Good morning, welcome to the Pets at Home Q3 FY23 trading update. Participants will be able to ask questions later by pressing star one. Now I would like to turn the call over to Lyssa McGowan, Chief Executive Officer. Please go ahead, ma'am.
Good morning, everyone, and thank you for joining us for our Q3 trading update. I'm Lyssa McGowan, the CEO, and I'm here with Mike Iddon, our CFO. As you would have seen this morning, we delivered a strong third quarter with acceleration in consumer revenue growth right across the platform. With volume growth underpinning our sales growth, we're really pleased with the quality as well as the quantum of our growth. In the quarter, we continued to welcome new customers to the platform. We made further progress in our price competitiveness, and we saw strong customer retention underpin the predictability and the stickiness of our revenues. Before we move to taking your questions, I just wanted to share a few highlights with you. Across Q3, we delivered 9% growth in the customer revenues.
Vet Group led the way with 11% growth and retail grew at 8%. Our Vet Group continued to grow into its embedded potential, with average annualized practice revenue now exceeding GBP 1.1 billion. Our unique JV model makes them some of the most productive practices in the industry, and there's plenty more to go. Across retail, our growth was strong, with pricing continuing to play a part, but it's important to note that we continued to grow volumes on a like-for-like basis. Our improved momentum was also helped by discretionary sales returning to growth in the quarter as our seasonal ranges resonated with consumers and sold through really well. New customer recruitment eased off recent exceptional levels, but was still really high relative to historic levels, averaging 23,000 Puppy and Kitten sign-ups and 8,000 Vet Group client sign-ups throughout the quarter.
While we remain mindful of the inflationary challenges, sales have come through better than we expected and our markets remain in growth. With around two months left of the year to trade, we feel confident of delivering a better PBT outcome towards the upper end of current range of analyst expectations, an increase from our previous guidance of around 131 PBT. The business remains in a net cash position, and our confidence in the business, together with this strong balance sheet, enabled us to continue to invest in growing our business. We've made really good progress in the quarter both on the development of our new distribution center and in the building of our new digital platform, including the successful rollout of our new app.
We talked at the half year about a search for a Chief Consumer Officer, a critical role as we move towards a more integrated platform. I'm absolutely delighted with the appointment of Kathryn Imrie into this role. Kathryn brings a wealth of experience and critical skills to the business, and I'm sure she'll have a big impact in helping us move the business forward towards our strategy of being a consumer-centric, omni-channel pet care platform. Lastly, our values continue to underpin everything we do, and the highlight of our Q3 was our annual Santa Paws collection, which raised over GBP 2 million for charity in our role as the biggest grant maker to the pet charity sector. With that, we're ready to take your questions.
Thank you. As a reminder, to ask a question, please signal by pressing star one. Please make sure the mute function on your phone is switched off to allow your signal to reach our equipment. The first question comes from Manjari Dhar from RBC. Please go ahead.
I should like to thank you. Could you perhaps give a little bit more color on the volume versus the price growth across the sorts of different... Secondly, I don't know whether you could give a bit more clarity on whether you'll be maintaining sort of price differentials versus the national living wage within the group next year.
Mike will take both those questions.
Hey, good morning. The color you're asking for on volume versus price, and clearly, you know, we saw growth across all of our retail categories in Q3, with discretionary accessories returning to growth, which is obviously, you know, reflecting some of the comments that Lyssa started with. In food in quarter three, overall like for like in our food, very much in line where it had been at the half with 12% growth. That splits out 3% volume, 9% on price. Commodity accessories, if you remember, these are things that people typically buy like cat litter, small animal bedding, health and hygiene products. That was also a 12% like for like growth, and broadly similar to food with 3% volume, 9% price.
Our discretionary accessories went into positive growth. That was positive 1%, and we were delighted with that. Your second question is around national living wage, and we do maintain a differential, and that will be our plan going forward. We did give an extra GBP 0.15 an hour uplift to our pay rates in December, was on the back of the increase we put through last year as well. Of course, we give all our colleagues the opportunity to earn and learn through a very opportunity for them to, you know, learn more on the job and get more pay as a consequence. A lot of our colleagues are currently earning more than national living wage, and our intention is to maintain that gap.
Thank you. Our next question comes from Jonathan Pritchard from Peel Hunt. Please go ahead.
Thanks, and morning all. One each, I think, here. On the price differential, obviously you just suggested that inflation was 9%. Is that, you think, actually increasing your price advantage or your price position against some of the competition or about in line? Secondly, a strong sort of cross-shopping number in the statement, probably a function of better CRM. Could you just give us a few highlights from that perspective?
