Half-year Report

RNS Number : 6590X

Pets At Home Group Plc

28 November 2017

 

FOR IMMEDIATE RELEASE, 28 NOVEMBER 2017

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

Pets at Home Group Plc, Interim Financial Results FY18

for the 28 week period from 31^st March to 12^th October 2017

Merchandise repositioning on track with improved sales momentum

(£m)	H1 FY17	H1 FY18	Change
Group like-for-like revenue growth#	2.5%	3.9%
Merchandise LFL#	1.9%	3.1%
Services LFL#	8.7%	9.5%
Group revenue	441.3	468.0	6.0%
Merchandise revenue	379.5	396.7	4.6%
Services revenue	61.9	71.3	15.3%
Group gross margin	53.9%	51.9%	(198) bps
Pre-exceptional EBITDA1, 2, #	65.2	62.2	(4.6)%
Pre-exceptional PBT1, 2, #	47.0	41.7	(11.2)%
Statutory PBT	46.0	40.8	(11.3)%
Free cashflow#	34.4	23.2	(32.6)%

1.     Exceptional items in H1 FY17 refer to £1.0m of costs related to the disposal of Farm Away Limited, the Group's equestrian retailing business

2.     Exceptional items in H1 FY18 refer to £1.0m accounting charge for acquisition of minority stakes owned by vet partners in the specialist referral centres

·     Continued positive momentum in Merchandise trading with H1 3.1%^# like-for-like growth (Q1: 1.5%, Q2 5.1%) as a result of our omnichannel initiatives, accessories range innovations and pricing changes

·     Strong performance from omnichannel with revenue up 81% to £24m, driven by Order In-Store and Subscription plans

·     Veterinary business growth remains strong: Total income from Joint Venture vet practices up 16.1%  to £28.0m and specialist referral centres growing revenues at double digit levels

·     Total interim dividend payable of 2.5 pence per share, maintained at the prior year level

·     FY18 guidance: Profit outlook for FY18 in line with market expectations. As we see the benefits of our pricing actions, we are accelerating our investment plans and now expect Group gross margin dilution of 200-250 bps. Operating cost growth is now expected at 6-6.5% as we see higher overall sales growth, and the associated costs of delivering a fast growing omnichannel business. All other financial guidance is maintained.

Ian Kellett, Group Chief Executive Officer, commented:

"Our strategic progress and trading momentum have steadily improved through the first half of the financial year. In the Merchandise business, our like-for-like sales grew by 5.1% in the second quarter, driven by our pricing changes, omnichannel offer and product innovation.

"Our veterinary business is taking market share and hitting the revenue and profit growth levels expected from both the First Opinion practices and Specialist Referral centres. We see the potential for significant future profit growth in our Vet Group, where 75% of practices are yet to mature.

"We are confident we are taking the right actions to reposition our Merchandise business and having seen the results from our initial investments, we are accelerating our plans. There remains much to do and we will continue to evolve our strategy and adapt to customers' needs in what remains a competitive market place."

Management and Board update

Ian Kellett, Group Chief Executive Officer (CEO), has informed the Board of his desire to step away from corporate life and pursue his own personal business interests. As part of the Board's succession plan, we are pleased to announce that Peter Pritchard, currently CEO of Retail, will succeed Ian as Group CEO when he leaves. Ian will remain as Group CEO until 31st May 2018 to support Peter and ensure a smooth transition. Peter joined Pets at Home in 2011 as Commercial Director and moved to the role of CEO of Retail in 2015. Over this time, Peter has overseen the establishment of our sourcing office in China, the launch of the VIP club, the development of our omnichannel strategy, and more recently, the repositioning of our Merchandise business.

Nicolas Gheysens, Non-Executive Director, has resigned and will step down from the Board with immediate effect. The Group's Principal Shareholder, KKR My Best Friend Limited, has decided not to exercise its right to replace Mr Gheysens' position on the Board as part of the Relationship Agreement. 

Results presentation

A presentation for analysts and investors will be held today at 8.30am at Bank of America Merrill Lynch, 2 King Edward St, London, EC1A 1HQ, attendance is by invitation only. An audio webcast and statement of these results will be available at http://investors.petsathome.com

Investor Relations Enquiries

Pets at Home Group Plc:                                                     [phone]

Amie Gramlick, Director of Investor Relations

Media Enquiries

Pets at Home Group Plc:                                                     [phone]

Brian Hudspith, Director of Corporate Affairs

Maitland:                                                                                [phone]

James McFarlane, Joanna Davidson

About Pets at Home

Pets at Home Group Plc is the UK's leading specialist pet omnichannel retailer and services provider. Pets at Home operates from 442 superstores located across the UK. The Group operates the UK's largest small animal veterinary business with 447 practices, run principally under a Joint Venture model using the Vets4Pets and Companion Care brand names, and four veterinary specialist referral centres. Pets at Home is the UK's leading operator of pet grooming services offered through its 301 grooming salons. The Group also operates seven specialist High Street based dog stores, called Barkers. For more information visit: http://investors.petsathome.com/

Disclaimer

This statement of financial results does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Pets at Home Group Plc shares or other securities nor should it form the basis of or be relied on in connection with any contract or commitment whatsoever. It does not constitute a recommendation regarding any securities. Past performance, including the price at which the Company's securities have been bought or sold in the past, is no guide to future performance and persons needing advice should consult an independent financial advisor.

Certain statements in this statement of financial results constitute forward-looking statements. Any statement in this document that is not a statement of historical fact including, without limitation, those regarding the Company's future expectations, operations, financial performance, financial condition and business is a forward-looking statement. Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. These risks and uncertainties include, among other factors, changing economic, financial, business or other market conditions. These and other factors could adversely affect the outcome and financial effects of the plans and events described in this statement. As a result you are cautioned not to place reliance on such forward-looking statements. Nothing in this statement should be construed as a profit forecast.

Chief Executive Officer's Review

Operational Highlights

ROLLOUT			H1 FY17	FY17	H1 FY18
Stores	Number of stores1		435	442	450
	New stores (net) 2		8	15	8
Vets	Number of vet practices (total)		405	438	447
	Number of standalone vet practices		143	149	151
	Number of in-store vet practices		262	289	296
	New vet practices (total)		17	50	9
Groomers	Number of groomers1		258	290	301
	New groomers (net) 3		18	50	11
Integrated store units	% of stores with a vet practice & grooming salon		49%	54%	55%
VIP CLUB
	VIP Club active members (m) 4		3.6	3.7	3.8
	VIP swipe as % revenue5		65%	68%	69%
PRODUCT
	Proportion of product SKUs refreshed		22%	39%	19%

1 Includes seven Barkers and one Whiskers 'n Paws by Pets at Home

2 Includes 9 new store openings, and the closure of one store in Wrexham

3 Includes 12 new grooming salon openings and one closure of the salon within Wrexham store

4 Active defined as customers who have purchased during the past twelve months

5 Average swipe rate of the card at store tills over latest quarterly period

Strategic Update

Unique integrated product and service offering

Our key strategic differentiator is our ability to provide everything a pet owner needs for their pet to live a happy, healthy and safe life. Delivering product, services and advice, through our stores, website, colleagues and veterinary professionals. At present over 28% of customer revenues are already spent in our vet practices and grooming salons despite these being such young businesses. Incorporating services into our offer increases overall customer spend and loyalty and also delivers an improved profit outcome, with EBITDA per square foot 24% higher in a mature store with services, compared to a store without services. Our Group strategy is therefore centred around encouraging customers to shop with us through more channels, and use more services.

