Earnings Call: Q3 2021

Jan 21, 2021

Earnings release

Hello, and welcome to the Q3 FY 'twenty one Trading Statement Call for Pets At Home Group PLC. Participants will be in a listen only mode for the first part of the call, but will be able to ask questions later in the call and should indicate their desire to do so by pressing star one on your keypad. I'd now like to turn the call over to the Chairperson for today's call, Peter Pritchard, Group Chief Executive Officer. Please go ahead, sir. Thanks, Emma. Good morning, everyone, and thank you for joining our call this morning, and I hope you're keeping safe and well in these really challenging times. We're pleased to share with you our Q3 trading update for our financial year 2021. I'm Peter, the group CEO, and with me today is Mike, our group CFO. Our Our quarter three covers a twelve week period from the October 9 to the December 31, and therefore, captures trading over Christmas as well as a second national lockdown in England across four weeks of the quarter. As an essential business, we've remained open throughout the pandemic, and our operations are well adapted to the world that we now live in. And this is reflected in the update we're giving today, and I'm pleased to say that our performance continues to be strong, and that's right across the group, demonstrating the ongoing success of our pet care strategy. Our update today highlights five key things of pet to home and the market in which we operate. First, the pet care market is robust and is in good health. Our group revenue increased by 17.6% in the quarter on a like for like basis despite ongoing COVID restrictions on both a regional and a national level. All parts of the group are seeing good growth. Our retail operations are growing at 17.5% on a like for like basis, and our vet group is up 17.8%. Retail sales growth was broad based across categories and across channels. Whilst accessories performed strongly, in part driven by new pet ownership, we've also seen good underlying strength within food sales, is, which of course, a good indicator of growth in customer numbers. Trading across the festive period as a whole was strong with like for like sales in December of 19.3%. Both core and seasonal accessories are selling and were selling particularly well across that quarter. Now turning to our vet group, we saw total revenue growth of 22.1% in the quarter, again, with a particularly strong performance over December. Customer revenues remain the most important indicator of the underlying health of our joint venture estate. Like for like customer sales across all first opinion practices increased by 22.6%, which is testament to the strength of our owner operator model. Like for like joint venture income grew by 17.3%. Second, we are only we are the only true omnichannel pet care business in The UK. Our model of providing customers with everything they need to look after their pet however they want it and however they choose to interact with us is absolutely working. More customers are choosing to engage with us digitally with our omnichannel revenues growing by 70% in the quarter or indeed 92% on a two year basis. The recent launch of our one hour click and collect from any of our 451 strong store estate is already exceeding our expectations, underpinning an 18% participation of retail sales from omnichannel during November. Our recent acquisition of The VetConnection broadens our digital capabilities in providing trusted advice and pet care solutions twenty four hours a day, and it will enable us to provide customers with around the clock veterinary telehealth advice, triage, and ancillary services, meaning that owners can access quality care for their pets remotely whenever they need to. Third, we are seeing continued growth in our VIP and Pupping Kitten Club memberships, and that's driving increased spend across our pet care platform. We're seeing more new pet owners, and our Pupping Kitten Club engages with those new owners at the start of their pet care journey, and it introduced them to all parts of our business. It's grown 47.2% year on year in the quarter, with members typically spending 25% more than nonmembers across the group. Our VIP membership now stands at a record 6,200,000 members with 26% of those members shopping across more than one channel. And our new client registrations across our veterinary practices are now averaging approximately 10,000 new client registrations per week supported by the continued success of our in store referral scheme. Fourth, our subscription business is growing, and that's increasing the resilience and the quality of our sales profile. We now have over 1,000,000 subscription customers, and it's growing. And that's generating over £85,000,000 of annualized customer revenue. We now have a brand new fully recruited propositions team who will build out our road map of providing unique bundles of products and services to customers that our competitors cannot easily replicate. And finally, we're continuing to invest across all channels to make pet care as convenient, as flexible and as engaging as possible. Strong cash generation of the business along with the recent disposal of our specialist hospital division provides significant resource to accelerate growth across our omni channel pet care platform. We're investing to digitize our entire business, making pet care even easier for customers, and we're setting out a bold ambition in this space. We continue to roll out our next generation of store, recently