Pets at Home Group PLC

LSE:PETS

Earnings Call Transcript 2019-Q1

[Peter Pritchard, Group CEO & Director]

Good morning, everybody, and thank you for joining us to discuss Pets at Home's Quarter 1 Trading Update. I'm Peter Pritchard, the Group CEO; and with me is Mike Iddon, our Group CFO.Overall, I'm really pleased with the good start to the year. Our repositioning of Retail followed its fifth consecutive quarter of strong growth. And in the Vet Group, we continue to deliver above market growth. We are confident in our actions to reposition the business and generate sustainable growth.Before going to the numbers, I'll just remind everybody that we're reporting under new segments: Retail and Vet Group. Retail includes all products purchased online and in-store, sales of pets in the store and also our grooming business. The Vet Group includes fee income earned from our First Opinion joint venture practices, where we receive a proportion of their total overall customer revenue, and the consolidated revenue from our 4 specialist hospitals.So moving on to the performance. Group revenue increased 8.1% to GBP 277.4 million, with like-for-like growth of 6.1%. Within that, Retail grew 6.9% to GBP 245 million with like-for-like growth of 5.3%. That's a really strong result by any measure despite the challenges of hot weather and the World Cup.Our pricing work has been a core driver of our performance, and we're making excellent progress, having seen a substantial reduction in the price gap of the total basket compared with online retailers. And on the biggest volume items, our price gap is now 0.And customers are responding. We're seeing growth in transactions, frequency and overall basket value with our VIP shoppers because we're giving customers multiple reasons to shop with us, whether that's because of our extensive range, our private labels, the great services, advice or the convenience of omnichannel rather than just stores or just a website, and making sure that price is never a reason not to shop with Pets at Home.One of our newest initiatives in Retail is the launch of easy repeat online delivery. From a range of around 350 products, mainly food and consumables, customers can select their own customized delivery schedule to either their home or collecting in-store. You can adjust, pause or cancel your order for added flexibility. But best of all, it's bringing value, and prices are lower than online peers.So we're really pleased with our consistent momentum in Retail. Although as we said before, we expect that growth to trend back towards market levels as we progress through the year and start for lack of price investment phasing of last year.Now moving on to our Vet Group. We saw revenue growth of 18.4% to GBP 32.4 million and a like-for-like growth of 13.6%. Within that, our specialist hospitals performed well. In the First Opinion business, practices had a really good quarter, and our fee income grew 19.9% to GBP 19.4 million. The mature practices are growing ahead of the market. And in the younger practices, their growth trajectories are in line with how we've seen historical cohorts performing.Bringing our Retail and Vet businesses together as a combined pet care company is a compelling customer proposition. And we've already made some good steps here, reintegrating our VIP puppy club with the addition of vet health plan offers and a 50% discount on the 'Best Start in Life' health plan. And we're already seeing exciting results with an increase in new client registrations of vet practices from puppy and kitten owners.Only Pets at Home is capable of doing this. And it shows that when we join it all for the customer, we can bring a unique and convenient solution. On rollout, we opened 1 new superstore and 7 vet practices, which puts us comfortably on track with our rollout plans for the year.To conclude, we're pleased with our first quarter, and we're on track to meet financial expectations for the year. I'm really pleased with the pace and the traction we're making, delivering on some of the commitments I made when I took over as CEO early this year, such as driving our health plans in our Vet business, continuing to narrow our price gap to online competitors and working to integrate the Retail and Vet businesses more effectively together into a combined pet care solution for customers.Looking ahead, our current strategy no longer reflect the full potential that I see for our business. We're operating in an environment where store rollout is largely over, where we need to create a different, more engaging store experience and with the data and digital revolution is well underway.Our business needs to move at a greater pace, building new capabilities on top of the amazing assets we already own and realize the maximum potential we see from a growing and attractive pet care market. We know that one of the biggest opportunities in our business is to accelerate the maturity and returns of our vet practices, which means getting to grips with the shortage of vets in the U.K. and the associated cost and cash requirements this places in our business.So I'm reshaping our strategy. It won't be a wholesale change as there's many areas where our current strategy is really delivering. And we remain committed to the 3-year financial plan we've previously laid out. But I think we need a sharpening of focus, and I will share that strategy in more detail at our November results presentation.So I'll stop there. Mike and I will be very pleased to answer any questions you may have. So let me hand back the call to Sophie, our operator.

