If you bought a puppy during the first lockdown, you wouldn’t have been alone (Miles Costello writes). Many animal lovers saw the dramatic change in lifestyle brought about by working from home as the ideal moment to take on that long-desired pet.
The resulting higher demand for food, toys and treats, particularly online, came as a big boost to Pets at Home, the FTSE 250 retailer that has traded well through the pandemic. Unsurprisingly, new and existing customers stockpiled goods for their pooches as well as themselves.
As we go into the latest national lockdown, the retailer is again classified as an essential service and can trade as normal, albeit with social distancing and other protocols in place at its stores and grooming salons. Whether there will be the same rush to take on lovable but demanding furry creatures, and to stock up the cupboards, is another matter.
The first Pets at Home shop opened in Chester in 1991 and there are now 451 outlets nationwide, along with 315 grooming parlours, 394 veterinary practices run as joint ventures and a further 46 that the company manages itself. It generates the vast majority of its revenues from its core business of selling pet food and basic provisions such as beds, toys and leads.
Having listed its shares in 2014 at 245p, Pets at Home has been a strong stock market performer, despite heavy competition from unlisted rivals such as Zooplus. The company’s quote now values it at just under £2.2 billion, based on annual revenues of more than £1 billion and underlying pre-tax profits of about £100 million.
Life under Covid-19 has not been a complete breeze for the retailer, which initially shut its grooming salons to install screens and take other measures. Sales of pets were stopped and restrictions were imposed on some vets’ procedures. This led to lower revenues in some areas, as well as to higher costs and pressure on margins.
These setbacks were more than offset by stronger trading, though, and group like-for-like revenues grew by 5.3 per cent over the six months to October 8. Underlying revenues surged by a striking 12.7 per cent during the second three months of the period as restrictions were eased. Although higher costs — including for personal protective equipment and bonuses for frontline sales staff — depressed underlying pre-tax profit by 5.1 per cent to £39.6 million, there was similarly notable growth of 43.7 per cent over the second three months.
So will there be another coronavirus-inspired surge in buying pets? In truth, it doesn’t matter either way. Pets at Home is already locked into the UK’s love of animals and the pandemic has inspired the company to raise its game with online sales and customer loyalty programmes. It is gaining market share in each of its business lines. The group has also demonstrated its ability to cope with lower-cost rivals, although with a hit to margins as it takes steps to compete on price.
As a cash-generative operation, the Pets at Home balance sheet is in rude health: net debts stand at a very modest £50.9 million and it has access to an undrawn credit facility of £297.1 million.
In June 2019, this column recommended holding the shares, since when they have risen by just under 138 per cent — and were up 11p, or 2.6 per cent, to 442p yesterday. Trading at about 25 times Liberum’s forecast earnings and with a dividend yield of 1.9 per cent or so they are not a screaming “buy”, but this is a high-quality retailer and the stock should have more to give, so hang on.
ADVICE Hold
WHY Has improved its offering during the pandemic and steady growth should continue
Softcat
Like many of its peers in the IT industry, Softcat put in a strong performance during the pandemic (Simon Duke writes). Its shares rose by nearly a fifth last year as its customers, particularly in the public sector, stepped up investment in their computer systems.
As Britain entered its third lockdown yesterday, Softcat shares were on a roll again. The stock closed up nearly 9 per cent after the group said that results for its fiscal first half would top City forecasts. In an unscheduled trading update, it said that trading for the six months to the end of January had been “significantly ahead” of expectations after a robust performance last month. City analysts raised their full-year profit estimates by between 9 per cent and 11 per cent.
Investors who bought Softcat stock at the time of its listing in late 2015 will be relishing their good fortune. Its valuation has risen from £472 million to £3 billion, making it one of the best performers on the stock market over the period.
The company was founded as Software Catalogue in 1993 by Peter Kelly, 63, who still owns about a third of the business. Based in Marlow, Buckinghamshire, it sells hardware, software and IT services and employs more than 1,500 people. Small companies are the bedrock of its private sector business, which accounts for about 60 per cent of revenues, with public sector bodies accounting for the rest.
The technology industry prospered in the first lockdown as companies pumped up IT budgets. The trend was strongest in the public sector. In the early stages of the pandemic, Softcat experienced a “softening” on the corporate side; companies in stricken sectors simply did not have the cash to invest in their IT systems.
Yesterday Softcat said that demand from its private sector clients was “improving” but remained “somewhat mixed”. Many customers are pushing ahead with big IT projects, but for others caution is the watchword. When the dust does settle on the pandemic, the laggards will be forced to catch up.
Softcat shares aren’t cheap — they trade at more than 30 times this year’s forecast earnings — but history suggests the company will capitalise on the surge in spending.
ADVICE Buy
WHY Profits are set to rise as customers invest more in IT