Expanding like-for-like growth

Better prices for customers

In the Merchandise business a large part of our focus is on delivering better value for our customers. We initiated pricing changes at the start of the calendar year with the Switch & Save campaign, which highlights the value in our private label Advanced Nutrition foods. We have followed this with price reductions in branded food lines and pet essentials.

Overall, we have seen good initial results, particularly in Food and Advanced Nutrition, where increased sales volumes are more than offsetting the price reductions, leading to overall revenue growth in those categories. Our private label Advanced Nutrition brands are performing particularly well after these pricing changes, growing their volume participation within the business. The increase in Advanced Nutrition transactions has primarily been achieved through the reactivation of old customers who have not shopped with us for some time, or existing customers who have not purchased food before, or are trading up from lower quality products. Our ultimate aim is to attract more new customers who have not previously shopped with Pets at Home, which we believe will occur over a longer period as our advertising campaigns gain traction.

Our plan remains to target price investment into product areas that we believe drive shopper frequency and loyalty, not simply reducing prices across the entire range. Given our results to date, we are accelerating these plans.

Innovation and education across food and accessories

Innovation is an important driver of accessories sales, where seeing something new and different often triggers a customer purchase. A key support to Merchandise like-for-like sales during the period came from dog accessories, where we launched a number of new ranges in the period across leads, collars, clothing and bedding.

We also launched a dog food education advertising campaign in the Autumn - "What's in the recipe?" Our customer research told us that very few dog owners understand the level of nutrition or meat contained in their existing food. Our campaign aims to educate customers on the importance of understanding the ingredients contained in their dog's food by using our bespoke online tool and colleague advice to help pick the best diet for their pet.

Omnichannel investment delivering significant growth

Omnichannel revenues grew at 81% during the period, with almost half the revenue of online orders delivered for customer collection in-store. The two major new initiatives driving such strong growth are Order in-store, and Subscription for flea products.

Investing in omnichannel and evolving to adapt to customers' shopping needs is crucial in being able to deliver more convenience and leveraging our strategic differentiators. We have recently improved our website experience even further with a faster checkout process, optimised for mobile device users, and in the medium term we intend to extend our Subscription initiative in further product areas.

Veterinary business taking market share

Our First Opinion business continues to perform, with mature practices growing ahead of the market rate. Our TV campaign for the 'Best Start in Life' puppy and kitten care packages ran over the Summer months and delivered a support to new client registrations that demonstrates the marketing leverage we can achieve through a national brand. A core operational focus in the First Opinion business is the recruitment of Joint Venture vet partners, within a UK vet market that continues to be undersupplied. We were therefore very pleased to see 70 graduates joining our Vet Group graduate programme this year, a vital part of growing our own talent.

Our Specialist Referral centres also performed very well and we are gradually adding additional capacity to these hospitals to accelerate their growth further.

Our First Opinion business already represents a strong and fast growing proportion of Group revenues, having delivered fee income of £28.0m during the period, growing at 16.1%. But this remains an immature business, with only around 110 mature practices in a total estate of 447. As each practice matures, the fee income delivered to Pets at Home increases significantly, and alongside our rollout programme, we expect our fee income from vet practices to double within six years. With a mainly fixed operating cost base, there is significant embedded profit growth to come from the Vet Group.

Space rollout and footprint development

We are on track to achieve our space rollout targets for the year, having opened 9 new superstores (total 442), 9 vet practices (total 447) and 12 grooming salons (total 301). We also closed one superstore during the period, in Wrexham, where we took the opportunity to exercise a break in the lease.

Our targets for the year are to open around 10 new Pets at Home superstores, 40-50 vet practices and a lower rollout of 20-30 grooming salons, as previously announced. We have also launched a new trial convenience store format, incorporating a Pets at Home unit within Tesco Extra in Durham, operated by our own colleagues, with a focus on private label food, Advanced Nutrition and accessories ranges.

Margin evolution

Group gross margin declined by (198) bps, in line with our expectations and overall guidance for the full year. This was primarily driven by our investment in Merchandise product pricing and the impact of Sterling depreciation, which more than offset the significant increase in Services gross margin. Whilst we maintained good operating cost control during the period, the majority of operational cost savings will be second half weighted, as previously guided. We also invested in marketing to support sales, and saw growth in omnichannel operating costs which is reflective of the fast revenue growth in this area of the business. This translated into a dilution of pre-exceptional EBITDA margin^# of (148) bps.

Looking ahead to the full year, as we benefit from the successes of our Merchandise price investment, we are accelerating our investment plans and now expect Group gross margin dilution of 200-250 bps. Operating cost growth is now expected at 6-6.5% as we see higher overall sales growth, and the associated costs of delivering a fast growing omnichannel business.

Medium term outlook

We are partway through the first year of a three year transition to lay the foundations for sustainable profit growth, as we realise the maturity benefits our Veterinary business will bring to the Group.

The current financial year is one focused on repositioning the Merchandise strategy and we remain on track to deliver on financial expectations. In FY19 we expect a return to Group profit growth as the Veterinary business delivers significant growth, whilst we continue investing in selected Merchandise areas. In the final year of our transition, FY20, we expect to see market share gains in the Merchandise business, which alongside the maturation of our Vet Group, will underpin Group profit growth at high single digit levels.

Ian Kellett

Group Chief Executive Officer

28 November 2017

Chief Financial Officer's Review

The H1 FY18 accounting period represents the 28 week period from 31^st March to 12^th October 2017. The H1 FY17 accounting period represents the 28 week period from 1^st April to 13^th October 2016.

Financial Key Performance Indicators

FINANCIALS		H1 FY17	H1 FY18	Change
Revenue	Revenue Split (£m)
	Food	209.5	220.0	5.0%
	Accessories	169.9	176.8	4.0%
	Total Merchandise	379.5	396.7	4.6%
	Services & other1	61.9	71.3	15.3%
	Total Group	441.3	468.0	6.0%
	Like-For-Like growth#	2.5%	3.9%
	Merchandise LFL #	1.9%	3.1%
	Services & other LFL #	8.7%	9.5%
	Revenue Mix (% of total revenues)
	Merchandise	86.0%	84.8%	(122) bps
	Services & Other	14.0%	15.2%	122 bps
Gross Margin	Merchandise Gross Margin	57.5%	54.9%	(265) bps
	Services & Other Gross Margin	32.0%	35.8%	380 bps
	Total Gross Margin	53.9%	51.9%	(198) bps
EBITDA	Pre-exceptional EBITDA2, # (£m)	65.2	62.2	(4.6)%
	Pre-exceptional EBITDA margin2, #	14.8%	13.3%	(148) bps
Other Income Statement	Pre-exceptional PBT 2, # (£m)	47.0	41.7	(11.2)%
	Statutory PBT (£m)	46.0	40.8	(11.3)%
	Pre-exceptional basic EPS2,# (p)	7.4	6.7	(10.0)%
	Statutory basic EPS	7.2	6.5	(10.2)%
	Dividend (p)	2.5	2.5	0%
Cashflow & Leverage	Free cashflow# (£m)	34.4	23.2	(32.6)%
	CROIC#	21.3%	19.4%	(192) bps
	Leverage (ND/pre-exceptionalEBITDA) #	1.3x	1.2x

1 Includes veterinary Joint Venture fees & other veterinary income, specialist referrals revenue, grooming salon revenue, revenue from live pet sales & insurance

2 H1 FY17 excludes £1.0m of exceptional costs related to the disposal of Farm Away Limited. H1 FY18 excludes £1.0m accounting charge for the acquisition of minority stakes owned by vet partners in the specialist referral centres

Revenue

Group revenue in H1 FY18 grew 6.0% to £468.0m (H1 FY17: £441.3m) and like-for-like (LFL) revenues grew 3.9%^#, driven by omnichannel sales, our Vet Group and grooming services.

