Today’s (29 May) full-year results report from FTSE 250 retail company Pets at Home (LSE: PETS) has many positives. One of the most encouraging is that the company held the shareholder dividend at last year’s level.
The directors described the 52-week trading period to 28 March 2024 as “a pivotal year building our platform for future growth”.
Increasing value
My impression is the business has been working hard during the past few difficult years to improve its structure, systems and methodology and value is building up. Now, just like shaking a bottle of pop, something must give!
My expectation is the forecast growth in earnings and a general consumer recovery will likely lead to a rising share price ahead. City analysts have pencilled in a rebound in normalised earnings for the current trading year of around 11%.
However, even though the business seems to be in better shape now than it was during the pandemic, positive outcomes are never certain.
Let’s face it, anything can happen in the world of stocks, shares and businesses. Meanwhile, Pets at Home is exposed to any future economic or geopolitical shocks because the retail sector is cyclical in nature. If consumers find their disposable income to be under pressure, they’ll often cut back their retail spending.
That’s a risk, and it’s possible for investors to lose money on the stock even though the company delivered a positive outlook statement today.
However, the business has an element of defensiveness because customers tend to service their pet’s needs whatever the general economic weather. So, Pets at Home is perhaps better placed than big-ticket retailers such as Currys or DFS Furniture, for example.
Diversified revenue streams
One of the big strengths is the way the company has been targeting revenue from providing services as well as retailing pet products. For example, it now has around 1.7m pet care subscriptions and they generated around 10% of overall revenue last year.
Meanwhile it operates a large and profitable vet group, which strikes me as perhaps the strongest part of the business right now. The service delivered almost 48% of the overall profit before tax and nearly 68% of the free cash flow last year.
Vet group revenue grew by almost 17% year on year, with “record” sales. The firm has been increasing its clinical capacity and that expansion programme led to more customer visits. Higher average transaction values also helped to bolster revenue.
The vet business is shaping up as a fast-growing category within the overall operations. It’s also a big contributor to the company’s shareholder dividend payments and share buybacks.
I like the strong-looking balance sheet, which has a net cash position rather than net debt. Meanwhile, there’s potential for a rebound in the product retail side of the operation as consumer finances hopefully continue to improve in the months and years ahead.
With the share price near 295p, the forward-looking dividend yield for this year is around 4.5%. I think that could be handy income to collect while waiting for recovery and further growth in the business to materialise.
