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Good day, ladies and gentlemen, and welcome to the Q3 2020 Trading Statement Call for Pets at Home Group Plc. [Operator Instructions]. I would now like to hand the call over to the Chairperson for today's call, Peter Pritchard, Group Chief Executive Officer. Please go ahead, sir.
Thanks, Barbara. Good morning, everyone, and thank you for joining us to hear about Pets at Home's quarter 3 trading update for full year '20. I'm Peter Pritchard, the group CEO, and with me is Mike Iddon, our group CFO. Our quarter 3 covers the period from the 11th of October 2019 to the 2nd of January 2020, and therefore captures the trading over Black Friday, Christmas and New Year. I'm pleased to say that our performance continues to be strong across our business, demonstrating the ongoing success of our pet care strategy, which builds on our pet care ecosystem. Despite the well-documented and unprecedented customer volatility, the pet care market continues to be resilient. In Retail, we delivered another quarter of robust like-for-like growth. In the Vet group, our recent actions continued to show signs of positive progress. So let me take you through some of the highlights of our strong performance in Q3. Total group revenue increased 7.9%, with like-for-like growth of 7.2%. Within that, Retail grew by 7.2% with like-for-like growth of 7%. We traded against good comps from last year, meaning our 2-year like-for-like was 12%. Our omnichannel business grew at 23.4%, driven by increased website visitor numbers and the continued popularity of our flea subscription service. This is now our 12th successive quarter of retail like-for-like growth, has been underpinned by competitive sustainable price position, product innovation and the ongoing success of our VIP Puppy and Kitten Club. Whilst the retail sales growth has been broad-based across all categories, we saw a particularly strong performance in food, continuing the trend we saw through half year 1. Our great range of Christmas accessories sold well, all of which culminated in a record trading day on Monday before Christmas. In addition to product sales, our grooming salons were full of dogs getting their Christmas haircuts as we groomed over 27,500 dogs in 1 week and 6,000 dogs on Christmas Eve alone. And we celebrated our first ever GBP 1 million worth of weekly grooming sales. So we are pleased with the continued progress in our Retail business, but as ever, we are not becoming complacent. As we said at our half year update, we do anticipate that our retail like-for-like will normalize. In quarter 4, we comp against our strongest quarter from last year. That said, we are setting up our business to take as many sales as our customers will give us, and we expect to continue to take share in a very healthy market that we believe is growing around 3%. Moving on to our Vet Group. We saw total revenue growth of 14.4% and like-for-like growth of 8.9%. There are a number of moving parts within the Vet Group since our revenue is made up of fee income, which we take on revenues generated by our joint venture practices, plus the revenues our company managed practices and our specialist referral the hospitals make directly. So let me break this down a little for you. In our First Opinion pet business, our total customer revenues grew by 8.6%. The market is growing around 5%. Our performance reflects the benefits of our younger practices growing quickly as well as our mature practices delivering growth ahead of the market, which we believe demonstrates the benefits of our own operated model. As we progress with the recalibration of our First Opinion business, this growth in customer revenues will remain the most important indicator of our underlying health of our practice estate. Our like-for-like joint venture fee income grew by 5.6%, and this is reflective of the planned adjustments to our fee arrangements for all of our JV practices. All adjustments made throughout this year will remain in effect for the balance of FY '20 and into next year. Also within our First Opinion business, we have a total of 44 wholly owned practices. Customer revenue growth here has continued in line with our expectations, and those we bought back and retained over the past 12 months or so are showing good signs of progress under our stewardship. Elsewhere within the Vet Group, our specialist hospitals continue to perform in line with expectations and our plans to increase both capacity and capability at Dick White Referrals, and our first greenfield site in Scotland, are both progressing well. One of our key strategic advantages is our ability to bring all aspects of pet cater for customers in ways that competitors simply can't. Whilst we were in a strong retail and vet business are driving customers across our total pet care offering, our pet ecosystem, we can create more value to customers, ourselves and investors. We continue to make progress on this, with the number of VIPs who both purchase products and use one of our services growing again year-on-year by 24%. Driving repeatable revenue from customers is a key area of focus for us, whether it be health plans, flea-in-one subscriptions or Easy Repeat food orders. We now have over 850,000 customers and clients signed up, that's 25% more than this time last year. As we look to maximize the lifetime value of our customers, these plans serve as a great solution for customers, making pet care really easy, whilst enabling us to capture an increasing share of customers at care spend. So to conclude, I'm really pleased with our Q3 performance, which was hard-won and only made possible through the commitment of all of our colleagues. I'm particularly proud that whilst delivering strong results, our colleagues went above and beyond raising a staggering GBP 1.9 million during December for pets who are less fortunate than our own. And whilst the world watched the disaster unfold in Australia, we were the first to step up to the plate and donate GBP 100,000 at WWF to support animals who desperately needed our help. All of this thanks to our VIP loyalty program, where every time a customer spends, money is donated to good causes. But there's still so much more to do. We're very much on track with our plans, and we remain confident in delivering our full year profit in line with current market expectations. So I'll stop there. And Mike and I will now be pleased to answer any questions. So let me -- let me hand you back to Barbara, our operator.