Total Merchandise revenues, which includes Food and Accessories from both stores and omnichannel, grew 4.6% to £396.7m (H1 FY17: £379.5m), with LFL growth of 3.1%^#. Food revenues grew by 5.0% to £220.0m (H1 FY17: £209.5m), reflecting good performance in dog Advanced Nutrition (AN), bridging and economy food lines, and treats. AN revenues overall grew 4.6% to £99.0m (H1 FY17: £94.6m). Accessories revenues grew 4.0% to £176.8m (H1 FY17: £169.9m) and again, saw particular strength in dog related lines such as leads, collars, bedding, toys and travel ranges, reflecting our range change and innovation. We also benefitted significantly from subscription sales on selected flea products. Alongside these areas of strong growth, we saw ongoing weakness in aquatics and small animal accessories, which is reflective of the areas which see space reductions following a vet practice or grooming salon retrofit into store.

Services revenues grew 15.3% to £71.3m (H1 FY17: £61.9m), with LFL growth of 9.5%^#. We saw excellent growth across our Vet Group, both from the Specialist Referral centres and also the First Opinion business, where practice income from the latter was up 16.1% to £28.0m (H1 FY17: £24.1m). Also within Services, our grooming salons experienced slower growth than in prior periods, and we also saw some weakness in trade from declining pet sales, which is an ongoing trend.

Gross margin

Group H1 FY18 gross margin declined by 198 bps to 51.9% (H1 FY17: 53.9%).

Gross margin within Merchandise was 54.9%, a reduction of 265 bps over the prior year (H1 FY17: 57.5%), in line with our plans. This mainly reflects our price repositioning activities, a foreign currency impact of £3.5m from the movement in USD vs GBP and the growth of our omnichannel business which has a greater mix of food product versus higher margin accessories.

Gross margin within Services increased by 380 bps to 35.8% (H1 FY17: 32.0%). Underlying this dynamic was an improvement in the gross margin of our Vet Group, with both progression in the First Opinion business as maturity benefits deliver leverage, and the Specialist Referral business as individual centres benefit from being part of a larger group. We also saw a significant improvement in the margin of pet sales in store, which reflects our activities to improve and simplify the care and welfare routines.

We now expect Group gross margin dilution for FY18 to be 200-250 bps, as we benefit from the successes of our Merchandise price investment and accelerate our investment plans.

EBITDA and operating costs

Pre-exceptional EBITDA was £62.2m^# (H1 FY17: £65.2m), with a margin of 13.3% (H1 FY17: 14.8%).

Selling and distribution (S&D) expenses of £163.8m decreased as a percentage of Group revenue, to 35.0% (H1 FY17: 35.8%). Within this, occupation costs (rent, service charges and other costs) again declined as a percentage of sales as we benefit from the rental costs paid by vet practices within our stores, which contributed £6.2m during the half (H1 FY17: £5.6m). Also within S&D expenses, colleague costs declined slightly as a percentage of sales, resulting from our streamlining of store colleague hours during the period.

Underlying administration expenses of £35.2m were 7.5% of revenue (H1 FY17: 6.8%), where we are seeing growth in Vet Group operating costs, alongside our investment in business systems and omnichannel.

We began to see the benefits of our operational cost savings programme during the first half. This delivered £3m through energy savings and a reduction in store hours where we are streamlining non customer facing activities, and we expect to see further cost savings delivered in the second half. Overall, operating cost growth for FY18 is now expected at 6-6.5%, as we see higher overall sales growth, and the associated costs of delivering a fast growing omnichannel business.

Exceptional costs of £1.0m were recognised in relation to the ownership structures and accounting treatment of the veterinary Specialist Referral centres. Three of our four centres are structured as a Shared Venture ownership model, where Pets at Home maintains a minimum 75% controlling share, with the remaining shares owned by multiple clinician Shared Venture Partners (SVPs). Pets at Home has an option to buy the SVP shares in the future, with the value of these shares related to profit performance targets. The accounting treatment of such an option is therefore structured as a forward contract. Within the income statement, the discounted future value of the SVP's shares is recognised as an expense over the period to which the option can be exercised, and recognised as an exceptional expense. We continue to expect this charge to be up to £2m for FY18.

Depreciation and amortisation, which is contained within our total operating costs, increased to £18.0m (H1 FY17 £15.4m), and our guidance for FY18 remains unchanged at £34-35m.

Finance expense

Net finance expense for the half year period was £2.4m, a reduction from the prior year (H1 FY17: £2.7m) as a result of declining leverage. The finance expense for FY18 is expected to be between £4-5m.

Taxation, net income & EPS

Pre-exceptional pre tax profit was £41.7m (H1 FY17: £47.0m) and statutory pre tax profit, which includes the exceptional charge related to the Specialist Referral centres, was £40.8m (H1 FY17: £46.0m).

Pre-exceptional total tax expense for the period was £8.3m, a rate of 20% on pre-exceptional pre tax profit, and in line with our expected tax rate for the full financial year.

Pre-exceptional profit for the period, after tax, was £33.5m (H1 FY17: £37.1m) and pre-exceptional basic earnings per share were 6.7 pence, (H1 FY17: 7.4 pence). Statutory basic earnings per share were 6.5 pence (H1 FY17: 7.2 pence).

Working capital

The cash movement in trading working capital for H1 FY18 was an inflow of £8.4m^#, reflective of our normal profile in the first half of the financial year. This was comprised of a £6.8m increase in inventory, offset by a £4.5m decrease in receivables and a £10.6m increase in payables.

We have also continued to support our younger First Opinion veterinary practices with an additional £8.1m of short term operating loans to underpin their growth. This created an increase in Group receivables of £3.6m and reduced the overall Group cash working capital inflow to £0.3m.

We continue to expect a Group cash working capital outflow of up to £5m for FY18.

Capital investment

Capital investment was £24.0m (H1 FY17: £20.9m), where £7.5m is represented by the retrofit of services into our existing store estate (H1 FY17 £7.5m) and new store capital investment totalled £5.0m (H1 FY17: £3.3m), investment in business systems totalled £4.8m (H1 FY17: £2.8m), and £2.2m was part of the energy savings programme to fit LED lighting and smart energy management systems in our store estate (H1 FY17: £3.6m). Our capital investment expectations for FY18 remain unchanged at £40-42m.

Cash capital expenditure was £25.8m (H1 FY17: £22.5m).

Cashflow and capital structure

Free cash flow (FCF) after interest, tax and before acquisitions was £23.2m^# (H1 FY17: £34.4m), representing a cash conversion rate of 35.9% (H1 FY17: 51.4%). The decline in FCF when compared with the prior year is driven by our price investments in the Merchandise business, increased working capital requirements and the purchase of shares to satisfy colleague stock option schemes.

