Earnings Call Transcript - PSNY Q1 2022

Operator, Operator

Good morning, and welcome to the Q1 FY'22 Trading Update Call with Pets at Home Group Plc. I would now like to hand the call over to Peter Pritchard, Group Chief Executive Officer. Please proceed.

Peter Pritchard, Group Chief Executive Officer

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, the Group CEO. With me today is Mike Iddon, our Group CFO. And we're pleased to share with you our Q1 trading update for our financial year FY '22. Our quarter one covers the 16-week period from the 26th of March to the 15th of July. 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 this 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 are five key messages that underpin our performance in the quarter. First, we again continue to grow our share of the U.K. 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/or channels with omnichannel revenue growth of 21.4% or 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 are 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%, and that's very 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 Club, 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 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. Puppy and Kitten Club members ultimately feed into our VIP loyalty club. And our VIP loyalty membership now stands at a record 6.6 million members, and that's up 17% year-on-year. New pet owners need a vet, and new client registrations across our vet practices are now averaging over 10,000 per week, roughly one in 10 visits. This is supported by the continued success of our in-store referral program and our Puppy and Kitten program. Third, our VIP gives access to rich customer data and of course, insight. 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 1.3 million plans, and that's now generating over GBP 100 million 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 24-hour access to our vet helpline provided by The Vet Connection, a telehealth business that we acquired last year. We're working really hard to encourage customers to shop across our entire ecosystem. I'm pleased to report that 26% of all of 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. 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. 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 and store stock was also launched in the quarter, which once scaled should generate significant cost efficiencies as well as providing a flexible and convenient solution for the customers. Finally, we continue to be laser-focused on 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 Handforth is particularly exciting, being the first to incorporate our brand-new best operating model. 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. In conclusion, our performance over the last quarter further demonstrates the strength of our unique pet care strategy and the robustness of the U.K. 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 our Better World Pledge, helping create a better future for pets, the people that love them, and our planet. Finally, I'd like to express my sincere thanks and gratitude to every single colleague and partner 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. I will stop there. I'm sure there will be a number of questions, which Mike and I will only be too pleased to answer. Let me hand you back to our call operator, Daniel.

Operator, Operator

We can now take our first question. It comes from Jonathan Pritchard at Peel Hunt.

Jonathan Pritchard, Analyst

Congratulations on an excellent quarter. I have a couple of questions regarding costs and the underlying assumptions moving forward. First, about the GBP 9 million you mentioned related to COVID and the general slowdown, which seems to be reflected in like-for-like comparisons. What are your thoughts? What assumptions are you making about pandemic-related disruptions? Are you anticipating any further lockdowns, or do you believe that by the end of the year, the GBP 9 million run rate will be significantly lower? Additionally, regarding freight costs, are we seeing a slight decrease there? We've encountered inflation rates in the hundreds of percent in some cases. Is that situation easing a bit, or do you expect those high costs to continue for a while longer?

Peter Pritchard, Group Chief Executive Officer

Jonathan, thanks for those two questions. Let me hand you over to Mike first to talk about our view on disruption for balance here, and then I'll come back and talk a little bit about our freight and our view.

Michael Iddon, Group CFO

Thank you, Jonathan. You are correct that we accounted for GBP 9 million in COVID-related costs right from the start of the year to address the anticipated operational disruptions. This breaks down to about GBP 380 per store per week for context. We are indeed seeing these costs manifesting as many of our team members, like in other companies, need to self-isolate due to track and trace protocols. The supply chain is experiencing disruptions which are well known to affect various consumer businesses. We believe that GBP 9 million is an accurate estimate. We hope the pandemic resolves sooner than expected so we can return to normal operations, but GBP 9 million is what we are currently tracking. We will provide an update on this during our half-year report. Regarding freight, we import approximately 3,000 containers annually. Last year, our freight costs were between $1,500 and $2,000, while current spot rates range from $12,000 to $14,000. Although we are not purchasing at spot rates, we are certainly paying higher than in previous years, resulting in roughly an additional GBP 10 million in costs, which has been factored into our guidance. Nonetheless, as Peter mentioned earlier, we have a program to help offset these costs through efficiencies, rent reductions, and similar measures. However, this remains a cost reflected in our profit and loss statement. In response to your question about like-for-like performance, the 30.2% reflects a weaker comparison from last year. We have strong business momentum and are planning for around 10% growth for the remainder of the year, which is modest compared to our first-quarter growth. Nevertheless, looking at our two-year like-for-like performance, we aim for over 20% as we continue through the remainder of the year. This sustained growth will be driven by momentum from the past quarter and our acquisition of many new customers this year.