launching two new small format stores inside M25, and we continue to leverage our proprietary data through our enhanced customer segmentation. We're also at the beginning of this journey, and we're starting to leverage the benefits, but there's still so much more left for us to do, and I'm genuinely excited about potential that this offers us. So to conclude, I'm really encouraged by our performance over the last quarter, testament to the strength of our integrated pet care strategy, our agility to respond to changing customer needs and the favorable trends within the pet care market. As we now trade through national lockdown three, we will play our part in providing customers with the essential pet products and health care that they need. We continue to prioritize the health and safety and the welfare of all of our colleagues to ensure we can provide a safe environment for our customers. High infection rates and restrictions on movement will make the final quarter challenging, but we're confident, as we've already shown, we can flex our business model to suit the environment in which we're in. There's still so much more left for us to do, but we're very much on track with our plans to build the best pet care business in the world. We continue to do the right thing by all our stakeholders, and I'm particularly pleased that despite the challenging external environment, we're able to provide a further £200,000 in much needing funding and support for support adoption of pest pet rescue centers across The UK, and that now takes that total since the onset of pandemic to one point three million. Finally, I would love to express my amazing, thanks and support to our colleagues and our partners who their commitment and support of our business has just been outstanding in this last year. I'm incredibly proud of the way that every one of them has risen to the challenges that we faced, and they continue to sell our customers and their pets in the best way that they can. So I'll stop there as I'm sure there'll be a number of questions, which Mike and I will be delighted to answer. So I'll hand the call back to Emma. Thank you. We will now take our first question from Craig Laws from Capital. It's Craig, actually. Good numbers. Could you just maybe just give a bit of color in terms of the shape last year of Q4? Obviously, there was a bit of pull forward through lockdown one as customer stockpiles. So just kind of the shape of that and what that might mean in terms of going into FY '22. And then the new two stores that you launched inside the M 25, is it possible to know where they are and, you know, what your thinking is there, please? Sure. Well, look. I'll I'll deal with points on the stores, and I'll ask Mike to talk about the shape of q four. So, there's two new formats. So Camden, was an existing store that we've reformatted, and Putney is a brand new store. They are high street based. They're typically half the size of a normal petahome store, which, of course, is typically on a retail park. In London, retail parks are few and far between. So with the changes that we've seen in the retail landscape this year, we're anticipating a greater availability of these types of sites to open up in London, in in in the, in the short term. And we're really pleased with the performance. We've built these stores from the bottom up, and it's a combination of getting as much services we can to these stores. So in these cases, a groomer. In future ones, we'd like to put a vet in as well. And it's about refining the range to customers in London. That's about refining our food offer, typically, more premium, typically smaller bag sizes, basically what you can carry to go home, but still bringing a full assortment. Early days, Camden was a very well, were very well established performing well. The refit has enhanced our performance, and Putney has got off to a cracking start. Although, obviously, we're in pandemic, so we'll need to get a full read on that as we move forward. We think there is potential in m 25, for sort of 20 to 25 stores of this type, and it's an area that we've been underrepresented in. And when you combine that with our digital and physical, we think this is, is is an opportunity for us moving forward. So Mike, you want to talk about Q4? Yes. Hi, Greg. Yes, you're right. I'd say Q4 was absolutely a bouncy period. You may remember that the COVID pandemic really started to impact sales, particularly as we got towards the end of that quarter into March. So quarter as a whole, our like for like in retail, which was the most, relevant, I think, is was 15.9% for the quarter as a whole, but it sort of went 7734% in that final month. And and and therefore, you know, as we as we know, we manage the business through that. We've got a pretty pretty pretty tough comp to to lap. But so far, so good, I think, in terms of how first few weeks of January are turning out. Just on supply, we're kinda reading, something in the accessories business and stuff. Port delays, you've obviously stockpiled, maybe stockpiled a bit for Brexit. Just what what what if you got any color that you can give us on that, please? Yeah. I'll cover that off. Look. I think the first thing is our imports actually are not a massive part of our business. So from the EU, it's about 2%, and from Asia, it's sort of 15 to 17% of cost of goods. We were building stock in The UK in anticipation of Brexit, so that's been beneficial for us. Without question, contain is actually the big issue, and I think you've seen that well