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The past six months have not been kind to the retailer Pets at Home (LSE: PETS). I FTSE 250 The stock fell on Wednesday (27 November) as disappointing sales through September prompted a profit warning.
At 242.3p per share, Pets’ share price ended around 13% lower in mid-week trading. This takes you to its cheapest since the Covid summer of 2020.
A strong economic background fabric can continue to challenge the pet expert. However, could the new price drop represent an attractive dip buying opportunity for long-term investors? Here is my decision.
The market is cooling
Pets At Home is the UK pet care market leader. It’s a one-stop shop for everything your furry friend might need, selling food, toys, and even providing medical care through a network of veterinary surgeries.
Income increased following the pandemic when pet adoption rates increased. But despite its strong market position, it has been falling victim to weak consumer spending recently.
Today it is called “we operate in the market for selling unusually docile pets,” and says it expects the pressure to continue in the second half of its fiscal year.
Cutting direction
Like-for-like sales in its retail business failed to grow in the six months to September. So Pets at Home then cut its profit guidance for the 12 months to March 2025. Now it only expects “modest” growth from last year’s underlying profit of £132m.
It had previously forecast a profit of £144m.
But poor marketing isn’t the only problem for Pets at Home. It also says it expects the measures announced in the Budget to hold back fiscal 2026.
Changes to the National Living Wage and National Insurance contributions for employers are expected to increase costs by £18m.
Structural progress
It is prudent for the seller to warn of difficult conditions continuing until March. Inflation appears to be sticking more than initially expected, while the broader economy remains very fragile.
Yet the long-term view remains compelling, in my view.
Pets at home are always happy. It says “we are confident that this will be temporary, and growth will return to historical trends with the attractive long-term outlook for the UK pet care market intact..”
There is good reason for a trader to continue working beyond the future. Themes such as pet adoption, market pricing, and product innovation can drive market growth in the coming years.
Pets At Home is making strategic progress to capitalize on this opportunity as well. Digital investments continue to deliver impressive results, with app-based sales nearly doubling in the first quarter. It also continues to grow its veterinary care division, adding two new joint ventures (JV) and seven JV extensions between April and September.
Like-for-like sales at vetcare were up 18.7% in the first quarter.
To buy or not to buy them
Today’s decline means that Pets at Home prices are now looking historically cheap. Its forward price-to-earnings (P/E) ratio is 10.9 times, well below the five-year average of 18.6 times.
Furthermore, the company’s price-to-book (P/B) ratio fell to 1.2 times.
Over 1, Pets continues to trade at a lower book value. But the premium is the smallest since late 2019.
Despite its current issues, I believe Pets at Home is an attractive buy for investors to consider.
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