Free cashflow# (£m)	H1 FY17	H1 FY18
Cash EBITDA1,#	66.9	64.5
Working capital4	2.6	0.3
Tax	(8.6)	(9.7)
Interest cost	(2.5)	(2.2)
Capital expenditure	(24.0)	(25.7)
Purchase of shares to satisfy colleague stock options	-	(4.0)
Free cashflow	34.4	23.2

1 Defined as pre-exceptional EBITDA plus IFRS2 share based payment charges

The Group's net debt position at the end of the half year period was £156.3m, which represents a leverage ratio of 1.2x pre-exceptional EBITDA.

£m	FY17	H1 FY18
Opening net debt	(162.0)	(153.7)
Free cashflow#	64.6	23.2
Ordinary dividends paid	(39.9)	(24.9)
Acquisitions	(14.8)	-
Other	(1.6)	(0.9)
Closing net debt	(153.7)	(156.3)
Leverage (Net debt / pre-exceptional EBITDA#)	1.2x	1.2x

Our capital structure and allocation policy remains as previously stated, with a priority to invest in areas that will expand the Group and deliver appropriate returns. We are comfortable with a leverage position of up to 1.5x net debt/EBITDA under normal circumstances, moving to a maximum of around 1.75x in the event suitable investment or acquisition opportunities arise. And dependent upon our acquisition outlook and if we do not foresee investment uses, it is our intention to return surplus free cashflow to shareholders.

Dividend

The Board has declared an interim dividend of 2.5 pence per share, equal with the prior year. The interim dividend will be payable on the 12^th January 2018 to shareholders on the register at the close of trading on 8^th December 2017. 

Our commitment for FY18 is to maintain the ordinary dividend at the same level as the FY17, during a year of repositioning and investing in the Merchandise business.

Foreign exchange outlook

The Group purchases products from Asia to a value of around US$60m each year and our policy is to hedge up to 95% of forecast foreign exchange transactions on a rolling 12 month basis. Our hedging requirements for FY18 are in place, at an average rate of 1.30 USD:GBP, which will have a negative impact of around £5.5m, slightly ahead of our original estimate of £5m. The impact during the first half of this financial year was £3.5m. At current FX spot rates, we expect no material foreign exchange impacts for FY19.

Mike Iddon

Group Chief Financial Officer

28 November 2017

Risks and Uncertainties

An effective risk management process has been adopted to help the Group achieve its strategic objectives and enjoy long term success. The Board does not consider that the principal risks and uncertainties have changed since the publication of the annual report for the year ended 30 March 2017. These comprise:

·     Protecting reputation

·     Competition with other retailers and vet practices, including other pet specialists, supermarkets, discounters, and online retailers

·     Stores and services expansion and rollout

·     Retaining and developing engaged colleagues

·     Keeping core business systems up to date and with the capability to support the Group's growth plans

·     Supply chain and sourcing risk

·     Liquidity and credit risk

·     Treasury and financial risk from exposure to US dollar fluctuations, in respect of goods sourced from Asia

·     Regulatory and compliance risk

·     Extreme weather, where prolonged unusual weather patterns can impact footfall to stores

A detailed explanation of these risks can be found on pages 38 to 43 of the 2017 Annual Report which is available at http://investors.petsathome.com

Responsibility Statement

We confirm that to the best of our knowledge:

·     the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

·     the interim management report includes a fair review of the information required by:

(a)  DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first 28 weeks of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining 24 weeks of the year; and

(b)  DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

By order of the Board on 27 November 2017

Ian Kellett, Chief Executive Officer                                         Mike Iddon, Chief Financial Officer

Disclaimer

This statement of interim financial results does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Pets At Home Group Plc shares or other securities nor should it form the basis of or be relied on in connection with any contract or commitment whatsoever. It does not constitute a recommendation regarding any securities. Past performance, including the price at which the Company's securities have been bought or sold in the past, is no guide to future performance and persons needing advice should consult an independent financial advisor.

Certain statements in this statement of interim financial results constitute forward-looking statements. Any statement in this document that is not a statement of historical fact including, without limitation, those regarding the Company's future expectations, operations, financial performance, financial condition and business is a forward-looking statement. Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. These risks and uncertainties include, among other factors, changing economic, financial, business or other market conditions. These and other factors could adversely affect the outcome and financial effects of the plans and events described in this statement of interim financial results. As a result you are cautioned not to place reliance on such forward-looking statements. Nothing in this statement should be construed as a profit forecast.

Independent Review Report to Pets at Home Group Plc

Introduction 

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the 28 weeks ended 12 October 2017 which comprises condensed consolidated statements of comprehensive income, changes in equity, and cash flows and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. 

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").  Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached. 

Directors' responsibilities 

The half-yearly financial report is the responsibility of, and has been approved by, the directors.  The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA. 

The annual financial statements of the group are prepared in accordance with IFRSs as adopted by the EU.  The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. 

Our responsibility 

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. 

Scope of review 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK.  A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit.  Accordingly, we do not express an audit opinion. 

Conclusion 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the 28 weeks ended 12 October 2017 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA. 

Nicola Quayle

for and on behalf of KPMG LLP 

Chartered Accountants 

1 St Peter's Square

Manchester

M2 3AE

27 November 2017

Alternative Performance Measures ("APMs")

Guidelines on Alternative Performance Measures (APMs) issued by the European Securities and Markets Authority came into effect for all communications released on or after 3 July 2016 for issuers of securities on a regulated market.

In the reporting of financial information, the Directors have adopted various Alternative Performance Measures (APMs) of historical or future financial performance, position or cash flows other than those defined or specified under International Financial Reporting Standards (IFRS).

The Directors measure the performance of the Group based on the following financial measures which are not recognised under EU-adopted IFRS, and consider these to be important measures in evaluating the Group's results and financial position.

The Directors believe that these APMs assist in providing additional useful information on the underlying trends, performance and position of the Group.

APMs are also used to enhance the comparability of information between reporting periods, by adjusting for non-recurring, to aid the user in understanding the Group's performance.

Consequently, APMs are used by the Directors and management for performance analysis, planning, reporting and incentive setting purposes and have remained consistent with prior year.

A full glossary of APMs is included in the most recent Annual Report & Accounts.

The key APMs used by the Group are:

 'Like-for-Like' sales growth comprises total revenue in a financial period compared to revenue achieved in a prior period, for stores, online operations, grooming salons, vet practices & referral centres that have been trading for 52 weeks or more.

EBITDA being Earnings before interest, tax, depreciation & amortization before the effect of exceptional items in the period.

Free Cash flow being net cash from operating activities, after tax, less net cash used in investing activities (excluding acquisitions), less interest paid & debt issue costs, and is stated before cash flows for exceptional costs.

CROIC being Cash Return on Invested Capital, represents cash returns divided by the average of gross capital invested (GCI) for the last twelve months. Cash returns represent pre-exceptional operating profit before property rentals and share based payments subject to tax then adjusted for depreciation and amortisation. GCI represents Gross Property, Plant and Equipment plus Software and other intangibles excluding the goodwill created on the acquisition of the group by KKR (£906,445,000) plus net working capital, plus capitalised rent multiplied by a factor of 8x.