reported. As we stand here today, we've tailored and changed our trading offer to reflect our stock levels. We're in a reasonably good position watching it like a hawk, and we have backup plans in case we need to do a bit more near sourcing. So we're not flagging an issue. It's just challenging, but we we're confident we'll be able to work our way through it. We will now take our next question from Matthew Garland from Citi. Hi, guys. Thank you for taking my questions. I had three. The first one was just I saw some stats around VIP customers in 2Q, 61% of them then spent in 3Q. I was wondering if you can give some color around how that's trended maybe from new customers from last year or over a longer period and how you expect that trend to continue? Secondly, in terms of the new sign ups, so obviously, the 10 ks average, has that concentrated in newer practices or older practices? Has it changed your view around how first opinion practices might mature? And then thirdly, in terms of the subscriptions, the $85,000,000 annualization of sales, how does that look? Or how should we think about that from a profit perspective? I imagine it's quite a high margin kind of area. Can you give a bit more color around how we should think about that? Yes. Look, I'll deal with first point, Matt, regarding VIP customers and sign ups. So you're absolutely right. So we we now are at 6,200,000, VIP members, which is up 12% year on year. And encouragingly, 26% of those customers have shopped across more than one channel, which is up 20% year on year. And, obviously, that reinforces all of the efforts that we've been placing behind, driving new customer sign ups as well as encouraging to get into more parts of our business. Underneath that, it's worth pulling out that the puppy and kitten club, which is a feeder into VIP, had its strongest ever quarter. And year on year, that was up 47%, and that really reflects, two things. One is we've been consciously doing new customer recruitment. So we've had above the line campaigns to make that, address that to customers as well as we've obviously seen a step up in puppies and kittens across The UK. The new client registrations in the vets, we've we've talked about being 10,000. Because we are a business which is in maturing mode, obviously, got lots of brand new practices. We would naturally see typically between six and seven thousand new client registrations anyway in our business. So that step up to 10,000 is a step up, and it's something we've seen really since not long into the lockdown. Actually, we started to see this trend starting to emerge. And I think the important thing to point out here is it's it's new client registrations of all types. So it could be a puppy, kidney, could indeed be a somebody who's changed practice or indeed somebody who has acquired, who has acquired a new pet. And we're seeing that right across the business. Actually, it's it's helped it it helps us enormously, particularly in the new practices because, see, they're maturing. So this really underpins the maturity curve. Actually, in existing practices, we've seen very strong like for like performances across all cohorts and an acceleration of their performance. So it's an encouraging factor. And, of course, for us within vets, this is this is a really important lead indicator because, of course, that clients tend to be more sticky. So once somebody signs up to a bet, the, the likelihood of them becoming a longer term valuable, client, you know, is really important. So this is a great indicator of maturity curve of our business, so a really important one for us and one that we're we're really pleased to see that play through. Mike, do wanna talk to the the revenue on subscriptions? Yeah. Thanks, Peter. So subscriptions are a key focus for us as a business, and over a million customers now on some form of subscription, up over 17% year on year. Another course is, you know, what we're trying to aim to do there is build a high quality annuity type sticky revenues, to build lifetime value from our customers. A million is great progress, but of course, we've got a huge amount of headroom still to go on subscriptions. We've got 6,200,000 members of our VIP scheme. Those subscriptions are very profitable for us. In fact, within that, our flea and worms subscriptions are probably one of our most profitable products. So you'll continue to see that being a focus. It is part of our strategic push and as a KPI is perhaps just as important going forward as looking back at like for like sales growth. If we can add to that, Mark, something we just put out in the announcement is that we've we've actually built a propositions team, whose job it is now is to, build out, existing plans across easy repeat, across health plans and across flea and worm. But also look at how we bolster combinations of products and services together. That's why the VetConnection was a really important acquisition for us because, obviously, that becomes a a service, which I think can really enhance value across our existing subscription plans. And as we get more granular about bringing solutions together for particular types of customers, think about grooming and other parts of our business where we can create most, you more repeatable revenue opportunities. So that team has been recruited. It has been in the last half year, and they literally are just onboarding as we speak now. It'll be an area that we're giving an awful lot of focus to moving forward. And just if I could, quick follow-up on the VIP