As the Pets at Home share price jumps, is this a sign of things to come?

High profit expectations for Pets at Home could indicate the success of its retail-meets-service model.

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I recently got a pet dog. Now, I realise that is probably of very little interest to you, but as well as the joy she brings, she also introduced me (indirectly of course) to a company I had only ever seen from the outside – Pets at Home (LSE: PETS).

It is when using Pets at Home for the first time that you begin to realise the all-encompassing nature of its business. As well as the products one would expect, the company offers a grooming service, a vet, pet insurance, and a whole host of other services. You never need to go elsewhere for your pet’s needs.

I say all this not to act as an advertisement for the company, but as a reflection of why Pets at Home is doing well – fair prices, good service, and an understanding of the love people have for their pets. Your pet gets a birthday card, for example, while all appointments and emails include their name.

It is no surprise then that the company upgraded its expectations this week for the second time in three months, saying it expects full-year earnings to be at the top end of what the market anticipates.

Subscriptions and care

As mentioned, the company offers a mix of retail and service business – you can go there to buy your dog its food, get it groomed and collect its medicine all at the same time. The company has also been making strong moves into subscription-based services, such as for medicines and food.

Subscription-based retail is an area in which Amazon has been dominating the market. That includes pet products as well as all the other categories Amazon sells. Pets at Home may struggle to compete with it on price for subscriptions and basic products, but instead it has been competing in an area where it excels – service and care. You may save 50p on a bag of food at Amazon, but you feel brand loyalty to Pets at Home. Combine this with the convenience of a one-stop-shop for all your pet’s needs, and it has allowed the company to compete even with one of the world’s most successful businesses.

Too high to buy?

From an investor’s point of view, share price rises need to be considered when mulling whether to buy. Investing here all depends on if we think things will continue to improve.

The company has highlighted the risk of Brexit, particularly with its veterinary service, which employs  “a significant number” of EU nationals. But I suspect that even the worse case scenario will be muted enough to not be devastating to Pets at Home’s bottom line.

The company has also said that over the next five years, it will see some 200 of its store leases up for renewal, for which it expects to negotiate lower rents overall, helping to cut costs. Again though, this effect is likely to be subtle compared to other headline numbers.

The company offers a 3% dividend, a decent number though not the highest for an income investor. With a forward-looking P/E of about 17 though, the latest share hike may be taking it to the expensive end. That said, I will be on the look out for a price dip soon as a way into this one.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Karl has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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