[Operator]

[Operator Instructions] Our first question comes from Andrew Porteous from HSBC.

[Andrew Ian Porteous, Analyst, European Retail]

A couple from me, if I could, just mainly on the Retail side. You talked about narrowing the price gap, that you've halved it. Could you perhaps give us some idea on the content of that, where you've come from and where you are you now? And perhaps, with a view to where you want to get to it, are you at a level you're happy with now? Or do you think there's more work to do? And then the second one, perhaps more of a technical one. Where are you in terms of volume growth within that 5.3% like-for-like growth in the Retail side? Are you still well ahead of sort of high single digit, I think, you talked about previously?

[Peter Pritchard, Group CEO & Director]

Andrew, thanks so much. Great question. So in terms of our price gap, we've halved our price gap versus online competitors. So let me put that into the context of where we measure it today. On a total basket, which is weighted based on volumes, actually, the toughest measure we could possibly apply versus Amazon, our price gap today is at 5%; and at zooplus, it's 7%. If we include our -- if we look specifically at the items where we've been very aggressive, our best-selling volume items, our price gap is actually now at 0. So as we've said, we've identified GBP 7 million worth of further price investment for this year, which we're working our way through. The ambition for our business is to be in low single-digit price gap versus online on a weighted [ back book ]. So Mike, can I hand over to you to the volume question?

[Michael Iddon, Group CFO & Executive Director]

Yes. So the best way to think about the volume is clearly, we're driving customer transactions, so customer transaction growth in the quarter was 2.5%.

[Andrew Ian Porteous, Analyst, European Retail]

Okay. But that's below your overall sales growth.

[Michael Iddon, Group CFO & Executive Director]

Yes.

[Andrew Ian Porteous, Analyst, European Retail]

I would expect the volume growth to be higher now that you've been investing in price.

[Peter Pritchard, Group CEO & Director]

Well, you've got to know where we've been investing. So as we've invested heavily into Advanced Nutrition food, what we've seen is you see a natural weighting up for 2 things. One, we've invested in big bags, so we see a natural trade-up out of small bags into large bags. So if you remember, our -- we talked a bit to the full year, but we've got a similar trend. If you look at our volume in Advanced Nutrition, it's in double-digit. So we've grown those segments. So we're getting a benefit of a trade-up in both cash because you're already trading up from smaller bags to larger bags; and as we narrow the price gap between Advanced Nutrition, food and grocery, we see an up trade of people switching out of grocery into Advanced Nutrition.

[Operator]

Our next question comes from Sahill Shan from N+1 Singer.

[Sahill Javed Shan, Senior Research Analyst of Consumer]

Two questions from me. Firstly, can I just sort of -- it's really around the net fee business. So the first question is the cracking like-for-like performance there. And perhaps more pertinently, could you perhaps give us a sense of how profitability of spares in the Veterinary business relative to your expectations? And secondly, is there any further thing you can add in terms of recruitment, whether you see stability, what initiatives you've got in place to help with the recruitment pressures that you're seeing in the Veterinary business?

[Peter Pritchard, Group CEO & Director]

Okay. Michael, take the first question.

[Michael Iddon, Group CFO & Executive Director]

Yes. First question, I think, was around how has been the profit performance of our Vet business. So clearly, this is a trading update. But I mean -- and obviously, we've been posting very hard in driving the sales performance of our Vet Group, and so we're delighted with the like-for-like of 13.6%. In fact, within that, our First Opinion growth within that 13.6% is over 17%. So our focus is driving sales, and sales will equate to profit growth. But actually, underlying the profit growth of our Vet performance is on track for the year, both in terms of profit and in terms of cash. And we're reporting today, we're going to maintain our full year guidance on profit.

