Pets at Home Group Plc

Good morning. I am Lisa McGowan and I've been the CEO of Pets at Home for almost six months now and it's been fantastic. I've seen and felt firsthand the fabulous and supportive culture Pets at Home has and I've received such a warm and open welcome from everyone and I've really felt the whole business has been behind me from day one. So, what are my views of the business six months in? Well, this is a truly compelling, distinctive and strong business with significant opportunity ahead and we have a plan to lean into it. My previous background has been in building consumer-centric, technology-enabled growth businesses in the media and telco sectors. So my first objective was to learn the business from the ground up. So I've made sure to spend lots of time in stores, in vets, in distribution centres and groomers. I've unloaded lorries, packed customer orders, cleaned fish tanks, groomed dogs and prepped cats for surgery. And this has given me the insight I wanted and allowed me to meet as many colleagues and customers as possible and hear their views on the business. I've also focused on building a deep understanding of the sector through data and insight, which we have an incredible amount of, as well as meeting with many of our suppliers, partners and charities. I've undertaken a reorganisation to simplify our structure and to better integrate the retail and vets businesses, and we've been able to promote and rotate some key internal talent as part of this process, which provides continuity, secures expertise and enables real progression for our best people. I've also hired Rachel Mooney as our Chief People Officer, and she brings deep functional expertise as well as data, digital and services experience. As part of this change, I've also created a new consumer function, bringing together customer value proposition, loyalty, subscriptions, digital, marketing, CRM, comms and format design. And this team will be led by the newly created role of Chief Consumer Officer, and will step change our customer centricity and bring critical external expertise into the business. As you would expect, I've taken a good look at our strategic initiatives to ensure our big in-flight investments land well. Projects including our new distribution centre, our digital re-platforming and our store refurbishment programme. And I've also had the chance to review and prioritise, together with the board, the many opportunities that lie ahead of us. Six months in, I'm more convinced than ever that this is a great business built on a strong and differentiated platform. First, the pet care sector is underpinned by structural growth trends. Premiumization, so customers seeking higher end products and services for their beloved companions, and humanization, so human trends such as natural foods, premium grooming, or complex healthcare crossing over into pets, continue to drive spend and innovation. And these have been joined by another trend of increased penetration of pet ownership. People are bringing pets into their families younger, often pre-kids, more readily as home working hybrid is here to stay, and in increasing numbers with second, third and fourth pet ownership. far from being a covered boom elevated levels of pet ownership are here to stay and they continue to drive growth within this context pets at home has a unique position our special colleague culture and deep expertise built and sustained over many years is a distinctive and very hard to replicate competitive advantage and something that we will continue to protect and grow We have real category authority in pet care reinforced by the clinical freedom and expertise of our vets, our commitment to pet welfare and our shared purpose of making lives better for pets and the people that love them. Our market leadership and strength in the UK gives us economies of scale and positions us as the partner of choice for suppliers and innovators in the sector. We are the go-to brand for consumers embarking on a new pet care journey or acquiring advice for their beloved companion. This market leadership is supported by a very well-positioned and well-invested physical estate. We are a sought-after anchor tenant on retail parts nationwide. And we're also able to use this distributed estate to power our unique omnichannel model, with pet care centres acting as local distribution hubs for click and collect or rapid delivery. And our new state of the art Central DC remains on track to come online next year. Our unique joint venture vets model is also a source of real strength for the business. It promotes an owner-operator perspective amongst our partners, which drives excellent consumer and pet outcomes combined with strong financial returns. It secures clinical expertise and vet tenure in our practices in a sector where the competition for talent is really strong, and it is a very attractive wealth creation opportunity for our partners that allows us to continue to grow organically. lastly pets at home has a genuine track record in esg in the last 12 years we have donated 40 million pounds to pet charities through our fundraising and through our vip club which gives to charity every time a customer swipes we remain the largest single grant maker to rescue and adoption centers across the uk and we support over a thousand local charities We will carry forward this strong commitment to pets and expand our focus to our people and our planet. Our vision is to be the world's best pet care business, providing the best products, services and advice to guide pet owners through their pet care journey. I would argue we're already the global leader, having created a unique pet care platform, bringing together retail vets and grooming. And there is still a very significant opportunity ahead of us. We will extend and deepen our strategy to create a customer-centric, omnichannel pet care ecosystem, delivering exactly what pet owners need, where and how they need it to power our growth. I've already spoken about the need to be customer centric in everything we do. This is underpinned by our best in class data capability with one of the industry's largest proprietary databases bringing together clinical, consumer and transactional data. And this allows us to better target our offering to consumers acquiring at lower cost and to tailor our physical and digital propositions to local and individual needs. With our unique insight into the special bond between pets and their owners, cemented by our market leadership position and 30 year plus track record of putting pets first, we can lead the way in innovation, anticipating emerging consumer needs and opening new market segments. between shipping a bag of dog food from a local pet care centre and performing orthopaedic surgery on a cat. There is a huge space encompassing nutrition, wellbeing, preventative medicine, homewares, accessories, end of life care, training and behaviour, and we understand it better than anyone. Omnichannel remains a cornerstone of our strategy. Our nationwide pet care centres bringing together retail, grooming and veterinary care, as well as acting as network distribution centres. And these centres are doing about 20% higher sales per square foot since pre-COVID, so we have the opportunity to grow our footprint further, particularly within the M25, as our newly opened smaller format stores are trading ahead of expectation. Our in-flight digital re-platforming will improve our multi-channel retail offer, of course, but it also opens up the opportunity to provide innovative services and advice digitally as well as physically. Our Vet Connection service, which offers remote clinical support from vets and registered nurses, and our Pet Expert Live service, which connects customers to in-store colleagues via video for advice on products, show the promise of hybrid digital and physical services to meet customer needs. Now our vet practices are absolutely central to our vision and we have a number of levers of growth. These range from building advanced practices like our recently opened hospitals in Colchester and Northampton, expanding our increasing number of highly successful mature practices within our pet care centres, to continuing to open greenfield sites within our existing centres and in new locations. And across these opportunities, we can deploy our capital in smart ways to underpin growth. And we can use all the talent within our four walls, from vets to pet care experts, to provide the right service at the lowest cost to us and the lowest cost to the consumer. And we can provide it all through the channel of their choice. We are uniquely placed to integrate our products, services and advice into a pet care ecosystem, a platform which is simple to use, highly personalised for customers and their pets. We can provide for pets and the people that love them in a way that no one else can by bringing together clinical expertise, trusted advice, best in class products, high quality services and tailored subscriptions. We have a strong track record of balancing investment in the business with returns to shareholders, and we'll continue to focus on driving top line customer and revenue growth alongside generating strong cash returns. Our capital allocation framework is clear. We invest first in the organic growth of the business, provide a progressive dividend, look for accretive M&A opportunities and finally return excess cash to shareholders. This is not changing and we will remain disciplined in how we manage shareholder capital. Now we are a market leading retailer in a structurally growing defensive industry, but we are so much more than just a retailer. Our diversified services proposition is unique and offering high returning growth, and we have emerging digital and platform opportunities that can support future growth and returns. Our sectoral growth trends, our robust balance sheet and the opportunity ahead of us will allow us to continue to invest through the cycle, something that many peers and competitors will struggle to do. And in executing our strategy, we will build a stronger and bigger business. I'm absolutely delighted that I made the decision to join Pets at Home and I'm incredibly excited about the opportunity ahead for the business. Now our performance over the first half of the year has been strong and we continue to grow our customer base, to grow our business and to grow our like for likes across all channels. Customer demand has proven resilient and pet care remains a highly defensive category. We've welcomed record numbers of new customers this year and alongside this we've continued to deepen our relationship with our customer base, engaging them in more parts of our ecosystem and improved our retention levels. we are of course conscious of the macroeconomic backdrop and the pressures it creates both for our customers and the business and in this context we remain vigilant and responsive in managing the business and as our results show this is working well our profit and cash generation remain in line with our plan and our profit guidance remains unchanged and mike will now take you through our h1 performance in more detail

