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

Hello, and welcome to the Pets at Home Q3 FY '24 Trading Update. I'd like to turn the call over to your host today, Ms. Lyssa McGowan, CEO, Please go ahead, ma'am.

Good morning, everyone, and thank you for joining us for our Q3 update call. I'm Lyssa McGowan, CEO; and I'm here with Mike Iddon, our CFO. As you have seen from the release this morning, we delivered a resilient Q3 performance over what was a tough trading period and lacking a very strong performance in the prior year. 3.7% like-for-like in Retail was one that most businesses would be very pleased with, but against our own very high standards and expectations, we did fall a little short in a period of muted consumer demand, as you have heard elsewhere. Our Food business remains in a great position. We're winning share and growing volumes with any slowing down due to inflation dropping away a little during the quarter. Accessories growth remained soft, though as we lapped the toughest of last year's comparative. We've seen this trend through much of this year and getting this part of the business back into growth is a key area of focus for us going forward. The slower-than-expected growth in Retail means we now expect to fall slightly short of our PBIT guidance and expect PBIT of around GBP 132 million this year, 3% below our previous expectation of GBP 136 million. While Retail saw some tougher conditions, our Vets performance remained very strong. At over 13%, our like-for-like was lower than the exceptional growth in H1, but this was in line with our plans. And our expectations for Vet through the rest of the year are unchanged. It's been a year of further strong strategic progress in that business. Our Vet Group is attracting more talent, more customers and increasing the proportion of advanced treatments that we carry out. We're investing behind this growth opportunity. And in the quarter, we made progress extending existing sites, converting more of our company managed sites to our unique JV ownership model and in selecting our new PMS system Provet. Lastly, an update on our new digital platform. which will launch to consumers over the next few weeks, in line with our target to have it launched by the end of this financial year. This launch is a key component of our growth strategy and will bring a vastly improved user experience, personalization, leveraging our incredible first-party data and upsell and cross sell opportunities, which will benefit our Accessories business in particular. We look forward to updating you further on this next quarter. So overall, while Q3 didn't quite live up to our high expectations, the business remains in great shape. Our Vets business is delivering differentiated performance, fueled by our practice owners. We're winning share in Food and growing volumes. And with the launch of our new digital platform following quickly on the heels of our new DC launch, the major foundations of our strategy to build the world's best pet care platform are coming into place. And with that, we're ready to take your questions.

[Operator Instructions] Our first question today is going to be coming from Matthew Abraham calling from Berenberg.

Just the first one is on the pullback in discretionary Retail spend. Can you just talk about what your expectations are for the fourth quarter and how that compares to the quarter just gone and also into FY '25. Additionally, I'd just like to ask what expectations you have in terms of the uplift or the benefit from the introduction of the new digital platform and when you expect that to come through in top line numbers? And finally, just a query on that talent improvement. Can you just talk through some of the specific levers that you're pulling to achieve that? And if that's through cost increases relative to what's been incurred historically.

And Mike, do you want to take the first 1 of those on Q4 expectations on growth, and then I'll take the digital platform and the improvement.

Thanks, Matt. So Q4. We're reporting today our Q3 to 3.7%. And our Q4 like-for-like, we're not expecting or not from a financial planning point of view, built into our full year GBP 132 million guidance. We're not expecting our like-for-like to be more than 3% in the balance of the year. We're pretty much assuming the shape of that will be the same as we saw in quarter 3, which is true business, remaining in good growth, consumable accessories out the same. But we recognize it's going to take some time given the subdued consumer appetite for discretionary, not just for us, by the way, but for the general market, to play through in terms of stronger growth in discretionary accessories. So from a financial planning point of view, we're assuming around 2% like-for-like for quarter 4. I think the final point of that, of course, is we are trading over a really strong quarter 4 last year. You may remember, we did 11% like-for-like in quarter 4 in Retail in FY '23. So that's 2% on a very, very strong count.