[Peter Pritchard, Group CEO & Director]

If I could, the second question around recruitment. We flagged at the year-end that we saw recruitment of vets a challenge, and I think we saw this week, so yes, we reiterate that it's very -- we have some challenges. I think for us, we would take comfort in the fact that we have already opened 7 practices this year, so we feel very comfortable on our full year guidance in terms of openings. But we know it is tough, so we are continuing to focus our efforts in partner recruitments, and we're doing some new things there in terms of widening our net. We're also focusing on international recruitment and reinforcing and doubling down on our [ grocery ] recruitment as well. So there is a fundamental issue that the market is not producing enough vets. And I think, similarly, in our business, it's not just about any vets, it's about the right quality. And we won't allow quality suffer for quantity. But as we stand versus our plans, we are feeling comfortable within our guidance.

[Operator]

Our next question comes from Tushar Jain from Goldman Sachs.

[Tushar Jain, Research Analyst]

Just -- actually, 4 questions from my side. First is, when you look at the like-for-like on the Retail side, Advanced Nutrition is giving you a little bit of a tailwind. Is there anything else given where there could have been sort of a significant headwind on your footfall and certain specific lines? That's the first question. Second one, easy and repeat, I mean, how are you splitting between own brands and your third-party brands? And how is that low price is being funded by? Is it you taking the price cut on the supply support? The third question is when you look at the store, a number of store targets still remains, you can still open up to 5 stores given you have sort of reduced by 2. And finally, looking at vets, just want to understand, is the pressure incrementally becoming more or stable or reducing? Just if you can give a sense on how vet recruitment pressures are there in the market.

[Peter Pritchard, Group CEO & Director]

Okay. Well, I'll think of capital for those issues, so let me feel the first couple. So in terms of like-for-like, we see like-for-like growth across all parts of our business, stores, online. And we're seeing it in all categories in their respective -- actually, food and accessories. So I think what you can take from that is whilst we're seeing definitely some benefits within Advanced Nutrition because we have invested heavily in Advanced Nutrition, we know that food drives footfall. And we know that when you drive food, you also drive your overall basket. So you should take comfort from the fact that actually, the whole business is lifting, not just food, although food is a driver. In terms of easy repeat, we have all aspects of our business covered. So we cover private label and we cover brands. I'm also not going to reveal our commercial conversations with suppliers, except to say I'm very comfortable where we've gone to in terms of our pricing position, and it is a sustainable position to be in. On the stores piece, I'll hand it over to Mike.

[Michael Iddon, Group CFO & Executive Director]

Yes, thanks. So the question you asked on stores is, are we still on track to open our store program this year? So I think you'll remember back, we said we would roll out up to 5 superstores this year. And we do remain on track to do that, which is obviously a lot lower rollout program in previous years and reflects really the fact we are coming to the end of the our rollout program and are being very particular where we're choosing to open stores. So we opened one store in the quarter. And in the balance of the year, we'll open a third -- up to 4 more superstores. And that will be in line with the guidance we gave at the beginning of the year. I think the fourth question you asked was, what are we seeing in the vet market regarding, is it starting to stabilize, is it starting to see a tail-off and become a bit easier in terms of recruitment? I think you remember back to the start of the year, we gave guidance that we'll open between 20 and 25 vet practices. And that was clearly a lot lower than our proportion of 50 guidance in previous years. In part, that reflects the fact that we were tailoring our program to be inclusive, mirror the fact that were have a shortage of vets in the market. But moreover, we weren't willing to compromise the quality of those vets. And we hold that line. Year-to-date, we've opened 7 vet practices. We're on track to maintain our opening plan this year of 20 to 25. We're working hard to mitigate the impact of the shortage of vets. We're building those links with the colleges and universities. And so far, we're on track in terms of our recruitment. I don't think the shortage of vets in the U.K. is a problem that's going to be fixed anytime soon. But what we're doing is working hard to mitigate that impact. And year-to-date, as I say, we're on track to do the opening program we set out at the start of the year.

[Operator]

[Operator Instructions] Sir, we currently have no more questions on the phone line.

[Peter Pritchard, Group CEO & Director]

Well, thanks very much. Very good.