Thanks Lisa. We are pleased with our first half results. We came into this year with sustained momentum, reporting 6% like-for-like growth in the first quarter and since then strong revenue growth has accelerated. Our group like-for-like sales grew by 6.4% and quarter two was stronger than quarter one. Profit before tax is £59.2 million. That's 9.3% lower than last year but it is in line with our plan. And likewise, free cash flow is £41.4 million, also in line with our plan and reflects the investments we've been making to drive our future growth. Our progress in the first half and our plan for the second half gives us the confidence to reconfirm our full-year profit guidance of £131 million. We continue to make solid progress implementing our pet care strategy. We've acquired a lot of new customers with our VIP loyalty club growing by 9% and we've continued to invest in our new distribution centre and digital capabilities. We're also dealing with strong external headwinds, including increased energy and freight costs. And despite these headwinds, our underlying business is strengthening and our prospects have never been better. Turning now to give you some more detail on our first half financial results. We saw strong revenue growth across both our retail and our vet operations. At a group level, like-for-like revenue growth across the first half was 6.4% and that's against a strong comparator of over 22% in the first half of last year. Within retail, our light for light sales growth was close to 6%, with our total food growth very strong at 14%. And although our total accessories was down by 3.5%, within this, commodity type accessories, which includes cat litter and health and hygiene products, grew by over 7%. Omnichannel sales also stepped up, growing by over 16% and our stores continue to play an important role through both our click and collect and deliver from store services. We also saw strong growth in the VET group with our like-for-like revenue growth up by 10.5% and that was against a strong comparator of just over 26% in the first half of last year. New client registrations averaged over 8,800 a week, and that's helped grow our active client base to 1.7 million, a clear indication of both the market growth and the strength of our joint venture VET model. Strong veterinary revenues drove a very robust underlying profit and cash performance with profit, margin percent and normalised cash increasing year on year and we still have a significant growth from maturity to come. We also have seen pet care plan subscriptions grow by 11%. We now have over 1.6 million plans and those generate over £135 million in annualised recurring customer revenue. All of this performance was underpinned by the growth we've seen in new customers. Our active VIPs increased by 9% to 7.6 million. And the sign-ups to our puppy and kitten club continued at pace, averaging 29,000 a week in the second quarter, higher than our pre-pandemic level, and creates a 12 to 15 year growth opportunity over the full pet lifetime. Let's turn now to group gross margin which was in line with our plan but lower by 123 basis points year on year at 47.5%. Retail gross margin was impacted by the well publicised increases in freight costs These were offset by FX gains in the half and the biggest impact on gross margin came from food sales growing faster than accessories. Importantly, we've been able to increase prices where necessary to offset supply cost inflation while still maintaining our price competitiveness. VET group gross margin expanded as expected, with our revenues growing by over 10% on a carefully managed cost base. So let's look now at our cost base in more detail. Total underlying operating costs grew by just over 11% and that includes the impact of increased energy and pay rates. We have a tight operational grip on the business and remain very disciplined on costs, investing to grow the business by building capability and capacity, but also continuing to drive operational efficiency. Our programme of rent reductions continues and we have a focus on improving productivity right across the business. We were impacted by external cost headwinds in the first half which held back our results. Freight costs were up 4 million year on year and energy costs were up 4.9 million year on year and this is not unique to us. Although we are creating digital capability with multi-year benefits, we're also required to expense a significant part of our digital investment. That's consistent with the revised IFRIC accounting requirements under IAS 38. In the first half, we invested a total of just under £17 million and this had an £8 million impact on our profit year on year in H1. Consequently, taking these three impacts into account, our first half profit declined by just over 9% to £59.2 million. Let's turn now to capital expenditure and our investment plans. We have continued to invest to support our pet care strategy. In the first half, we invested nearly £56 million, of which £39 million is accounted for as capex and £17 million is digital investment we are now required to expense. We're planning for a full year total investment of around £100 million, and that's before the sale and lease back of our new distribution centre equipment, of which 30 of the 100 will be digital capability investment, which we will be required to expense. So that'll make our fully reported capex around 70 million. And there are three focus areas for this investment. Building out our new distribution centre at Stafford, which is well underway and on track. investing in the digitisation of the business through Project Polestar and regenerating our existing pet care centres as well as opening new pet care centres and expanding our vet practices. Turning now to cash flow, the business continues to be very cash generative, with free cash flow of £41.4 million in the first half. This cash result was in line with our plan, although lower than last year, driven by several factors, including the non-recurring one-off £21 million benefit we saw in last year's result. It also includes the impact of choices we've made to maintain a level of investment in future growth, optimise our inventory levels, as well as the impact of lower profits year on year. Within our working capital, we've also continued to see the strong performance in the VET group, leading to the ongoing repayment of operating loans, and we had a further £5.3 million repaid in the first half. Turning now to look at our very solid balance sheet. Our £50 million share buyback programme, which we announced last May, is progressing well. To date, we've acquired over £27 million of shares in the first half. As I've said, we have a very strong balance sheet. That includes net cash of over £43 million and significant liquidity of over £340 million. So in conclusion, we've made real progress in the first half. Our revenues have continued to grow, with quarter two even stronger than quarter one. Our profit and cash result is lower year on year, but it's still very much in line with our plans, despite the external cost headwinds. More importantly, the underlying business is strengthening and we're maintaining our plan level investment to drive the future growth of the business. And our unique business model has attracted a significant number of new customers, which bodes really well for the future of the business. And we remain very much on track to achieve our median term customer revenue target of at least £2.3 billion. Taken together, this gives us the confidence to reconfirm our full year profit guidance of £131 million. I will now hand back to Lisa to wrap up today's update. Thanks for listening.

