I have intended to write this Blog for ages - but keep getting distracted. Luckily the shares have not moved much yet so still seems relevant.
Pets at Home (epic code PETS) is probably my favourite share at the moment and I have very big hopes for it (oh, no, this is gonna be a right turkey then !!) and I have about 4% of my Portfolio in it - and it wouldn’t take a lot to encourage me to buy more.
PETS operates those huge Out of Town shed places where you can buy a fluffy Bunny or a Cat or a Fish or whatever you fancy - and alongside they do food for your beloved animal and all sorts of accessories like Dog Leads, Rubber Bones, Fish Tanks etc. etc. They also sell own label Dog Food and Cat Food and I understand it is a very successful part of the business.
You may have gleaned from earlier Blog Posts I have done or from Tweets I have put out that I do love a bit of ‘Thematic’ investing. I just love powerful Big Picture trends that I can buy companies involved in where they are experiencing a hugely favourable tailwind for growth.
The whole pets (Companion Animals) thing is an amazing high growth trend. I am on the verge of hitting 50 (OMG !!!) and over my lifetime the change in how pets are ‘dealt with’ is incredible. When I was a nipper, your dad looked in the Local Paper and found an advert for ‘Kittens to good Homes’ - you then all piled into the Austin Allegro (all agro?) and had the excitement of entering an unknown random’s house and being taken to where there was a proud and tired looking Moggy surrounded by about 8 tiny little furry bundles. You then picked the one (or 2 if you could twist dad’s arm) you wanted and off you went with your new playmate for weeks of fun until it grew up and you lost interest. No money changed hands - the ‘vendor’ was just chuffed to bits to get rid of the bloody thing.
If your bunny got sick, it was a trip to the vets in the next village and they always gave you a sort of pink looking liquid which the poor misfortunate animal had to drink and they always seemed to die afterwards anyway. But who cared? A few minutes of grief and within days you had a new exciting replacement bunny in a different colour scheme and the fun of thinking up a daft name (think Vivian’s ‘SPG’ hamster in ‘The Young Ones’).
For the bunny, it was either pink liquid or the “sorry mate, you need to put him down!” conversation. If the pink liquid failed (it always did) then it was “bring him back to be put down” anyway.
My how things have changed - much to the benefit of the Animals and arguably to the detriment of the Owners. I think you might be able to categorise the Children of the Owners in the latter grouping - I am sure most UK pet owners would happily throw their kids overboard to save their Pet……….
Nowadays Pets are bought from Pets at Home and other smaller Pet Shop outlets and you even have to pay for Rescue Dogs. That is another huge change - nobody blinks at paying huge money for a Pedigree dog these days. Again, when I was a lad, no one had a Pedigree dog - that was just a make of Canned Dog Food…….You got a free ‘Heinz 57 Varieties’ mongrel.
And as for Vets - wow, what a change. They now have Cardiac Centres for Dogs and one of my bestest friends has a cat that is diabetic and she has to give it injections (and Chicken but that is another story of a pampered moggy) which cost the earth. It truly seems that sometimes healthcare for Pets is superior to the NHS - maybe next time you are queuing at A&E with all the drunks you would be better off nipping down to Vets4Pets !!!
Another amazing phenomenon is Pet Insurance - even my Miserly father has Insurance for Boycie - his adorable Sheepdog thing. This is remarkable as he wouldn’t waste money on insurance for anything else - car and House insurance excepted of course. Again, 30 years ago, Pet Insurance didn’t even exist. By the way, my dad buys Boycie’s nosh from Pets at Home and he says very good things about them (my dad, not the talking dog).
Anyway, you get the picture. The whole industry around pets has changed in an unrecognisable way in recent decades and I believe this trend is still growing fast - this is backed up by PETS financial results.
Where will the growth come from?
One very attractive aspect of PETS business model is the classic ‘retail Rollout’ story - this is then enhanced by Vet4Pets and The Groom Room.
PETS are building new stores on a similar footing to the stores they already have - Out of Town, big sheds, cheap land and leases etc. It is a well proven concept and the Cash Flows from the business effectively help fund the rollout around the country.
The next bit of growth comes from Vets4Pets. This is wicked as they are being very shrewd in several ways. Firstly, they use spare space within existing Sheds to shove a Vets4Pets bit in - so they utilise space more effectively and increase the Revenue and Profit per square foot of floorspace. The other sneaky bit is that it almost costs them nothing - they do as a Franchise and get Veterinarians to pay big money up front !!! Genius.
