FTSE 250 stock Pets At Home just soared 15%! I think there could be more to come

Shares in pet care business Pet At Home (LSE: PETS) shot to the top of the FTSE 250 leaderboard this morning as the company reported its latest set of quarterly numbers to the market. Here’s why the stock is soaring 15% higher.  

Pets bounces back

Total and like-for-like revenue fell 1% and 0.7% respectively over the period from 27 March to 16 July. However, this doesn’t tell the whole story.

In the first eight weeks, like-for-like revenue growth tumbled 13.5%, only to bounce back by 12% in the second eight weeks. In other words, Pets was hit hard, had done well to recover, and was “emerging as a stronger business“.

Broken down, retail like-for-like revenue increased 0.4% on decent sales of merchandise. This helped cushion the blow of needing to shut down its grooming salons and the sale of pets during the period. During the quarter, Pets also trialled new initiatives, including a “Call and Deliver-to-Car” service and home delivery of medication.

Unsurprisingly, omnichannel revenues soared 71% on record order volumes, prompting Pets to announce that it had signed a conditional lease agreement for the construction of a new storage and distribution facility; the idea being that it will then be able to manage its online orders and retail stores from one site.

As if this wasn’t enough good news, Pets at Home also reported on “heightened demand for pet ownership“, evidenced by the growth in members of its VIP service (+20.3%) over the period. The number of subscription customers also rose 18.1% in the quarter to just over 900,000. 

The only slight negative from today was that like-for-like revenue from its veterinary business fell (by 9.3%) as restrictions on procedures came into force. Nothing revelatory there.  

So, more gains to come?

Not necessarily, at least in the near-term. While recent momentum had been ahead of expectations, even Pets said that it would be wrong to assume that trading would continue like this for the rest of the year.

All perfectly prudent, in my view. After all, we have no idea how long social distancing restrictions will go on for. There’s also the possibility of more local lockdowns and even, worst-case scenario, one that extends to the whole country. 

While many rushed to buy a puppy for lockdown, there’s also no certainty that the rise in pet ownership will be sustained. Indeed, a jump in unemployment may mean that buying a furry friend will become less of a priority for many would-be owners.

That said, the fact that Pets was able to use its designation as an ‘essential’ retailer to stay open during lockdown allowed it to gain “valuable insight into consumer behaviour and preferences“. This should serve it well if we’re all sent back to our homes again. It should also make it easier (though not easy) for the company to estimate costs, at least compared to other businesses. 

In the meantime, Pets looks pretty sound financially. It ended the quarter with a total of £267m in cash and undrawn banking facilities.

Solid buy

All told, I think today’s news and the fact that it’s got its paws in so many non-discretionary spending pies underline the solid case for investing in Pets At Home. 

A forecast price-to-earnings ratio of 24 before this morning looks high. However, a bounce-back in earnings in FY22 should bring the valuation back down.