Thanks Mike. I'm incredibly proud of what we've achieved together so far this year and we could not have delivered it without the support of all of our amazing colleagues across the business. Pet care remains a highly defensive category and the nation's pet owners continue to prioritise spending on their beloved pets. And we continue to invest to drive long-term sustainable growth and I'm incredibly excited about the opportunity that lies ahead. Thanks for watching.

Good morning, everyone, and thank you for joining us for our interim results. I'm Lisa McGowan, CEO, and I'm here with Mike Iden, our CFO. I'm delighted to report that we've enjoyed a strong first half, and I hope you've had the chance to listen to our recorded presentation, which includes my impressions of my first six months as CEO and our vision to build a customer-centric, omni-channel, pet care ecosystem. Before we move to taking your questions, I just wanted to share a few highlights with you. Our performance over the first half of the year has been strong, and we continue to grow our customer base, to grow our business, and to grow our like for likes across all channels. In a difficult environment, we have reported 7% growth in sales with our Q1 performance improving on an already strong Q1. We have welcomed many more pets and pet owners into our ecosystem, And we're seeing record numbers in recent months, averaging 29,000 sign-ups a week to our Puffy and Kitten Club. That's three times the pre-pandemic average. Our vets have continued to deliver sales momentum with 7% growth in vet practice sales, again, fueled by strong new customer recruitment, averaging almost 9,000 registrations a week. Subscriptions continue to grow strongly, increasing the predictability of our revenues, now reaching $135 million in annualised recurring revenue. And good cost control has seen profits land where we expected, albeit with PVT down to $59.2 million due to the already flagged increases in energy, freight and our digital expenditure. This is as expected, and we have the confidence to confirm guidance for the full year at $131 million of PVT. Our confidence in the business, together with our strong net cash balance sheet, also allow us to increase the dividend by 5% to 4.5% at the interim stage. Now, it's been a busy first half from my perspective, as I've taken on the CEO role. And my priorities in the first six months have been to spend time really getting to know and understand the business from the bottom up, and to build a deep understanding of our customers, and to begin to position the business to make the most of the fantastic opportunity we have ahead of us. My early impression is that this is a business with distinctive strengths and compelling competitive advantages. We are a clear leader in a structurally growing market with a uniquely strong store portfolio and building digital capabilities supported and underpinned by passionate and skilled colleagues and partners. Now, my track record is in building consumer-centric, digitally capable platforms. And the main change I've made in the first half is to reorganize our teams to simplify and streamline the organization and enable the business to better serve and focus on our customers and on the front line. And this includes the creation of a chief consumer officer role to lead the focus. As you'd expect, I've also spent time looking at our major projects and strategic initiatives, such as Spice and Polestar. ensuring they have what they need to land well and deliver what we want them to. So to conclude, it's been an eventful first half against a challenging backdrop for many of our customers. But our industry is a defensive one, benefiting from structural growth trends. And our business is well positioned to capitalize on this growth, as you can see in our results. It really is a privilege to lead such a fantastic business. And in my first six months, I've reinforced the size of the opportunity we have in front of us. I'm more excited than ever to deliver our goal of a truly customer-centric, omnichannel pet care ecosystem. And with that, we're ready to take your questions.

If you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. To withdraw your question, please press star 2. Please ensure your lines are unmuted locally, as you will be advised when to ask your question. The first question comes from the line of Jonathan Richard from Peel Hunt. Please go ahead.

Thank you, and morning all. Sort of two, if I may. Firstly, lots of inflation, especially in food, but in general. Where do you think your price position relative to the competition has settled? I mean, I know it only settles for seconds on end, but where do you think you are? Has it improved? Has it stayed the same? Are you happy with it? And then... Looking out second half and into FY24, are you baking in any form of better consumer outlook, any more confidence in discretionary items? Is that part of your thinking behind those guided forecasts?

