Pets at Home (LSE:PETS) continues to see its veterinary business bolster overall company value, even as its retail segment faces ongoing challenges, according to Jefferies.
Last week, the group issued a profit warning, revising its fiscal 2026 profit before tax (PBT) guidance to a midpoint of £95 million, down from previous estimates of roughly £185 million. Jefferies noted that the decline has been entirely driven by retail underperformance, with divisional PBT expected to drop from £101 million in fiscal 2022 to £31 million in fiscal 2026.
The company highlighted a 5% decline in year-to-date store sales, with accessories and advanced nutrition categories also underperforming despite growth in digital sales. Jefferies pointed out that these areas carry higher associated gearing and margin, amplifying the effect 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, noting that the company is pursuing plans to address gaps in its food range and innovation, while accessories remain more problematic.
Pets at Home has also seen shifts in market share trends. After years of retail share gains, the company experienced losses over the past year. While the relative trend shows some improvement, Jefferies suggests these challenges are not purely market-driven. The recent departure of CEO Lyssa McGowan was attributed to these ongoing retail difficulties.
In response to the warning, Jefferies revised forecasts, lowering fiscal 2026 retail like-for-like sales from +1% to -0.5% and cutting gross margin by 100 basis points. This adjustment translated into an 18% reduction in group PBT, from £115 million to £94 million. For fiscal 2027, limited visibility prompted Jefferies to assume modest 1% growth in retail like-for-like sales, leading to a further contraction in retail PBT from £31 million to £24 million. Meanwhile, the veterinary division is expected to maintain momentum, keeping overall group PBT flat.
Jefferies’ sum-of-the-parts valuation places considerable emphasis on the veterinary business, which now represents roughly 90% of group PBT. The base case price target is 250p per share, reflecting a 6x P/E multiple for the retail division and a discounted cash flow valuation for 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 12x retail multiple and 3% terminal growth, yielding a target of 320p, while a downside scenario, valuing retail at zero and applying more conservative assumptions to the veterinary division, results in a 150p target.
Despite retail struggles, Jefferies emphasized that the scale and profitability of the veterinary division underpin the company’s market value. “We continue to see value in PETS with the Vet group accounting for the entire market cap,” the brokerage said, highlighting the unit’s central role in maintaining investor confidence amid broader retail headwinds.
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