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Pets at Home Group (LSE: PETS) was trading significantly lower today (31 March). As I write, the FTSE 250 stock is down 13% to 205p, bringing the four-year decline to 50%. Yikes!
Here, I’ll look at what has caused today’s sell-off, and whether I think the stock now looks attractive.
Trading update
Pets at Home is the UK’s leading one-stop destination for pet owners, offering a wide selection of food, toys, and accessories in more than 450 stores.
It also provides grooming services. My mate likes to pamper his pooch at one of the firm’s dog spa salons, meaning she gets shampooed, nails clipped, breath freshened, the full works, for a pretty reasonable price.
The firm also offers veterinary care through its Vets4Pets brand, which now represents more than half of underlying profits.
The culprit for today’s stock price fall was a trading statement put out by the firm. In the 12 months to 27 March (FY25), underlying pre-tax profit is expected to be £133m, in line with analysts’ consensus. However, it was guidance for the current year (FY27) that was the main issue. It expects pre-tax profit to fall 6%-13% to £115m-£125m.
So, Pets at Home shareholders have weak guidance and the likelihood of falling profits to blame for today’s slump. Basically, the outlook had less bite than expected.
The UK economy strikes again
One problem here is that a “challenging and volatile UK consumer backdrop” is hurting its pet retail business. It expects these conditions to continue throughout the year.
We’ve seen this trend recently with other UK consumer-facing businesses, including Greggs and JD Wetherspoon. Both of those FTSE 250 stocks are also in the doldrums.
Another problem flagged up by Pets at Home is rising costs related to higher wage and National Insurance contributions. This is estimated to cost £18m, while new packaging regulations, the reinstatement of variable pay, and higher marketing costs will also add pressure.
The stock looks cheap
It’s not all doom and gloom though. The company is accelerating the rollout of new veterinary practices, with plans to deliver at least 10 this year. And it is investing £3m in a new, capital-light insurance offering, which its says will “leverage our best-in-class consumer data, large customer base and leading brand.”
Meanwhile, it will make efficiency savings where possible to make sure that operating costs rise by no more than 5%. And capital expenditures will now return to normalised levels of less than £50m.
The stock was already looking cheap, trading at around 10 times earnings. But it now offers a 6.2% dividend yield, which the firm says it remains “committed” to.
So there could be a fair bit of value on offer here for contrarian investors willing to take a longer-term view on the stock. A lot of the pessimism might now be priced in.
Then again, I thought that about JD Sports stock at the start of the year and that just keeps sliding ever lower!
Am I tempted to have a nibble?
Unfortunately, the economic situation in the UK remains dire and many pet owners are skint. Things aren’t expected to improve anytime soon and there’s not much the company can do about any of this.
Therefore, I’m not tempted to buy the shares, even after today’s double-digit dip.
This story originally appeared on Motley Fool