[Operator Instructions] We will now take our first question from Jonathan Pritchard from Peel Hunt.
And well done on a good number. Just on the refits, perhaps if you could give a little bit of commentary on the perhaps the older ones and where you've got perhaps a better read on the profitability post refit? And whether the newer refits have carried on the sort of momentum of the older ones as well.
Okay. Great question. Thank you. So, so far we actually have 19 new format pet care centers, which is made up of a combination of some brand-new stores, some relocations and some refits. Our latest batch of refits actually only took place just before Christmas, so it's still quite early to get a read on it. What we can see is we've seen a very positive customer response from what we've delivered, spending more time in our stores, visiting more parts of the store, and we've seen the benefit of that across our broader pet services. We continue to learn. We are very pleased, and we'll continue to amend and adjust as we move forward. Some of the things we're particularly pleased about, we've seen a step change in subscription sign-ups in stores, we've seen a step change in customer advocacy of our stores. And we're pleased to see that as we reduced the range down, as we connect more of our online versus offline, we've been able to take good sales with slightly less -- with a less product range. I don't think we can say this is finished. The way that we're approaching it is with tech learnings through every store that we do, we continue to modify. We don't think we're in rollout mode yet, but we're pleased that we can continue to move forward, and we think we continue to build a better center. So I can't give you feedback yet on gross margins, et cetera. It's still too early to get a proper read, but I'm confident enough to say what we're seeing we like, and we're going to continue to modify and continue to test before we do a full rollout.
We will now take our next question from Tushar Jain from Goldman Sachs.
Just a couple of questions on my side. First, I'm just trying to get an understand in terms of your food is doing well. Are you trying to see kind of the first cohort of customers who came in terms of better recruitment, trying to buy more accessories. I'm just trying to get a sense of how long it takes for a customer to move from food to accessories? And second question, just trying -- the fee adjustment impact is slightly more than I expected. I was just trying to get a sense of what's the average fee production across the whole vet practices you have done? And finally, if you can give us a color in terms of, I assume it's still fair to assume Christmas is more important than Black Friday for your overall sales and profitability.
Thanks, Tushar. There's 3 questions. I'll take one and three and then hand over to Mike for question two. I think the first thing is the food market is substantially bigger than the accessory market. So to see customers shop in food and winning more share of that food, frankly overall, is just a great thing to do because it's a bigger addressable market. And we know as people are much more habitual in food, what we then see is we see more accessories pick up over time. So it's a gradual process but frankly, we win more cash. So I'm quite happy to take an accessory sale or a food sale. It's just good news overall. And I think the latter point in terms of Christmas and Black Friday, I have to put both into context, neither of them are make or break for our business. They're important parts of what we do, but we don't hang our business whether we have a good Black Friday or indeed a good Christmas. Overall, Christmas is substantially more important to us than Black Friday would be, and that's really reflective of 2 things. One is we have a dedicated Christmas range, which obviously we only ever sell at Christmas, and that's an important but not life changing for our business. And the second part is what we do see is we see some of our services, for example grooming, it's the peak of the year for us as people get ready to welcome visitors to their house, they want to make sure their dog looks good. And that's why we're very pleased this year to see over 27,500 dogs groomed in that week, which was a record. I'll hand over to Mike for the middle question.
