Earnings Call: Q1 2022

Jul 29, 2021

Earnings release

Good morning, and welcome to the Q1 FY 'twenty two Trading Update Call with Pets At Home Group plc. Participants will be able to ask questions later. But for now, I'd like to turn the call over to Peter Pritchard, Group Chief Executive Officer. Please go ahead. Thank you, Daniel. Good morning, everyone, and thank you for joining the call. I hope you're keeping safe and well. I'm Peter Pritchard, Group CEO. With me today is Mike Idunnall, Group CFO. And we're pleased to share with you our q one trading update for our financial year, f y twenty two. Our quarter '1 covers the sixteen week period from the March 26 to the July 15, and therefore, it's worth noting that the comparative quarter coincided almost exactly with the implementation of the first national lockdown last year, so to help we're presenting comparative numbers on both a one and a two year basis. Many of the positive trends we discussed at our prelims back in May have not only continued since the financial year, but have accelerated. This is reflected in the update that we're giving today and I'm pleased to say that our performance continues to be strong across the group, demonstrating the ongoing success of our pet care strategy. From our update today, there's five key messages that underpin our performance in the quarter. First, we again continued to grow our share of The UK pet care market. Our like for like group revenue increased by 30.2% year on year, that's an impressive 29.4% on a two year basis, and all parts of the group are growing. In retail, like for like grew by 29.1% year on year or 29.6% on a two year basis, and in our vet group, the like for like grew by 44.7% year on year and that's 25.9% on a two year basis. In retail, our sales growth was across all categories and all channels, with omnichannel revenue growth of 21.4% or a 107.5% on a two year basis. In our Vet Group, customer sales remain an important measure of the momentum across our joint venture estate and is now closely aligned to fee income growth as our program of fee adjustments are now fully annualized during FY '21 as they were planned to. Like for like customer sales across our joint venture practices increased by 44.5%. That's really a testament to the strength of our joint owner operator model and like for like joint venture income grew by 48.1% in the quarter. Second, we're continuing to see growth in new customers across all channels. This is driven in part by our Puppy and Kitten growth, our Puppy and Kitten Club I should say, which is focused on engaging new owners at the very start of their pet care journey. Crucially, the club introduced them to all parts of our business, helping to drive an average spend uplift of approximately 30% versus nonmembers. It's actually grown a 167% year on year, and that was supported by our TV campaign in the quarter. The trend for new pet ownership has continued, and we saw our strongest ever week of new sign ups during quarter one. Hobby and Kitten Club members ultimately feed into our VIP loyalty club, and our VIP loyalty club membership now stands at a record 6,600,000 members, and that's up 17% year on year. New pet owners need a vet and new client registrations across our veterinary practices are now averaging over 10,000 per week, roughly one in 10 visits, and that's supported by the continued success of our in store referral program and our puppy and kitten program. Third, our VIP oh, sorry. VIP gives access to rich customer data and, of course, insight, and the investment we've made in our data capabilities is helping us use that insight to better serve our customers and in turn increase our customer share of wallet and the annuity like income. So the number of subscription plans across the group grew by 24% year on year to over 1,300,000 plans, and that's now generating over £100,000,000 in annualized recurring revenue. Our new dedicated propositions team are developing unique bundles of products and services, and our newest plan, Complete Care Junior, a health plan for puppies and kittens, is already proving popular with customers. It's actually the first plan to include twenty four hour access to our Vet helpline provided by The VetConnection, this healthy health business that we acquired last year. And we're working really hard to encourage customers to shop across our entire ecosystem, So I'm pleased to report that 26% of all our VIPs shopped across more than one channel during the quarter, so that's up 18% year on year. Fourth, we continue to drive productivity gains across our operations. As I'm sure you're all aware, there are many well reported inflationary pressures such as freight, and we're proactively trying to mitigate these using our strong top line growth as a catalyst and specific initiatives to increase our operational efficiency across our business. For example, our successful program of rent renegotiations continues and we've also recently launched a new project focused on improving product availability and lower fulfillment costs and this project commenced during the quarter. Our pilot project to deliver orders to customers' homes from store stock has also launched in the quarter, which once scaled should generate significant cost efficiencies as well as providing a flexible and convenient solution for customers. And finally, we continue to be laser focused in the execution of our strategic priorities to accelerate growth across our pet care platform. We are progressing the digitization of our business, making pet care even easier for our customers through Project Polestar. We continue to roll out our new generation pet care centers through our store transformation project and with two new pet care centers launched in the quarter. Our new center in Hanford is particularly exciting being the first to incorporate our brand new VET operating model. And