Condensed consolidated income statement

	Note	28 week period ended 12 October 2017			28 week period ended 13 October 2016
		Underlying trading £000	Exceptional items (note 3)  £000	Total £000	Underlying  trading  £000	Exceptional items (note 3)  £000	Total £000
Revenue	2	468,014	-	468,014	441,316	-	441,316
Cost of sales		(224,907)	-	(224,907)	(203,325)	-	(203,325)
Gross profit		243,107	-	243,107	237,991	-	237,991
Selling and distribution expenses		(163,842)	-	(163,842)	(158,113)	-	(158,113)
Administrative expenses		(35,150)	(966)	(36,116)	(30,164)	(996)	(31,160)
Operating profit	3	44,115	(966)	43,149	49,714	(996)	48,718
Financial income		330	-	330	258	-	258
Financial expense		(2,700)	-	(2,700)	(2,980)	-	(2,980)
Net financing expense		(2,370)	-	(2,370)	(2,722)	-	(2,722)
Profit before tax		41,745	(966)	40,779	46,992	(996)	45,996
Taxation	5	(8,269)	-	(8,269)	(9,868)	61	(9,807)
Profit for the period		33,476	(966)	32,510	37,124	(935)	36,189

All activities relate to continuing operations.

Basic and diluted earnings per share attributable to equity shareholders of the Company:

	Note	28 week period ended 12 October 2017	28 week period ended 13 October 2016
Equity holders of the parent - after exceptional items - basic	4	6.5p	7.2p
Equity holders of the parent - after exceptional items - diluted	4	6.5p	7.2p

Condensed consolidated statement of comprehensive income

		28 week period ended 12 October 2017 £000	28 week period ended 13 October 2016 £000
Profit for the period		32,510	36,189
Other comprehensive income
Items that are or may be recycled subsequently into profit or loss:
Foreign exchange translation differences		79	37
Cash flow hedges - reclassified to profit and loss		(1,586)	536
Effective portion of changes in fair value of cash flow hedges		2,058	3,811
Other comprehensive income for the period, before income tax		551	4,384
Income tax on other comprehensive income		(90)	(869)
Other comprehensive income for the period, net of income tax		461	3,515
Total comprehensive income for the period		32,971	39,704

The notes on pages 21 to 31 form an integral part of these consolidated interim financial statements.

Condensed consolidated balance sheet

	Note	At 12 October 2017 £000	At 13 October 2016 £000	At 30 March  2017 £000
Non-current assets
Property, plant and equipment	7	132,815	121,738	128,835
Intangible assets	8	991,958	988,637	990,266
Other non-current assets		18,586	13,885	16,990
		1,143,359	1,124,260	1,136,091
Current assets
Inventories		63,192	59,316	56,420
Other financial assets		896	6,211	1,863
Trade and other receivables		73,161	63,544	69,567
Cash and cash equivalents		50,720	42,171	56,345
		187,969	171,242	184,195
Total assets		1,331,328	1,295,502	1,320,286
Current liabilities
Trade and other payables		(183,988)	(175,312)	(176,496)
Provisions		(464)	(475)	(492)
Other financial liabilities		(1,714)	(606)	(1,509)
		(186,166)	(176,393)	(178,497)
Non-current liabilities
Other interest-bearing loans and borrowings	9	(206,416)	(212,198)	(209,296)
Other payables		(35,751)	(34,001)	(35,028)
Provisions		(1,375)	(1,377)	(1,394)
Other financial liabilities		(7,959)	(4,676)	(8,023)
Deferred tax liabilities		(4,893)	(9,366)	(5,404)
		(256,394)	(261,618)	(259,145)
Total liabilities		(442,560)	(438,011)	(437,642)
Net assets		888,768	857,491	882,644
Equity attributable to equity holders of the parent
Ordinary share capital		5,000	5,000	5,000
Consolidation reserve		(372,026)	(372,026)	(372,026)
Merger reserve		113,321	113,321	113,321
Translation reserve		48	32	(31)
Cash flow hedging reserve		1,188	3,049	806
Retained earnings		1,141,237	1,108,115	1,135,574
Total equity		888,768	857,491	882,644

The notes on pages 21 to 31 form an integral part of these consolidated interim financial statements.

Condensed consolidated statement of changes in equity

	Share capital £000	Consolidation reserve £000	Merger reserve £000	Cash flow hedging reserve £000	Translation reserve £000	Retained earnings £000	Total  equity £000
Balance at 30 March 2017	5,000	(372,026)	113,321	806	(31)	1,135,574	882,644
Total comprehensive income for the period
Profit for the period	-	-	-	-	-	32,510	32,510
Other comprehensive income	-	-	-	382	79	-	461
Total comprehensive income for the period	-	-	-	382	79	32,510	32,971
Transactions with owners, recorded directly in equity
Equity dividends paid	-	-	-	-	-	(24,912)	(24,912)
Share based payment transactions	-	-	-	-	-	(1,935)	(1,935)
Total contributions by and distributions to owners	-	-	-	-	-	(26,847)	(26,847)
Balance at 12 October 2017	5,000	(372,026)	113,321	1,188	48	1,141,237	888,768

	Share capital £000		Consolidation reserve £000	Merger reserve £000	Cash flow hedging reserve £000	Translation reserve £000	Retained earnings £000	Total equity £000
Balance at 31 March 2016	5,000		(372,026)	113,321	(429)	(5)	1,097,623	843,484
Total comprehensive income for the period
Profit for the period	-		-	-	-	-	36,189	36,189
Other comprehensive income	-		-	-	3,478	37	-	3,515
Total comprehensive income for the period	-		-	-	3,478	37	36,189	39,704
Transactions with owners, recorded directly in equity
Equity dividend paid		-	-	-	-	-	(27,396)	(27,396)
Share based payment transactions		-	-	-	-	-	1,699	1,699
Total contributions by and distributions to owners		-	-	-	-	-	(25,697)	(25,697)
Balance at 13 October 2016		5,000	(372,026)	113,321	3,049	32	1,108,115	857,491

The notes on pages 21 to 31 form an integral part of these consolidated interim financial statements.

Condensed consolidated statement of cash flows

	28 week period ended 12 October 2017 £000	28 week period ended 13 October 2016 £000
Cash flows from operating activities
Profit for the period	32,510	36,189
Adjustments for:
Depreciation and amortisation	18,041	15,440
Financial income	(330)	(258)
Financial expense	2,700	2,980
Loss on disposal of subsidiary	-	690
Share based payment charges	2,332	1,699
Taxation	8,269	9,807
	63,522	66,547
Increase in trade and other receivables	(3,587)	(2,573)
Increase in inventories	(6,772)	(7,748)
Increase in trade and other payables	11,658	12,938
(Decrease)/increase in provisions	(47)	29
	64,774	69,193
Tax paid	(9,720)	(8,649)
Net cash flow from operating activities	55,054	60,544
Cash flows from investing activities
Proceeds from sale of property, plant and equipment	276	1,026
Disposal of subsidiary, net of cash disposed	-	677
Interest received	330	258
Investment in other financial assets	(3)	(2,503)
Loans issued	(872)	(1,194)
Acquisition of subsidiary, net of cash acquired	-	(14,964)
Acquisition of property, plant and equipment and other intangible assets	(25,771)	(22,465)
Net cash used in investing activities	(26,040)	(39,165)
Cash flows from financing activities
Equity dividends paid	(24,912)	(27,396)
Share based payments	(4,000)	-
Proceeds from new loan	-	11,000
Repayment of borrowings	(3,000)	-
Finance lease obligations	(157)	(106)
Interest paid	(2,570)	(2,704)
Net cash used in financing activities	(34,639)	(19,206)
Net (decrease)/ Increase in cash and cash equivalents	(5,625)	2,173
Cash and cash equivalents at beginning of period	56,345	39,998
Cash and cash equivalents at end of period	50,720	42,171

The notes on pages 21 to 31 form an integral part of these consolidated interim financial statements.