Peter Pritchard, Group Chief Executive Officer

I think just another thing to add because often when we talk, we obviously immediately focus on the retail business. I wouldn't forget the dynamic of our business, which is our veterinary business. Our fixed costs are pretty much fixed. 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&L very effectively. We have a natural hedge as we think about the overall pet care profit pool for us. You can see where our vet business is running relative to our retail business. So that's the other thing that helps us balance off our overall equation. Of course, freight is impacting everybody, and we're not isolating here. I think the other thing we'll be watching very carefully is inflation. We've got a very hard-on-price position within Pets. I'm keen to make sure that we don't let our price position erode. If anything, I think we should use our scale and our growth to ensure we keep our pricing very competitive.

Operator, Operator

We can then move along to our next question. It comes from Tony Shiret of Panmure Gordon.

Tony Shiret, Analyst

You mentioned the data insights that you're getting through the enhanced data capabilities you had. Just wondered if there's anything specific interesting you could point to as a sort of general indicator of whether 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?

Peter Pritchard, Group Chief Executive Officer

Great. Thanks, Tony. Well, let me deal with the question on data insights, and I'll hand over to Mike to talk about how the retail like-for-like is performing. You're absolutely right. One of the things that we're seeing is, as that capability is on board, we're now in sourcing all our data. What we're doing now is operationalizing that data. The biggest benefit we're seeing immediately is in CRM. Our mailings and our customer relationship management are increasingly becoming more effective. We can see that in the performance rates in terms of revenue spend from customers or success rate, which just gets better and better because our algorithms are learning very quickly. As we do campaigns, we are modifying campaigns in flight as we see early response from consumers. There are a couple of areas I would point to that we're seeing significant success in this year. One is in subscriptions. You have seen that we've now got 1.3 million plans. We've got strong growth across Flea & Worm, Easy Repeat, and healthcare plans. What we've been doing is looking at which customers are most likely to take a subscription based on the behavior of other customers. Therefore, it provides us with a really effective target pool to go for. That's why you've seen a strong performance in subscriptions. Some of our early work there is proving to be very successful. One of the other things, which is work in progress, I'll tell you about because I only saw it last week, is we've been looking at our range optimization by store. Historically, we ranged quite uniformly by store. Our data teams are now working closely with our merchandising teams to provide much more tailored insight for store locations and performance. The early trial work there is really interesting. As we are executing our pet care reformat, it gives us an opportunity to reset space and ensure we're optimized. I think that's something we hadn't anticipated when we were looking at our store refresh program, but it's starting to build into it. The final point on data is when we invest in it, we do it very clearly from a CRM point of view. As we brought that capability in-house, we are now solving many problems with a data-led approach, which we had never factored into our thinking. It means that as we make decisions, we are making significantly more sophisticated and nuanced decisions, which flow through the P&L in many ways. For me, this has been a great experience, one that I’m really excited about because our team continues to ramp up, and I think the opportunities are still unknown because we are discovering them, but it is very exciting. I'll hand over to Mike to talk about retail like-for-likes.

Michael Iddon, Group CFO

Yes. Tony, for the quarter, you'll see in the statement that retail like-for-like is at 29.1% in total. If you break that down into its components, store like-for-like was particularly strong at close to 28%. We report here omnichannel growth of 21.4%. The other third component of that is our grooming business, which you may remember was closed for a lot of Q1 last year. So we've got a very strong like-for-like growth in our grooming business. Add those three together, and you get to the 29.1%. To add a bit of color, in terms of category level, food and accessories are pretty much equal in terms of their growth, with both contributing to overall retail growth. In terms of the shape of participation, our online business dropped back slightly compared to Q1 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 as customers are returning to stores. Other businesses are seeing a similar trend. So whilst our omnichannel business is still growing strongly in the quarter, the biggest contribution by far is from the stores.

Tony Shiret, Analyst

And Mike, is there any price inflation in this like-for-like?

Michael Iddon, Group CFO

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 and more transactions.

Operator, Operator

Thank you. We have no further questions at this time. We have no additional questions, so I will now turn the call back to the speakers for any further or closing remarks.

Peter Pritchard, Group Chief Executive Officer

Great. Well, thanks so very much, everybody. I know today is an incredibly busy day. There are a lot of results out. So I really appreciate your questions. Have a great summer. Hope you manage to get away. And to Andrew Porteous, if you are listening, hope you have a great wedding on Saturday. Thank you.