we continue the development of our new storage and distribution facility in Stafford, which has now broken ground early this month and is on target for go live in 2023. So in concluding, our performance over the last quarter further demonstrates the strength of our unique pet care strategy and the robustness of The UK pet care market. I'm pleased that not only do we focus on running a successful business, but we also focus on building a good business too. We continue to do the right thing by all our stakeholders. We are progressing we are progressing our Better World pledge, helping create a better future for pets, the people that love them, and our planet. And finally, I'd like to express my sincere thanks and gratitude to every single colleague and partner across across our business. This last quarter has not been easy, but these results reflect the hard work and commitment in serving the nation's pets. They are helping us build the best pet care business in the world. So I'll stop there. I'm sure there'll be a number of questions which Mike and I will only be too pleased to answer. So let me hand you back to our call operator, Daniel. Thank you. If you would like to ask a question at this time, please press star one on your telephone keypad. We can now take our first question. It comes from Jonathan Pritchard at BWL Hunt. Just a couple on costs, if I may, and underlying assumptions going forward. Firstly, the 9,000,000 you mentioned on from a COVID perspective and and the sort of slowing in general that I think is implied in like for like. What are your think thinking? What's the underlying assumption on disruption from from the pandemic? Are you assuming any further lockdowns, or are you assuming from the end of the year that that 9,000,000 sort of run rate as it were will be a lot lower? And then on on freight, are we coming off the top a little bit there? I mean, you know, we're talking hundreds of percent in in terms of inflation there in some instances. Is that slightly coming off the the the top and calming down a bit, or do you think that will persist for for quite a bit longer? Hi, Jonathan. Thanks for those two questions. Let me hand you over to Mike first to talk about the, our view on disruption for balance of year, then I'll come back and talk a little bit about freight in our view. Thanks, and, good morning, Jonathan. Yeah. You're quite right. We built £9,000,000 of COVID costs in actually right from the beginning of the year, to reflect really the disruption we anticipated in the operation through whatever means it caused COVID COVID costs coming through. And and, you know, currently, you know, that and that, by the way, that works out at about £380 per store per week, just put it in. And we are seeing those costs come through. You know, a lot of our colleagues, like in many businesses are having to self isolate as the either track and trace that will continue. And in supply chain, there is disruption caused and clearly, you know, well understood difficulties that other consumer businesses are facing on their supply chain. So we think that 9,000,000 is the right number. We hope, of course, that the pandemic clears up quicker than everybody expects and that life returns normal, but nine million is where we're tracking, and we'll be able to give an update on that when we give our our half year numbers. You asked about freight. To context freight for us, we import about 3,000 containers a year. Last year, we're paying freight rates of about between 1,500 and $2,000. Spot rates on containers today is anywhere between $12.13, $14,000. So we're not buying a spot, but we're certainly buying at a higher rate than than than previous years. You know, year on year, that for us is probably around 10,000,000 of cost extra to deal within our plan. So that's built into our guidance. But as Peter said in his in his introductory comments, we've got a program to help mitigate that in terms of cost efficiencies, rent reduction, and other similar things. But nevertheless, it's a cost we're having to bear in the P and L. Like for like, that was your third point to your question. Clearly, 30.2% reflects weak comp last year, but clearly we've got strength in the business, got momentum. We're planning on around 10% the balance of the year. So quite a moderate growth compared to what we've seen in the first quarter, but nevertheless, if you look at our two year like for likes, that still needs us to do 20 plus two year like for likes for balance of the year. So still strong growth, but that's what will be driving that will be momentum coming out of the quarter we've just done. Plus, of course, as Peter was outlining, we've acquired a lot of new customers so far this year. I think just the other thing to add there because, obviously, when we talk for everybody, obviously, immediately focused on the retail business. I wouldn't forget the other dynamic, of course, of our business, which is our veterinary business. So our fixed costs are pretty much fixed. So as we see stronger revenue growth coming in from customers, that does translate into higher fee growth, and that pretty much flows through our p and l very effectively. So we have a natural hedge as well as we think about the overall pet care profit pool for us, and you can see where our vet business is running relative to our retail business. That's the other thing that actually helps us balance off our overall equation. And, of course, freight's impacting everybody. You know, we're not isolating here. So I think the other thing we'll be watching very carefully is all that means for inflation. And we've we've, we've got a very hard one price position, within pets. And I'm very keen to make sure that what we don't let happen is let that price position erode. If anything, I think we use our scale and our growth and our flow through to make sure we keep our price