Pets at Home Group Plc

Good morning and welcome to Better Homes FY20 preliminary results. I hope you're safe and well and managing to adapt to the challenges that have been presented to us all as a consequence of COVID-19. Of course, that also means today we're unable to present our results to you in person. Instead, my kid and our CFO and I have produced this short video to take you through some of the highlights from last year, as well as the progress we've made through COVID-19 and what our pet care business may look like beyond the crisis. In addition, there's a full presentation deck available for you to download from our investor website. At 9.30 today, we will host a live Q&A for analysts and investors. Please see our R&S for details on how to join. Looking back, we had a strong FY20, reflecting the ongoing execution of our proven pet care strategy. We delivered record results in FY20, exceeding £1 billion worth of revenue for the first time and delivering profit ahead of expectations. Underlying PBT grew 11% year-on-year, ahead of our sales growth. We exit FY20 and enter the COVID crisis from a position of strength. The crisis is testing the fundamentals of many businesses across most sectors. Pets at Home has resilience in its balance sheet, has good liquidity headroom, and with the steps we've taken to preserve cash, adjust our business operations, and continue to serve pet care customers, we will be able to navigate the financial impact of the pandemic. The four pillars of our pet care strategy remain unchanged. However, we've already adapted the execution of our strategy to ensure it reflects the changing consumer environment. Post the pandemic, there will be scars for many years to come. The normal we knew will be replaced by a new normal. But the pet care market is built on strong foundations. It has previously demonstrated its defensive nature, performing well in even the most challenging economic climates. We believe our strategy is robust. We are aligning the execution of our plan to meet that new normal. We're doing this at pace to make the most of our new opportunities presented to us. That's because we're confident our pet care strategy is compelling. Our performance in FY20 speaks for itself. It's the result of the determined actions undertaken over the last two years, reaping the benefits of our investments as we implement our pet care strategy, winning more new customers and increasing their pet care spend. We are leveraging our unique assets, investing in building capability and capacity and building an ecosystem of pet products and services that quite simply can't be delivered by any other business. In retail, we delivered a one year like for like of 9.4%. If you exclude the COVID impact in the last four weeks, our like for like was 7.2%. And on a two year basis, our like for like was 15%. In our first opinion vet business, our recalibration was completed on time and within the financial envelope we previously set out. We delivered 13.5% lifelike growth in customer revenues. We recorded strong growth in new customers across all parts of our business. We did this through our focus on new customers via our puppy and kitten clubs. These customers are spending up to 23% more as a result. We've invested in data capability and we're starting to see the results of improved business insight and will soon have been sourced all of our VIP data and analysis. And this will help underpin our future growth. Our investment in automation and our distribution network enabled us to serve more customers, particularly online, where we've seen demand double since March. Against the backdrop of an uncertain economic climate, the pet population in the UK is resilient and stable. There's around 18 million cats and dogs in the UK, and never has their role been more important in people's lives. Whilst the virus has impacted us humans, pets' lives, however, remain unchanged. But people are spending more time at home, whether working or just restricting time spent outside. This improves the conditions for families to consider adding a pet to their family. In recent weeks, we've witnessed robust sales of puppy products and new client registrations at our vets. What's more, pet owners are becoming increasingly likely to cut back on other things before they cut back on spending on their pets. All of which support the structural growth of the pet care market in which we operate. We're not immune to the challenges posed by COVID-19. But we have a compelling strategy, unique assets, capabilities, and an experienced management team that is responsive to changing customer needs. Let me now hand over to Mike, who will take you through our financial performance.