Absolutely. On the price position, we actually made progress, I think, in the quarter. Our scale is obviously a big advantage here. I'm very happy now with where we benchmark against all of our competition, so grocers, other face-to-face specialists and digital. Yes, I do think it's one of the things that's underpinning our strong growth. We do envision that will, that will continue. Keeping customers, volumes, price, position and margin in good balance has been a real focus for us this year, and we've achieved that, and it will continue to be a focus for us in the coming year. In terms of cross-shopping and CRM, you're right, of course, we have one of the...
actually the best datasets that spans everything from veterinary data and healthcare through to shopping habits. We've been very successful over the last few years within our VIP scheme at using that to drive and target customer behavior. We are now starting to use that data more broadly across the business, in fact, back into our supply chain to manage our stock position in terms of understanding the localization and range and clustering in our stores. I think that is a journey that is right at the heart of our strategy and will continue to be so. There is a huge amount more opportunity to go. Our strategy around building a pet care platform is absolutely underpinned by that data, that richness and that capability.
Thanks for them. Thanks a lot.
Our next question comes from Simon Bowler from Numis. Please go ahead.
Good morning. I was just wondering if we could get a quick update on some of the kind of SaaS costs that you were expensing. I think you started this year kind of guiding for GBP 33 million in this year's numbers. Is that whereabouts you expect to fall, and how should we think about that looking into outer years? Then kind of linked into that in terms of what that's kind of delivering, just any kind of updates on specific pieces of Polestar that have been delivered or we should be looking out for over the coming months.
Yeah. Thanks, Simon. I'll take your second question first, and then Mike can update on the costs. Really pleased with steady Polestar progress. This is the program by which we are in-housing our digital and data capability and bringing it all together to really enhance what we deliver for customers in our platform. In the quarter, we started the rollout of our new app, which brings together our VIP with our shopping, and that continued through January. It's now almost fully done. We're really pleased with how seamless that was, how well consumers reacted. It's always difficult to roll out an app that customers use at the till point all the time to get their VIP benefits. You don't want that to be clunky, and it was very seamless.
Actually, that was really, although it was an app, the first deliverable of our Polestar platform where we actually did single sign-on and brought together our data and our customer identities, as well as bringing shopping and VIP together. You won't see it in the numbers yet because as I said, December was the rollout, we are seeing some uplifts, commercial uplifts from that. More importantly, it was the first deliverable from our Polestar platform, and progress continues apace in that area. Mike, do you want to talk to the SaaS cost?
I will. Software as a Service cost, Simon, SaaS costs, in our guidance for this full year includes around GBP 30 million of costs, which we are investing to build out our in part our digital platform, which are expensed. Of course, what we must remember there is that whilst we are expensing them in the year we're incurring them, we are actually building assets of enduring benefit to the business. In future years, no depreciation charge on that investment, and clearly benefits from that investment yet to flow. It's around GBP 30 million in the current financial year.
Great. Thanks. I appreciate this isn't a kind of any way a kind of fiscal 2024 call, but in terms of where's your thinking at in terms of how those costs can develop? Is this, you know, is this the peak year for development? Do you.
Yeah. No. We've always said that. Sorry, Simon. Yeah. We've always said FY23 is peak investment year, both in terms of our new distribution center, which is, you know, already up and running in the sense we're starting to take pallets into there, and we've actually gonna do our first delivery to a store from that distribution center. We're delighted with that. That's a big project for us. Yeah, it drops. Clearly we are investing behind the growth agenda of the business. You know, our digital platform, our new DC, and of course our stores are increasingly looking to invest behind the growth of our vet business by extending in-store practices.
you know, not only have we got a lot of things to invest behind, you know, we're pretty confident that they're the right choices.
Great. Thank you. Our next question comes from Tony Shire from Panmure Gordon. Please go ahead.
Morning, all. I just wondered if you could give us any sort of insights from your VIP data. Sort of cohort type of analysis on whose, which customers, groupings are sort of spending more or less, any sort of color on that. Secondly, could you give us an indication of the % of own label in retail sales year-over-year? Lastly, just maybe as a thought for the finals, can you sort of think about how the in-housing of the data and digitization is gonna impact your marketing spend going forward? Will it result in you spending more or being more efficient with what you spend now? Thank you.
Thanks. Mike, I'll let you take the one on VIP cohorts, and I'll talk to own label and marketing spend.
