Shares in Pets at Home (PETS) have plunged 30% over one year due to an overhang from the CMA (Competition and Markets Authority) review of the UK veterinary sector and signs there are limits to the sums pet owners will spend on their animal companions during a cost-of-living crisis.

While competitive threats from the supermarkets and online-only player Zooplus are already priced in, the market may be underestimating the challenge posed to the UK pet care leader by the second largest player Jollyes, where TDR Capital has snapped up a majority stake from Kester Capital.

Valuing Jollyes at around £130 million, the TDR deal will enable Pets at Home’s unquoted rival to lower prices and accelerate its UK store opening programme. One of the UK’s fastest-growing brick and mortar retailers with a sharp value focus, Jollyes expanded from 64 to 100 stores and more than doubled profits under Kester’s ownership and its expansion plans include rolling out more grooming and veterinary-led community pet clinics.

Ominously for Pets at Home, Jollyes chief executive Joe Wykes says the new investment will help the pet food superstore build ‘a much bigger stage, accelerating our growth plans and giving us the resources we need to bring more value to more places’. An expansionist Jollyes could impact Pets at Home’s ability to win market share and possibly constrain like-for-like growth by keeping a lid on prices.

On 30 January 2024, Pets at Home conceded third quarter sales ‘didn’t quite hit’ anticipated levels and downgraded its year-to-March 2024 adjusted pre-tax profit guidance to £132 million, below the £135 million consensus estimate. While like-for-likes rose 13.3% in the 12 weeks to 4 January 2024 in the veterinary services business, retail like-for-like growth of 3.7% came in below expectations.

Pets at Home’s policy of offering pet products as well as veterinary and grooming services under one roof continues to be a successful model, but the outlook for the business is also clouded by the CMA vet sector probe, albeit Pets at Home has been clear it doesn’t engage in the sort of practices the CMA plans to stamp out.

Nevertheless, any future regulatory action from the CMA might impede the ability of Pets at Home and acquisitive veterinary services business CVS (CVSG:AIM) to grow earnings in the years ahead. CVS remains a rival to be reckoned with in this market, with first half results (29 February 2024) showing it delivered robust 6% like-for-like sales growth in the six months to December 2023. 

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