LONDON (ShareCast) - (ShareCast News) - Pets at Home shares fell on Friday after HSBC downgraded the stock to 'hold' from 'buy' and lowered the target price to 230p from 290p after the company reported its third quarter trading update.
The pet supplier on Thursday said group revenue was up 4.4% to £203.7m in the 12 weeks to 50 January, with like-for-like revenue growth of 0.1%, reflecting continued strong growth in veterinary services, offset by more subdued trading across the Merchandise business. The company said the profit outlook for the year remains in line with expectations.

HSBC said the third quarter sales growth was below its expectations of £207m, led by a 0.5% like-for-like sales decline in the Merchandise business.

"Structural market growth and maturity should have been strong supporters of positive like-for-like growth, so this is a disappointing performance," said HSBC.

"Lower footfall was the main cause, with customer feedback suggesting Pets at Home (PAH) needs to improve its value credentials."

However, management is responding to customer feedback by investing in price with the initial focus on its own label food.

HSBC believes the investment in its own label, which is higher margin than branded products, should support margins.

"Pets at Home's shift of strategy is likely to see it become more sales growth led and less gross margin led - an encouraging move, in our view. It suggests Pets at Home will increasingly share the benefits of its dominant advanced nutrition position with consumers."

The bank added that the firm's competitive advantages should mean it is well placed in the long term if it pursues the right strategy.

However, changes may take some time to positively impact customer perceptions and behaviour given an average purchase frequency of about seven times a year.

"It may be a few quarters before we see the benefits of the shift in strategy," HSBC said.

The bank cut its forecasts for earnings per share by 2-5% for fiscal years 2018 and 2019, reflecting a "more cautious outlook". A 3.5% dividend yield with potential for special returns, on a strong cash generation, should offer support in the meantime, HSBC said.

Shares dropped 1.46% to 209.80p at 0913 GMT.

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