Pets at Home Has Staying Power

The Week: Morningstar columnist Rodney Hobson is looking at buying into the pet retailer because even in a global pandemic, people are still spoiling their cats and dogs

Rodney Hobson 22 May, 2020 | 9:09AM

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Delivering profits ahead of expectations is usually a signal for a sharp rise in the shares but these are unusual times. Pets at Home (PETS) shares ended the day 4% adrift, having been a ludicrous 15% down at the opening.

Results for the 52 weeks to March 26 showed like-for-like sales up an impressive 9% while group revenue topped £1 billion for the first time. Underlying pre-tax profits rose 11% and free cash flow soared by 40%. The dividend was maintained – not many companies can say that.

However, the fourth quarter was inflated by panic buying ahead of the coronavirus lockdown. The first quarter of the current financial year will be correspondingly depressed as Old Mother Hubbard empties her cupboard of dog food.

But there again, we were warned that would happen in a trading update on April 2. There were simply no nasty surprises in the latest pronouncement. Pets at Home has hidden nothing from investors. Debt is easily manageable and steps have been taken to steer the business through these uncertain times.

The company operates in a large and growing market with solid long-term demand. We surely all know someone who would starve themselves rather than see their pet go hungry. Pets remain an important part of many people’s lives, especially during times of restricted movement, when any company is precious.

Pets at Home is smaller than most companies I invest in but I am thinking of taking a modest stake. The shares dropped from 315p to 195p, pretty much in line with the market as a whole even though the prospects are much better than average. They are now back to 220p. The best buying opportunity has admittedly gone and will not be repeated but it is not too late to take a punt.

M&S Now Worth a Look?

This is in sharp contrast to Marks & Spencer (MKS), a large company that has been shrinking, closing uneconomic stores and diversifying out of its traditional area of women’s clothing with limited success.

Five years ago the shares were just shy of 600p. This month they hit a new low of 85p. Yet there are at last some signs that we have seen the bottom. Yes, the High Street is still a disaster area and that is not going to change any time soon. And no, M&S has still not fully got to grips with its non-food lines, which will have yet another leader on July 6.

Sales in the year to March 28 were not too bad considering that they included the first two weeks of lockdown: off just 1.9%. Profits, though, slumped 20%, thanks mainly but not entirely to the impact of Covid-19. The setback will be worse in the current year.

According to chief executive Steve Rowe, M&S was making substantial progress. We’ve heard that before so many times from the company that investors are entitled to wait and see but it could just be true this time, especially if rival retailers fail to survive the lockdown and shopping mall rents are forced down further. Much will depend on how well the investment in delivery company Ocado (OCDO) works out. Delivering clothing as well as food to customers’ homes could tip the balance.

If I had to choose, I would still prefer great rival Next (NXT) but M&S shares are so bombed out the potential is at last more on the upside than the downside.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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