Questor: we are 'humanising' our animals and Pets at Home is reaping the rewards. Buy

Questor share tip: the company has cleverly positioned itself to benefit from pet owners’ willingness to spend freely on their dogs and cats

Richard Evans 19 February 2020 • 6:00am

Cat dressed as nurse — The 'humanisation' of pets is a lucrative business Credit: Getty

There is a hierarchy to how families spend their money when times are hard: the children come first, then the pets, and finally the parents.

This view, expressed some years ago by the head of Nestlé to the fund manager we feature this week, is behind the latter’s belief that pet shops are “defensive” businesses.

“Opinion polls show that a majority of pet owners will cut spending on themselves rather than on their cat or dog,” said the fund manager, Eustace Santa Barbara, who runs the Marlborough Special Situations fund alongside Giles Hargreave.

It’s not just when money is short that we show our devotion to our animals. “We are seeing the ‘humanisation’ of pets – we now spend money to give them better diets, health care and insurance,” Mr Santa Barbara said. “And we spend on fun for them too, such as grooming or giving them Christmas and birthday presents.”

He said this made pet shops one of the fastest growing areas of retail, with 3pc annual sales increases. He pointed out that 25pc of Britain’s adult population had a cat and 24pc had a dog. The latter typically cost their owners £15,000 over the average lifespan of 12 years.

Mr Santa Barbara has exposure to the sector via a holding in Pets at Home, which floated in 2014.

He said the firm encouraged customers to keep coming back by offering a range of services: while you can of course buy pet food and accessories, most of the shops also offer an on-site veterinary service via a business called Vets4Pets, operated as joint ventures with the vets themselves.

“The stores put pets centre stage. There are play areas for children and their animals, showers for dogs and weighing scales,” he added. “The company also operates a loyalty scheme, whose members tend to spend 20pc more.

“The scheme captures their data, which can be used to remind them that their pet hasn’t been groomed for a while, for example.” He said all these initiatives made customers “very loyal”. “There is latent value in having multiple services in the store, and people tend not to change their vet unless they move,” he said.

“Even Amazon is not too much of a threat. Pets at Home cut its prices two years ago and they are now close enough to Amazon’s, whether in the shops or online. And while Amazon is fantastic for certain types of retail, it is not going to send a vet or a groomer to your door.”

He said the company had been growing sales by 7pc a year and could expect to benefit from the maturing of the vets’ business within the next year or so. “It takes a few years to build up the practices but they should start to generate cash soon,” he said.

“In the medium term I would expect profits to grow at a rate in the mid-single digits. The firm is strongly cash-generative: the ‘free cash flow yield’ [cash generated relative to market value] is forecast at 7.5pc for the current year, rising to 9pc in 2022. The valuation of 20.5 times expected earnings for next year looks attractive given the growth rate.”

The shares yield about 2.4pc and Mr Santa Barbara described the firm’s debts, now £75m, as “negligible”.

Questor says: buy

Ticker: PETS

Share price at close: 309p

Update: JD Sports Fashion

The Marlborough fund manager put us on to JD Sports in April 2017, since when the share price has almost doubled.

He said nothing had changed with the business: “the management are still executing well and they have delivered on everything they said they’d do”.

He added: “It’s so far so good for Finish Line, the American chain it bought recently, and its mission is still to be the number one sportswear retailer globally. We have cut our stake somewhat as the share price rise changes the risk-reward balance but it remains a significant holding for us.”

Questor says: hold

Ticker: JD.

Share price at close: 850p

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