Thank you for those questions. I'll take the first one and I'll let Mike answer the second. Our price position is very important to us. We've always said that we will Never let price be a reason for consumers not to shop with us. And we've been able to maintain a competitive price position throughout the first half. And I think you see that reflected in our really strong customer growth. We do offer price points right across the architecture. We have over 10,000 products and it's important to us that we have everything from entry level right up to very advanced nutrition and premium accessories. And we've definitely been able to maintain that architecture. And we haven't seen any evidence of customers trading down through that. One area of real strength in that price architecture is our own label, where customers can save up to 25% versus a branded product. And our recent campaign on switch and save has been very successful on that. That's a really good outcome because the customer saves money. We make the same as not slightly better cash margin. and then they're locked into our ecosystem because obviously those are exclusive brands. We've got a particularly strong price position at the moment versus Tesco, partly because of their well-publicized withdrawal of some products, but we're also price compare versus Zooplus and Amazon, and we're very comfortable with where we stand on that price. Mike, do you want to take the second question?

Yeah, I think the second question, Jonathan, was about how and then our thinking on how that might shape up in FY24. So, I mean, yes, just to look back first, I mean, across the half, we saw really good growth in our food business, 14%, and we did see a decline in our accessories business, which we'd planned at minus four. If you dig into that, the second quarter for us was better than the first quarter. Our like-for-likes picked up. And actually, the last period of the half was our best, growth period of the entire half. So we've got a strong tailwind going into the second half of the year. Big changes, actually. Between the first half and second half, accessories did pick up, you know, and discretionary accessories did pick up. So we've always seen growth in what we call commodity accessories. That's about a third of what we sell, particularly non-discretionary, things like cat litter, things like health and hygiene. And we saw volume growth there as well. but the discretionary side did pick up in the second quarter. And since the end of the half, which was 13th of October, we'd have Halloween and then we'd have Christmas. And those ranges, which are clearly discretionary, are selling really well. So I think we know when we've got affordable products, that they're well-priced, good availability, that customers engage in, we will sell the product regardless whether it's discretionary or not. But clearly, as we pet care affordable and therefore our own labels in particular will be really important to us as we head into next year. Our own label food is typically 25% cheaper than the branded equivalents and likewise a big focus on making our accessories affordable for customers. So we recognise there is going to be a significant tightening of the consumer belt but we do think pet care in particular is very resilient. I'm going to remember 75% of what we sell in total across debt and retail is non-discretionary. So we're well set up to deal with that, but we will continue to make sure we're competitive across everything we sell.

The next question comes from the line of Wayne Brown from Liberum. Please go ahead.

Morning. Just following on from That last question. It's quite difficult to understand the defensive comments or the defensive nature of the business if we don't put like for like sales into the context of price and volume. So obviously accessories versus food. If you can just give us what inflation you're seeing within those subcategories and then how volumes actually compared because If pricing was obviously put through during the period, then one would expect Lark for Lark sales to have been better in the latter period rather than the former. So, just trying to understand that dynamic better. And then, with regards to inflation within the food chain, how long do you think does it take for inflation to food through into your end products from feed inflation and the raw materials at source? Thank you.

For the half, our 14% like-to-like growth in food splits 9% pricing, 5% volume growth. So very pleasing to see volume growth. Pretty consistent with what we saw in the first quarter. Commodity accessories, that's about a third of our accessories. The total like-to-like there was 7%. 4% is volume, 3% is pricing. And in our discretionary

is volume.

Okay, very helpful. Thank you. Yeah, just from a cost inflation perspective of when feed cost inflation feeds through, what's the lag that you see in the end pricing of the products?

Well, pretty much straight away. Manufacturers are pretty keen to pass it on, as you imagine. So that's pretty much the negotiation we have with our supply base. And I think while we've got volume growth, obviously we've got a good leader there. because volume growth is very helpful to suppliers, creates value in their supply chains through operational leverage. So part of that negotiation is we get growth in our volume, we go back, capture the value we create in the supplier base, which helps us negate the cost price increases that they wish to put through. So that's the virtuous circle that we're trying to create there. But yeah, manufacturers are very keen, as you'd imagine, to pass on cost prices really quick.

And then, sorry, one last follow-up. And are there any concerns around security of supply for next year or that the cost of supply is going to increase materially from what you can see in the market at the moment, certainly considering what's going on in Europe with the pressures on farmers by new climate change regulations?

Don't really see much change there, Wayne, you know, from this year to next. Something we're looking Availability of products in the, certainly in the second quarter, year on year, is actually better for us. You remember this time last year, there's quite a lot of supply chain disruption, mainly caused by the availability of truck drivers for suppliers, actually, as much as the products. But we've certainly got a little bit more stock year on year, and that's helping us through to see better availability, which is helping drive better sales.

Great. Thank you very much.

The next question comes from the line of Michael Benedict from Barenburg. Please go ahead.

Good morning, all. Thanks very much for taking my questions. I have three, if that's OK. So firstly, on the gross margin, I wondered if you could break down the various moving parts over H2 and broadly where you expect it to land for the full year. Inventory is my second question. well up year on year but appreciate there were supply chain issues in the prior year just wanted to check in on how happy you are with the quality of that inventory position and then lastly i think you mentioned in the presentation that you expect 30 million pounds of investment to be expensed this year i wondered directionally where you think that will be next year thank you

Thank you. I'll take the second of those and I'll let Mike answer on the gross margin and the expense of the investment. As Mike said, we're happy with our inventory position. Availability is a really strong and important KPI in our business because where we've got product on the shelves, we're able to sell it. I think we're very happy both with the quality and the quantity of the inventory we're holding. One change in investment that we've made in the business is a demanding forecasting tool which is now live in most or some of our estate we're rolling out for the rest and that will enable us to even more precisely kind of pinpoint stop from our DCs into our stores so happy with the inventory position and in fact much better improvement year on year. Mike do you want to take the gross margin and the investment question?