We've had a record financial performance, demonstrating the progress we've made in implementing our pet care strategy. And this is clearly showing through in these results, which cover the year to the 26th of March. In the year, group revenue growth was over 10%, helping total revenues exceed a billion pounds for the first time, with group like-for-like sales growth of 9%. Within this, our retail like-for-like sales growth was 9.4%. In the 11 months to February, it had been 7.2%. And then we saw exceptional demand, which drove light-for-light sales growth of over 36% across the final four weeks of the year, during which we maintained our competitive pricing position across all product lines. Across last year, our omnichannel revenues grew by 27.8%. That's 83% on a two-year basis. From mid-March onwards, we have seen nearly a doubling in the volume of online orders, and we benefited from the investment we had already made in automation at our Northampton DC, which has given us the capacity to meet this demand. In the VET group, customer revenue growth in our first opinion practices was over 13%, helping drive VET group like-for-like of 5.6%. And this includes the planned fee adjustments, which have now all been successfully implemented. Strong revenue growth and good cost control helped grow group underlying profits by 11% to £99.5 million on a pre-IFRS 16 basis. And profit was slightly ahead of expectations, even before the benefit from the additional sales in March. Underlying free cash flow grew by over 40% to nearly £90 million and helped reduce net debt to less than £86 million and reduce leverage to only 0.6 times. We've come into the new financial year with liquidity of £162 million and have since taken steps to reinforce this further. And that strong cash performance, together with the confidence in the resilience of our business, enables us to maintain a full year dividend of seven and a half pence. The final month of our financial year also saw the first month that the UK was meaningfully impacted by the coronavirus crisis. And our approach to managing this crisis in the year ahead is being guided by a five-phase plan, across which we expect changing customer behaviour to shape our FY21 performance. In the pre-lockdown phase, customer stockpiling in the final few weeks of FY20 drove around an additional £20 million of retail sales, mainly in food, where we saw an influx of new shoppers, particularly from supermarkets, as we became number one by market share in grocery dog food for the month of March. As we entered the lockdown, the government deemed us to be an essential retailer, and this meant we had a key responsibility to both feed and provide healthcare for the nation's pets, whilst protecting everyone who came into our business and works in our business. As such, in retail, we focused on providing essential products only, choosing to close all our grooming salons and stop the sale of pets. the annual revenues from which last year were £43 million. We will slowly restart these parts of the business in the coming weeks, albeit at reduced capacity, as we develop protocols that make it safe to do so for both colleagues and customers. But until we do, we will temporarily lose the revenue whilst maintaining the full cost base. After the lockdown on the 23rd of March, we saw reduced customer transactions as customers followed government advice by staying at home and only making essential journeys. And we've seen a significant proportion of the pull-forward purchases reverse in the first seven weeks of this year as stockpiles have been reduced. Having said that, our food and accessories sales are still in positive, like-for-like growth over the last 11 weeks as a whole, with online sales double their run rate going into the COVID crisis, although this does create an adverse mix effect and incurs incremental fulfilment costs. We are seeing and planning for a gradual recovery in footfall as our merchandising business remains robust and we've already extended opening hours to 8pm in some stores after initially restricting opening to 6pm. We also expect to see an element of lasting shift online and whilst those discretionary purchases which customers have been delaying during the lockdown should also begin to increase over time. Likewise, in our vet operations across both first opinion vet practices and specialist hospitals, compliance with the RCVS guidelines regarding permitted procedures and social distancing has restricted our customer revenues. Initially, we saw a reduction of revenues of around 50%, although this has improved in recent weeks as guidelines have evolved. Whilst restrictions remain in place, customer revenues will be reduced. However, the use of telemedicine and implementation of new ways to deliver medication to customers' homes has supported revenues, and there are also signs of new client registration stepping up as many of our competitors have remained closed. Finally, in our specialist hospitals, more first opinion consultations will lead to more referral work. We are adapting well to the temporary restrictions and additional COVID-related costs and fundamentally the business remains robust and resilient. Our financial resilience will enable us to navigate this period of uncertainty and also provides a platform for future growth. The balance sheet is strong, debt has been reduced, leverage is low, liquidity is solid and we have a significant headroom on our banking covenants. We have stress tested the business for a variety of scenarios and added as a backstop a new additional £100 million revolving credit facility that further strengthens the resilience of the business. We've responded well to the COVID-19 challenge, supporting all our stakeholders fairly and responsibly. However, in doing so, we have incurred £5 million of direct incremental costs as we look to safeguard our colleagues and customers. These costs include rewarding our store colleagues with a £1.9 million recognition award, establishing a £1 million colleague hardship fund, supporting our pet supply chain and donating £1.1 million to animal welfare charities, as well as supporting NHS workers. In addition to these initial costs, we are also incurring ongoing costs of around £200,000 per week associated with implementing social distancing across our operations. And the necessary restrictions on the provision of pet care services, such as grooming, pet sales and veterinary health care, mean that although we are not currently seeing normal levels of customer sales, we continue to incur the costs associated with those services. We do welcome the business rates relief that's worth £33 million to us and this will go part way towards offsetting the financial impact of the restrictions imposed on our retail and vet businesses and the additional costs we are incurring running our operations. Finally, we have exercised sound judgment in preserving cash and mitigating the financial impact. These include a 20% reduction in salaries for the executive management team, non-exec directors and senior leadership team. The benefit of a six-month loan repayment holiday for our First Opinion joint venture practices on their third-party bank debt, on top of the pass-through of any business rates relief for practices located in stores. We've moved store rent payments to monthly and are progressing our ongoing programme of lease negotiations. And finally, we are ensuring that our capital and critical expenditure, such as marketing, continues to closely align to our renewed priorities as we proactively manage the business through the COVID-19 crisis. Our financial resilience enables us to both navigate this period of uncertainty, as well as provide a strong platform for future growth. So with that, let me hand back to Peter, who will take you through our operational plans for emerging from the coronavirus pandemic.