Thanks Matthew. For other 2 questions. So the new digital platform really is at the core of our strategy. What we're cutting over in the next few weeks is the Retail piece of that, which will give us a significantly improved UI and ability to leverage our data, subscriptions capability that significantly improved, recommendations, just all around a significantly improved experience. That's the first part of the journey as we move through the next year or 2 and as we laid out in May, we're going to be adding Vets into that platform, Pet Care journey and other improvements. So this is the start of the journey. And really, you'll see the benefits of that come through in our overall financial model, which we also laid out in May, which is in a market growing 4%, we'll take share and grow our top line at 7% and you'll see that come through across the piece, really, not just in online sales but actually in overall share of wallet. Our average customer today spends GBP 160 with us. That's about 30% to 40% of their overall share of wallet. So by creating a platform that is omnichannel, integrated and consumer-centric powered by data, which we have an incredible amount of, we will see that we will gain share, and that is a share of wallet game and making it easy, making it seamless, making it simple, making us the one-stop shop, the destination for all of our pet care needs. So the platform itself, the digital platform is baked into our overall growth formula. In terms of Vets, you asked about cost. No. The improvements we're seeing in Vet and nurse availability are not related to inflation in salaries or inflation in costs over and above the market. In fact, we are just seeing a decreased use of very expensive locums as we're able to win more talent. So that's actually a tailwind in terms of cost. The initiatives that we've undertaken are in terms of recruitment, retention initiatives, looking into other geographies. And actually, our unique joint venture model here is a classy. We are now running and have been running for some time, the sort of Vet practices to attract talent that are growing into advanced practices, that have owner-operators who passionately care and are driven to drive great business and great clinical outcomes because they have that operational and clinical freedom. So it's coming together behind our unique model, the intervention we're making in recruitment and retention and certainly not a cost-driven growth.

We'll now move to Kane Slutzkin of Numis.

Just a quick one. On the Vet growth of 13%, could you just break down the sort of components of Vet in terms of price, visits and maybe mix and how is that tracking your sort of medium-term target or at least as implied by your medium-term target of, I think it was 9%. And then just on some sort of leading indicators, I noticed you didn't really provide anything on sort of Puppy and Kitten Club, new client registrations or subscription plans. Is there anything to add there?

Do you want to take the first one, and I'll be leading into second?

Yes. So that growth, 13.3%, Kane, in the quarter. And of course, on a 2-year basis, I ask you do the math, our Vet growth stepped up quarter 3 compared to quarter 2. All of our verticals settle their pricing independently. So getting to that split, the Vets, and probably even pricing isn't quite straight forward. We don't simply have central control of pricing. When we look to this at the half year, you may remember we had the half year Vet group growth was 17%. And I think [indiscernible] that it was about 14%. Is it a 14% price -- for the 4% is it? One of the things why we're continuing to grow the Vet group so strongly, Lyssa point earlier, is we've got -- we're making great progress on hiring more Vets and with very strong demand for small animal health care, and we provide the supply. And of course, we've got capacity, and we're still signing on new clients, new pet registrations. We're seeing strong revenue growth on the back of it. So we're very pleased with the progress we made in the Vet Group. And I think some of the levers of growth now are really, really well proven. You asked for those numbers of Puppy and Kittens on new pet registrations. We haven't put them in the statement this time around because we think that those are sort of statistics that we expect to start to come up a little bit and they're not as relevant now going forward. But we're still growing significantly faster, for example, on both of those than we were pre the pandemic.

Yes. I think that's right. I mean if you look at our VIP club, up to 7.7 members -- million members now is up 2%. So we're still seeing consumer growth. We're still winning share. And as Mike says, on those leading indicators, while we have settled at a normalized level following what was probably an extended being even a year longer than we thought and we have normalized, they have settled at a much higher level than they were pre pandemic. So the population is high, the renewal rates are higher. We're not seeing anything that would worry us at all on churn actually, and those cohorts are moving through as expected. So this year is a normalization year following an extended boom. Next year, we'll see -- we'll be lapping a normalization year. So confident that those leading indicators are in really good shape. And I think with the launch of our new digital platform with a renewed app, a brand-new app, we will see -- that we've got even more ability to sign up and lock in customers through our Retails.