Notes (forming part of the condensed consolidated interim financial statements)

1     Accounting policies

The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements.

Basis of preparation

Pets at Home Group Plc (the Company) is a company incorporated in the United Kingdom and its registered office is Epsom Avenue, Stanley Green, Handforth, Cheshire, SK9 3RN.  The company is listed on the London Stock Exchange.

The condensed consolidated interim financial statements as at and for the 28 week period ended 12 October 2017 comprise the Company and its subsidiaries (together referred to as the Group).

The consolidated financial statements of the Group as at and for the 52 week period ended 30 March 2017 are available on request from the Company's registered office and via the Company's website.

The financial statements are prepared under the historical cost convention, as modified by the revaluation of derivative financial instruments to fair value, and in accordance with those parts of the Companies Act 2006 applicable to companies reporting under IFRS as adopted by the European Union.

Statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS34 Interim Financial Reporting as adopted by the EU. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at and for the 52 week period ended 30 March 2017.

The financial information included in this interim statement of results does not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006 (the "Act"). The statutory accounts for the 52 weeks ended 30 March 2017 have been reported on by the Company's auditors and delivered to the Registrar of Companies. The auditor's report was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

Going concern

The Directors of Pets at Home Group Plc, having made appropriate enquiries, consider that adequate resources exist for the Group to continue in operational existence for the foreseeable future and that, therefore, it is appropriate to adopt the going concern basis in preparing the condensed consolidated interim financial statements as at and for the 28 week period ended 12 October 2017.

Significant accounting policies

The accounting policies adopted in preparation of the condensed consolidated interim financial statements as at and for the 28 week period ended 12 October 2017 are consistent with the policies applied by the Group in its consolidated financial statements as at and for the 52 week period ended 30 March 2017, except as described below:

·     Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual profit or loss.

Accounting estimates and judgments

The preparation of the condensed consolidated interim financial statements in conformity with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS34 Interim Financial Reporting as adopted by the EU requires management to make judgments, estimates and assumptions concerning the future that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses.  These judgments are based on historical experience and management's best knowledge at the time and the actual results may ultimately differ from these estimates.  Estimates and underlying assumptions are reviewed on an ongoing basis and revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. 

The estimates and assumptions that have significant risk of causing a material adjustment to the carrying value of assets and liabilities are discussed below.

Impairment of goodwill and other intangibles

Determining whether goodwill and other intangibles are impaired requires an estimation of the value in use of the cash-generating units to which goodwill and other intangible assets have been allocated.  The value in use calculation requires estimation of future cash flows expected to arise from the cash-generating unit (CGU) and a suitable discount rate in order to calculate present value.

2     Segmental reporting

The Directors consider there to be one operating and reportable segment, being that of the sale of pet products and services through retail outlets, specialist vet referral services and the Group's websites.

The Group's Board receives monthly financial information at this level and uses this information to monitor the performance of the store portfolio, allocate resources and make operational decisions. The internal reporting received focuses on the Group as a whole and does not identify other individual segments. To increase transparency, the Group has decided to include an additional voluntary disclosure analysing revenue within the reportable segment.

Revenue	28 week period ended 12 October 2017 £000	28 week period ended 13 October 2016 £000
Food	219,954	209,544
Accessories	176,780	169,922
Services and other	71,280	61,850
	468,014	441,316

The 'Services and other' category includes revenue from management fees for First Opinion veterinary surgeries, veterinary referral centres, grooming services, insurance commissions and the sale of pets.

The performance of the operating segment is primarily based on a measure of earnings before interest, tax, depreciation, and amortisation (EBITDA) before exceptional items. This can be reconciled to statutory operating profit as follows:

	28 week period ended 12 October 2017 £000	28 week period ended 13 October 2016 £000
Operating profit	43,149	48,718
Exceptional items	966	996
Underlying operating profit before exceptional items	44,115	49,714
Depreciation and amortisation	18,041	15,440
Underlying EBITDA (before exceptional items)	62,156	65,154

3     Expenses

Included in operating profit are the following:

	28 week period ended 12 October 2017 £000	28 week period ended 13 October 2016 £000
Exceptional operating expenses (see below)	966	996
Depreciation of tangible fixed assets	14,950	13,216
Amortisation of intangible assets	3,091	2,224
Rentals under operating leases:
Hire of plant and machinery	2,404	2,865
Property	40,725	39,400
Rental income from third party sublets	(561)	(561)
Rental income from related parties	(6,190)	(5,642)
Share based payment charges	2,332	1,699

The exceptional operating expenses in the period ended 12 October 2017 relate to the increase in the financial liability for put/call options over shares held by clinicians in three specialist referral centres.  The charge represents an increase in the equity 'option'  value held by those clinicians based on the Board's best estimate of the future settlement on exercise of the put/call.  The charge is classified within operating expenses as a clinician is required to remain an employee of the Group in order to access the full equity value of the option at the time of the exercise

The exceptional operating expenses in the period ended 13 October 2016 represented costs incurred in relation to the disposal of its 100% holding in its subsidiary Farm-Away Ltd. The costs include legal and professional fees, redundancy costs and property costs.

4     Earnings per share

Basic earnings per share is calculated by dividing the net profit for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.

Diluted earnings per share is calculated by dividing the net profit for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on the conversion of all dilutive potential ordinary shares into ordinary shares.

	28 week period ended  12 October 2017		28 week period ended 13 October 2016
	Underlying trading	After exceptional items	Underlying trading	After exceptional items
Profit attributable to equity shareholders of the parent (£000s)	33,476	32,510	37,124	36,189
Basic weighted average number of shares (000s)	500,000	500,000	500,000	500,000
Dilutive potential ordinary shares (000s)	3,427	3,427	1,941	1,941
Diluted weighted average number of shares	503,427	503,427	501,941	501,941
Basic earnings per share	6.7p	6.5p	7.4p	7.2p
Diluted earnings per share	6.7p	6.5p	7.4p	7.2p

5     Taxation

Recognised in the income statement

	28 week period ended 12 October 2017 £000	28 week period ended 13 October 2016 £000
Current tax expense
Current period	8,886	11,048
Adjustments in respect of prior periods	-	-
Current tax expense	8,886	11,048
Deferred tax expense
Origination and reversal of temporary differences	(503)	(1,241)
Impact of difference between deferred and current tax rates	(109)	-
Adjustments in respect of prior periods	(5)	-
Deferred tax expense	(617)	(1,241)
Total tax expense	8,269	9,807

The UK Corporation Tax standard rate for the period was 19% (2016: 20%). The March 2016 budget announced a further reduction in the corporation tax rate to 17% from 1 April 2020. Deferred tax at 12 October 2017 has been calculated based on the rate of 18% which is the blended rate at which the majority of items are expected to reverse.