Whilst COVID has been disruptive, we believe this is an opportunity to accelerate investment in our digital capabilities to serve customers seamlessly and profitably. As an essential business, we traded through the crisis and in doing so, we've learned a lot as we prepare for unlock and an elongated period of social distancing. We entered this crisis at a time when our business was in its strongest position, but we now have a choice. We either play defensively or we accelerate. We are choosing to accelerate. We believe by adapting our plans to meet changing customer behaviours, we can maximise pet care spend. This is an opportunity for us to ensure our business is well placed over the longer term to achieve that. In retail, we will maximise the benefit of having an omnichannel business. Our business benefits by not being dedicated to one channel or service. It's naive to think that customers think offline and online. The reality is customers choose how to shop and where to receive the products and services they need. Our job is to do this quickly, flexibly, affordably and profitably. We'll use our national reach of stores combined with an increased investment in digital and logistics to ensure we can meet those needs. In vets, we've implemented telemedicine and we've changed the way customers can choose to receive medication through delivering direct to their homes. Both of these are here to stay. This will be an acceleration of a more digitally led vet relationship with clients. Veterinary is still attractive and we want to continue to extend our business and we will actively look for exciting and rewarding adjacencies. During this crisis, we've seen strong sales in puppy and kitten products, indicating there may well be more new pet owners, not less. We will continue to focus our efforts and double down on puppy and kitten as a point of acquisition across the entire pet care opportunity. We will uniquely combine products and services to meet pet care needs, increasingly use our new data capabilities to leverage our assets and better inform our decision making. This crisis has accelerated the need for digital connectivity with pet care customers. As an omnichannel operator, we're able to serve customers' needs however they want to be served. Over 1 million vulnerable people may still need to shield. Many more may be cautious of shopping in-store. Our strength is in putting the customer in charge of their shopping choices. Whilst operating costs may be inflated as we cope with social distancing and high fulfilment costs, our focus will be on maximising our share of customer wallet. We will aggressively invest in driving top line sales growth. We'll focus our operation creating new and unique ways to serve customer needs. So for example, you can now call a store, order and pay and within an hour have those products delivered direct to your car boot in our car park without ever coming into the store. In the coming months, we're planning to utilise our 453 strong store network combined with our digital capabilities to create new and unique ways of serving customer demands in a post-COVID world. In summary, we're confident in the long-term potential of our business and we will reshape our operations to maximise pet care revenue. So why should we be confident? Well, there are six core factors. First, the £6.5 billion pet care market is in structural growth and is resilient. Pets will still need feeding and still need loving. Humanisation and premiumisation are trends which will continue. We're focused on continuing to take share across all categories and channels. We are building an ecosystem of pet products and services. It's not just the wide range of products and services which are compelling, but the way in which we will deliver them. We'll continue to build subscriptions and unique product and service bundles which make pet care easy and affordable whilst building predictable annuity income streams across our business. We have a 5.6 million active customer base and it continues to grow. Our VIP loyalty programme allows us to use proprietary data to better serve pet owner needs. When combined with our investment in data capability, we will build significant strength and insight and actions to grow our pet care spend. Our unique vet owner driver model is attractive in a corporatised market. The JV ownership structure has always been growth led as owner drivers are more incentivised to drive new and improved revenue streams versus corporately owned structures. This was true before COVID-19 and will be especially true as we come out. Our business is still young and practice maturity represents a significant future cash growth opportunity. We have sustainable omnichannel proposition of retail. Using all our assets, we will serve customers however they want to be served. Customers still need help navigating pet care. The customer relationship and purchasing decisions are not merely transactional, but based on pet health and wellbeing. When you combine our colleague expertise with customers needing help, you do create more value. We will launch new and innovative ways of delivering pet care to customers. Finally, we're a financially strong and resilient business. We have 162 million of liquidity with access to a further 100 million facility should we need it. Our leverage remains low at 0.6 and we have strong cash conversion. We've maintained our dividend at 7.5p. These six factors all lead into our core strategy of building our share of customers' pet care spend. moving customers from our retail business into services and vice versa, building unique propositions that only Pettoham can deliver. Whilst the world has changed dramatically and will emerge into a new normal, we all focus on delivering our pet care strategy and creating a stronger and more determined business than ever. FY20 was a year of excellent progress. The strength of our business going into the crisis has meant that we've been able to adapt and protect the interests of all of our stakeholders. I'm so incredibly proud of our colleagues and how the business has responded at incredible speed and enormous agility. New procedures, which normally take weeks and months to implement, were put in place in hours and days to exceptionally high standards. The pet market remains resilient. If anything, pet ownership looks like is going to increase and pets will play an increasingly important role in their owners' lives. Our response to the pandemic shows our strategy is robust. We will continue to adapt our execution to serve the changing needs of pet owners. We are building from strong foundations and our investment and data capabilities are still to flow. Our strong leadership team and our financial strength has allowed us to navigate this period of uncertainty. But above all, we remain excited about the considerable headroom that remains to capture more pet care spend as we build the best pet care business in the world. And finally, I just want to say thank you to our chairman, Tony D'Annunzio, who leaves us today. He's guided the business through a significant transformation and hands over a very different business today from that he joined 10 years ago. Thank you, Tony. We will really miss you and we wish you well in your future. And we're delighted to welcome Ian Burgers, our new chairman, who will be in position from today and will help guide the business through its next phase of growth. Thanks for listening and we look forward to taking your questions later on today.

Good morning, everybody. Sorry for the slight delay. We had quite a late flurry of people wanting to join the call. I certainly hope that you're all safe and well. We're very sorry that we can't do our presentation in person today. Obviously, the crisis means that we're doing it remotely. We'd be pleased to know that Maekaden and I are here to answer your questions. We are, of course, socially distanced in case you're worried about that. Hopefully, you've all had a chance to see our audio webcast, and our full presentation is on our website. Before we open it up for Q&A, I'd just like to give you a very brief summary of our results for last year. So FY20 was an outstanding year for pets at home, and we feel that the results speak for themselves. It demonstrates our pet care strategy is working, with revenue being above £1 billion for the first time, with revenue being up 10% year-on-year. In retail, we experienced lifeline growth of 9.4%, and vet customer revenue was up 13.5%, and PBT growing at 11% was ahead of our revenue growth. We saw a strong growth in our subscriptions business, 865,000 subscriptions of 23%. And more importantly, we saw more new customers and we saw growth in all channels and all categories. The timing of the crisis fell at the end of our financial year, which meant we entered the crisis in the strongest place we could have possibly been in. We've traded all the way through the crisis. And we focus our business on providing essential products and health care services and chose to temporary pause our grooming and our live pet business. And we've had to adjust our business to make it COVID safe, which has meant that we've also taken a whole host of associated costs and making sure our business was safe for our colleagues and our customers and their pets. We've done the right thing by all our stakeholders. We thanked our colleagues for their hard work with a £1.9 million bonus. We introduced a £1 million public hardship fund to help our families of our colleagues. We donated £1 million to pet charities and we supported NHS workers both with flexible shopping and 10% off their shopping. Impacts on our business are primarily driven by the restrictions placed on us or the ones that we've placed on ourselves in areas like grooming. We have a strong team, and we've executed our way through this strategy with enormous agility, having to implement new policies and procedures in hours for things that would normally would have taken us months to be able to do. And we've done that to such a high standard. But we are as positive as ever about pet care. We are in an uncertain environment. But pets have not been impacted through this crisis. Humans have. And therefore, we need to adjust our business to adjust to the pet owner's needs. But the needs of pets are still the same. They still need to be fed. They still need to be loved. The market is robust, £6.5 billion worth of revenue. And indications are that pet ownership through the crisis has probably increased, not decreased. As more people stay at home, the role that pets and the value they bring to their lives is probably now more important now, more than it's ever been. So as a consequence, we'll be choosing to accelerate our pet care strategy, certainly focus on the areas of driving more digital capability as we respond to a new normal once we return out of this crisis. So I'd now like to open this up for questions. So thank you very much. I'll pass it back to Casey and we'll take the first question.

