Shares in Pets at Home Group PLC (LON:PETS) leapt higher this morning after the pet supplies retailer saw growth perk up again in its first quarter.
The FTSE 250-listed company cut some of its prices earlier this year in a bid to rekindle some growth at the top line, a move which seems to be paying off.
READ: Merchandise sales fall flat at Pets at Home
Total group revenues increased by 5% to £256.5mln in the 16 weeks to 20th July, backed by robust growth in both its merchandise and services divisions.
Merchandise – which accounts for around 80% of the business – saw revenues grow by 2.8% in the period, while the smaller services division – which includes its vet practices – saw sales rise by 18.8% to £40.1mln.
Five new Pets at Home stores, two Vets4Pets practices and six Groom Room salons opened during the quarter, with a further ten superstores, 40 to 50 vet practices and 40-50 grooming salons expected to open during the current financial year.
Excluding the impact of those new openings, like-for-like sales added 1.5% in merchandise and 10.5% in services.
Given that the lower pricing strategy is likely to put pressure on margins, investors will be looking for this revenue momentum to continue for a while yet.
As for profits, Pets at Home said they remained on track to hit its full-year expectations.
‘Positive start’ but Pets still a ‘sell’ for Liberum
“Overall, this appears to be a solid start to FY18 with Q1 tracking ahead of expectations in both merchandise and services, management’s outlook remaining positive and no changes to guidance,” wrote Liberum analyst Adam Tomlinson in a note to clients this morning.
“The key for us will be to assess any further top line momentum in the context of gross margin performance, where we read today's update as implying that there has been no change to management's guidance of a decline in FY18 of -100 to -200bps, reflecting its ongoing price investment initiatives.
“Estimating where the gross margin will settle continues to be a key area of risk, which we believe consensus forecasts may well be underestimating.”
Tomlinson added: “We acknowledge the company's relatively healthy balance sheet and the current dividend yield of 4.4%, but in our view this does not pay investors enough to wait for a turnaround that could take three years to deliver meaningful profit growth.”
The analyst has the stock as a ‘sell’ with a price target of 145p.
Online competition could prove challenging
“After a forgettable 2016, which saw sales momentum stutter badly in the second half, Pets has taken action to improve its competitive position by reducing prices,” said Hargreaves Lansdown equity analyst George Salmon.
“This tactic seems to be paying off, with like-for-like sales on an upward trend.
“The elephant in the room is the threat from online retailers, particularly from that all-conquering giant Amazon.
“While cutting prices to defend market share feels sensible, especially given the potential for cross-selling once customers are in-store, this approach impacts profitability and few cross swords with Amazon and walk away victorious.”
Shares jumped 5.6% to 182p in late afternoon trading.
--Updates for analyst comment and share price--