customers. So in terms of, I guess, looking back to last year when lockdown began and the new customers that you took on then, how has that trended in terms of their spending through to now? So obviously, the stat, I think, was 2Q through to 3Q was 60%. Can you give us an idea of what that might be? I know it's not a year on year comparison, but is it at a similar level, say those customers are still continuing to spend quarter on quarter at a very high level and you expect that to continue? Or based on, I guess, data that you have, you expect that to tail off? How should we think about that? Yes. So Pete, obviously, we've acquired a lot of customers, Matt, quarter two, for example, we acquired a lot of customers. If you look at how our like for likes progressed, in a quarter two like for like for the group was 12.7%. Quarter three like for like is 17.6%. So we've had pretty much a 50% increase in growth rates. Now a lot of that will be attributable to the retention of customers we acquired in quarter two that continue to shop with us. Key to our activities, and Peter referenced it with the proposition team, but also the use of our data is to lock actually lock those customers in, through subscriptions we've just been talking about, and retain those customers. It's a great opportunity for us and bodes well as we look into the new financial year. Great. Thanks for taking my questions. Thank you. We will now take our next question from Owen Charlie from Berenberg. Please go ahead. Your line is open. Good morning, guys. Thanks very much for taking questions. The first was three, please, if that's okay. The first was just wondering, for your kind of above £77,000,000 of PBT guidance, what does that factor in for Q4? The second one was if you'd be able to give an update on your thoughts around what you think has happened to the pet population this year, what the kind of key KPIs you're seeing that's driving our and how sustainable you think it is going forward? And then that was whether you can update, on your kind of investment in the data team, perhaps if you're still seeing the strong results from the mailers recently? Thanks. Okay. Well, thank you. Three great questions. I'll talk about pet population and investment in data and I'll hand over to Mike to talk about Q4 and PPT. One of the challenges in the pet sector is there aren't very accurate reporting mechanisms at the top pet population. So we look at lots of measures. Probably the most important one we look to is actually our own database itself in terms of what we can see in terms of pets. The first thing without question, and I think this is being widely reported in lots of different sources and actually in lots of different countries actually, is there has been a notable step set up in new pets throughout, the pandemic. And we'll often talk about puppies and kittens, but the other thing which is not very well reported is typically now most adoption centers, are, pretty much empty of pets. So it's it's actually been a demand across all types. And, whilst we'll also pups and kittens, when somebody adopts a dog or a cat, often they behave as if they are a puppy or a kitten in terms of the setup, and we've definitely benefited from that. That's why we talk about baby boomers. So the factors that we would talk to, there's there's a few that I think are really important. So puppy and kitten, club registrations are a good lead. It was a step up in the quarter to, over 47%. Now some of that is driven by our own marketing. I think the underlying factor, which is probably more important if we look at the category performance, to actually the things that people are physically buying in puppy and kitten, and that's typically between 1720% step up in like for likes. And they represent things often that you buy, you know, once only like a cage or a setup. But I think I think it's probably fair to say we've seen that trend all the way through. So if I without holding me to a position, I actually would say that probably means we've seen a step over between 1520% of new pets in The UK this year that goes into that, you know, that that new pet category. And, of course, that means the overall population has lifted. And, of course, pet lives are anywhere between sort of ten and fifteen years depending on on cat, dog, and species. So that should be that, there is a step up near real pet pet population, which means the market should be robust moving forward. So I think that's a really good lead indicator. And, of course, that goes alongside the two factors which have driven the pet population for the last number of years, which is humanization and premiumization, which typically led to between a 2% and a 3% step up in in growth. So I think the market is really, in a strong position, and you'd anticipate that we should see a good market moving forwards because the pet population numbers have changed. So we do think that's sustainable. We haven't seen a slowdown yet in registration, so, we can't yet say this phenomenon has come to an end. It's been continuing in the quarter, and we'll continue to measure and report accordingly. The data team, we're really pleased and encouraged by what we've done. So we're now live on, having in sourced all of the information and all of our resources to our own teams. That gives us enormous benefit. We can just do an awful lot more work. Our segmentation models are live live by in the fact that all our CRM is now driven from it. And for all our mailings that we've been in acting since September, which