Thank you. At this time, we will open the floor for questions. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad now. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. And again, that is star 1 if you would like to ask a question. And we'll pause for just a moment to allow everyone an opportunity to signal for questions. And we'll take our first question from Andrew Porteris with HSBC.

Hi, team. Thanks for all the extra color today. Really, really helpful in that respect. Obviously, a few questions given the sort of uncertainty we're seeing at the moment. The first of those was on online. Online is obviously growing very quickly and you sort of hit your plans very early in terms of the 20% sales participation. I'm just wondering about online capacity. Do you think there's sort of demand for more? Are you capacity constrained at the moment? And is there sort of anything you can do around that? Then on the pet ownership side, yeah, certainly something I'd sort of subscribe to. But can you give us any sort of stats around maybe puppy cover-up registrations in recent weeks? Are you seeing a tick up in pet ownership there? It does feel like it's something that could come through. And then lastly, really around cash flow, could you give us an idea on how you're thinking about CapEx and any sort of cash impacts from the holiday on sort of vet paying, vet loans and et cetera, any impacts around that?

Okay, Andrew, thanks very much. I'll take the first two on online and pet ownership. Last year, you remember that we invested £6 million in our facility in Northampton to increase our capacity in online to drive more automation. And that gave us a significant headroom. And that was fortuitous in terms of the demand we saw from customers. So that demand has doubled. We initially had to elongate delivery time to customers, but they've now all been pulled back in. So you can have an order placed today and delivered to store tomorrow. You can have it delivered to home tomorrow or typically within two days. So that demand has been very robust. So we have enough capacity in our online centres, although we've probably chewed through that capacity a bit faster than we thought because that investment last year was designed to last for three years. And we will be going back to review further capacity But one of the ways we will think about it is we have 453 stores, and that gives us an enormous opportunity to use the capacity of those stores too. And that's how we're thinking about it. And meeting the two together allows us to use the investments we've already made, but also probably gives us a distinct advantage that our stores are significantly closer to people's homes, and therefore solving that last five miles conundrum is probably an advantage to us. And just to give you a flavor, one of the things we launched through the crisis, we launched a brand new service, which is you can call the store, place your order, pay for it, and within an hour, arrive to the store in the car park, never even getting out of the car, and we'll deliver it to your boot. And I think actually that's only something you can do if you've got online and offline capability. So that's something we're going to continue to focus our energies on. In terms of pet ownership, it's obviously only eight weeks in, so it's very hard for us to give you any firm evidence. The things that I've been looking at, I've been looking at particularly sales of puppy and kitten food and accessories. And what I can tell you is that participation of our total business through the crisis has increased quite notably. So it's very early days. We're doing a lot of work looking at all the market stats. I suspect as more people are at home, having a pet now is probably easier for many people. And I think as we forecast into the future where more people may well be working from home now, I sort of can't help thinking that the name of our company, Pets at Home, has probably never been more apt than it is right now. So we're very encouraged by the signs that we see, and we think that leads to long-term opportunity, which is why we're very much focusing on accelerating some of our investments to make sure we can be there to service that demand. I'll hand over to Mike to talk about cash flow. Hello.

Good morning, Andrew. So question on cash flow. I mean, we've always had a really strong focus on cash flow. And actually, the crisis has probably sharpened our focus even further. You asked a specific question around capex. And clearly, we set off this year with a plan on capex of around $45 million. We're confident that $45 million is going to return to grow the business. But clearly, we want to manage that through in terms of total preserving cash and liquidity. So for the time being, we've ring-fenced 15 million of that 45. And we'll keep a watching brief on that. That $15 million ring fence will be more around the store redevelopment program. We've seen a couple of the refurbishments already done. Depending on how we get on and how quickly the temporary restrictions we've got on the business are lifted, we'd like to spend the capital because we know it's going to grow our business, and that's our focus. But temporarily, we put a ring fence around $15 million. And then you asked a question around the repayment holiday in the VET practices. This will help our VET partners with their third-party bank VET. It's effectively a six-month repayment holiday extension on the period in which they have to repay back their bank loans. And that will give quite a bit of cash benefit this year to individual partners.

We'll take our next question from Jonathan Pritchard with Peel Hunt.

Hi there. Question for you three, if I may. Firstly, without blinding us with too much technical stuff, could you just tell us about data and the improved use of data and how that's helping? Secondly, looking forward on vets, how's that going to evolve? We talked about telemedicine, et cetera, but just how being a vet is going to change over the next sort of three years? And then just an update on the green fits. I know you've got to about probably some variation of 20 by the time the crisis hit.

