I was recently in Pets at Home (LSE:PETS), the FTSE 250 retailer whose share price has nosedived 59% in five years. While there (and spending a small fortune), I realised I hadn’t taken a look at the stock for a while.
Here, I’ll do just that to see if it might be a bargain buy for my portfolio.
We have a furry friend
After years of resistance, I finally gave in to my daughter’s pleas for a hamster. So off to the local Pets at Home we went.
Pretty quickly, I exceeded the budget I had in mind. That’s because I basically got upsold everything from the cage (especially the cage) to the running wheel and food. Who knew a Syrian hamster was best suited to a home the size of Buckingham Palace?!
Other than that, I was pretty impressed with the experience. Thankfully, I got a 10% reduction for signing up as a Pets Club member (potentially locking me into the group’s ecosystem).
And given our new furry friend’s penchant for the firm’s strawberry-flavoured biscuit treats, I’m sure we’ll be regular visitors moving forward.
Digging deeper
Pets at Home has two divisions: the retail consumer side I’ve just discussed (460 stores), and a veterinary business (about 440 practices). Both have faced headwinds, with consumer belt-tightening hitting discretionary spending on higher-margin pet accessories and the Competition and Markets Authority (CMA) investigating pricing in the UK veterinary sector.
In FY26 (ended 26 March), retail’s underlying pre-tax profit slumped 58% to £30.8m while the vet division saw profit rise 10% to £83.8m. Group pre-tax profit fell 30% to £92.8m.
In order to get things back on track, Pets at Home’s in the early innings of a turnaround under CEO James Bailey. It has cut prices on over 1,000 food lines to remain competitive with supermarkets and online rivals.
In Q1 FY27, there were rays of light, with retail consumer revenue up 4.9% to £399m. Bailey said this was evidence that the turnaround plan was “gaining traction“. Active Pets Club members numbered 7m, so the firm still has a large base of customers.
The vet group continued to grow ahead of the market in Q1, and over 50% of clients now have a recurring Care Plan. Also, the outcome of the CMA investigation wasn’t as bad as some had feared.
Will the stock find a new home in my portfolio?
Last year, the firm slashed its dividend by almost 50%, from 13p to 7.4p. This translates into a 3.5% yield, which is broadly in line with the FTSE 250 average. To be honest, the dividend doesn’t really get my tail wagging.
Currently, the stock trades at 12.5 times FY27’s forecast earnings. Again, that’s about average for the FTSE 250.
Looking at this, I think Pets at Home’s fairly valued at the moment rather than an obvious bargain.
Where next? Well, a recovery in the share price will probably need the retail side to start growing again. But with fuel and food prices expected to go up in the coming months, the firm’s facing a tough backdrop. Execution will have to be flawless.
Weighing things up, I’m going to pass on the stock, despite the green shoots of recovery. For now, I’ll remain a customer rather than a shareholder.
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Ben McPoland has no position in any of the companies mentioned.
This story originally appeared on Motley Fool