I hadn’t realised this vital aspect until a few weeks back when I was at a BBQ and met a friend of a friend who I have known for many years but only meet at odd social events. Anyway, she is a Vet who lives in London and she told me she had been looking at taking a Vets4Pets franchise as some close friends of hers run one in Raines Park or somewhere like that which has been really successful. The figures I heard were something like £60k upfront and my friend was extremely positive about PETS and it seems a great endorsement if a Vet says that. She did not take up the franchise she was offered as it was an older store and she was not confident it would be as good - but I think she is still very keen to do one.
The next bit of clever growth comes from The Groom Room - these are little corners of the Shed which are dedicated to a Doggy Hair Styling section. Again, this is incredibly shrewd use of space and at £60 for a doggy trim it is Money For Nuffin’ as Dire Straits would say (I bet Mark Knopfler has a mutt).
So, they are rolling out Sheds with Vets4Pets and Groom Rooms and are putting Vets and Doggy Hair Choppers into existing stores - you got to admit this is a cracking business model.
PETS also has a Loyalty VIP card (Very Important Pets) which is seeing good growth rates. As ever with these cards, they help the retailer as they tie transactions to a person so they can individually target customers with Special Offers etc.
They have also revamped the website earlier this year and are in line with a trend visible in may other Bricks and Mortar retailers who are trying to make more of their ‘Clicks’ channel to market.
This is another aspect of the business where PETS looks great. To be honest, I think a case can be made that they almost have zero competition. The biggest challenge is from small ‘Mom and Pop’ pet shops and vets etc. but the usual hopeless UK government and especially EU regulation is driving them out of business anyway - as we have sadly seen in so many industries - Opticians the outstanding example.
“Ah“, you counter, “PetSmart is their challenger”…..it’s a good point, but there is a slight flaw in your thinking…..PETS bought the UK Licence Rights to PetSmart from the $2bn US Parent Company back in March 2013.
Tesco, Asda and Sainsbury etc. are competitors on Pet Food but one other wonderful thing about PETS is that you can bring your dog into the Shed on a lead - a lot of owners love this and feel it treats their Little Darlings with respect - rather than having to tie them up outside.
I think PETS scores pretty good here as well. Of course there are the usual risks around economic activity that all retailers (and most businesses) face and it might even be slightly defensive as the Dog will be the last thing to go when belt tightening is needed.
There are risks around the rollout but this is fairly formulaic and just repeating a process really - this applies to the Vets4Pets and Groom Rooms as well.
There is a bit of debt but the usual highly positive cashflow of retailers lessens risks here.
An unusual risk might be that they get taken over themselves. The risk here is that my shares get taken from me at an inferior price to what they are worth - but this is a high class problem as any bid would be far higher than today’s price and I probably wouldn’t moan too much.
As ever, you have to be careful with IPO stocks as the seller is often dumping rubbish onto the market but I see nothing to concern me in this respect.
At the current price of 179p it looks good value as a growth stock and there is a decent divvy as well.
It’s quite hard to find forecasts for PETS - in fact, I think this is one reason why the stock is undervalued as there is no broker coverage that I can see. This is about to change however, so now is a great time to hold the stock.
One easy way to measure PETS is the Price to Sales ratio. Based on 2014 reported figures you are paying roughly £900m (the Market Cap) for £665m of sales which are growing fast. As a comparison, with DNLM, you are paying £1650m for £730m of sales in the same reported year.
Investors Chronicle say Buy the stock and have Bank of America Merrill Lynch targets for 2015 of 14.2 Earnings Per Share and 4.95p dividend. On these numbers at 180p, PETS is on a p/e of 12.6 and a divvy yield of 2.8%. Good value I reckon.
The PEG must be close to 1 so not bad there either.
Last reported debt was £229m from what I can find - reported cash profits after IPO costs were £111m so this looks quite comfortable - and the positive cashflow aspects make debt not too large a concern in my view. Each to their own…….
Appeals to me as a clear growth story with a strong tailwind from secular trends regarding pet ownership. It floated at 220p I think back in March 2014 and reached a peak of 255p before getting into a nasty downtrend and sliding to a low of 167p intraday on 15th October. They had a very good trading update last week and there is an Analyst Site Visit today (27th October).
Due to PETS being a recent float, there is very little broker coverage but I expect something to come out very soon. The Chart looks to be turning up as the price moves sideways out of the clearly defined downtrend channel and this seems a good time to be in the stock. Nice divvy to boot.
The rollout story reminds me of Dunelm (DNLM), and that is trading on a p/e of about 16 and the uptrend there has been very sweet. At present PETS has 377 stores and the CEO, Nick Wood, reckons this could grow to over 500 in time.
I see no reason why PETS cannot get back to its IPO levels and 250p has to be an initial target for me but I would most likely topslice at these levels but hold on for the Long Term with a few as this could be a great stock for many years to come.
Oh my god, I just went on their website and saw a pooch in a Halloween costume. Forget everything I just said………….
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