Deferred tax recognised in comprehensive income

	28 week period ended 12 October 2017 £000	28 week period ended 13 October 2016 £000
Effective portion of changes in fair value of cash flow hedges	90	869

Reconciliation of effective tax rate

	28 week period ended 12 October 2017			28 week period ended 13 October 2016
	Underlying trading £000	Exceptional items £000	Total £000	Underlying trading £000	Exceptional  items  £000	Total £000
Profit for the period	33,476	(966)	32,510	37,124	(935)	36,189
Total tax expense	8,269	-	8,269	9,868	(61)	9,807
Profit excluding taxation	41,745	(966)	40,779	46,992	(996)	45,996
Tax using the UK corporation tax rate for the period of 19% (28 week period ended 12 October 2016: 20%)	7,932	(184)	7,748	9,398	(199)	9,199
Impact of change in tax rate on deferred tax balances	(109)	-	(109)	66	-	66
Expenditure not eligible for tax relief	454	184	638	404	138	542
Adjustments in respect of prior periods	(8)	-	(8)	-	-	-
Total tax expense	8,269	-	8,269	9,868	(61)	9,807

The UK corporation tax standard rate for the 28 week period ended 12 October 2017 was 19% (28 week period ended 13 October 2016: 20%).

6     Dividends paid and proposed

	28 week period ended 12 October 2017 £000	28 week period ended 13 October 2016 £000
Declared and paid during the period
Final dividend of 5.0p per share (2016: 5.5p per share)	24,912	27,396
Proposed for approval by shareholders at the AGM
Interim dividend of 2.5p per share (2016: 2.5p per share)	12,410	12,454

The trustees of the following holdings of Pets at Home Group Plc shares under the Pets at Home Group Employee Benefit Trusts have waived or otherwise foregone any and all dividends paid in relation to the period ended 12 October 2017 and to be paid at any time in the future (subject to the exceptions in the relevant trust deed) on its respective shares for the time being comprised in the Trust Funds:

Computershare Nominees (Channel Islands) Limited (holding at 12 October 2017: 3,618,166 shares, holding at 13 October 2016: 1,423,466 shares) and Wealth Nominees Limited (holding at 12 October 2017: nil shares, holding at 13 October 2016: 434,056 shares).

7     Property, plant and equipment

	Freehold Property £000	Short leasehold property £000	Fixtures, fittings, tools and equipment £000	Total £000
Cost
Balance at 30 March 2017	2,517	48,720	183,625	234,862
Additions	-	2,729	16,451	19,180
Disposals	-	(221)	(189)	(410)
Balance at 12 October 2017	2,517	51,228	199,887	253,632
Depreciation
Balance at 30 March 2017	198	15,469	90,360	106,027
Depreciation charge for the period	21	1,794	13,135	14,950
Disposals	-	(56)	(104)	(160)
Balance at 12 October 2017	219	17,207	103,391	120,817
Net book value
At 30 March 2017	2,319	33,251	93,265	128,835
At 12 October 2017	2,298	34,021	96,496	132,815

	Freehold Property £000	Short leasehold property £000	Fixtures, fittings, tools and equipment £000	Total £000
Cost
Balance at 31 March 2016	2,517	41,174	155,235	198,926
Additions	48	1,846	16,602	18,496
Assets acquired on acquisition	-	1,762	1,291	3,053
Disposals	-	(674)	(1,811)	(2,485)
Balance at 13 October 2016	2,565	44,108	171,317	217,990
Depreciation
Balance at 31 March 2016	158	12,608	71,414	84,180
Depreciation charge for the period	21	1,631	11,564	13,216
Disposals	-	(67)	(1,077)	(1,144)
Balance at 13 October 2016	179	14,172	81,901	96,252
Net book value
At 31 March 2016	2,359	28,566	83,821	114,746
At 13 October 2016	2,386	29,936	89,416	121,738

8     Intangible assets

	Goodwill £000	Customer list £000	Software £000	Total £000
Cost
Balance at 30 March 2017	979,845	771	24,916	1,005,532
Additions	-	-	4,783	4,783
Balance at 12 October 2017	979,845	771	29,699	1,010,315
Amortisation
Balance at 30 March 2017	-	71	15,195	15,266
Amortisation charge for the period	-	42	3,049	3,091
Balance at 12 October 2017	-	113	18,244	18,357
Net book value
At 30 March 2017	979,845	700	9,721	990,266
At 12 October 2017	979,845	658	11,455	991,958

	Goodwill £000	Customer list £000	Software £000	Total £000
Cost
Balance at 31 March 2016	965,925	-	19,133	985,058
Additions	-	-	2,424	2,424
Assets acquired on acquisition 1	14,117	771	-	14,888
Balance at 13 October 2016	980,042	771	21,557	1,002,370
Amortisation
Balance at 31 March 2016	-	-	11,509	11,509
Amortisation charge for the period	-	-	2,224	2,224
Balance at 13 October 2016	-	-	13,733	13,733
Net book value
At 31 March 2016	965,925	-	7,624	973,549
At 13 October 2016	980,042	771	7,824	988,637

¹ Assets acquired on acquisition have been restated to split out the customer list which was shown within the goodwill figure at 13 October 2016.  The goodwill arising on acquisition as reported in the 28 week period to 13 October 2016 has been reduced by £197,000 to reflect an adjustment in relation to the purchase price made in the second half of the year ended 30 March 2017.  The value of assets acquired in the period to 13 October 2016 have not been restated to reflect this.

The Customer list is a separately identifiable intangible asset arising on the acquisition of Dick White Referrals Limited in April 2016.

Amortisation and impairment charge

The amortisation charge is recognised in total in operating expenses within the income statement.

Impairment testing

Cash generating units ('CGUs') within the Group are considered to be the body of stores including vets' practices, specialist referral centres and the Group's websites as disclosed in note 2. The Group is deemed to have one overall group of CGUs as follows:

	Goodwill
	At 12 October 2017 £000	At 13 October 2016 £000
Pets at Home Group	979,845	980,042

The goodwill balance was assessed for indicators of impairment at 12 October 2017.  This assessment included the consideration of internal and external factors.  No indicator of impairment was identified.  For details of the full annual impairment test conducted at 30 March 2017, including key assumptions and sensitivity testing, please see the Annual Report and Accounts for the year ended 30 March 2017.

9     Other interest-bearing loans and borrowings

	At 12 October  2017 £000	At 13 October 2016 £000	At 31 March 2017 £000
Non-current liabilities
Secured bank loans	206,416	212,198	209,296
Total liabilities
Secured bank loans	206,416	212,198	209,296

Terms and debt repayment schedule

				12 October 2017		13 October 2016		30 March 2017
	Currency	Nominal interest rate	Year of maturity	Face value £000	Carrying amount £000	Face value £000	Carrying amount £000	Face value £000	Carrying amount £000
Senior Finance Bank Loans	GBP	LIBOR +1.25%	2020	207,000	206,416	213,000	212,198	210,000	209,296

The Group has access to a revolving facility of £260m, with a drawn amount of £207m at 12 October 2017.  The facility expires in April 2020 and is reviewed each period. Interest is charged at LIBOR plus a margin based on leverage (net debt: EBITDA). Face value represents the principal value of the Senior Finance Bank Loans. The bank loan is secured against the various tangible, intangible and monetary assets of the Group (excluding investments in joint ventures and hedging agreements).