Okay. One of the things we always call out, Tony, in our VIP is the attachment rates of our Puppy and Kitten customers. Those customers continue to grow, you know, 23,000 a week in the quarter. We do know that the propensity of those customers to engage across a broader range of products and services, more likely to be vet clients, more likely to have a subscription, and typically spend 20% more than our average VIPs. That's the trend we've continued to see in the quarter. The Puppy and Kitten Club not only is a source of new customer acquisition, but those customers are spending more.
Absolutely. In terms of own label, I think this is a huge strength of the business, actually. We've made really good progress in the quarter on own label. We ran a switch and save campaign through the back end of the year. We have a really strong price advantage on our own label. Our own labels would typically retail for 25% less, 20%-25%. They're a little bit higher actually at the moment, less than the branded product. Of course, all of our colleagues are fully trained on nutrition and will help customers find the right food. Really good result from that. Once customers are switched into one of our own label brands, they tend to be very sticky, and also they can only purchase from us.
Own label is a really core part of our strategy, both across food and accessories, and we're making really good progress there. In terms of marketing spend, you're right to point out that our VIP data gives us a really good advantage in targeting, discounting, targeting marketing. Through every single month of the last year, we have seen improvements in that in efficiency and effectiveness. I expect that to continue as we move through the coming years as we get even better at using that data to hone and target our marketing.
Thank you.
Thank you. Our next question comes from Adam Tomlinson from Liberum. Please go ahead.
Morning, all.
Morning.
Three questions from me, please. The first is, if you could give a little bit more color, perhaps around store versus online performance over the period and over Christmas, that would be helpful. The second question is just in terms of customer behavior, whether you're seeing any signs of any trading down in any of the categories. The third question is looking into FY24, just given the cost headwinds that you mentioned in the statement. I'm just wondering how confident you are of delivering profit growth in FY24. Thanks very much.
I'll take the first one, and then Mike can take the second of two of those. In terms of store versus online, we've seen very similar trends actually to the rest of the market, where we saw growth in both channels. Just to reiterate, both channels are profitable for us. We saw faster growth in our store estate than we did in online through the quarter. That's actually a benefit, because we... It's one of the things that's driving our profit, increase, 'cause obviously stores are somewhat more profitable than online, although both are profitable. I think that's a tailwind for us. We're very happy, though, to respond to consumer demand.
We've got a strong store business and a strong online business. We're very happy to let customers decide how and when they want to consume their services through which channel. Yeah, definitely, stores were the star performer this quarter. We tend to continue to have a good business in online. Mike, do you want to take the other two?
Yeah. Adam, you asked about customers trading down. I guess our indicators of that would be things like subscriptions, which remain really strong. You know, we've got 1.6 million subscriptions. That's up 9% year-over-year. And cancellations are, you know, we're still managing those very successfully. Net, that is still growing because subscriptions. The Vet visit's incredibly strong. We actually call out our first week of period 11, so that second week of January, for the first time, our Vet revenues went past GBP 10 million in a week. We've always got close to GBP 10 million. That's the first time it's over GBP 10 million. That's a good strong indicator. Our grooming business, where you perhaps think of that as being customers trading down. No, that remains really strong and in growth as well.
Then within retail, we're still growing our grocery category, you know, but I think that's a lot of trading in. All of our categories in food, advanced nutrition, bridging and grocery are in growth. Grocery is probably growing a little bit faster, but I think that's the consequence of trading in. Yeah. Those indicators that we track suggest that, we're not seeing, if anything, any trading down at all actually, so far. Then on the headwinds and your question about profit growth, you know, look, we're going into next year, with a lot of momentum in the business. We have got a lot of new customers, and you can see we're making a lot of investments to continue to grow the business. Those are the things that we can control.
Clearly, the macroeconomic environment looks very uncertain for customers. You know, for the U.K. consumer macroeconomic environment looks, you know, customer confidence all-time low, interest rates going up. We all know the challenges U.K. consumer faces. I think, coming into today, our, you know, I think FY24 average consensus for next year was GBP 134 million. After today's uplift in our guidance for FY23, that's sort of flat year-over-year, and I think that's where we'll be. I think, that's a good starting point. Yeah, that's how we see it.
Great. Okay, that's helpful. Thank you very much.
Our next question comes from Andrew Waite, from Jefferies. Please go ahead.
Morning, all. A couple from me, if that's all right. First one, the improvement that you've seen on the discretionary side of things, do you think that's a change in behavior or is it just that you had particularly strong ranges in those seasonal categories? Perhaps looking at some of the categories that have been continuity through there, have they seen improvements as well? That's the first one.