Yeah on the gross margin we actually have a bridge And we split it between retail and VET group. Quickly on the VET group, what we see there is expanding gross margin, completely consistent with the structural growth we see in revenues on a fairly fixed cost base. So that will expect that to continue, and that should continue into next year. In retail, we pull out three impacts, the biggest one of which is product mix. So product mix is 147 basis points. And there's two or three things happening there. The first is we've got a really fast-growing food business. So participation of food in the total sales mix is about four percentage points higher year on year. And that in itself, because food has a slightly lower gross margin than accessories, will drive in a mix impact. It will be obviously more cash, a mix impact, real percentage. And then within our products, a couple of things I've called out already in accessories, You know, our commodities accessories is this single growth. Discretionary, which is a high percentage margin, is in decline. So that also goes into product mix. And in food, whilst all of our food categories have been growing significantly, contributing to that 14% growth, grocery, as we welcome some new customers into the business, has been growing slightly faster, and that's got a slightly lower gross margin. So all of those feed into product mix. And the other two points we've got in there is freight. You know, we call that out on the front page of the R&S. Freight costs year on year, 4 million. That's 49 basis points. We'd expect going into next year that freight to come back quite a lot, actually. Local freight rates have really come off their peaks. So that's very much this year's impact as we're going to next year, although it will still hit us in the second half. And then finally, foreign exchange on there, which is a positive. year's fx as we look into next year you know clearly cables weakened uh we pull out in the rns we've got about 50 percent of our next year's requirement at about 117 uh 1.17 that compares to 1.34 this year so going into next year you'd expect the fx to come back unmitigated and we'd look to see how we can mitigate some of that but that would impact our gross margin so As we look at the second half, mix will continue. Freight will have an impact into next year. Freight will drop away. Mix will probably even itself out. FX will be a bigger feature. And we'd expect gross margins in the VET group to continue to expand as we grow revenues. And then I think the third question was around digital and what we're expensing. And obviously we've fully embraced now the clarification on the accounting standard. that requires us to expense digital investment. Even though that digital investment has got enduring benefit to the business, we're building real capability. We're probably at peak build at the moment. Impulse Start this year is peak investment. But the accounting standard requires us to expense that. So this year, $30 million. Next year, it will be lower. It will go down because we're going through the peak this year.

but it will go down next year. That's great. Thanks very much.

The next question comes from the lineup.

Adam Tomlinson from Libra. Please go ahead.

Good morning. Three follow-ups from me, please. First of all, just in terms of customer behavior, I think you've covered a few points there, but When you talk about particularly new customers coming in, spending more on grocery, can you maybe just talk about where you think you might be acquiring those customers from? And as they come in and spend on grocery, you mentioned no trading down, but are you seeing the new customers, is there a greater percentage of those now spending on grocery versus advanced nutrition, for example, that you might have seen in the past, given the tough conditions for the consumer? Second question is, you talk about structural growth drivers. And I think the consensus was the pet population over COVID increased about 8% to 10%. And I think within the market, it's often talked about that sort of barbell spend, people's overspend in the early years, and then that sort of plateaus out until the later years. So just how much of a tailwind do you think there still is from that pet population increase that we saw during COVID and how much of that has sort of fallen off? And then the third question is around the cost base. I'm thinking a bit more on the retail side here. You mentioned the FX headwinds, energy going up, labor as well. We've seen some big increases there, perhaps freight coming back and other efficiencies perhaps helping to mitigate some of that. But just in terms of the overall retail cost base, how that compares when you look for FY24 versus the current year. Thanks very much. Thanks, Adam.

So I'll take the first two of those and then Michael pick up on the third. So generally, and I'll come to grocery, but generally customer behaviour is robust. We've seen no material change from what we talked about at the end of Q1. In fact, probably a bit of an acceleration through accessories through Christmas and Halloween. I'll just talk to the vets because the customer behaviour there is really solid. There's a few leading indicators we could look at for changes in vet behavior. A mix of curative versus preventative, where customers are leaving it longer to take their pet to the vet. An increase, unfortunately, in euthanasia, a decrease in vaccination rates, a sort of cancellation of care plans. We're not seeing any of those. So I think the customer behavior in the vets part of the business is absolutely rock solid. In terms of retail, again, I mean, Mike outlined the trading shape and we're seeing that as a really sort of strong, solid set of trends. We are attracting more customers into grocery, particularly in the last kind of couple of quarters where Tesco in particular have been in dispute with some suppliers. And that's definitely been a tailwind, but that's always been where we've attracted new customers into the business. We've always had a strong track record of laddering customers up through grocery, through Step Up and Bridging Brands, which are growing very well, and then into Advanced Nutrition, which continues to grow well, particularly in scientific and particularly in our own brands versus the branded suppliers. So we see the attraction of customers into the grocery, from the grocery sector, as a real future tailwind in our business as we're able to trade them up. And we're seeing signs already that that's the case. And we're not seeing signs in the other direction where our advanced nutrition customers are trading down into grocery. All of that growth is fueled largely by new customers. So a really strong set of trends there. In terms of the structural growth, we've talked in the past about premiumization and humanization as being two really strong tailwinds. And we've also talked about a COVID boom in terms of pet penetration and the 12 to 15 year life cycle that sits off the back of that. I think we are now confident to say that that's no longer a moment in time in a COVID tailwind. It's actually a new third trend joining premiumization, humanization, and we're calling it penetration, which is just the propensity of households to take on a pet, and if they've already got a pet, to take on a second, third, or fourth pet, and we're definitely seeing evidence of that. It's across a number of demographics. It's particularly younger people who maybe are delaying families and are having a pet before or instead of children. It's families that maybe couldn't afford a pet during COVID because the prices were significantly elevated. But largely, we attribute it to changes in lifestyles as people are working from home more. And whereas a pet may have been something that they couldn't have considered previously, And it's something they're now considering. So getting a pet is actually a pretty considered decision for most households. It's not something that they do lightly. And the fact that we're still seeing puppy and kitten numbers at 29,000, that's higher than during the peak of the pandemic. And it's three times higher than pre-COVID suggests that, you know, while we talked a lot about this 12 to 15 year timeline on the COVID boom, it wasn't a COVID boom at all. It was a structural step up in pet penetration into into households in the UK. And we don't see that changing at all. We think that is a third tailwind downpowering our business. Mike, do you want to talk about our retail cost base?

