Pets at Home’s vet arm underpins value as retail division lags: Jefferies

Investing.com -- Pets at Home’s (LON:PETSP) veterinary business continues to support the company’s overall value even as its retail division faces persistent challenges, according to Jefferies. 

The group last week issued a profit warning, revising its fiscal 2026 profit before tax (PBT) guidance to a mid-point of £95 million, down from previous estimates of roughly £185 million.

Jefferies noted that the decline has been entirely driven by underperformance in the retail segment, where divisional PBT is expected to fall from £101 million in fiscal 2022 to £31 million in fiscal 2026.

The company flagged a soft performance from stores, reporting a 5% decline in year-to-date sales. Accessories and advanced nutrition categories also underperformed, despite digital sales growth. 

Jefferies highlighted that these areas have higher associated gearing and margin, exacerbating the impact on profitability. 

“The diagnosis is yet to be fully fleshed out, but our discussions indicate that mgmt believes it is more of a range/product problem than a pricing issue,” the brokerage said with the company pursuing plans to address gaps in food range and innovation, though accessories remain more problematic.

Pets at Home has also experienced a shift in market share trends. After years of retail share gains, the company saw losses over the past year. While the relative trend is improving, Jefferies suggests the shift indicates the challenges are not purely market-driven. 

The recent departure of CEO Lyssa McGowan was framed as a consequence of these ongoing retail difficulties.

In response to the warning, Jefferies lowered forecasts, adjusting fiscal 2026 retail like-for-like sales from +1% to -0.5% and gross margin down 100 basis points. 

This translated into an 18% reduction in group PBT, from £115 million to £94 million. Looking ahead to fiscal 2027, limited visibility prompted Jefferies to assume a modest 1% growth in retail like-for-like sales, leading to a further contraction in retail PBT from £31 million to £24 million, while the veterinary division is expected to maintain progress, keeping overall group PBT flat.

Jefferies’ sum-of-the-parts valuation places significant emphasis on the veterinary business, which now accounts for approximately 90% of group PBT. 

The base case price target is set at 250p per share, reflecting a 6x price-to-earnings multiple for the retail division and a discounted cash flow of the veterinary business assuming £60 million of free cash flow by fiscal 2026, 2% terminal growth, and a 7.5% discount rate. 

An upside scenario assumes a retail multiple of 12x and a terminal growth of 3%, yielding a target of 320p, while a downside scenario, valuing retail at zero and the veterinary business under more conservative assumptions, results in a 150p target.

Jefferies emphasized that despite the retail underperformance, the veterinary division’s scale and profitability underpin the company’s market value. 

“We continue to see value in PETS with the Vet group accounting for the entire market cap,” Jefferies said, highlighting its central role in sustaining investor confidence amid broader retail headwinds.