Pets at Home Group PLC

LSE:PETS

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, and welcome to the Q1 FY'22 Trading Update Call with Pets at Home Group Plc. [Operator Instructions] But for now, I'd like to turn the call over to Peter Pritchard, Group Chief Executive Officer. Please go ahead.

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

Thank you, Daniel. Good morning, everyone, and thank you for joining the call. I hope you're keeping safe and well. I'm Peter Pritchard Group CEO. With me today is Mike Iddon, our Group CFO. And we're pleased to share with you our Q1 trading update for our financial year FY'22. Our quarter 1 covers the 16-week period from the 26th of March to the 15th of July. And therefore, it's worth noting that the comparative quarter coincided almost exactly with the implementation of the first national lockdown last year. So to help, we're presenting comparative numbers on both a 1- and a 2-year basis. Many of the positive trends we discussed at our prelims back in May have not only continued since this financial year, but have accelerated. This is reflected in the update that we're giving today, and I'm pleased to say that our performance continues to be strong across the group, demonstrating the ongoing success of our pet care strategy. From our update today, there's five key messages that underpin our performance in the quarter. First, we again continue to grow our share of the U.K. pet care market, 2.2% year-on-year that an impressive 29.4% on a 2-year basis. And all parts of the group are growing. In retail, like-for-like grew by 29.1% year-on-year or 29.6% on a 2-year basis. And in our Vet Group, the like-for-like grew by 44.7% year-on-year, and that's 25.9% on a 2-year basis. In retail, our sales growth was across all categories and/or channels with omnichannel revenue growth of 21.4% or 107.5% on a 2-year basis. In our Vet Group, customer sales remain an important measure of the momentum across our joint venture estate, and is now closely aligned to fee income growth as our program of fee adjustments are now fully annualized during FY'21 as they were planned to. Lifelike customer sales across our joint venture practices increased by 44.5% and that's very testament to the strength of our joint owner operator model, and like-for-like joint venture income grew by 48.1% in the quarter. Second, we're continuing to see growth in new customers across all channels. This is driven in part by our puppy and kitten growth -- our Puppy and Kitten Clubs, I should say, which is focused on engaging new owners at the very start of their pet care journey. Crucially, the club introduced them to all parts of our business, helping to drive an average spend uplift of approximately 30% versus nonmembers. It's actually grown 167% year-on-year and that was supported by our TV campaign in the quarter. The trend for new pet ownership has continued, and we saw our strongest ever week of new sign-ups during quarter 1. Puppy and Kitten Club members ultimately feed into our VIP loyalty club. And our VIP loyalty membership now stands at a record 6.6 million members, and that's up 17% year-on-year. New pet owners need a vet and new client registrations across our vet practices are now averaging over 10,000 per week, roughly 1 in 10 visits. And that's supported by the continued success of our in-store feral program and our puppy and kitten program. Third, our VIP -- sorry, VIP gives access to rich customer data and of course, insight. And the investment we've made in our data capabilities is helping us use that insight to better serve our customers and, in turn, increase our customer share of wallet and the annuity-like income. So the number of description plans across the group grew by 24% year-on-year to over 1.3 million plans, and that's now generating over GBP 100 million in annualized recurring revenue. Our new dedicated propositions team are developing unique bundles of products and services. And our newest plan, Complete Care Junior, a health plan for puppy and kitten, is already proving popular with customers. It's actually the first plan to include 24 hours access to our vet help line provided by the Vet Connection, a healthy business that we acquired last year. And we're working really hard to encourage customers to shop across our entire ecosystem. So I'm pleased to report that 26% of all of our VIPs shopped across more than one channel during the quarter, so that's up 18% year-on-year. Fourth, we continue to drive productivity gains across our operations. As I'm sure you're all aware, there are many well-reported inflationary pressures such as freight. And we're proactively trying to mitigate these using our strong top line growth as a catalyst and specific initiatives to increase our operational efficiency across our business. For example, our successful program of rent renegotiations continues. And we've also recently launched a new project focused on improving product availability and lower fulfillment costs, and this project commenced during the quarter. Our pilot project to deliver orders to customers' homes and store stock has also launched in the quarter, which one scale should generate significant cost efficiencies as well as providing a flexible and convenient solution for the customers. And finally, we continue to be laser focused in the execution of our strategic priorities to accelerate growth across our pet care platform. We are progressing the digitization of our business, making pet care even easier for our customers through Project Polestar. We continue to roll out our new generation pet care centers through our store transformation project and with two new pet care centers launched in the quarter. Our new center in Hanford is particularly exciting, being the first to incorporate our brand-new best operating model. And we continue the development of our new storage and distribution facility in Stafford, which is now broken ground early this month and is on target for go live in 2023. So in concluding, our performance over the last quarter further demonstrates the strength of our unique pet care strategy and the robustness of the U.K. pet care market. I'm pleased that not only do we focus on running a successful business, but we also focus on building a good business, too. We continue to the right thing by all our stakeholders. We are progressing our Better World pledge, helping create a better future for pets, the people that love them and our planet. And finally, I'd like to express my sincere thanks and gratitude to every single colleague in part across our business. This last quarter has not been easy, but these results reflect the hard work and commitment in serving the nation's pets. They are helping us build the best pet care business in the world. So I'll stop there. I'm sure there will be a number of questions, which Mike and I will only be too pleased to answer. So let me hand you back to our call operator, Daniel.