Tushar, yes, you asked the question about vet fees. I think the start of that answer is a reminder [ to you ] of what we're trying to do in the Vet Group, which is adjust our fees in order that we drive the practices to profitability as fast as possible with a big focus on cash generation. So what we've done on fees is exactly what we plan to do, both in terms of the quantum of the fee adjustment and the timing of it. And in quarter 3, what we've done now is seen what is going to be the run rate going forward. So all of the fee adjustments are now in the base in quarter 3. The headline growth in our vet practices is really very, very strong. And that's the customer revenue growth. So we quoted today, total revenue growth in our vet practices of 8.6%. But don't forget, we've closed 35. The like-for-like revenue growth in our vet practices is well into double digit. And what we've seen is a very good response by our partners to the activity we're doing to manage our fees in a better way. So exactly in line with our plan, and we're very pleased with the results we're seeing.
Got it. Just a follow-up on sort of Black Friday. So you specifically -- just wanted some clarity around margin. So you're not really seeing any online impact in the category because of Black Friday promotions? I know different categories behave differently. But just trying to get a sense, there's nothing incremental pressure around Black Friday that you need to get involved on?
There's nothing material for us, Tushar.
We'll now take our next question from Simon Bowler from Numis.
A couple of questions, if okay. First of all, can you just kind of comment on gross margin shape in Retail, whether you've kind of seen any kind of further price investment kind of targeted or otherwise? And how we should think about that for the second half of the year? And then secondly, there looks to have been kind of a step-up in kind of subscriptions across the period. And there's also kind of a number of different offers that you have to kind of count into that subscription book. I was just wondering if you can share any color on which, in particular, you had success with, whether there's any kind of targeted investment in trying to grow that part of your offer over the period.
Well, 2 questions. I'll deal with the subscription one and then hand over to Mike for the gross margin question. You're right, we've had a continued focus on subscriptions across the business. And the one area we were particularly focused in, in the last quarter, which we know actually the natural peak is around flea and it really comes down to a very simple fact. As people switch their central heating on in their homes, if there is flea larvae in the carpet, it breaks out. So it's a great time, believe it or not, to talk about flea subscriptions. And we were particularly successful at doing so. One of the things you'll see in our announcement is a new customer acquisition. And so as we see the strength of our Retail business, we are taking the opportunity to drive further customer acquisition in new customers, and that is around 2 areas, puppy and kitten acquisition, always on, and we're going to get stronger. But also, we are going to focus on subscriptions. And there are 2 areas that we're very focused in on. One is continued acquisition within flea and worm as we go into the final quarter. The other one that we want to start to tune up is Easy Repeat, and that's really about making food deliveries and consumable deliveries more easy for customers. So we've been getting our capability in the DCs ready for that. That's all done and enacted. So now we will start to put our foot on the pedal and start to drive acquisition harder in those spaces. So I'll hand it over to Mike to talk about gross margin.
Yes. So Simon, the question on gross margin. That's what we're seeing in gross margin is no different what we saw in the first half and that is a mix impact because of the strong sales we're seeing in food which does have a lower percentage margin than accessories. We see this as business as usual. We're managing that and all of that is built into the guidance we've given. We don't actually see that as a bad thing. Growing food really well is a really strong thing. And don't forget, accessories is also in growth as well. Food sales is the way that customers start to trade with -- shop with Pets at Home. And from that, we can then get those customers to shop across a broader range of categories. So really, same sort of pattern we saw in the first half. It's all about the mix, not about the rate. We're managing that. Business as usual. And actually, we see it as a good thing that we're growing our food business so strongly.
Okay, great. That makes sense. A quick follow-up, if I may, just on the subscription side of things. In terms of kind of stepping up the kind of the acquisition both kind of what you've done and what you're talking to across the balance of the year, how are you going about doing that? Is this kind of a marketing push to drive awareness of it? Or is it kind of investment into pricing that tends to kind of drive new customers into the business? And is something like a flea subscription a way of introducing a customer to the broader Pets at Home? Or does that tend to be sold as kind of an additional service to existing customers?