Look, I'll take the question on data and on bets. As you're aware, we've been building our capability in terms of team, and we've been insourcing our data from our provider to ourselves, and that project will complete this year. The main benefit we've had through this is giving us significantly improved visibility of customer behaviour, So our data team and the data scientists we have brought on board have allowed us to look at our customer base in a very granular detail to understand their behavior and then help us predict how they're going to respond. And I have to say it's been incredibly valuable as we look both through the customer lens and at a local store lens. And it's allowed us to make really informed decisions around which stores do we shrink opening hours, which stores do we extend opening hours. And how we actually respond to customer needs. So it's been invaluable, I have to say, to get to a level of detail that we've never been able to get to before. And I think the most important thing, we've been able to be unbelievably agile and hyper-local in our decision-making. And that is a capability which is really transforming our decision-making. On VET, you're absolutely right. The vast majority of services that VETs need to deliver still today are through person to person in terms of the procedures. The thing that we've seen in our VET business is a massive acceleration for digital connectivity in the form of telemedicine. That, I've got to say, without this crisis, I think it would have been very slow coming because in the main it's driven by the RCVS and guidelines and that has transformed in the last eight weeks. So we think telemedicine is here to stay, particularly as a way of connecting with vets for that initial consult. We don't think in any way it's going to take away from the procedural aspect of vets. And we really welcome this because I think it gives us an opportunity with our reach and our connectivity with customers to welcome more customers into our vet business. And just whilst on that, because we have remained open throughout and many of our competitors have been forced to close because we have the benefit of being inside a store environment, we have seen good new client registration throughout this entire period, which we're very positive about. I'll hand over to Mike to talk about refits.

Jonathan, we've done, actually we've done 16 store refits so far into the new tech format, starting first with Stockport, then Chesterfield, then rolled out a further 14 to make 16, so up to date. We're really pleased with the results. If you think what we're trying to achieve there, we see our stores as a really important point of customer acquisition. So we're improving the experience of customers in those stores. There's a switch of space out of retail into more services. And we're seeing good feedback from customers. I think the contextual point is last year we saw overall like-for-like in retail grow by 30%. 9.4%. Even if you take out the boost of sales we had in March, retail life flight was still 7.2%. these take out multi-channel you'll see that stores are still in really strong growth over five percent like growth so we're opening those new formats in in a retail business it's growing really strongly um but we still see so good good numbers coming out of those those those those new those new three-fifths looking ahead you know we plan to do more this year um in fy21 but that's part of that 15 million i just said we'd bring events uh and clearly you know as soon as we get uh as soon as we see some of the temporary restrictions lifted onto more revenue streams, and then we can think about re-spending that capital, we do more this year.

And we'll take our next question from Simon Bowler with Numis.

Hi, everyone. Thank you. Apologies, there's quite a lot of noise in the background, but hopefully you can hear me okay. Three questions, if it'd be okay. Firstly, you've spoken to an increase in VET customers. Revenue is obviously compromised by what services they can access. I was just wondering if you can talk kind of simply around the retail side of the business. What are you seeing in terms of customer numbers? Do you think you're kind of winning or losing customers during this period? Second question then being, I appreciate recent weeks will have seen the reverse of demand, which may have made the read on this harder. But can you talk about what you're seeing in terms of revenue trends by category, particularly kind of between food and accessories on the retail side of the business? And then third and final question, you've obviously outlined some kind of incremental costs being incurred by a function of kind of social distancing through stores. Can you just perhaps share a little bit of colour on the nature of those costs?

Sure. Well, thank you, Simon. You're very classy. I heard those very well. So I'll talk to VET customers and retail, and I'll ask Mike to talk about our cost position. You're absolutely right. We've seen our new client registrations continue to be good actually through this period of time. Bearing in mind, there's quite a long lag from seeing a new client registration to actually seeing their full revenue flow over time. So typically, they show up in the form of when you have a puppy or a kitten. We also have to context that actually the restrictions from the RCVS means that we are restricting the number of customers who actually physically enter our practices. As they're easing their position, and that will continually change, we've seen VET revenues continue to build. So for us, the real indicator is looking at the strength of your client base, which looks strong and has been growing for us. So we feel relatively confident that as the restrictions lift from the LCVS, that we should see a good return in our VET business. Bearing in mind that the vast majority of times you go to vet, you go for one of two reasons, either preventative, which has been actively dialed down with the restrictions, or emergency, which of course you've got to go and regard as so. What we'd expect to see is more of the preventative elective work start to come back as those restrictions lift. Within retail, obviously very, very early days, What I can tell you is in the pre-lockdown phase, we saw significant growth, particularly in food and particularly within grocery food. Now, we have seen the market share for that four-week period prior to lockdown. If I look at our market share of the grocery sector, so that's us competing with the likes of Sainsbury's and Tesco, which is a smaller part of our business, so much more dominant in advanced nutrition, we typically occupy number three position in that market. In the four weeks prior to lockdown, we saw an acceleration of 300 basis points of market share to becoming number one in the market, overtaking Tesco. That for us is really encouraging because we know that the grocers are being focused on feeding the nation. We're focused on feeding the nation's pets. And the bulk nature of our business, bigger pack sizes, I think has fitted well there. And it's very early days yet, but we would like to focus our energies on trying to retain those customers as we come out of the crisis. When we look at category, undoubtedly in the early days, people were bothered about filling cupboards with consumable items. So we saw a big uptick in areas like food, cat litter, sawdust, the things that you need every day irrespective of this crisis. We saw a bit of a reversal of that. But if we look through, and as every day passes, we're seeing a more normal return in category performances between food and accessories. So we're sort of quietly encouraged by what we've seen in customers, albeit very, very early days. But as I mentioned before, the one area that we have seen a significant shift in is in puppy and kitten categories. That has been very robust and stronger than we would have expected through this crisis. And I think that leads us to a good assumption that that will probably continue coming out and that is a good indicator of the future. So early days, but pleasantly encouraged by the strength in our merchandise business.

costs. So Peter in his initially described that £5 million of one-off costs we incurred in the first few weeks of tackling the COVID crisis but we're also incurring in addition to that ongoing operational costs relating to us implementing social distancing or adhering to the social distancing rules in our stores and primarily related to safeguarding our colleagues and protecting customers. In terms of context, we amount to one extra colleague per store per week, which is an extra 40 hours per store per week. You can imagine with 450 stores, you quickly start to get quite a significant extra weekly incremental cost. In our planning scenario, we're assuming that all year. So in our planning scenario, those additional costs were planning for all year. But obviously, as soon as there's any changes in social distancing, those costs would fall away.

