Pets at Home Group Plc ($PETS)

Good morning, everyone. Welcome to our full year results. Sarah and I will take you through our FY '26 results and particularly the progress made through half 2, and we'll give you some early impressions of the business we joined around 8 weeks ago. So a little about me and why I'm here. I spent my career in retail, and it's part of the reason that I'm passionate about the opportunity that Pets at Home represents. I joined Pets around 8 weeks ago as Chief Exec, coming from Waitrose, where I spent 5 years as Managing Director. And before that, I spent 18 years at Sainsbury's, lastly as Commercial Director for the Grocery business. When I was approached about this role, 2 things stood out. Firstly, Pets at Home is the clear market leader in a genuinely attractive sector. If we get the basics right and leverage that competitive advantage we have, we can create significant value for shareholders. Secondly, I can see an opportunity to create value by improving execution and building on the strong foundations the business already has. And I want to reassure you that the current priorities are the right ones for now. The team is talented and there's meaningful headroom to do better. I spent my first 8 weeks immersing myself in the business, spending time in our stores, in our vet practices with our amazing colleagues and with our customers, and I am genuinely encouraged by what I've seen so far. Today, I'll share some of those early impressions with you. So Pets at Home is the market leader in a structurally attractive market. Let me start by why I think Pets at Home is such an exciting opportunity. The U.K. pet market is structurally attractive. Pet ownership benefits from a deep emotional connection and pet owners increasingly want the best products, care and advice for their pets. This drives premiumization and humanization in the sector that supports structural growth over many years. These underlying trends are alive and well, even though growth in the sector has been more subdued in the past couple of years. And within this market, we are the leading pet care business with a 20% market share and delivering close to GBP 2 billion sales, over GBP 1.3 billion from retail sales alone and over 650 from our vet consumers, 460 pet care centers, 455 vet practices, 339 grooming salons and a well-invested modern online platform. No other business in the sector brings together retail, vets, grooming and digital in the way we do. And this is a genuine competitive advantage, and it's one I'm excited to build on. And those competitive advantages are underpinned by a set of genuine hard-to-replicate strengths. Our colleagues sit at the heart of our business. The expertise and passion of our store teams, our vets and our groomers is something you can really feel when you walk into our pet care centers. I've been a customer of the business and since joining have visited many of our stores and vet practices and the quality of our people is undeniable. They know their products, they know their customers, and they do genuinely care. Our vet business is unique in the U.K. market. The joint venture model we have built partnering with clinical entrepreneurs creates aligned incentives and genuine quality of care. There is nothing quite like it. Our physical estate across 460 locations gives us unrivaled reach. And combined with our digital capabilities and our Pet Club membership base of over 7 million active members, we have a compelling platform that I think it's difficult for any of our competitors to replicate. And of course, we have that trusted brand in a sector where pet owners want reassurance and expertise, being the most recognized and trusted name matters enormously. So diving deeper into our vet group. We have a truly unique business built around the alignment that our JV model gives us, bringing together our best-in-class infrastructure and service with the entrepreneurial and clinical expertise of our practice owners. Our Vet business delivers differentiated economics for us and for our partners while delivering great outcomes for pet owners and their pets. The JV structure means that we support practices in running a great business, leveraging the scale and expertise we have as a group, bringing our trusted brand, commercial rigor, large customer base to support our practice owners who are free to run their practice with clinical autonomy and take the best care of their pets. We know that our practices are the most productive in the sector because of this, with average practice revenues reaching GBP 1.5 million this year and plenty more to go for in this respect. They benefit from co-location in our stores, great infrastructure, which will get even better with the deployment of our new practice management system. And this combination drives differentiated economics while delivering great customer outcomes. And this was confirmed in the recent CMA report, which found our practices are considerably better value than our corporate competitors, while delivering significantly higher levels of customer satisfaction, something we can see in our own data with vet satisfaction up a further 1.5 points in the year from already high levels. This is a high-quality cash-generative business that supports the resilience of the group. This winning combination has supported a long track record of revenue, profit and cash growth. Over the course of the last 5 years, we've compounded practice revenues at a 13% growth rate, leveraging the proven growth levers of driving out maturity, extending practices, rolling out new practices and growing our care plan revenues. Profits have compounded at 18%, reaching GBP 83 million in this financial year. And our practices have seen similar benefits with GBP 48 million in dividends taken out by our practice owners. And the capital-light nature of our Vet Group means that free cash flow has compounded at 28% and now represents the vast majority of group free cash flow. This is not a 1-year story. That is a sustained track record of growth built on a sustainable model that delivers great outcomes for all stakeholders. And there is more to come, leveraging the proven growth levers we have consistently executed against. Practice sales growth, we've grown average practice revenue significantly over recent years, reaching GBP 1.5 million per practice