actually very, very competitive. Great. Thanks a lot, guys. Thanks, Jonathan. Thank you. We can now move along to our next question. It comes from Tony Charette of Panmure Gordon. Your line is open. Please go ahead. Good morning, gents. Well done. You mentioned the data insights that you're getting through the sort of enhanced data capabilities you had. I wondered just if there's anything sort of specific, and interesting you could point to, as a, you know, just a sort of general indicator of, whether, you know, these insights are actually leading you to think differently about the business? Second question is, about the retail like for like. I wonder if you could, sort of split it down maybe into, pricing volume mix, that type of stuff. Thank you. Great. Thanks, Tony. Well, let me I'll deal a question on data insights, and I'll hand over to Mike to talk about the, how the retail life life is forming. You're absolutely right. I think one of things that we're seeing is as that capability is on board, we've now insourced all all our data. What we're doing now is operationalizing that data. So the biggest benefits we're seeing immediately are in CRM. So our, our mailings and our CRM to customers increasingly is getting more and more effective, and we can see that in the performance rates in terms of revenue spent from customers, our success rate, and they just get better and better and better because our algorithms are learning very quickly and literally as we're now doing campaigns, we're actually modifying campaigns in flight as we see early response from consumers. But there's a couple of areas I'd really point to that we're seeing significant success in this year. One is in subscriptions. So you've seen that we've we've now got 1,300,000 plans. We've got really strong growth across flea and worm, easy repeat and healthcare plans. And what we've been doing there is looking at which customers are most likely take a subscription out based on other customers and therefore it gives us a really effective target pool to go for. And that's why you've seen such another, you know, another strong performance in subscriptions and somewhat early work there is proving to be very successful. So we're very interested in it. One of other things actually, which is something which is work in progress, and I'll tell you about it because I only saw it last week, is we've been looking at our range optimization by store. Historically, we range quite flatly by store, so we range by space. But our data teams have been working very closely with our merchandising teams to provide much more tailored insight for store locations and range of performance, and the early trial work there is really interesting. So as we're doing our as as we're doing our pet care reformat, it gives us an opportunity to reset space and make sure we really optimize, and I think that's something that we hadn't anticipated when we were looking at our store refresh program, but something that actually started to build into it. I think the final point on data is, you know, when when when we invest in here, we obviously invested very clearly from a CRM point of view. But what we're seeing is as we brought that capability in house, the amounts of problems that we're now solving by taking a data led approach would never factor into our thinking. I think what it means is as we're making decisions, we're making actually significantly more sophisticated and nuanced decisions, which really flow through the p and l in many, ways. So for me, this has been a great experience. One that I'm really excited about because as our team continue to ramp up, I think the opportunities are still actually actually in cars are unknown because we're discovering them, but really exciting. So I'll hand over to Mike to talk about retail like for likes. Yes. Hi, Tony. So retail like for like for the quarter, you'll see in the statement is 29.1% in total. You break that back down into its components, store like for like was particularly strong at close to 28%. We report here omnichannel growth of 21.4%. And the other third component of that is our grooming business, which you may remember was closed for lot of q one last year. So we've got, you know, a very, very strong like for like growth in our grooming business. Add those three together, you get to the 29.1%. Two of the features though to help add a bit of color, one is, you know, in category level, pretty much food and accessories is pretty equal in terms of their growth, pretty much equal contribution to overall retail growth. And in terms of shape of that, as a participation online business dropped back slightly compared to quarter one last year. We actually called that out in the statement. This time last year, our online business was 16.6% of sales. This year it's 15.6. I think that's understandable. More customers are going back into stores and I think other businesses are seeing a similar trend. So whilst our omnichannel business is still growing really strongly, actually in the quarter, the biggest contribution by far is the contribution our stores have made to retail like for like. And, Mike, the, is there any price inflation in in this, in this like for like? Very little. It's all transactions. Inflation in terms of basket spend is less than 2%. Average transaction values haven't really moved significantly. This growth is driven by more customers, more transactions. Thank you very much. Thank you. We have no further We have no further questions. So at this point, I hand the call back to the speakers for any additional or concluding remarks. Thank you. Great. Well, thank you very much, I know today is an incredibly busy day. There's a lot of results out. So I really appreciate your questions. Have a great summer. Hope you get managed to get away. And, Andrew Paltese, if you're listening, hope you have a great wedding on Saturday. Thank