Okay, great. Thanks.

We'll take our next question from Craig Lawless with Shore Capital.

Good morning, guys. Just following on from Simon's question about the additional operating costs, are there any opportunities to kind of mitigate those through any kind of cost savings opportunities, please?

Yeah, thanks, Greg. Yeah, of course, we're still continuing with the program we've always had to make the business more efficient, more effective. So areas around simplification, automation and processes, removing needless tasks that doesn't touch the customer, getting our supply chain more efficient. That is continuing in the background, as it always has done. And you'll know that, you know, cumulatively, we've achieved some big savings in that area to enable us to increase sales per hour in terms of stores and improve efficiency in the business. But we're not planning a big cut in the overheads of the business because we see the restrictions placed upon us as quite temporary. We think holding that cost base in place, as soon as those revenues return, we'll be getting back on to profit growth. And we want to emerge out of this stronger than when we came in. And we see FY22 as a year we want to get back on it. So what we don't want to do are take short-term cost savings out of the business, but then make it more difficult for us to grow back into FY22. But the efficiency program we always had is continuing in the background.

And our next question comes from Owen Shirley with Ehrenberg.

Good morning, guys. Just three questions, if that's okay. The first was on the first opinion that you mentioned the type of work they've lost, a lot of it's preventative, things like vaccines. I just wondered if you could quantify of the revenues that you've sort of forgone in recent weeks, what proportion do you think you can recoup in the future? i.e. they're not lost forever. Secondly, on the vets, you also touched on the take-up of telemedicine. I wondered if you could perhaps give us a better idea on the percentage of revenues that might have become for vets and also how economics might differ for JVPs, if they do at all, under that model. And then thirdly, also on the kind of telemedicine point where you mentioned you think you can take advantage of that shift online, just wondered exactly how have your vets been participating at the moment and where do you see yourselves kind of coming into that value chain, if you like?

Sure. Look, I'll try and put that... You can probably group some of those together. So you're absolutely right. In the first instance, the guidelines in the RCVS was to focus on emergency treatment only, which is what happened, and that started to relax. That resulted in things like vaccinations and second stage vaccinations, repeat vaccinations being extended out by up to two months by the RCVS. We're now able to start to redo those. And we would expect all of those to come back in time because you have to provide vaccinations every year to your pet to keep them safe. So we would expect in time there's no reason why they wouldn't come back to normality. Clearly, the emergency part of the workload, we expect to come as and when that happens. And as surgery starts to reopen and you start to consult more, what actually happens is you identify more underlying problems as a consequence of consulting. So we have no reason to believe why that wouldn't change at all. And we purely put it down to the restrictions placed upon us will restrict our ability. As those restrictions ease, we fully expect that to come back to a sense of normality. Telemedicine is a really interesting one because in the first instance, we have used telemedicine as a way of replacing the initial consult with clients. So the consumer still pays the same level of consult fee online for the telemedicine as they would be going into a practice. And it's been a very efficient way for our practices to be able to connect with their clients, especially telemedicine. for more of the inquisitive work uh so we expect um it has no um it's a it's a revenue mitigator in some respects so the fact we've been able to do it online means actually we've been able to keep revenue flowing through to practices and the fact that we are open probably means we've probably been at a better position than many of the corporate science vets who have had to close practices down so i think what it does shift is it shifts in i think Connect with your vet in more than the physicality. And the reason why we see this as a big advantage is we have 5.6 million active VIPs who are predominantly retail shoppers. And it's really making us think about how we connect that big customer base with our vet business in a differentiated way. And so we now have telemedicine capability in all of our vets, whether that be telephone or indeed video. And that's something that we think will be part of everyday behaviors moving forward. And leveraging our broader customer base and introducing them to the reasons why our vets are not only more modern, more accessible in terms of open more hours and now telemedicine, And we plan to move very fast in our ability to move on that as we move through this crisis.

Could I ask just one follow-up on telemedicine? Are you able to give us any sense of participation, whether it be percentage of revenues in recent weeks or number of consults?

It's far too early, but it's something we know is being – we can see by the adoption of our partners that it's been a very useful tool. So it's something we're going to watch very carefully. But we don't think – this is not going to replace first consults. I think we're going to be really clear about that. It's going to be a really helpful addition and a helpful tool, particularly encouraging more people to connect with their vets maybe before they come into the practice. I anticipate moving forward, actually what this becomes is a really important acquisition tool that they connect with the vet, have a first chat, and then actually the vet encourages them to come into practice for a more detailed consultation. I think that's how it's going to play out in the future.

Very interesting. Thank you.

We'll take our next question from Matthew Garland with Citi.

Hi, President. Thank you for taking my question. My first one was just obviously looking slightly further beyond the crisis, and obviously I know that you've talked about increased online penetration and things like that. How you kind of see the growth rate of the overall market changing? So I know historically you kind of talked around 3% to 4% for the retail business, around 5% for the vets. I was wondering if in your longer-term thinking, whether that had changed. In addition to that, obviously, with a greater proportion of sales maybe going online, can you give us an indication of how you see longer-term gross margins trending? And then just in terms of my final question, I assume that you've seen probably a greater shift towards maybe home delivery over click and collect in store. Can you give us some indication? I assume, obviously, the gross margin difference is probably more to do with the mix, but in terms of the, I suppose, relative difference in operating costs, can you give us some indication as to the difference in profitability between those two channels. Thank you.