in this financial year from only GBP 1.1 million 3 years ago. But there is plenty of headroom here as our practices continue to mature as we drive further optimization of core practice operations and through the continued growth of our extremely successful care plans. In practice, rollout in the last financial year, we accelerated our openings to 8, and this is a marked acceleration from previous years. And then we expect to further accelerate this year with plenty of white space in which to grow through in-store practices and stand-alone, both of which are successful models. We will bring our winning formula to more of the U.K. pet owners in the years to come. Alongside new openings, we have a strong pipeline of practice extensions. This is a proven model with attractive returns and advanced capabilities, we're building clinical specialisms that deepen the offer for our most committed pet owners, which will help us expand our revenue pool. Now let me return to retail. We've built a retail business on great foundations. Our infrastructure is solid, having undergone significant investment in recent years, and it was aimed at the right areas and gives us a strong foundation for the future. And while execution and core retail basics have led to some underperformance in recent years, this remains a market-leading business with significant competitive advantages. At our interim results, we announced our retail turnaround plan to address shortcomings and sharpen focus around some clear priorities of product, price, cost and execution. And these are the right priorities for the business now. We're executing against this plan, and we've seen good improving momentum in retail, including winning back some share as a result. Bringing my retail experience to this turnaround plan, this is how I see it. In product, we need to ensure our ranges are relevant to today's pet owners. Consumer tastes have shifted. And for a period, our ranges didn't evolve with that. And that's changing. We've brought on a number of new brands in food, and there's more to come, and we're launching strong and well-supported own brands. And we will bring innovation to accessories. On price, we need to be competitive. We've dug deep to understand where we are competitive and where we need to do more. And late last year, executed nearly 1,000 targeted price cuts to put us in a much more competitive position and we've seen a really encouraging volume response as a result. On cost, we committed to remove GBP 20 million from our support office, which had grown too large, and we have completed that program. Cost control outside of this has been strong in recent years, but productivity is a constant requirement, and you'll hear much more from me on this in the future. On execution, retail is a discipline. Getting the basics right in store every day is what drives customer satisfaction and sales. And we have raised the bar here, and we will continue to do so. Against these priorities, we've made meaningful progress, and we are starting to see these flow through into our results. Having invested price on around 1,000 lines by an average of 12%, price discipline is a must, and we will remain vigilant. But right now, we've taken the action we need, and we'll focus on making sure we get the deserve credit for this from our customers and with our suppliers. We executed our half 2 trading plan well and delivered positive sales growth through half 2 with improving momentum as we move through the half, and that continues into this financial year. And this has enabled us to deliver the PBT outcome of GBP 93 million, in line with expectations. We have improved execution and as a result, improved customer experience, which has helped us drive customer satisfaction higher. It's up 4 points in the year and a good improvement in product availability. And on cost, we've delivered our commitment to remove GBP 20 million from our group overhead. I am encouraged by the progress we've made. It is delivering results, and it puts the business on a more solid footing, but there is more to do. We will continue to deliver improvement to our product range this year and beyond, and we'll work hard to delight customers and improve customer satisfaction further. We'll look closely at cost at all levels to ensure we have the right cost structure to deliver great value to customers, recover the gross margins and deliver better outcomes on the bottom line for our investors. Some of this will take time, and we are focused on the right areas and moving quickly. The progress we've delivered against our retail turnaround plan is showing up in our results, and those early results are encouraging. Volume momentum has been building through the second half of the year as we've sharpened the offer. Our Q4 volume growth was over 5% with broad-based growth across food, consumables and accessories. And this is translating into sales growth, which turned positive in Q4 and taking half 2 overall into positive territory. And we've continued this momentum into the new financial year. This improvement is sustainable with customer satisfaction up as we focus on doing the right things for them, but it's still early, and we're not complacent. We have clear plans for this financial year coming, and we're focused on delivering our plan and embedding a volume-based recovery in our business. Now moving on to pet insurance. Pets insurance is an exciting addition, and it's ready to launch in 2026. In May '25, we announced this move and we said that we will launch a pets branded insurance offer, leveraging the considerable advantages we have to gain our fair share of the GBP 2 billion U.K. pet insurance market. We've made considerable progress in just a year, and we're on track to launch in 2026. We have a team in place with deep experience in building insurance businesses, including for pets. We have FCA approval in place with a technology platform built from the ground up, a strong endorsement of the way we've built our new digital platform. And this is a genuinely exciting opportunity that represents a further complementary business for the group. I have talked in detail about the strength of our business and the competitive advantages we have. But what genuinely excites me about the future and our ability to unlock value is the talented and passionate team I found at Pets at Home. The