Quickfire roundup of the pet industry – what investors need to know – Hargreaves Lansdown

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The pet industry boomed over lockdown. Millions of us in the UK alone got a pet. Now as with most consumer trends, certain companies got a boost from this change.

But a surface level spike in demand doesn’t mean all companies with exposure to the pet sector are on equal footing. It’s important to understand where these companies stand now. We think there’s ongoing opportunity, but there are a few things to keep in mind.

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Pets at Home

This one doesn’t need too much introduction, it’s the pet store chain with almost 460 shops throughout the UK. As you can imagine, the pet boom during the pandemic meant Pets did very well. Even as things were uncertain, all those new puppies and kittens needed their supplies. As these animals grow, they become long-term sources of repeating revenue.

What’s very interesting with Pets at Home is its hybrid approach. 41% of omnichannel revenue involves input from a store colleague, so think of that in terms of things like click & collect or ordering something in store. 57% of the group’s shops also have a vet practice or grooming salon – offering services in this way is a great way to encourage repeat custom and massively increases cross-selling. That’s also true of Pets at Home’s VIP club, with over seven million members, its users are more likely to shop across more than one of the group’s channels.

I certainly can’t knock momentum but there are some things it’s prudent to mention.

The valuation shows the market has high hopes for the group, but that does mean there’s more pressure to perform. Keeping up with the market’s expectations is a tough ask at the moment. Pet spending is more resilient than other forms of spend – we’re going to keep feeding our dogs no matter what happens, but customers are more likely to rein in spending on accessories and extras. I think it’s likely Pets at Home’s margins are going to come under some pressure.

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CVS Group

From a pet superstore to a vet group. CVS Group has over 500 veterinary branches across the UK, Ireland and the Netherlands, plus a handful of diagnostic laboratories and pet crematoria. They’re supported by the growing Animed online veterinary pharmacy. As we shift to a more digital world there’s reason to think this division will only build scale and become more profitable. Offering services across the broad spectrum of pet needs helps CVS capture as much income from owners as possible.

That also feeds into another point, similar to Pets at Home, which is that cats and dogs go to the vets more than once in their life. On a business level that equates to reliable revenue, especially as all the lockdown animals age, which is a morbid way to look at things but true nonetheless.

As is also the case along with Pets at Home, CVS Group’s valuation is anticipating high growth levels. But what I would say is this has come down a lot from the very frothy days of a few months ago. That means there’s more breathing room from the market’s perspective than there has been, but at 19. 5, the price-to-earnings ratio still suggests the market has high hopes.

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Nestle

Nestle’s known for making KitKats but the reality is, Nestle is also responsible for a wide range of brands including Purina Petcare, whose products saw revenue rise by double digits last year. What is interesting, and a potential growth lever of the longer-term, is the rising success of the group’s science-based brands and vet products.

As the world becomes more pet-obsessed and all these new owners continue to humanise their furry friends, spending more on specialist food is a trend that should progress. Of course in the immediate term with inflation biting this might not play out fully.

The larger contributor to Nestle’s organic growth tends to be its coffee products, it looks after Starbucks at-home drinks too. But as an option that offers exposure to the booming pet trade, while offering other goods, Nestle is an interesting one.

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Content for this article comes from a recent episode of HL’s Switch Your Money On Podcast. For further insights to sector and market news you can listen to all available episodes now.

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