We definitely see anybody who signed up to our flea subscription as the great opportunity to then trade them off to complete care within the vets and that's a very well-trodden path for us. So that's definitely the case. We're not planning price investment. We don't need to. We've got a really well-priced item, which works very well for customers. Actually, it's a very low cost of entry, it starts at GBP 4 a month. Our focus really is on 2 things, it's awareness and making sure as many customers are aware of this service as possible because generally once they are aware, they like it and they sign up. And the second is making sure that our digital journey, because most of our energy is being focused in store, making sure that our digital journey is as seamless and frictionless as physically possible. And that's an area that we've place a lot of focus in on, and we'll see those benefits in terms of an improved sign-up process starting at Christmas in this quarter.
[Operator Instructions] We will now take our next question from Andrew Porteous from HSBC.
A couple for me. Just on the VIP spend, I noticed that was up 27.8%. Could you give us some color about what the drivers of that are? Are you seeing more people signing up for VIP? Is most of the growth driven by increasing spend within the core base of VIP customers? And then a second question, just more broadly on customers. I know you said you're sort of doing quite well at recruiting new customers in. Can you just talk about whether you're seeing net customer numbers increase? I mean, obviously, there's some churn in your customer base as well. Are you continuing to sort of gain share from a customer perspective and recruit them in even as the sort of the store open program has gone away?
Yes. In terms of the VIP base, quite simply it's driven by more signups. So if you look at the -- 2 things: we've welcomed more shoppers into the store, and we've got more of those people to sign up. And also, we've been able to improve the swipe rate in stores, so the more customers are using their card as they swipe so it's more identifiable. And that today is now in the 70% -- over 75% of our revenue comes from VIP members. So we've done 2 things at the same time, and part of that as I've been able to point out the benefits that you get directly as a customer. But the other thing is, for example, the donation we just made to World Wildlife Fund for Nature was a consequence of our customers swiping and our customers responded so positively to that because the sheer act of swiping their card does good. So it was a really great way of doing that. The second thing is if you look at our -- if you look at what we're doing, we are super focused on new customer acquisition in terms of [ welcome pet ]. And as a consequence, we have genuinely more customers in our business. So when you look at our like-for-like growth, I think it's very easy to be seduced by -- well, it's all about pricing, isn't it? No. If you look at the quality of the growth that we're experiencing, it's down to fundamentals. We are seeing more customers come to us, which is great; they're spending more money with us, which is great; and we're introducing them to more parts of our business, which is great. So they're real sustainable things that we think are high quality, repeatable things to do. So -- and that's where our focus is. You always have to remember in our sector, we are only relevant to customers if you've got a pet and therefore, what we see is we see customers come into the pet market, they can stay for 2 years, if you're a hamster owner, they could stay for 15 years if you're a dog owner. So acquiring them, getting them into all parts of our business and then treating them really well is the most important thing that we can do, and that's where we're super focused.
Our next question comes from Adam Tomlinson from Liberum.
Three questions from me, please. First of all, just on the retail side of the business. Any particular call-outs in terms of trading patterns across the 12-week period? I think generally in Retail, Christmas seems to be coming a bit later each year. So just wondering for you guys, how that looked across the period? And also, within that like-for-like growth, are you still growing across all channels, including, if we take store only? That's the first question on Retail. Second question, just in terms of subscriptions, and delving a little bit more into the Puppy Club. So can you give any color on how the spend of the oldest, I guess Puppy Club members is developing, and your ability to get those not just to buy food, but to transact across the whole business, including the services and the vets piece? Just any numbers or color you can give to show some -- the progress on that? And the third question, just on the Vet Group, obviously, top line going well there. Are there any changes to your expectations around the operating loan balance? So I think previously, you've said a slight tick up this year and to be expected, but then a material come down in the years after, which should support that improvement in cash flow. Anything we should think about in terms of changes there?
Yes. That's 3 great questions. What I'll do is, I'll pick up question number two on subs, and I'll ask Mike to talk to Retail and vets, if that's okay? So on Puppy Club, what we can see -- and bear in mind, the club's only now a couple of years old -- what we can see is that the customers who joined the club have spent 21% more than the cohort we would previously have seen as puppy owners but not members of the club. And what we've seen is, our spend premium has continued. Bear in mind, we're only a couple of years in, so it's still relatively early days, but we can see that spend premium has continued, and in part it's because what we're seeing is they are more likely to join our vet business because it's the most obvious time when you can recruit a customer at the start of the pet journey. And it's the most obvious time to introduce them to your grooming services. So, so far, albeit in the context of still very early days in puppy, we're very pleased by what we see. And if anything, we will double down even further because we've realized how important this is for our customers. And it's the one time when you can really change behavior as people make those fundamental choices on vets and grooms. And they tend to be very sticky to those relationships. The benefit you get is actually, as you see the stickiness of the services, retail naturally benefits and I think we see in that order, seen it first in Retail, we acquire them, introduce them and then we see a stickiness. And that's sort of the model that we're trying to replicate. Early days, please, a lot more to do. I think, on Retail and Vet, I'll just hand it back to Mike.
