Pets at Home shares within the doghouse as rising prices take a chew out of earnings

Pets at Home Group shares fell sharply on Monday after the retailer warned higher costs and weaker demand would likely hurt profitability in the coming year.

It told shareholders profitability would be hit by cost hikes and subdued growth in Britain’s pet retail market amid an ‘uncertain economic backdrop for both demand and inflation‘.

From April, the National Living Wage is increasing by 6.7 per cent to £12.21 per hour, in line with changes announced in last October’s Budget.

Employers’ National Insurance Contributions are also increasing from 13.8 per cent on annual salaries above £9,100 to 15 per cent on wages exceeding £5,000.

The most recent data from the Office for National Statistics show animal and pet product prices fell 2.7 per cent in February after falling 1.2 per cent in January.

But Pets at Home said the combination of higher wages and national insurance contributions would cost its retail arm around £18million extra next year. 

Cheshire-based Pets at Home anticipates making underlying pre-tax profits of between £115million and £125million in the current financial year, compared to £133million in the 12 months ending 27 March. 

Shares in the animal products retailer plummeted by 11.6 per cent to 209p by the late morning, making them the FTSE 250 Index’s second-biggest faller behind oilfield services provider John Wood Group. 

Animal concerns: Pets at Home Group shares slumped on Monday after the company warned its profits would probably decline next year

Lyssa McGowan, the firm’s chief executive, has criticised the NI hike, telling the Mail on Sunday in January that it would negatively affect ‘young, flexible workers, as well as part-time workers and women.’ 

Pets at Home expects an additional £15million impact from variable pay levels, new packaging regulations, and marketing investment.

The company said productivity initiatives and ‘material cost reductions’ would mean its operating costs increase by ‘no more than’ 5 per cent this year.

But it warned: ‘The extent to which we can further mitigate cost inflation will depend on the rate of sales growth we are able to deliver, which is dependent on how consumer demand evolves and how inflation comes through.’

Despite the subdued outlook, Pets at Home said it ended the last financial year with a record number of Pets Club members.

For the coming year, the retailer forecasts its retail segment to outperform the broader market and rebound to growth thanks to the launch of its new digital platform and the transition of online sales to its Stafford distribution centre.

Russ Mould, investment director at AJ Bell, said: ‘While Britons are famously devoted to their furry friends, consumers have less disposable cash to spend on toys and treats, and are focusing more on the essentials which is making life difficult for a specialist like Pets at Home.

‘There is also competition from larger, non-specialist rivals like the supermarkets who have more capacity to compete on price.’