very successfully. So net-net, still growing with subscriptions. Vet visits is incredibly strong. We actually called out our first week of [indiscernible] January, for the first time, our Vet revenues went past GBP10 million in a week. We always got close to GBP 10 million, that's the first time, it's over GBP 10 million. So that's a good, strong indicator. Our grooming business, where you perhaps think of that as being customers trading down, no, that remains really strong in growth as well. And then within Retail, we're still growing our grocery category, but I think that's a lot of trading in. All of our categories in Food, Advanced Nutrition, bridging and grocery are in growth. Grocery is probably growing a little bit faster, but I think that's a consequence of trading in. So yes, so those indicators that we track suggests that we're not seeing, if anything, any trending down at all actually so far. And then on the headwinds on your question about profit growth, we're going into next year with a lot of momentum in the business, we have got a lot of new customers, and you can see we're making a lot of investments to continue to grow the business. And those are the things that we can control. But clearly, the macroeconomic environment looks very uncertain for customers. For the U.K. consumer, macroeconomic environment looks -- customer confidence all-time low, interest rates going up, we all know the challenges U.K. consumer faces. So I think coming into today, I think FY '24 average consensus the next year was GBP 134 million. After today's uplift in our guidance for FY '23, that's sort of flat year-on-year, and I think that's where we'll be. I think that's a good starting point. So yes, that's how we see it.