The British pet supplies retailer Pets at Home (LSE: PETS) has had a stuttering share price this year. Currently, it is down to almost 50% of its all-time high. However, I’m seeing compelling evidence that these cheap shares might make a shrewd addition to my portfolio.
How cheap are the shares?
Pets at Home was one of the companies that rode the wave of the pandemic to new and dizzying highs, offering outstanding 400% returns between 2018 and 2021. It was also one of the companies that suffered recently, perhaps as a result of being overvalued.
As I write, the stock sits at 265p, down from a high of 518p in August 2021. Of course, all this means nothing to me if the company isn’t a good bet for the long term. But it does present an opportunity for me to learn more and maybe buy in while the going is cheap.
Increase in pet ownership
The percentage of UK households that own a pet remained steady at around 45-47% for years. This changed during the pandemic – with people spending more time at home – and meant that pet ownership reached record levels, rising to an astonishing 62% in 2021/22.
As the pet population has increased in size, so has spending on pet-related products and services. This reached a total of £8bn in 2020, up from £4bn in 2005. Clearly, this is a growing market and one that Pets at Home is at the front of the queue to take advantage of.
Of that £8bn in pet-related spending, almost £4bn of it is made up of veterinary and pet service. This is a key element of Pets at Home’s offerings.
Strong underlying performance
On 23rd November, Pets at Home released its FY23 interim results. Revenue has grown 7.3% year on year to £723m, although pre-tax profit has decreased by 9.3% to £59m. This would perhaps go some way to explain its cheaper share price.
What stood out to me, though, is the strong performance in its subscription services – an excellent bet, in my view, of long-term sustainability. The number of total subscription plans across the group was up 11% to 1.6m, which generates over £135m in recurring yearly customer revenue.
The icing on the cake is an increase in dividend yield, which is up 4.7% year on year to 4.5p. That’s an annualised return of 4.3% for shareholders. It’s an amount that is easily covered by the company’s earnings and can be expected to grow moving forward.
Struggles
A word of caution: the company is not immune to these trying times. Indeed, the CEO makes the point that “industry-wide cost headwinds” must be navigated. In particular, the impact of foreign exchange rates, energy costs and the proliferation of the National Living Wage may be issues for the business moving forward.
All in all, I think Pets at Home is an attractive option for me. If I had a spare £1,000, I would strongly consider buying this stock and would look to hold for a long, perhaps 10-year, period.