Okay, look, I'll talk about overall online penetration, actually our view on the growth of the market, and I'll ask Mike to talk about the channel shift and what that means for us. I guess there is a very stark reality all the way through this. This crisis has had a catastrophic effect on humans. It's completely bypassed the pet population. This hasn't changed the needs of those pets at all. What it's changed is the way that us humans need to be able to buy and secure the services to look after those pets. And we're feeling very encouraged about the pet population moving forward. We think it's really robust. And if anything, I think it's looking very positive, actually, in terms of that market. All the essences of what made that market stronger, I don't think have changed. Premiumization, I think, is still going to be the order of the day. People are really bothered about their pets, and they want to take care and look after them. And interestingly enough, we did a consumer survey recently, Only last week, we asked 1,000 pet owners about their likelihood of changing their spend profiles. And 88% of pet owners said they would cut back on other things before they cut back on pet care spend. So I think that tells you an awful lot about the role the pet plays in the family. And I think it's going to play an even more important role. So I think our focus, therefore, needs to be on how we serve the pet owner And I think the days I was thinking about it being an online or an offline play actually are just really quite outdated. What we see is that the customer will choose how and where they order and how and where they collect. And our job is to join it all up, be able to meet their needs in the speed and the cost that they want. So for us, and I come back to that earlier service we've created, which is call and collect, it's a new service. But increasingly, we've got to join up the whole of the business to satisfy that order as fast and as cheaply as we can. In some cases, that will be doing it from a store and solving the last mile logistics rather than picking it in a distribution center and then put it in with a And that's the way that we're thinking about it. Receive the order, deliver the order how the customer wants, and knit up the background to make it really efficient, really cost effective, and really fast. And I think that gives us enormous capability that others just don't have. Because if you've got a single DC in the UK, which many do, you're a couple of days away from the customer. And in many cases, we can be minutes away from the customer or hours, not days. And that's how we're going to play it through. So Mike, do you want to talk about? Yeah. So how that sort of plays through in terms of the numbers.

I think Peter's point is spot on. You can't look at just online store-based sales and try to attribute costs because customers shop, as Peter's just saying, right across the business. Some days they'll shop online. Some days they'll come into store. But a couple of things we'd already put in place are, enable us to manage those sales quite efficiently. So, you know, we've already automated or put significant investments in the automation in our Northampton, D.C. We've spent £5 million over the last two years. And that's enabled us to be more efficient in fulfilment, not just in terms of total capacity, where we've actually seen the two years future growth happen in one month, but actually the efficiency per order. we've also seen the average order value increase because customers are ordering from home and increasing their numbers of items per order. Obviously, that improves our profitability as they do so. The other feature obviously we've seen is that with customer movements restricted and the stay-at-home message, we are doing more delivered to home. So you may remember that the split of our Online sales of broadly 60% was click and collect and picked up in store, 40% delivered to home. That's pretty much switched around, and you can probably understand why. You've got to remember the reasons why people came to store to collect was it's convenient. They can pick up when they choose. We've got a great store network, 450 plus stores, well positioned, all with free car parking. So we probably would see that return to click and collect in store once the restrictions on customer movements are changed. Of course, traffic into store gives us the opportunity to to add on incremental sales onto their purchases. The other point in online, which nobody's touched on yet, is that actually our subscriptions, which are also part of our online business, increase 23% year-on-year. This is a really important financial dynamic, of course, because what we're effectively doing is creating a future annuity of the customer subscriptions. And we've got 865,000 subscriptions now, and those continue to grow. And that will be a big focus for us as we go into the new financial year.

Great. Thank you. Thank you for asking my questions. I just had one quick follow-up, if that was all right. In terms of the, obviously, I know that you've talked quite a lot around the data capabilities and things like that. Do you have any, I suppose, firm milestones that you're looking towards where we might start to see a significant increase in terms of sales or profitability metrics that we can kind of look towards?

It's a great question actually. So Matthew, our first priority was to build the team. So we built a 35 strong team of analysts, scientists. It's been quite a rampant phase. They're all now recruited and on board. That has enabled us to start to source all the data back into the organization. We expect that to be done at the end of the summer, and we're on progress to do that. That then gives us a single view of our customers across the entire operation, which is the most important thing that we needed to establish. And the way that this will start to materialize is as we start to do marketing for our customers, it allows us to get into a micro level of detail based upon the behavior of shoppers previously, making predictions around their behavior, and then therefore being able to activate them. And as we come out the summer and we take control of that, we expect to really start to see the ability for us to target those customers really well. The way I'd expect to see that materialize in seeing more of our customers sign up to things like subscriptions is a big focus area for us. Seeing more of our customers in puppy and kitten engage in more parts of the pet care ecosystem that we're building. And they'll be the things I'll be looking at as the indicators because we know the best way for us to shift customers into the broader ecosystem is at the point of acquisition. And this is what data really helps us to introduce those services at the right time in the life cycle of our pet. So there'd be the areas that I'd be looking at. And I expect as we move through the year and obviously get back to a sense of normality, there'd be the indicators, I will say, whether our investment into data is delivering the fruits that we expected. Thanks for taking my questions.

And as a reminder to our audience, if you would like to ask a question, that is star one on your telephone keypad now. We'll take our next question from Adam Tomlinson with Liberian.

