Investing.com -- Shares of Pets at Home (LON:PETSP) tumbled 12% on Monday after the company warned that profits for the next financial year would fall short of expectations, driven by weakness in its Retail division and mounting cost pressures.
Pets at Home has released its pre-close trading update for the financial year 2025, confirming that profit before tax is expected to align with consensus expectations.
However, guidance for the following year signals a weaker outlook. RBC Capital Markets notes that the midpoint of FY26 PBT expectations is about 15% below current Visible Alpha consensus estimates.
The British retailer selling pets pet food, toys, bedding and medication stated that trading trends in the fourth quarter remained largely in line with its expectations despite ongoing volatility in the UK consumer market.
For FY25, Pets at Home expects to report a PBT of £133 million, consistent with previous guidance and consensus estimates.
The company has successfully transitioned its online sales operations to its new distribution centre in Stafford and is on track to close the year in a net cash position. Full-year results are scheduled to be released on May 28.
Pets at Home anticipates continued market pressure in FY26, which will particularly affect its retail operations.
The Vet Group, however, is expected to show further underlying profit growth despite challenging year-over-year comparisons.
The company is accelerating its expansion plans within the Vet segment, with at least ten new practices set to open in the year and an additional 15 practice extensions planned.
Additionally, Pets at Home is investing £3 million into a new capital-light pet insurance proposition.
In contrast, the Retail business is expected to see a decline in underlying PBT in FY26 due to cost pressures and economic uncertainty. While the company believes it will outperform the broader market due to the benefits of its digital platform, it faces multiple cost headwinds.
These include an £18 million impact from National Living Wage and National Insurance changes, £2 million from new packaging regulations, £10 million from the rebuilding of variable pay, and an additional £3 million investment in marketing to drive sales.
Pets at Home plans to mitigate these pressures through cost-saving measures and productivity initiatives, aiming to limit operating cost increases to a maximum of 5% in FY26.
Given these factors, the company has guided FY26 PBT to fall within the range of £115-£125 million, well below the current consensus of £141 million. Capital expenditure is expected to return to normalized levels of under £50 million.
RBC Capital Markets acknowledges Pets at Home’s strong position in the UK pet care market, describing it as a relatively defensive sector.
However, near-term growth in the UK pet market is expected to be more subdued following the strong expansion seen during the pandemic.
While the Vet Group remains a resilient and attractive part of the business, RBC warns that UK veterinary valuations could remain under pressure due to the ongoing Competition and Markets Authority (CMA) investigation into the sector.
The brokerage also notes that Pets at Home’s mid-term PBT growth target of approximately 10% per year appears ambitious given historical performance and broader market trends.
Additionally, with ongoing capital expenditure and business investments, achieving this target may prove difficult. Prior to this update, Pets at Home was trading at around 11 times its estimated CY25 earnings per share.
RBC suggests that better opportunities may exist elsewhere in UK retail, such as Marks & Spencer (OTC:MAKSY) or Sainsbury’s, as growth prospects for Pets at Home appear increasingly challenging.