Pets at Home (LSE: PETS) shares have been rising steadily and recently hit an all-time high of 482p on 7 July. The stock is up 105.81 % over the last 12 months, giving incredible returns even during the turbulent lockdown period. Will the stock continue to rise, or is it too late for me to cash in on the price boom?
The reason for this meteoric rise
The pandemic was bad news for a lot of businesses across the globe, but some niche markets saw a sudden increase in demand. Pets at Home, UK’s leading pet care business, is one company that rode the treacherous pandemic wave and has become one of the most successful FTSE 250 companies in recent times. The main reason for the boom in Pets at Home shares is the increasing number of pet owners in the UK. Statistics from the Pet Food Manufacturer’s Association (PFMA) show that 3.2m households acquired a pet in 2020, for an 8% increase in the total number of pets. This was a result of people being restricted indoors and working from home.
Even before the pandemic, the company showed excellent results. In FY 2018-19, it recorded a net revenue of £30.49m which grew to £67.4m in 2019-20. This 121% increase in revenue was used to pay off the £28.9m business rates relief. The company is expecting pre-tax underlying profits to be around £85m in 2020-21, significantly ahead of the original £77m estimate. The main reason I am watching Pets at Home shares closely is the increase in sales figures and revenue combined with what I think are intelligent business decisions.
The company focuses on pet-related products like food, toys, and grooming services. But its unique selling proposition is the small-animal veterinary business. These first-opinion clinics are located both in stores and as standalone facilities across the country. Pets at Home has 450 stores in the UK with over 50% having vet facilities. It also offers grooming stations and a live food mixing stations called ‘home of nutrition’ that offer comprehensive dietary plans based on a pet’s specific needs.
The company also improved its e-commerce portal, which now contributes 10% of its total product sales revenue. Its VIP (Very Important Pet) service, a membership program, offers subscribers discounts on products both in-store and on online portals. VIP membership grew by 26% in 2020, adding 6.2m customers. This shows me that the company has retained a large portion of new customers gained during the pandemic.
The company still faces stiff competition from large online retailers like Amazon. Also, the high share price at the moment could dip once consumer habits normalise. Financial analysts have predicted a fall in sales in 2021, which could impact share prices. Another issue I see is its reliance on just two distribution centres in the UK that supply its stores with products. Even a small disruption could see hundred of stores affected, causing customers to turn to more reliable alternatives.
Despite these concerns, I still remain bullish on Pets at Home shares. I will continue to monitor the company’s growth and business moves in the second half of 2021. Strong sales figures and a robust and unique business model make it a stock I’ll be watching for the long term.