Good morning, everyone. Most of my questions have actually been covered now, but I just had one in terms of the VETS practices. And you've given the comment in the statement around the improvements in the operating metrics, the three key ones you look at in terms of the number of loss-making practices the cumulative EBIT and then the total indebtedness there so I was wondering if you could just from our point of view looking externally into the business if you could provide some colour around those any numbers you can give to help sort of quantify that and help us assess those points and then appreciate you're not giving guidance for the year ahead but just any commentary you've got around to sort of manage expectations around those metrics in terms of the vet practices as well would be very helpful

Okay, thanks, Adam. I'll take that one up. So, you're quite right to point out that we've got a clear focus on improving some of the key underlying metrics of our debt practices. I mean, remember that Project Light, which was around getting a stronger portfolio and a big focus on cash, we've now completely implemented successfully all the adjustments that who needs to make an hour in place. And the practices have responded really positively. So, you know, we highlight that the customer revenue growth, which probably is the most important financial measure in the year, has grown by over 13% growth in customer revenues. At the same time, putting in place steps to improve the pricing, the way the gross margins work in those practices, So gross margins stepped up and they're becoming more cost efficient. So the operating margins of the practices at practice level have also improved. So EBIT has really stepped on at practice level. Combination of 13% growth, practices going up that maturity curve, being run more efficiently. in the R&S, £329 million. That's a 13% up year on year. But the numbers of practices that have gone from being, remember, we expect practices to be loss-making in the first four years. But the numbers of practices that switch from loss-making to profit-making is plus 100 year on year. 100 more profitable practices. And even the practices that are 10 years and older, within that 13%, 13.5% overall growth, are still growing their revenues by more than 7%. We've got growth right across all cohorts. Underlying, we've got an improvement in profitability, and the indebtedness of those practices has also improved year on year. It's lower. As we look forward, we'd expect pretty much after the temporary restrictions are lifted, custom revenues to continue at that level, the practices to continue to grow up the maturity and for them to be repaying their operating loans, which was always in our plan. And the focus on the cash performance was always what we wanted out of Project Life.

Okay, that's very helpful. Thank you.

We'll take our next question from Simon Buller with Numis.

Yeah, hi. Sorry, just two quick follow-ups. First one, can you just comment on the kind of current pricing environment? Have you seen, I guess, in particular, any of your kind of online pure play competition kind of step up their aggression in any way during this period? And then kind of secondly, if you can just talk about kind of the attachment rates of accessories to online orders. I know you won't necessarily give a number on that, but how have you seen that trending? Have you got any kind of plans in that area?

Okay, Simon, I'll deal with both those. The current pricing environment, actually, I would just say is unchanged. So we haven't seen anybody increase their aggressiveness. I suspect some of the online guys have probably faced increased costs too. So I would say that environment is as it was. Our pricing position has marginally improved, actually, through that period of time. And in terms of attachment rates, our basket spend online is slightly up. And I think that probably more reflects people still continuing to buy bigger amounts of things, i.e. bigger packs. So we've seen a general uptrade, but people may have bought, let's say, a 10-kilo pack of food and bought 15. So we haven't seen any change in our attachment rates in our online transactions, apart from basket sizes getting slightly bigger.

Okay, that's great. Thank you.

And we'll take our final question from Andrew Porteris with HSBC.

Hi, guys. A couple of follow-ups from me as well, sort of along similar lines, really. Just thinking about some of the trends you've highlighted as people shift online, you know, more grocery, more food. how are you thinking about the ways that you help customers build baskets? Are you thinking about getting people to trade up from grocery into advanced nutrition and, as I say, sort of build baskets in other areas? And I sort of link to that really. Can you give us a bit more color on the subscriptions business? Are you developing new lines there? Is it an expansion of the offer or simply growth within the sort of existing sort of flea and worms business?

Two great questions, actually, Andrew. I've got to say, I absolutely welcome with open arms all our grocery shoppers. So whilst the margin is not the most exciting in the world, it gives us the most amazing opportunity to move what we call through our food ladder, which is trading people up to the next best choice. So that, for us, is probably one of the best forms of customer acquisition we could ever welcome, albeit it gives you a bit of short-term pain. And any growth in food, as far as I'm concerned, is always amazing because it's the one repetitive part of people's repertoire and it gives you the best opportunity to build baskets thereafter. So of course, absolutely. And it's one of the areas that we do use our data team to identify and then really start to talk about making better choices on nutrition, not a lot more money. So I'm really excited about that opportunity that builds on subscriptions. Um, What is quite interesting, we'd already planned to significantly improve our customer experience online, particularly on fleet subscriptions. You remember last year we talked an awful lot about how 95% of all the subscriptions we sold were sold through store. We'd actually built a brand new journey and actually it launched just as the crisis landed. And what I can tell you is whilst for a period of time we stopped doing subscriptions in store because of the person-to-person contact But our online journey actually replicated the volume that we were doing in-store, which we're really pleased about. We just started switching subscriptions back on in-store. And we'll do that in a very slow and gradual way because we've had to redefine the process in-store to maintain social distancing. So as Mike said, it's one of those areas that we are really focusing on. I'm very excited about the new journey online. It's worked really well. switch that back on in store for me subscriptions is one of those areas we understand it there is an enormous opportunity particularly around flea so whilst um you know there's a great temptation to want to go and develop new products which we will by the way and we are there are 18 million cats and dogs in the country which means there are 18 million subscription opportunities a month And, you know, I'm really excited about just going after something that works really well and building it as well as in time building new propositions. So watch this space on this one. That's one of the areas that we will be very aggressive on coming out.

Thanks, guys.

I'll now turn it back to today's speakers for closing remarks.

Thank you, everybody. I really appreciate your time today. Some really great questions there. Most importantly, I hope you're all safe and well, and we look forward to seeing you in person very soon. Thanks very much.