[Operator]

[Operator Instructions]We can now take our first question. It comes from Jonathan Pritchard at Peel Hunt.

[Jonathan Pritchard, Retail Analyst]

Just a couple on costs, if I may, and underlying assumptions going forward. Firstly, the GBP 9 million you mentioned on -- from a COVID perspective and the sort of slowing in general I think is implied in like-for-like. What are you thinking? What's the underlying assumption on disruption from the pandemic? Are you assuming any further lockdowns? Or are you assuming on the end of the year that, that GBP 9 million sort of run rate, as it were, will be a lot lower. And then on freight, are we coming off the top a little bit there? I mean, we're talking hundreds of percent in terms of inflation there. in some instances. Is that slightly coming off the top in calming down a bit? Or do you think that will persist for quite a bit longer?

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

Jonathan, thanks for those two questions. Let me hand you over to Mike first to talk about the -- our view on disruption for balance here, and then I'll come back and talk a little bit about our freight in our view.

[Michael Iddon, Group CFO & Executive Director]

Thanks. And Jonathan, yes, you're quite right, we built GBP 9 million of COVID costs in actually right from the beginning of the year to reflect really the disruption we anticipated in the operation through whatever means, COVID cost coming through. And currently, and that, by the way, that works out at about GBP 380 per store per week, just to put it in. And we are seeing those costs come through. A lot of our colleagues like in many businesses are having to self-isolate as the either truck and trace that will continue. And in supply chain, there is disruption caused and clearly well understood difficulties that the consumer businesses are facing on their supply chain. So we think that GBP 9 million is the right number. We hope, of course, that the pandemic clears up quicker than everybody expects, and that life returns to normal, but GBP 9 million is where we're tracking, and we'll be able to give an update on that when we give our half year numbers. You asked about freight. To context freight for us, we import about 3,000 containers a year. Last year, we're paying freight rates of about between $1,500 and $2,000. Spot rate on containers today is anywhere between $12,000, $13,000, $14,000. So we're not buying that spot, but we're certainly buying at a higher rate than previous years. Year-on-year, that for us is probably around GBP 10 million of cost extra having to deal within our plan. So that's built into our guidance. But as Peter said in his introductory comments, we've got a program to help mitigate that in terms of cost efficiencies, rent reduction and other similar things. But nevertheless, it's a cost we're having to bear in the P&L. Like-for-like, that was your third point of your question. Clearly, 30.2% reflects weak comp last year. But clearly, we've got strength and the business got momentum. We're planning on around 10% for balance of the year. So quite a moderate growth compared to what we've seen in the first quarter. But nevertheless, if you look at our 2-year like-for-like, that still needs us to do 20 plus 2-year like-for-likes about the balance of the year. So still strong growth, but that's what will be driving that will be momentum coming out of the quarter just -- plus, of course, as Peter was outlining, we've acquired a lot of new customers so far this year.

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

I think just other thing to add because often when we talk -- we, obviously, immediately focus on the retail business. I wouldn't forget use the dynamic, of course, our business, which is our veterinary business. So our fixed costs are pretty much fixed. So as we see stronger revenue growth coming in from customers, that does translate into higher fee growth and that pretty much flows through our P&L very effectively. So we have a natural hedge as well as we think about the overall pet care profit pool for us. And you can see where our vet business is running relative to our retail business. So that's the other thing that actually helps us balance off our overall equation. And of course, freight impact in everybody. We're not isolating here. So I think the other thing we'll be watching very carefully, to what I mean to inflation. And we've got a very hard on price position within Pet. And I'm very keen to make sure that what we don't let happen is let that price position erode. If anything, I think we use our scale and our growth and our flow through to make sure we keep our price actually very, very competitive.

