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Is This The Secret Of Success For Dixons Carphone PLC, Pets at Home Group PLC & Halfords Group plc?

Shares in pet superstore Pets at Home Group (LSE: PETS) wobbled after the firm’s full-year results were published this morning, but the reality is that Pets at Home is doing well.

Revenue rose by 9.6% to £729.1m last year, while operating profit rose by 8.2% to £96.8m. Pets shares have been a rare IPO success story for investors, and the firm’s shares have risen by 20% since May 2014.

Over the same period, shares in Halfords Group (LSE: HFD) have risen by 11%. Dixons Carphone (LSE: DC) has rocketed almost 40% higher since the merger between Dixons and Carphone Warehouse became effective in August last year.

Why so successful?

These firms aren’t simply profiting because demand for their products is surging. Each company also has a service offering that’s being used to boost growth, generate extra sales and increase customer loyalty.

At Halfords, it’s the Autocentre car servicing network, which combines with the WeFit service and bicycle repairs to generate additional income and tie customers into the Halfords brand.

At Pets at Home, it’s the rapidly growing number of in-store vets. The firm only added 25 new stores last year, but it added 61 new vet practices and 50 new groomers. I suspect that the vast majority of visitors to vets and groomers result in in-store purchases, adding to the high margin revenue these services generate.

At Dixons Carphone, the services picture has two elements. Firstly, the company’s Knowhow and Geek Squad brands generate useful additional sales from installation, servicing and support activities.

Secondly, many of the firm’s products, such as smartphones and tablets, are sold within 12-24 month contract packages, tying customers in and providing recurring revenue.

For each firm, providing a good service experience is likely to generate additional retail sales and help improve customer retention and loyalty. Services also enable these firms’ growth to outpace the wider market.

Impressive numbers

For example, Pets at Home’s services revenue rose by 10.7% on a like-for-like basis and by 25% in total last year.

In contrast, merchandise sales only rose by 8.3% in total and by 3.7% on a like-for-like basis.

Although services remain a fairly small part of revenue and profit for all three businesses, they offer growth potential in excess of what would be possible if the companies had chosen to remain as traditional retailers.

Nick Wood, chief executive of Pets at Home, made this clear in today’s results. Mr Wood commented that as our vet practices mature there is an opportunity for our revenue stream to increase without a significant rise in our cost base, delivering margin leverage.”

Today’s top buy?

I’m fairly bullish on all three of these specialty retailers, which I suspect could continue to outperform the troubled supermarket sector for some time.

However, there are some differences for prospective buyers:

2016 consensus forecast

Dixons Carphone

Pets at Home

Halfords

Earnings per share growth

18%

11.1%

9.5%

P/E

17.2

17.8

14.2

Yield

1.9%

2.1%

3.6%

Halfords looks cheapest and offers the strongest yield, but has the weakest earnings growth forecast.

On the other hand, both Pets at Home and Halfords enjoy operating margins of around 8%. Dixons Carphone only reported an operating margin of 2.8% in its interim results this year.

Although I don’t have any pets, my pick in today’s market would probably bet Pets at Home.

However, I would not buy shares in any of these three companies without considering a fourth retailer.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.