Sorry, Mike, can I just ask 1 quick follow-up. Just on the pricing. I know it's localized. I'm just wondering, I see sort of peers as well as yourselves in the past talking about more accurate pricing or better charging. Just wondering, is that still a feature? And how do you sort of marry that with the sort of macro and maybe even the sort of a little bit of a CMA overhang or at least if you may bring down the sectors next.

Yes. I mean there's a couple of things that play into the value part of the growth. Well, accurate pricing is definitely one of those. Obviously, we're providing our tech through the technology and the skill set. We are able to do that and no choice [ during the past ] But we have always been the [ Vets ] accurately charging. So we made great progress there. The other component, of course, is the growth of Curative as a percentage of the total revenue in the Vets. So Curative being higher-end procedures. And we're making great progress there. You may remember, the advanced practice, advanced procedures was one of the building blocks of our revenue growth we set out last May. So both of those are playing into the fact that revenue -- got really strong 13% revenue growth in our Vet business.

We'll now move to Jerry Dyer of RBC.

The first one, I was just wondering if you could give a bit more color on the volume versus price breakdown for Food versus Retail? And then secondly, just thought on gross margin, I appreciate [indiscernible]that has been improved in Q3. I was just wondering if you could give a bit more color on the major moving parts of that and how you see it moving into next year?

Thanks for those questions. On price versus volume, we're not giving kind of complete splits, but I think it's safe to say that the trends that we saw all of last year have continued into this year with Food and consumables really strong and our core accessories a little bit behind. And I think that mirrors the trend that you would have seen across the market this Christmas, overall netting out at 3.7% Retail like-for-like and it is a really robust performance in the marketplace. But certainly, Food Retailers have been stronger and discretionary accessory quite a bit weaker than that 3.7%. And our volumes across the categories would have been no different. Getting core accessories back to place is a really key priority for the business. And there's 3 big levers we have really that we have to offset -- the first is bringing our innovation, our quality credentials to fore. We're already expanding our ranges. We've recently launched Coco Pops and we've recently launched Lords and Labradors, which are 2 higher-end ranges. We're working at the more affordable ranges -- end of our ranges as well and we're seeing great innovation come through. Secondly, the digital platform I spoke about, the really growing part of the market and accessories is online, and our new digital platform and website gives us significantly better capability to market and sell and recommend and use that data to target those against the right consumers. And thirdly, we know that where we get our seasonal range is really right where we lean into gifting. So Halloween was really strong. Christmas was strong. We've got Valentine's out in the shelves today, Easter in the warehouse. We know that where we get it right and able to merchandise where customers are responding, we just need to do that in our stores more often. So very confident about getting accessories, core accessories back where they need to be in plenty of levers. Mike, do you want to take the second question?

Yes. Yes, you asked about gross margin percentage and sequentially we commented that it's improved from H1. We'd expect to do that, by the way, because H1 was held back a little bit, remember, by advertising, one-off brand advertising in our Vet business and the impact year-on-year of FX playing into our Food business. As we look into next year, we'd expect to see our Vet gross margin continue to expand. The reason why that is, is we planned for very good revenue growth. We've seen the 13% in the quarter, but also the cost base doesn't grow up that significantly. So structural gross margin expansion. And some of the headwinds that have held back the gross margin in our Food business and particularly in our Retail business, and I'm particularly thinking about FX, that starts to become a tailwind as we go from FY '24 into FY '25. And in our Retail business, and certainly our Food business, in effect, we're aiming for 3 targets there. We're aiming to get like-for-like growth, maintain a target on gross margin percent and grow market share. And I think on the year just gone, we've been very successful in our Food business at achieving that. And that price position, I think, is helping us hold up really strong Food growth and we know that's going to continue to be key to our success as we head into FY '25. So yes, so I think I expect to see gross margin in Vets continue to expand. And our gross margins in our Retail business sort of flatten out compared to the declines we've seen this year.