Pets at Home profits drop on restructuring costs, may close 30 stores

Pets at Home reported a 9.3% drop in first-half profit on Tuesday as it took a hit from restructuring costs in its vet business.

The company announced plans to buy out up to 55 of its 471 joint venture pet practices and said 25 of those will be company-operated, while 30 will be put under review for possible closure. This will result in around £49m of exceptionals, £27m of which will be cash, split between FY19 and FY20.

This will cover the repayment of JV bank loans, closure costs and the assumption of leases, onerous lease provisions and the write-off of loans from Pets.

In the 28 weeks to 11 October, underlying pre-tax profit fell to £37.9m from £41.8m even as group revenue edged 5.3% higher to £499.3m. Non-underlying group gross margin came in at 44.5%, down from 51.9% in the same period a year ago, with Vet Group gross margin of 45.5% versus 49.4% the year before.

This reflects a provision of £29m relating to all Pets at Home funding, and recognition of bank and lease obligations relating to those practices the company will offer to buy back from JV partners in the future.

Like-for-like revenue was up 5.3% in the half and the group dividend was unchanged year-on-year at 2.5 p per share.

Chief executive officer Peter Pritchard said: "Reviewing our Vet Group has been a priority. I recognise we have grown at pace and more recently, have seen the pressure that rising costs and our fees are placing on this young business. We will need to recalibrate the business to deliver more measured growth, whilst maintaining our plan to generate significant cash profits.

"We are focused on maximising our unique assets and delivering a plan for sustainable cashflow and profit growth. Given the success of the changes we have made in retail, I'm confident we can do this."

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: "A strategic review has seen the Vets business come in for a major shake-up. Some are set to close and others are being bought out as the group’s partner vets struggle to make sufficient money to pay Pets’ fees and still take home a decent wage themselves. The rollout of new practices is set to slow as well.

"The good news is that Pets’ price cuts are pulling customers back through the door, even if it’s trashing margins, and that increases the opportunity to cross sell services as well as products. With the new CEO targeting 50% of revenues from pet care, that’s clearly where he sees the group’s future."

At 1115 GMT, the shares were down 1.5% to 112.90p.