So on Retail, the question on Retail like-for-like sales growth. So across the quarter, it was 7%. And we've got really strong growth, both in terms of stores and omnichannel on a like-for-like basis. So store like-for-like within that 4% or 5% of that growth. If anything, actually the shape was pretty steady all the way across the quarter. The final period, so 3 periods in the quarter, probably slightly lower than the start of the quarter but only by a percent across December.In terms of sort of what came through in our Christmas trading, Christmas obviously came very late, came late for everybody, not just for us. But what we were able to demonstrate is we had our strongest ever sales day on Monday, the 23rd of December, we took over GBP 6 million. And earlier this morning, Peter pointed to the fact we groomed 27,500 dogs. So I think we've demonstrated the capacity of the business to manage quite significant volumes. So we've hold up -- we were already in a setup as a business to take those sales over Christmas no matter how late they came. But the latter end of the period, of the quarter was a slightly slowing-down of the like-for-like compared to the beginning. But that would still start with a 6%. The other point, that Vets is relevant is 2-year like-for-like in the quarter is really strong. That was 12%, 2 year. And you may remember, last year, as we go now into the fourth quarter, our like-for-like was our best of the whole year. So retail like-for-like in quarter 4 last year was 6.6%. So we are now going to trade over a really strong comp in the final quarter. I think that's just worth pointing out.
And then, sorry, just the last question on the -- yes, the operating end.
So I'll sort of just connect what we're doing here. Clearly, what we're doing is reducing our fees to drive practices to profitability faster and manage the cash better. So you're quite right, we did indicate operating loans would pick up from the half year balance of about GBP 35 million. They're actually finally in line with where we planned them to be. That demonstrates the actions we're taking in the Vet Group are the right ones, huge focus on operating loans. So we'd expect them to tick up towards year-end. And then next year, the combination of the things we're doing, stronger revenue growth, improving the gross margin performance, managing the costs better, all that combination of those activities at practice level will lead to operating loans coming down. But you're quite right, they will tick up between the half year and the full year.
Our next question comes from Tony Shiret from Whitman Howard.
Just a couple of follow-up questions from previous questions. Within the retail like-for-like, can you split it between, say basket size and customer numbers, how the 7% was comprised? And within the basket size, perhaps some further analysis between price and units mix, that type of thing. So that's the first question. Second question is really about the marketing costs. And you're sort of referring to customer acquisition costs continuing at sort of elevated levels. Has marketing cost as a percentage gone up? And as a sort of subsidiary part of that question is, now that your digital capabilities are much, much enhanced, are you going to sort of start to spend more on digital marketing? Are we going to have dog influencers or something like that appearing through Pets at Home, that type of stuff?
Well, Mike, if you want to take the first question. I'll come back and talk about marketing in a broader sense.
Yes. So your first question, Tony, is how does the retail like-for-like split out between volume and transactions. So just as in the first half, transactions -- transaction growth, so numbers of customers and transactions was the strongest element of that. So predominantly, of the 7, the majority of it was because we -- more customers coming through the business. On pricing, we have maintained our price competitiveness. That's part of our DNA. We are absolutely determined to be price-competitive. So pricing per SKU, we are competitive. What -- and there isn't really any growth there. What we are seeing is unit price increase, as the continuation of the trend we've seen for a while now, customers shopping up into bigger bags drives up the average unit prices. So our like-for-like sales growth has come from a combination of the way customers are shopping, choosing to shop, buying bigger bags, and more customers. Our pricing per SKU has not been a contribution to that sales growth.