[Operator]

[Operator Instructions] We can then move along to our next question. It comes from Tony Shiret of Panmure Gordon.

[Tony Shiret, Analyst]

Well done. You mentioned the data insights that you're getting through the sort of enhanced data capabilities you had. Just wondered if there's anything sort of specific interesting you could point to as just a sort of general indicator of whether these insights are actually leading you to think differently about the business? Second question is about the retail like-for-like. I wonder if you could sort of split it down maybe into pricing volume mix, that type of stuff?

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

Great. Thanks, Tony. Well, let me -- I'll deal the question on data insights, and I'll hand over to Mike to talk about the -- how the retail like-for-like is forming. You're absolutely right. I think one of the things that we're seeing is as that capability is on board with [indiscernible] all our data, what we're doing now is operationalizing that data. So the biggest benefit we're seeing immediately are in CRM. So our mailings and our CRM customers increasingly is getting more and more effective. And we can see that in the performance rates in terms of revenue spend from customers or success rate and they just get better and better and better because our algorithms are learning very quickly and literally as we're now doing campaigns. We're actually modifying campaigns in flight as we see early response from consumers, but there's a couple of areas I would point to that we're seeing significant success in this year. One is in subscriptions. So you've seen that we've now got 1.3 million plans. We've got really strong growth across Flea & Worm, easy repeat and health care plans. And what we've been doing there is looking at which customers are most likely take a subscription out based on other customers. And therefore, it gives us a really effective target pool to go for. And that's why you've seen another strong performance in subscriptions and some of our early work there is proving to be very successful. So we're very interested in it. One of the other things, actually, which is something which is work in progress, I Telia because I only saw it last week is we've been looking at our range optimization by store. Historically, we range quite flatly by store. So we range by space, but our data teams are doing to work very closely with our merchandising teams to provide much more tailored insight for store locations and range of performance. And the early trial work there is really interesting. So as we're doing our pet care reformat, it gives us an opportunity to reset space and make sure we really optimize. And I think that's something that we hadn't anticipated when we were looking at our store refresh program, but something that actually starting to build into it. I think the final point on data is when we invest in it, we obviously invested very clearly from a CRM point of view. But what we're seeing is as we brought that capability in-house, the amount of problems that we're now solving by taking a data-led approach, we never factored into our thinking. I think what it means is, as we're making decisions, we're making, actually, significantly more sophisticated and nuanced decisions, which really flow through the P&L in many, many ways. So for me, this has been a great experience, one that I'm really excited about because as that team continues to ramp up, I think the opportunities are still -- actually [indiscernible] are unknown because we're discovering them, but really exciting. So I'll hand over to Mike to talk about for like-for-like.

[Michael Iddon, Group CFO & Executive Director]

Yes. Tony, so retail like-for-like for the quarter, you'll see in the statement it's 29.1% in total. You break that back down into its components, store like-for-like was particularly strong at close to 28%. We report here omnichannel growth of 21.4%. And the other third component of that is our Grooming business, which you may remember was closed for a lot of Q1 last year. So we've got a very, very strong like-for-like growth in our Grooming business. Add those three together, you get to the 29.1%. Two of the features, though, to help add a bit of color. One is in category level, pretty much food and accessories is pretty equal in terms of their growth, pretty much equal contribution to overall retail growth.And in terms of shape of that, as a participation, our online business dropped back slightly compared to quarter 1 last year. We actually called that out in the statement. This time last year, our online business was 16.6% of sales. This year it's 50.6%. I think that's understandable what customers are going back into stores. And I think other businesses are seeing a similar trend. So whilst our omnichannel business is still growing really strongly, actually, in the quarter, the biggest contribution by far is the contribution our stores have made to retail like-for-like.

[Tony Shiret, Analyst]

And Mike, is there any price inflation in this like-for-like?

[Michael Iddon, Group CFO & Executive Director]

Very little, it's all transactions. Inflation, in terms of basket spend, is less than 2%. Average transaction values haven't really moved significantly. This growth is driven by more customers, more transactions.

[Operator]

Thank you. We have no further questions at this time. [Operator Instructions] We have no further questions. So at this point, I'll hand the call back to the speakers for any additional or concluding remarks.

[Peter Pritchard, Group CEO, Director & CEO of Vet Group]

Great. Well, thank you very much, everybody. I know today is an incredibly busy day. There's a lot of results out. So I really appreciate your questions. Have a great summer. Hope you get manage to get away. And [ Andrew Porteous ], if you are listening, hope you have a great wedding on Saturday. Thank you.