Yeah. And I think, Jonathan, sorry, Adam, I think the thing to think about on retail cost base is we've always had a really tight operational grip on our costs. And that's been the case looking back. It will be the case as we go forward. I'll look at sort of three or four components of our costs. Second biggest cost in the retail cost base, you know, our rent bill is £80 million. You know, we've had a really good programme of success at getting our rents down, typically 45 to 50 leases a year, and we've been getting, well, we've got rent reductions there, 20 to 25%. So that's continuing, and we expect that to continue into the future. And store payroll is our biggest cost in the P&L. And clearly, you know, national living wage increases going into next year. That will be £10.42 in the autumn statement. We actually pay slightly higher than the national living wage, which is a good thing, plus give our colleagues the opportunity to earn above as they train through. But we've got a big focus on store labour productivity. We put a lot of technology into our stores to enable our colleagues to spend less time on non-customer-facing colleagues up to serve customers so they'll make our payroll more efficient if you look at our this year revenue per payroll hour actually in stores that's actually stepped up as you'd expect with the investment remaining technology I think the third one to pick on is distribution at the moment we're managing our distribution out of three DC's Northampton Stoke and we've got a satellite DC for Stoke you know spice will transform that the new staff at DC is comes on stream spring summer next year, delivered to stores, and then we'll get all of our online business in there as we go through next year. That's going to really step change operational costs in terms of distribution, create a lot more efficiency, but also, of course, reduce our working capital as well. So that's coming through. And I guess the fourth one I'd look at is energy. You know, I mean, energy costs, you know, not... million last year on an Apple to Apple basis. We put a big focus on trying to reduce the amount of energy we use. A great example will be, and it's in our capital plan, we're going to spend 3 million putting solar panels on the roof of our new DC. Effectively, that'll make that DC self-sufficient in energy. So really good payback there as well. But those are the things we can do to manage energy costs. So hopefully that was helpful.

Yeah, thanks very much. Just to follow up on a couple of points you made there. On the VET side of things, you mentioned almost 9,000 new customers a week there. How much do you think your... Can you just remind us what that compares to versus pre-pandemic and how much you think you might be benefiting from potentially the independent sector there struggling? And then just on... You made the point about you think that the... the propensity for people to buy a new pet or add a third or fourth pet is now a sort of permanent feature. Is that from your data or anything you're seeing in terms of market data you've been able to look at? Thanks.

Mike, do you want to take the back question?

Yeah, so you're quite right to highlight, you know, we've got to step up in new client registrations. So 8,800 a week. That is up from pre-pandemic levels. It's actually up from last year. Last year we did 8,500 a week. I think the thing to remember about our debt business is we've still got capacity in there to take on new clients. We still have over 60% as a helpful slide in our presentation deck that breaks this out. We still have over 60% of our practices still building, establishing themselves. So still less than eight years, nine years old. with the capacity to take on new clients. And I guess the other feature of our debt business was that mainly through the pandemic, we stayed open and they're able to take on more clients. So I think that combination of capacity, the joint venture model, the owner-driver makes our business capable of taking on more clients. And we see that trend obviously continuing. Over to Lisa.

Yeah, and just on that as well, and it sort of supports the penetration trend, we talk about new client registrations, which is humans. But if an existing human takes on a new pet, that doesn't count in that number. So actually, we're seeing new pet registrations with our vets accelerate ahead of our new client registrations, which is one of the data points that gives confidence that penetration is going up, and particularly amongst our engaged customers. Our view that this is a permanent trend is a combination of our own data, of course, and our own trading, but also the customer research we do, the insights into our customers and segmentations, which suggests that these are underlying trends that are going to continue. Thank you. Okay, thanks.

The next question comes from the line of Simon Bowler from Numi. Please go ahead.

Good morning. Two, maybe three for myself. I'll take them one at a time. Firstly, can you comment on what you're seeing and perhaps expecting in terms of pricing both in food and accessories as we look into 2023? And perhaps within that, how you think about managing any FX headwind? Do you typically look to hold percentage gross margin or would you take that on the chin?

Okay, so thanks for that. I think to your question on gross margin, there's a real focus, obviously, on gross margin percentage, and in a non-inflationary environment, that makes sense. I think as we move forward in a very high inflationary environment, we have the ability to pass on sort of cash increases, and we've proved that we've been able to do that over the last year and year and a half quite successfully. particularly in food, without taking a margin, as it were, on the increase. So I wouldn't focus too heavily on our gross margin percentage going forward. I think our cash margin, which we will hold firm on, is a better indicator. And so far, we have a good track record of being able to pass through that pricing, and we expect to be able to continue to do so. But as Mike said earlier, our growth, our scale, our relationships with suppliers, mean that we are definitely in a good position on all of that, including actually our sourcing office in China or in Hong Kong, which enables us to source very effectively from the Far East as well. Mike, do you want to comment specifically on the FX piece?

Yeah, you're right to call that out, Simon, because this year, as we say in the R&S, we've got our exchange rate at 134%. about £600,000. That clearly in the past, we have done things to try and mitigate that. You know, we can do things on pricing to some extent, and we can look at where we source from and move to more near-shore sourcing. However, I think the overriding thing we're trying to achieve is affordability and price competitiveness. And clearly in the market we're in, that's really important as we head into next year, particularly those accessory lines, you know, where we know that, you know, those price points make a big difference to customers. So we will not try and pass on price if it risks us being uncompetitive, but clearly we'll be looking to see what we can do to mitigate some of that foreign exchange. But it's right to call out, look, you know, if we do end up at 117 full year versus 134, you know, that gap for us is worth, what, 10, 11, 12 million pounds.

Okay, and then...

Can you say anything in terms of expectations on pricing for next year on food or accessories?

Do you want to take that one?