quality, the passion and the commitment of our people across retail, vets, insurance, grooming and our support office is an advantage a few other businesses in retail and pet care have. Our people are a special advantage. They care about what they do, and they genuinely care about our customers and their pets, and they care about our business. So as I look across the business, I'm excited about the future and the opportunities we have in front of us. We are the market leader in a structurally attractive and growing sector. We have very hard to replicate competitive advantages in our vet businesses, our physical estate, our brand and our people. We have a turnaround underway in our retail business that is showing real early signs of momentum, and we have exciting adjacencies in insurance and beyond. Our Vet Group has a clear focus and a number of proven growth levers to execute against. We will continue to deliver against this with a relentless focus on delivering growth and great outcomes for our clients, our practice owning partners and our shareholders. Our retail business has better sales momentum and transaction-led recovery. Continuing to embed this is a core focus. And in time, our profits, margins and cash will follow. And we have an early-stage opportunity in insurance that has the potential to create significant value over time. We have a clear plan and are executing this plan of strong foundations with well-invested infrastructure and an enviable balance sheet. As we deliver against our priorities, I see a tremendous opportunity to create sustainable value for shareholders. So what can you expect from me? You can expect a relentless focus on customers. I spent the vast majority of my career in retail, and I've been through turnarounds. I know the importance of a consumer customer focus in everything we do and everything we do will start with the customer. And you can expect discipline and consistency on costs, on capital allocation and on execution. So what next for me? I will continue to spend most of my time in the short-term in the business, listening and learning, talking to our colleagues, our customers and our suppliers. I'll be focused on continuing the momentum we've begun to build, and I look forward later in the year to coming back and talking to you more about our plans and the opportunities that lie ahead. I'll hand you over to Sarah now to take you through the financials in detail.

Thanks, James, and hello, everyone. I'm Sarah Pollard, the group's new CFO. I joined the business back in March, and I've already reconfirmed for myself the opportunity that Pets represents, an opportunity to create meaningful value for our shareholders, success from which all our stakeholders can benefit. I took over the reins from Mike Iddon, who has earned himself a very well-deserved retirement. Having spent my career in listed U.K. and global consumer and retail businesses, Diageo, Tesco, Unilever and lastly PZ Cussons, I'm thrilled to be here and reporting my first set of Pet results with James. So let me start with an overview of our financial performance in FY '26. Retail underperformance impacted our results, but the Pet's underlying financial position remains strong. While group consumer revenue grew by 1% to close to GBP 2 billion, underlying profit before tax reduced by 1/3 to GBP 93 million, generating free cash flow of GBP 62 million. Within this, the strong structural economics of Vets has remained resilient, thanks to our proven JV model, contributing GBP 688 million of revenue. But by contrast, our retail business underperformed during the financial year, with revenue down 1% to GBP 1.3 billion. Retail profit of GBP 31 million is some 60% lower, generating GBP 3 million in cash. And we know that, that level of performance is neither good enough nor sustainable, and the business has clear plans to improve it. And we're starting to see some improvement already, including volume growth off the back of the retail turnaround plan, which centered on 4 priorities: product, price, execution and cost, as James explained. So pausing now on our current trading. Whilst only 9 weeks into our new financial year, we are quietly encouraged by the volume and sales growth, plus progress in some operational metrics, namely customer satisfaction and availability, but we know there is much, much more to do. The underlying financial strength of the overall business remains very strong. Our CapEx investment requirements remain in line with our previous guidance, normalizing now after the peak tech platform and distribution center investments of prior years. The spend in FY '27 will be focused on our retail store space reset program, the largest we've ever done, and we will employ a disciplined return on investment mindset. We continue to have very little debt on our balance sheet, meaning growth investments need not to be restricted nor do we have any liquidity concerns. Our leverage is low for a business of our size and risk profile at only 0.1x. We remain fully committed to our capital allocation approach with surplus cash being returned to shareholders in a sustainable way. The overall quantum returned in FY '26 was in line with the year before. Turning now to a more detailed breakdown of the group's revenue performance, where continued vet growth offset the retail decline. Statutory revenue was very slightly lower in the year, defined as our retail sales plus for vets, primarily the JV fee income paid to the Pets Group. Vet revenues, therefore, constitute a smaller proportion of our overall statutory revenue than they do our consumer revenue. Overall consumer revenue, measuring actual vet practice revenues grew 1% to approximately GBP 2 billion. This comprised vet growth of 6% and a decline in retail revenue of 1%. And this vet JV practice revenue growth generated a 5% increase in fee income for the group. Revenues in our company-managed vet practices, which we have now returned to a position of profitability, were 3% lower as we continue our strategy to transition them onto our proven JV model. As I mentioned, retail revenue declined by 1%, but we saw sequential improvement with sales improving as we progress through FY '26, exiting Q4 at a growth rate of 2%. And volumes grew ahead of sales as we invested in price at the beginning of the second half, supporting an improved performance