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The words ‘retail’ and ‘raised profits’ are not ones we have seen combined into one sentence too often in 2020. In fact, even before the pandemic the retail sector was struggling in many areas. But two words that have become closely correlated during the pandemic - ‘lockdown’ and ‘puppy’ probably go a long way to explaining why pet store Pets at Home Group (PETS) is on a roll right now.

So much so that the pet care business has raised its profit forecast for the full year, following strong sales in the eight weeks to 10 September that saw “double digit like-for-like growth”. While the company acknowledged that Covid-19 had created “material uncertainties” in the trading environment, it said it now expected pre-tax profits to be ahead of current market expectations.

Exactly how strong that sales growth was - and hopefully will have continued to be - will be spelled out at Tuesday’s full-year results announcement.

What investors will be hoping is that those double-digit sale hikes will lead to a tasty dividend pay out. There is good reason for optimism to be running high. The chain’s 453 stores have remained open throughout the coronavirus pandemic because pet care products are deemed essential by the government. Pets at Home will undoubtedly have been helped by government permission to stay open when other shops had to shut, as well, of course, as that surge in sales of lockdown puppies. Combined, they have kept the retailer’s cash flow in good shape, with cash in the bank of around £73 million in the year to March 2021. Again adding to the hope that investors will be rewarded with cash dividends.

Sales in March rose more than a third, as pet owners stocked up ahead of the first lockdown. This saw revenue for the year to 26 March top £1 billion for the first time. Pre-tax profits including the impact of new lease accounting rules came in at £85.9 million, from £49.6 million the year before.

It has not been all plain-sailing though. After spending £5 million on staff bonuses, charitable donations and costs associated with implementing social distancing measures at its stores and distribution centre, at the half-year stage back in May, chief executive Peter Pritchard was cautious. He said the closure of pet grooming services, the cessation of pet sales and the cancellation of most elective surgery at the company’s veterinary practices during lockdown meant that revenue in the first 11 weeks of its new financial year was about £20 million lower than expected.

The warning back then was that first-half profits would be “materially below” those of 2019. Pets at Home did not give an updated forecast, but the update prompted broker Numis to cut its full year profit forecast for the group, from £99 million to £68 million.

With the reopening of veterinary services instore, the ‘enhanced services’ model at Pets at Home, offering per services such as grooming and in-house vets, has proved to be a smart move that will have paid off as it has kept shoppers and their four-legged friends coming through the door and then browsing/sniffing the aisles on their way through.

Looking ahead though the focus is likely to be on boosting online sales in addition to making sure Pets at Home remains a shopping and pet care ‘destination’ for animal lovers. The group already knows it needs to accelerate its online ordering and subscription services, as there has been a huge shift towards these, as a result of the pandemic. Investment has been stepped-up here already, but further investment in these areas probably would not go amiss. Omnichannel sales, things like subscriptions for pet food and parasite treatments, orders taken in store and orders made online, still only account for around 10% of sales.

The all-important Christmas season is now underway and with stores open during England’s second lockdown, it will be interesting to hear what new tricks Pets at Home has up its sleeve. Tuesday’s results though should have enough treats in store to get investors’ tails wagging.

More on Pets at Home Group

Important information: Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics Covered:

UK; Shares

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