Yeah. I think the discretionary growth that we've seen is good retailing really. It's a combination of, you know, good buy, good ranging, good merchandising, good availability, actually. I think that shows that where, you know, we get that right, our customers are very keen to treat their pets, particularly around the festive season. I think this ongoing humanization and animalization trend sort of shows that customers are willing, even especially in difficult times, actually. Most of our accessory customers would retail for below GBP 10. That, you know, in a, in a tricky time for consumers is actually, you know, what they want to be doing and it's a small treat. I think we got it right, and consumers were ready and willing.
Great. Very, very helpful. Thanks. I'm sure you'll have seen, zooplus sort of talking about Royal Canin putting through some excessive, in their words, price increases and having a sort of a thinner range of Royal Canin on their site as a result and trying to get customers to switch and save. Just interested as to, one, what your thoughts are on that. Secondly, if you've had the sort of conversation with the Royal Canin which is suggesting some significant price increase coming through from them.
Look, I think, these are a real feature of the market now, these negotiations between suppliers and retail businesses. I'm not gonna comment on that specifically, but I do think we've said before and it remains the case, that our price position, our relative price position is very important, and that we use our scale and our share, and our category authority to make sure that we've got the right ranges at the right price. Keeping consumer volumes, the right pricing and our growth margin in balance is the focus for the retail business. We've done it successfully this year through some pretty difficult times. That's the focus for next year.
Cool. Okay, thanks. On VIP, you're obviously year-on-year solid growth, but the number was at GBP 7.6 million. I appreciate there might well be some rounding in there, but sort of looks flat versus the interim level, Q3 versus interim. Just wondering if there's sort of any calendar effects and how that squares with the substantial new puppy and kitten customers that you're getting coming in the business or whether it's just a rounding thing.
Mike, do you want to take that one?
Yeah, I think, Gav, the point to remember on VIP, Andy, is, you know, you go back to the end of FY19. March 2019, VIP was GBP 4.4 million, and it's GBP 7.6 million now. just shows the pace and scale at which we've acquired customers, so the business is 30% bigger. It's in growth quarter three, quarter three last year. As you point out, you know, versus the half, we've still got roughly the same number of VIPs. I would point to where we've grown from, you know, GBP 4.4 million at the end of in March, in March 2019. That was only, what, four years ago.
Yeah, yeah. Okay, yeah. Then last one on market share. Have you got any sort of idea? It looks like you've gained market share, any idea, sort of maybe conversations with suppliers or anything like that gives you any idea what you've done on from a share perspective?
Yeah. Market share is notoriously difficult to measure in this category. I think from our results, we would have some confidence that we have grown share, but it's not something that we are able to measure regularly or with absolute precision. Yes, I'm pretty sure we have.
Yeah. Good stuff. Okay, thanks very much. Well done.
Our next question comes from Matt Garland from Deutsche Bank. Please go ahead.
Hi, guys. Thank you for taking my question. I just had 2. First of all, in terms of the much better and sort of more robust performance that you've had this year, does this change your view around the speed that you might be able to achieve your sort of medium-term guidance, or does it change the makeup of that at all? Just in terms of the new sort of app that has recently come out. I understand it's obviously quite early days, but do you see any significant sort of change in customer behavior around them using, you know, more services or using the Vet Group more? Do you sort of see any early signs, I guess, that the percentage of customers using more than one service has materially increased? I understand it's sort of early days at this point.
Thank you.
Thank you. Yeah, we talk about our medium-term guidance of GBP 2.3 billion. I think it's important to note that that was issued a year ago, just over a year ago, we have made better than expected progress. That really is not a, that's not a ceiling, it's just a way point. If we look through and past that, we're putting the investments in the business now, in digital, in data, in our continued store estate revamp, and in our Spice, in our Spice distribution center project Spice. All of that is geared to taking us to and beyond the GBP 2.3 billion. We're, we have a lot of confidence in that, and we have confidence in going through and past that as well.
In terms of the new app, it brings together shopping and VIP. It is the first kind of deliverable in terms of bringing together the ecosystem and the data. We wouldn't have expected it to do anything in the broader ecosystem because it doesn't have vets or anything in it yet. The early signs, which is that we were hoping to increase retail revenues by putting shopping more conveniently alongside VIP. The very early signs are that it's in line with our expectations, so we're very pleased with that. More pleased with the fact it's delivered so seamlessly with very little disruption. Consumers are enjoying it, and it's proving out that when we do put more things more conveniently in front of consumers to enable them to care for their pets better, they're taking that up.
That's a very exciting development, and gives us even more confidence in our Polestar project. Thank you.