is significantly more targeted, we're seeing a really a really good step up in redemption rates from customers, and that's helped underpin our like for like performance. But behind the scenes, there's loads of the things our team are adding value to. So they've built a a retention model, which predictions may may well churn, and therefore, we can intervene. Only this week, we're seeing some of the work they've done, not just on customer stuff, but other business improvement opportunities where they've we've applied our data analytics skills to identify opportunity for business. So the way I see this is we're building a capability which just does two things. It allows us to be very targeted with customers, allows us to subsegment in a way we haven't been able to do before, which creates value in its own way. Also, it's it's creating business opportunity just by using our data and analytics in a significantly better way to allow us to predict better and be able to respond better. So I see this as a capability that just unleashes the business moving forward. Mike, do you want to talk about our PBT? Yes. So guidance we gave back on the January 8, 77,000,000 full year PBT took into account, of course, that very, very strong performance we've seen in quarter three. As we did that looking forward, we're assuming that the current restrictions COVID restrictions will exist in some form all the way through to the March. So for our business, that means clearly numbers of customers in stores. We're essential retailer, but numbers of customers, numbers of visits, our grooming businesses are under constraints. We're doing any welfare, any groom, so that's about 60%, 56% of capacity. We're assuming that the guidance that the RCBS have given for the First Opinion Vets doesn't change. That means we can continue to offer services. But clearly, there's a lot of unknowns and literally, we respond to events, external events and new news as they develop overnight. We're three weeks into our quarter four now. Trade has, not been at the levels of it as it was in December, where we were 20% like for likes, but it still remains pretty robust despite the restrictions. So but we are literally managing the business week on week. So we've held that guidance at GBP 77,000,000, not because of things that are going to change the way we operate our business, but mainly because of the material uncertainty that exists as everybody will understand in the external environment. Thanks, Mike. Could I ask just a follow-up on that? I don't know whether you'd be able to give a sort of like for like figure that you would need in Q4 to get to that kind of $77,000,000 Yes. Well, we just had the whole conversation about the comp being really strong. So, you know, last year, we were 15.9%, like for like in across the quarter four. You know, we would normally assume our planning growth rates between 45% normalized, and that's the level we're assuming as we go across quarter four. Great. Thank you. Thank And we will now take our next question from Geoff Ruddell from Morgan Stanley. Please go ahead. Your line is open. Yes. Good morning, everybody. Can I just ask one question about vet practices, please? I see that the number of company owned First Opinion vet practices, the number is still creeping up and the number is still creeping down in the number of JV practices. When do you expect the well, firstly, are you still committed to moving the company owned ones back to a JV model? And on what sort of time frame should we I mean, I realize there will always be a handful of of company owned ones, but when are we expecting to see the number go back to, I don't know, 10 or something like that rather than the 47 at present? Yeah. I'll pick up. Obviously, that that number is obviously higher from the the work that we did two years ago where we actually bought some of those practice back, Jeff. And we've always had, the ability to buy practice back in, often triggered by JVP events. So, for example, sadly, one of our JVPs died, in in in the six month period. And, obviously, we'd buy that back in whilst we've been going, hothouses to find a new, a a new partner. And I think what we, we've been able to do is demonstrate our ability to run both. So we can actually we can actually move practices either way. We actively do, bring practices back out into JVs. And to be honest, it's driven by one factor only, which is finding the right partner in that locality who we think is the right person to do it. So that's an ongoing activity, and you will expect to see those numbers move, subtly between each each each piece. So are we likely to you still likely to be running 30 or 40 practices yourself in two or three years' time? Yeah. I I think we'll always have a number where we will we will own them for different reasons. And, you know, we've we feel very comfortable, confident and comfortable to be able to do both. I think it helps us, particularly because, obviously, in each one, we're dealing with small business owners. And sometimes life life gets in the way, and you need to have an ability to be able to bring them in, run them whilst you find the next owner. Okay. Thank you very much. You. We will now take our next question from George Plackett from Amnios. Please go ahead. Your line is open. Hi, good morning guys. The first one was just on given that population will have jumped this year. Just on your thoughts on kind of the vet rollout for the kind of new practices, whether there's kind of white space, whether we would