Yeah, I mean, overriding things, Simon, across all of this is the price competitive. So we're trying to keep three KPIs sort of in attention there. First of all is our gross margin percent. Clearly our commercial team is very focused on gross margin percent. But notwithstanding Lisa's point around, you know, actually cash margin matters more, but percentages is clearly one of the KPIs our commercial team managed to. Second, obviously, is like-for-like sales growth. Keeping our business in growth, you know, we know that makes good sense to us in terms of the efficiency of the business operational leverage, like-for-like sales growth and taking market share. But obviously, the third one is being price competitive. You know, those, you know, our trading meetings each week, our price position are like-for-like three KPIs, then we've got to keep in the right place. So far this year, we've made good progress there, but we won't become uncompetitive on price at the risk of chasing a higher percentage margin. That's the key point.

Okay. And then the second I just wanted to touch on was you mentioned the sequential improvement in discretionary accessories. It doesn't feel like consumers sequentially got better. So Just wondering what do you think has kind of driven that? Has there been kind of a change in your trading stance? Is there kind of some self-help efforts that have gone into supporting that? And then kind of along similar lines, just on the grocery side of the food, are you kind of leaning into that opportunity through kind of range expansion and working closer with some of those third-party brands in that part of their business?

Okay, thanks, Simon. So on the discretionary accessories, I think there's a few things. One is we've traded well, and our traders are on top of that day in, day out. Secondly, availability has been stronger. I talked earlier in the call about how availability is a big driver for our business. certain elements more in our consumables actually so things like puppy pads and hay and cat litter we've had better availability in the second quarter but mostly actually it's the quality of our accessories range and we're not a particularly seasonal business but Halloween was really strong we did a big push on Halloween this year and my dog Fred definitely enjoyed his pumpkin costume but Over the general, all of our stores saw a really good response to Halloween and great ranges. And then Christmas has started really strongly. We're slightly ahead on our sell-through of Christmas. And if I told you that we have sold almost 100,000 purple spotted dinosaur dog toys, I think you might be surprised. But we're definitely seeing customers respond really well to Christmas, it's not a particularly expensive thing to buy a dog toy at five or 10 pounds. And when times are tough and the press is reporting all sorts of bad news, I think just that ability to walk into a pet's at home and treat the companion that loves you more than anyone is definitely something that our customers are responding to. In terms of food, yeah, we're always looking at range expansion, customer needs, humanization, premiumization, continuing to evolve. As I said, our bridging, we've got an own brand in our bridging area. That's doing really strongly. Our own brands in advanced nutrition are performing really, really well. Our own brands in accessories continue to grow. We expand and innovate in that area as well. And then lastly, areas such as frozen and fresh are areas that we think are about to take off. And that's something that will be very well placed to compete in. So overall, you know, strong trading, strong availability, but mostly a really good product.

Okay. Thank you.

The next question comes from the line. Sorry. Go ahead, Lisa. The next question comes from the line of Manjari Shah from RBC.

Please go ahead.

Hi, morning, guys. Thank you for taking my questions. I just had two, if I may. The first is on Pathfinder in the vet business. Can you give a bit more color on what you're seeing from this initiative, why you have rolled it out? And I suppose, how are you thinking about the rollout to joint venture practices in fiscal 24? And then secondly, on customer churn for the VIP club, could you give a bit more colour on activities that you're doing to mitigate customer churn and anything else you might have planned in the pipeline? Thank you. Yeah, no problem.

Great question. Thank you. So Pathfinder is our initiative to use our in-store colleagues to take some of the task away from the vets and the nurses and create better signposting into our retail office. So they replaced a receptionist and work with the client through the journey. And we've seen that be very successful. It's one of the productivity improvements that Mike referred to earlier. And we're seeing a stronger sign up into a cross-sell into the retail offer, stronger sign-ups into preventative medicine. We're seeing stronger sign-ups into advanced nutrition, as well as freeing up more vet time to focus on the things that vets should be doing into curative care and treating animals. So very pleased with that initiative. Two thoughts on that. One is, I think we can go further. The fact that we have vets and retail and grooming within four walls means that we are much more able than any competitor to get the right task to the right person with the best customer outcome, the best revenue at the lowest cost. And we will take the learning from Pathfinder and potentially look more broadly at the four walls within the four walls at task and where it's best done. So in terms of plans to roll out to our JV practices, A number of our JV practices have seen the results of our group-managed practices and are very excited and very keen to do that. It isn't something that costs a lot of money, obviously, to do. It's just a change in roles and responsibilities, so it's something that we can roll out quite fast and quite effectively. I think this is one of the strengths, actually, of having a small group-managed estate within our ecosystem in that we can test and trial things and then figure out the best way to get them through to the joint venture practices. But because this one in particular creates a bigger pie, then it's sort of a win-win and we will proceed with that. In terms of churn, you'll have seen that we've made real strides year on year in reducing churn. A lot of that is down to our data platform and our ability to target offers, relevant offers and relevant products to customers that we think are at risk of churning. We've made good steps in figuring out the signals that mean a customer is at risk of churning, and both doing that now more cost-effectively and to greater effect, which is one of the things, as well as the attraction of new customers, that's increased our active VIPs year-on-year by 9%. So thanks for your questions, and I think both of those things are both really good things that are showing up in our H1 results, but also have lots of legs for the future.

Great. Thank you. The next question comes from the line of Andrew Wade from Jeffrey. Please go ahead.

Morning. A couple of questions from me. The first one, I think probably for Lisa, you talk about in the statement and you mentioned in your intro about reorganization to delay, simplify and speed things up. I'm sort of interested in that. That sounds like the sort of language we normally hear in businesses that aren't working well, but this one obviously is. So just sort of a little bit more color on what changes you've made there and what needed to change and why it needed to change.