Interest-bearing borrowings are recognised initially at fair value, being the principal value of the loan net of attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at a carrying value, which represents the amortised cost of the loans using the effective interest method less any impairment losses.

The analysis of repayments on the loans is as follows:

	At 12 October 2017  £000	At 13 October  2016 £000	At 30 March 2017 £000
Within one year or repayable on demand	-	-	-
Between one and two years	-	-	-
Between two and five years	207,000	213,000	210,000
	207,000	213,000	210,000

Pets at Home Group Plc has entered into fixed rate interest rate swap agreements over the senior facility borrowings at various fixed rates using a number of hedging instruments which expire between 30 March 2018 and 30 March 2019.

The Pets at Home Group's policy with regard to interest rate risk, is to hedge the appropriate level of borrowings by entering into fixed rate agreements.  The Group has entered into two fixed rate interest rate swap agreements over a total of £152.8m of the senior facility borrowings at the balance sheet date at a blended fixed rate of 0.99%.  One swap expires on 30 March 2018.  The other swap has been taken out over £142.1m of the borrowings to cover the year commencing 30 March 2018 at a fixed rate of 0.183%. The hedges are structured to hedge at least 70% of the forecast outstanding debt for the next year.   

10   Financial instruments

Fair value hierarchy

The table below analyses financial instruments measured at fair value into a fair value hierarchy based on the valuation technique used to determine fair value.

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices).

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

12 October 2017

	Level 1 £000	Level 2 £000	Level 3 £000	Total £000
Available for sale financial assets
Investments	-	-	12,566	12,566
Derivative financial assets
Interest rate swaps	-	1,183	-	1,183
Fuel forward contracts	-	37	-	37
Forward rate contracts	-	859	-	859
Derivative financial liabilities
Interest rate swaps	-	(506)	-	(506)
Forward rate contracts	-	(105)	-	(105)
Other financial liabilities	-	-	(8,959)	-

12 October 2016

	Level 1 £000	Level 2 £000	Level 3 £000	Total £000
Available for sale financial assets
Investments	-	-	11,646	11,646
Derivative financial assets
Forward rate contracts	-	5,159	-	5,159
Fuel forward contracts	-	21	-	21
Interest rate swaps	-	362	-	362
Derivative financial liabilities
Interest rate swaps	-	(1,732)	-	(1,732)
Other financial liabilities	-	-	(8,240)	(8,240)

30 March 2017

	Level 1 £000	Level 2 £000	Level 3 £000	Total £000
Available for sale financial assets
Investments	-	-	12,563	12,563
Derivative financial assets
Interest rate swaps	-	521	-	521
Fuel forward contracts	-	106	-	106
Forward rate contracts	-	1,757	-	1,757
Derivative financial liabilities
Interest rate swaps	-	(1,112)	-	(1,112)
Forward rate contracts	-	(278)	-	(278)
Other financial liabilities	-	-	(7,854)	(7,854)

Measurement of fair values

The following table shows the valuation techniques used in measuring Level 2 and Level 3 fair values at the balance sheet dates, as well as the significant unobservable inputs used.

Type	Valuation technique	Significant unobservable inputs	Inter-relationship between significant unobservable inputs and fair value measurement
Investment in equity securities	The fair value of investments in unlisted equity securities are considered to be their carrying value as the impact of discounting future cash flows has been assessed as not material and the investment is non-participatory.	Not applicable	Not applicable
Forward exchange contracts and interest rate swaps	Market comparison technique - the fair values are based on broker quotes. Similar contracts are traded in an active market and the quotes reflect the actual transactions on similar instruments.	Not applicable	Not applicable
Other financial liabilities	Other financial liabilities includes the fair values of the put and call options over the non-controlling interests of subsidiary undertakings and contingent consideration in relation to acquisitions.  The fair values represent the best estimate of amounts payable based on future earnings performance discounted to present value.	Future earnings performance	Fair value linked to increase or decrease in the best estimate of the future earnings performance

11  Seasonality of Operations

The Group's sales can be sensitive to periods of extreme weather conditions. The Group sometimes sees a reduction in sales during periods of hot weather in the UK, due to reduced customer footfall and reduced demand as pets eat less and generally spend more time outdoors, reducing the need for essentials such as food and cat litter. If temperatures are extremely high for a prolonged period, declines in sales can be material. The number of customers visiting Pets at Home's stores also declines during periods of snow or extreme weather conditions affecting the local catchment area. In addition, the sales of certain products and services designed to address pet health needs, such as flea and tick problems, can also be seasonal, increasing in times of warm and wet weather.

Traditionally the financial performance of the Group in the four-week period to the end of December is marginally stronger than in the other periods, due to Christmas purchasing. Purchasing of Accessories is also more prevalent during this season. Timing of the holiday season and any adverse weather conditions that may occur during that season impacting delivery may adversely affect sales in our stores.

12   Related parties

Veterinary practice transactions

The Group has entered into a number of arrangements with third parties in respect of veterinary practices.

The transactions entered into during the period, and the balances outstanding at the end of the period are as follows:

	12 October 2017 £000	13 October 2016 £000	30 March 2017 £000
Transactions
- Fees for services provided to veterinary practices	27,954	24,087	47,058
- Rental and other occupancy charges to veterinary practices	6,190	5,642	10,686
Balances
Included within Trade and other receivables:
- Funding for new practices	1,268	3,201	2,435
- Trading balances	-	-	1,998
- Operating loans
- Gross value of operating loans	30,944	17,805	23,176
- Provision held for operating loans1	(3,033)	(2,728)	(3,336)
- Net Operating loans	27,911	15,077	19,840
Included within Other financial assets and liabilities:
- Loans to joint venture practices	12,054	11,034	12,054
- Loans to other related parties (non-current)	4,357	2,868	3,416
Included within Trade and other payables:
- Trading balances	(6,708)	(9,158)	(1,427)

¹  The provision held for balances due from veterinary practices was classified within Trade and other payables in the period ended 13 October 2016 being £3,336,000. At 12 October 2017 and 30 March 2017, the provision is held within Trade and other receivables to offset the gross receivable values.

Fees for services provided to related party veterinary practices relate to charges for support services offered in such areas as clinical development, promotion and methods of operation as well as service activities including accountancy, legal and property.

Funding for new practices represents the amounts advanced by the Group to support a surgery opening costs. The funding is short term and the related party joint venture company draws down their own bank funding to settle these amounts outstanding with the Group shortly after opening.

Trading balances represent costs incurred/income received by the Group in relation to the services provided to the veterinary practices that have yet to be recharged.

Operating loans represent amounts advanced to related party veterinary practices to cover working capital requirements and support their longer term growth.  In the 28 week period ended 12 October 2017, the value of balances written off to the income statement amounted to £755,000 (period ended 13 October 2016: £nil, period ended 30 March 2017: £1,221,000).

Loans to joint venture practice companies trading under the Companion Care and Vets4Pets brands represent a long term investment in the joint venture, supporting their initial set up and working capital.  These loans are held at fair value and classified as an available for sale financial asset.

Loans to other related parties represent loan balances to joint venture partnership businesses and shared venture partners and are typically to support capacity expansion.

The comparative period ended 13 October 2016 has been restated to provide greater analysis of related party transactions with veterinary practices and to be consistent with the presentation as at 12 October 2017 and 30 March 2017.

 

END

 

 

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