be looking to kind of bring new groups in, how easy you're finding it to find the right vet partners to to do a JV with. The second one was just a a little bit extra if you could on the the proposition teams. I'm sure that was really interesting. How how will they be working together with the data teams? Can you give any sense to kind of the number of people that, will will be working on that? How will they be kind of testing it? Will they be kind of testing on a localized basis? Just anything more you could share there. Yeah. Sure. Well, I'll I'll pick up the proposition team and ask Mike to talk about that rollout. So we've recruited a director of what we're calling pet care plans, our proposition team, and we've identified a number of target segments. Obviously, you can think about things like puppy and kitten being an obvious target segment as well as health care plans being another segment. It's a it's a team of about 10 people, which is a combination of some dedicated analytics support, some CRM support, some marketeers. So these people are part of the commercial team, but their job is to work across both vets and retail in in using the data to identify the ability to combine products and services. So the first thing we want to do is make sure that the existing plans that we've got are really compelling, and we and we use all the capabilities of the group to differentiate them. So I I use this as as as an as an exemplar, but imagine that we bundled in twenty four hour access to a vet, through the vet connection as part of a flea and worm plan. That really adds significant value to the the the product offer, and it brings in, something that's got a high value to customers, relatively low cost to us because we own it as part of our group, and it allows us to drive both stickiness but also acquisition. I I'd give you a micro example. The most popular dog that we would see in our in our groomers would be a Shih Tzu because it needs grooming every four to six weeks. That customer type behaves quite differently to a German Shepherd owner. So bringing together a a proposition that would have grooming built in for that customer type, their grooming, maybe plus their food, plus their their flea, will be very relevant for those customers. And because we're able to segment our shoppers not just by pet type but by breed, and breed in dog is super, super important, what we're able to do is start putting things together for customers in ways that nobody else can because we both understand their need, we know who they are, and we've got the capability. So we've got quite a long road map ahead for us because we've got a million subscribers, which is fantastic. We think there's a really big runway ahead, and we wanna move more of our revenues. And so stop waiting for people to turn up, actually, make things convenient. So if I use flea, it's a really good example. There's 18,000,000 cats and dogs in the country. They should be fleaed every four weeks. That means there's a target opportunity of 18,000,000 customers. We've got just under 300,000 subscribers. You could see quite a long road road map ahead just on Flame One subscriptions. So we're we're genuinely excited because you need to do it. People forget to do it. We wanna make it dead easy, and we've got the proposition to do it. So we're gonna invest in this space and build out stuff that other people can't do. Mike? Yeah. Your question on vet rollout, there's a few points, I think, to help answer that question. The first, I think, is that our model, which is joint venture ownership model with the vets, obviously, the owner driver, I think has proven its worth through the pandemic. We've been able to stay open, and we've seen very strong customer revenue growth. So 20% customer revenue growth across the portfolio. So unsurprisingly, the incoming from vets interested in our model is quite strong. And we've got a very active team looking at, how we turn those into, new practices. But of course, one of the things we know is the quality of those vets is of most paramount importance. Looking ahead, you've got to be a good business owner well as a strong vet. So the supply of new vets though, in terms of incoming interest is is pretty strong. Clearly, while we're in a pandemic, we haven't been opening new practices. I think it'd be wrong to try and launch a business with all the restrictions that exist. But beyond the pandemic, the future is looking pretty positive. We have about 150 stores still without a vet practice. And clearly, one of our intentions is to try and put services, including vets in all of our stores. And we have a very strong standalone model, which we know from a financial point of view, is at least as strong as our store model. So location wise and the model wise, we've got a good, a good runway. So as we head into next year, I think a sensible planning assumption going forward, perhaps 10 to 15 new practices a year. But if the supply of vets get stronger and they are sufficient quality, we could clearly go faster than that. There's a planning assumption, 10 to 15 new practices a year is where we're sort of thinking. Perfect. Thanks very much. Thank you. There are currently no questions in the queue. I'll turn the call back to your host. Great. Thanks very much, Emma. Thanks, everybody, for your great questions. Really appreciate it. All it leaves me to say is please stay safe, and we'll speak to you soon. Take care. Ladies and gentlemen, that will conclude today's conference, and you may now all disconnect.