against a subdued U.K. pet retail market overall broadly flat during FY '26. Within this, Pets at Home retail food sales were flat with volume growth offsetting deflation of around 1%. Our own label products performed better than branded food as we maintain our focus on strengthening our own label proposition, introducing 2 new pets brands, Ruff's Recipes for dogs and Willow's for cats. Own label food sales were up 3% in the year, while branded food sales declined 2%. Discretionary accessories continue to be our main area of challenge with a sales decline of around 3.5%, and it remains a key area of focus for us. We've already taken steps to strengthen our team, and they're focused on bringing innovation and newness to our product ranges. The performance of consumable accessories was held back by the lapping of a very strong weather-related flea season in FY '25. Looking now through the important retail channel lens, store sales experienced an overall low single-digit decline, but we saw the rate of that decline slow, exiting Q4 down approximately 2%. We've seen further green shoots so far in FY '27. Online again delivered double-digit sales growth in FY '26. Turning now to profit performance in the year. Group underlying PBT was GBP 93 million, GBP 41 million lower than the prior year. The retail sales decline of 1% alongside a gross margin rate reduction of 175 basis points, with half of that explained by our targeted price investments are the key contributors to the decline in overall group profitability. We know that our retail gross margins can't continue to be eroded, and we have plans in place to improve them. Vets again improved its profitability, but not enough to offset retail. Cost control was strong with productivity largely offsetting cost headwinds and underlying inflation. Insurance start-up costs and the reinstatement of an employee bonus for our hard-working colleagues complete the picture. And both of these figures came in, in line with our expectations. Now to cash flow. Within the context of our performance, the business has continued to deliver strong cash flow. We generated overall free cash flow of approximately GBP 62 million, GBP 22 million lower than in FY '25 due to the decline in retail profitability. Vets, however, generated cash of GBP 74 million, GBP 7 million more than the prior year, demonstrating the predictable, high-quality and capital-light nature of our Vet's JV model. Lower non-underlying costs, tax payments and CapEx outflows all benefited free cash flow in the year, with CapEx maintained at normalized levels. We booked some impairments on some old investments totaling approximately GBP 6 million. So more now on our investment program. We invested GBP 42 million in CapEx in the year with just over GBP 30 million of that being in our pet care centers. We opened 3 new stores, we relocated 3 and we completed 23 store refits, which helped to drive higher sales. We also continue to invest in our digital capabilities, but this has normalized versus prior years. The capital requirements of our vet business remain very low, with the Pets Group contributing only modest sums to practice expansions with the vast majority funded by the JV practice owners themselves. Now we partner with the practice owners to ensure the investments will yield a good level of return for all, and we have significantly reduced our level of operating indebtedness with practice owners over the years to now less than GBP 2 million. Being disciplined with our capital investments allows us to maintain a very strong balance sheet, which you can see on the next slide. Our balance sheet is flexible and robust, allowing us to invest in the future growth of the business as well as reward shareholders now. We have net debt of GBP 19 million after returning a total of GBP 84 million to shareholders in either ordinary dividends or share buybacks. We've maintained our overall cash returns to shareholders despite lower profitability as an indication of our commitment to and confidence in the future prospects of the business. We have flexible funding arrangements and good financial capacity with leverage of just 0.1x and significant headroom on our borrowing facilities. Let's take a look at capital allocation in some more detail. Our refreshed capital allocation approach highlights the importance we attach to effectively rewarding our shareholders. We have been consistent and clear on the 4 elements of our capital allocation policy and have been disciplined in the execution of it. We've returned over GBP 430 million of surplus capital to shareholders in the last 5 years. Following extensive consultation across our shareholder base, we announced a rebalancing between dividends and share buybacks at our pre-close statement at the end of March. We're not changing the overall quantum we will return to shareholders in FY '27, but we will rebase our dividend back to a sustainable 50% payout ratio and increase the cash amount returned to shareholders via our buyback program to GBP 50 million. Looking now more broadly to the year ahead. We're comfortable with current consensus expectations. And this will represent a year of profit growth for the group from another strong vets contribution and critically, an increase in retail profitability as the benefits of the retail turnaround plan and other actions come through. We will see the GBP 20 million support office overhead saving flow to the bottom line. Now as is the case for everyone in the U.K. consumer and retail sector, we have sizable cost headwinds to navigate with our productivity programs geared up to offset these. This will allow us to continue to invest in the right areas to support both the short and the long-term growth of the business. So in closing my first set of Pets results, I would leave you with the message that the business has a unique set of strengths and the actions that are being taken are starting to deliver. These factors, together with our very strong balance sheet, give me confidence in the future prospects for Pets. And with that, I'll hand us back to James to close the call, and I look forward to meeting you all very soon.

So thanks for listening, everyone. Thank you for your time. Sarah and I are confident about the future for this business, and we look forward to seeing and hearing from some of you over the coming days.