When you talk about marketing generally, I think as a percentage, our marketing spend hasn't gone up actually. But we've been very focused about where that spend has gone. Over the last couple of years, we focused much of our activity onto existing customers, because it gives us an amazing cut through. Because we know these are our customers, we know who they are and it gives us great marketing effectiveness. And a big chunk of our marketing spend will always go towards our VIPs because it's the most obvious place to go to. Over the last couple of years, we've definitely taken a much more digital-led approach. So we have been less doing the Big Bang TV campaign to the exceptional vets because our brand awareness is very high. And we've actually switched most of our spend into digital, that will only continue. As we move into this quarter, we have planned marketing campaigns anyway. We're going to upgrade those campaigns. And it'll be focused really around new customer acquisition in this quarter. And the answer is you've actually got to do a degree of all of them when you're doing a big campaign. So you will definitely see us do some TV work, which was planned both within Vet and within retail, and that will be supported and active through digital. But increasingly, for us digital allows you a much more laser-like approach. But there are times that we need to also do a general call to action. And actually, in terms of new puppy [Audio Gap] in acquisition, that's a good place to be in terms of slightly more traditional media. What you shouldn't be expecting from this, though, is the underlying question is, are we going to take this massive -- bigger costs and marketing costs. No, this is all sensible, within budget, tweaking up, but we're leveraging the retail sales growth and our operational benefits to make sure this is going to give us a strong exit from this year and a good start into next, what we think is pretty sensible.
When we have the finals, could you maybe think about -- talking about squaring up the sort of obvious effort in terms of aiming your marketing at existing customers but at the same time, talking about new customer acquisition. I mean I'm not saying they're mutually exclusive, but you would expect the marketing overall to increase if you're increasing focus on both areas. Maybe I've misread your answer, but...
No, no, no. I think one of the things -- I mean there's that classic quote, when you spent on marketing, over 50% of it is wasted. I think in our world, we are super focused. Actually, you've got a slightly different dynamic that when you do broad-brush marketing you speak to non-pet owners, which is completely irrelevant. The real skill in our world is making sure every pound we spend is as targeted on pet owners as possible and in the segments you really want to get to. And we've very clearly identified those segments that we want to be able to talk to and we've found very effective ways of getting to them. So [ limited ] degree. And marketing effectiveness is probably your biggest friend when you want to really use your marketing well to drive your sales. And there, I think we're pretty well versed as to how to do that.
And our final question today comes from Simon Bowler from Numis.
So just a quick follow-up on, but actually more on the vet business this time. Just [ because you ] mentioned some of the trends within practices you brought back -- bought back. And I was just wondering if you could kind of share a little bit on what kind of things you're doing there? What kind of confidence that gives you in those practices? And I don't know if you're happy to kind of comment on whether that kind of cohort of own stores is profitable this year or otherwise?
I'll talk more generally about what we're doing, and then I'll hand over to Mike [ to chat ] about the question. There's only 3 things that really matter in the vet business. The first one is your revenue and there's loads of things that we can do when we own the practice to drive awareness and new customers into a practice. The second thing is your margin and we've got some really good tools and techniques to make sure that vets are properly charging for their time and they maximize their gross margin. And the third thing is your cost base. The cost base is a really big part of that business and really good, strong cost management. Get those 3 things right, you don't have to worry about many things, and therefore that's exactly where our focus is -- that's exactly where our focus has gone. And as you'd imagine, by doing those 3 things really well, you can stabilize and start to see a good business come through, and that's all we've done quite simple -- as simple as that. Mike, I don't know if you want to ...
Yes. So your question on the profit, Simon. These practices have got long-term liability. And that's the reason why we bought them out and are running them ourselves. But clearly, we bought them out because they were not performing against expectation. They were underperforming. So we see this as a great opportunity, actually, because they're well-located practices that need to be run better. So looking ahead, we will see the profits of those practices be accretive to our total group profit, and there's a great opportunity there to drive the revenues and profits for those practices. So the way you want to think about it is, this year, clearly low level of profitability, perhaps some of them are loss-making, but into next year, we've got an opportunity to turn them around. And just following on from Peter's comments, we've got lots of levers to pull. So we also see that as a -- as an opportunity to build revenues and profits out of that group going into next year.
Thank you. So there are no further questions left in the queue. So I'll hand the conference back over to your host for any additional or closing remarks.
Thank you, everybody, for those questions. Really high quality questions, and thank you for your continued support, and have a great day.
And that will conclude today's conference call. Thank you for your participation. You may now disconnect.