Yeah, no problem at all. Thank you. Yeah, and actually this is very much what it says on the tin. It's about streamlining and flattening and speeding things up. It's not sort of code for restructuring or cost-cutting. In fact, the whole thing is cost-neutral. It's just about pitting our resources where they're needed and closer to the front line. So one major change as part of the reorganisation was to remove layers, layers of execs to create one single exec. And that's important because the strategy of the business is very much about creating an integrated ecosystem and therefore, you know, wanting to remove all silos and divisions between, or as many silos and divisions as possible between vets and retail and bringing those businesses together, as well as taking out a layer between the executive and both the frontline and our customers. So a true sort of streamlining and flattening. Also as part of that created a consumer function responsible for digital, for marketing, for brand, for consumer value proposition. And while this business has always been incredibly pet centric and it's a huge source of strength, we're not going to step away from that. Our number one value is that we put pets first. It's right at the heart of what we do. It's important to every single one of our colleagues and partners. But we have an opportunity both through offering our expertise and bringing together our data to really step up our customer centricity. what our real insight is, is into the bond between the owner and the pet. A pet is just an animal until it has an owner. So putting our customers more at the heart of our thinking is a real opportunity for us. And so as part of the change created a chief consumer officer role, which we'll be filling in the new year. We've also been able to bring in some external talent. So Rachel Mooney joins us as CPO. She comes from a background of data, digital, services, which will be a really strong addition. And she started off brilliantly. And then we've been able to sort of rotate and promote some of our top talent to ensure continuity. So Lisa Mayo takes on the retail role. She's been with the business a number of years, has deep expertise in retail. Louise, who for a long time was our GC, took us through the IPO. In fact, I think has been with the business almost two decades. She's gone over to run the Vets, which is a fantastic move and we're really pleased with that. And then Lucy, our General Counsel, has been promoted to Chief Legal Officer and has taken on a number of other corporate functions. So all in all, not code for cost cutting. It's come out cost neutral, which was the intention. But I think we've got a simpler, more streamlined, more integrated structure that will serve us better going forward.

Very helpful. Thanks. And you sort of segued into my second question, which was around customer centricity or specifically you're talking about step changing customer centricity. You've talked about the importance of it there, but just interested as to what that will, what that could slash will look like to customers. How is it going to look and feel different for them? You being customer centric?

Yeah, no, thanks for that. So I've sort of created the consumer function to bring together We've got a lot of data, we've got a lot of insight across the business into customers, but we've not potentially been using it to its full capability. So I think if I can just give you a little example of what a future kind of customer journey might look and feel like, which might help bring it to life for you. So my dog, Fred, is a little bit overweight, let's say. And so in the future, I would go on to the Pets app to try and book a vet appointment for Freddie to talk about his weight loss. And we would have the data and insight from all of his vet visits to know. We'd use a couple of AI questions to know that this isn't an issue with Fred. It's not unwell. He just needs to be on a different diet. So we would offer up, obviously, a vet appointment, which the customers ask for at a cost. But we'd offer a free nutrition consult. And we'd use all of our data to know what breed he was, therefore who's the right expert, where that customer, where I live, and therefore what's the right pet care centre for me to go to. And we would find a match with Sharon in Staines, who is an expert on Labradors and nutrition. And I would be offered a virtual or a face-to-face consult. I'm choosing a face-to-face, so if I go down to Staines, a week later at the time that's convenient for me. Sharon's there. She talks to me all about Fred. She does a weight check. She does a health check, a coat check, puts Fred onto a particular weight loss diet. She notes he's an older dog, so she gives us a supplement in there as well for his bones. All of that packaged up into an easy repeat, which is sent every three weeks, because that's the pattern that suits me, to my house. All of that's then written to the vet records, which is in our ecosystem. And then I have an ongoing chat relationship with Sharon, telling her how Fred's going, putting in his weight records. And three months later, I go in with my now slim, svelte Labrador, and she puts him onto a new diet, and that's now in my EasyRepeat. So we can bring together all of our data, online, digital, hybrid, We can bring together the expertise in store, all of our product in a way that is so customer centric that we know what the customer needs. We deliver it how they need at brilliant cost. And that powers the business. So hopefully that just brings to life a little bit what I mean by both customer centric, but also omnichannel and an ecosystem.

Gotcha. Yeah, absolutely. Thank you. And then just a final one from me. The store transformation program, just interested as to any additional information or data points or returns or anything like that you can give us on how that's performing. Thank you.

Yeah, let me think about that. So it's ongoing, Andy. It's an ongoing store refurbishment program. You know, we're making good progress. Cumulatively now, we've got around 60, just over 60 stores now that is in The format, I think you may have seen a couple of those when we've been out on visits. So we'll continue with that program. We're refining it all the time. So some features we know are particularly appealing and are particularly good for customers. So the service desk, for example, has proved universally appealing for customers. And then we're also looking to see how that can work in much smaller formats. So, for example, the store opening in Putney, store opening in Ballum, the way we've You'll continue to see us looking at opportunities for new pet care centers in the M25 in particular, but also continuing to refurb our rest of our estate. We'll do it at a sensible pace. You know, we think about 40 a year, 45 a year. clearly that's part of our capital investment program. We can dial up, dial down, you know, we've got choices to make on the pace we go, but as we move forward, we've definitely now honed down on what actually is working for us. And, you know, we're really enthusiastic because, you know, putting the window, at least it's talking about customer customers of the centre, because that's basically what we're trying to do in one of our new pet care centres. And we're quite excited about it and happy to take people around by the way, anybody on this call who wants to not have the chance to go around one of our pet care centres, very happy to organise that and show what we're achieving there.

And just to add to that, one of the main things we do when we refurbish a pet care centre is we put a vet in. there isn't a vet and we've still got real opportunity in that space. As well as where stores already have a vet, we've got good opportunity to provide extensions as our vets are the ones that are getting to seven to 10 year olds or even earlier actually are filling up and can do with more space and open advanced practices as well within our stores. So I wouldn't think of it as just a retail investment. It is in fact an investment across our ecosystem. So thank you all for your time today. I hope you can understand the confidence we have in the business and in its growth and in the future. Thanks very much.