Thank you.
We'll now take our next question from Andrew Whitney from Investec. Please go ahead.
Good morning. Thanks for taking my question. It's just one for me on the Vet Group. The performance is very strong. Got record weekly sales and, you know, new client signups sort of running at 8,000. I think previously you've commented that some of your vet practices might be getting to the sort of capacity constrained level. I just wondered if this ongoing particular strength changes your view of the way capital is allocated in the business. Does this make the vet business a sort of higher priority in terms of allocating capital to it to serve this big opportunity? Thanks.
Yes. Yeah. Thanks, Andrew, for the question. Yeah, really pleased with the growth in the Vet Group. I think we've been saying for a few good few months and probably years now that there's a lot of opportunity in the Vet Group. Previously, that's focused more on the maturity of the practices, and I think that's what you're seeing coming through the numbers now with our average practice taking GBP 1.1 million. Actually, we think there are a number of other levers of growth in the Vet Group. So extensions whereby we can extend the space allocated to the vet, put in more consulting rooms, more opportunity to sign up clients. We think there's around 70 of those already in our estate that we could do.
That's expanding into existing voids or mezzanines within a retail store, so we pay not a penny of extra rent, and we densify the revenues coming out of that estate. That's an exciting opportunity. We also have the opportunity within those extensions and more generally for our vets to do more advanced surgeries, advanced practice, whether that be CT scanner or orthopedic surgery. We're seeing a lot of vets now expanding into those areas. Advanced practices is another opportunity. We're also seeing opportunity for productivity within our four walls ecosystem. With vets being at a premium, the more you can get nurses to do instead of vets, the better, and the more you can get laypeople to do instead of nurses, the better.
Obviously, we're hugely advantaged in that, both within our four walls, because we have colleagues there and available to take on tasks that vets don't need to do, that can free them up. Also that's one of the underpins of our digital platform, is that we can get the right task to the right colleague, whether that be face-to-face or virtually, and use our data to make those decisions. Across those levers of growth-Expansions, advanced practices, and increased productivity, as well as the maturity that's embedded and the attractiveness of our JV model, which we think means we can open further greenfields. We're super excited about the opportunity within the vet. Some of that requires capital, and we've obviously got a very clear capital allocation policy where we'll primarily invest in organic growth in the business.
We've got plenty of that to go after. Some of it's just good operations, and we'll leverage the existing investments that we're putting in the business as well. Great question, and I think it's one of the areas that we are most excited and confident about going forward.
Thanks a lot. That's clear.
Thank you. As a reminder, to ask a question, please signal by pressing star 1. We'll now take our next question from Paul Rossington from HSBC. Paul, please go ahead. Your line is open. Paul, please make sure the mute function on your phone is switched off.
Apologies, I was on mute. Two quick questions, please. Firstly, you talked about launching a new digital tool for booking, vet appointments in the quarter. Did they contribute meaningfully to vet revenue growth in the quarter, or is the benefit of that yet to come? That's my first question, please.
Yeah. The new digital tool allows consumers to communicate with vets and vet practices to do a number of things. Yes, we do think actually that it has driven productivity improvements because the vets can communicate the receptionists throughout the day with clients, which means that the vets are freed up to do tasks which they may have previously done at the end of the day. Yeah, actually we do think this is a driver of productivity, but it's very early days, and we think it just shows the potential of what's to come. It's one tool that we can open up a lot more of that with our Polestar investment platform. Yeah.
Thank you. My second question, is that you talked at the half year about looking at new ways or better ways of recruiting more vets into the Pets at Home ecosystem. I was just wondering if you were able to say anything about that at this stage, whether you've made any progress in that regard just yet. Thank you.
Yeah. Our recruiting is improving. I would say the things that we talked about at the half year are still reasonably nascent. One thing to note, though, is that our JV model has an embedded level of retention and a recruitment benefit because we have some of the most experienced vets in the country, running our as JV partners running our practices. They're moving, increasingly expanding their practices, moving into advanced practices. Those big busy advanced practices are the places where young vets want to work. We are definitely seeing the, at a graduate level, at a new vet level, that is a real advantage which we'll lean into. I think there's more to come on that.
Thank you very much. Thank you.
Thank you all. As there are no further questions in the queue, I would like to hand the call back over to Lyssa for any additional closing remarks. Over to you, ma'am.
Thank you very much. Thank you for your questions. A really great set of questions. Thank you. Very thoughtful. Yeah, we're really pleased with the performance in Q3 and with our full year outlook. We look to forward to speaking to you at the end of the year.
Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.