The Pets at Home (LSE:PETS) share price has been quite a stellar performer this year. In fact, over the last 12 months, the stock is up by over 80%. But last week, it took a bit of a tumble, falling from 502p Thursday morning to as low as 455p the following day. What caused this sudden fall? And is it an opportunity to add this stock to my portfolio at a discount? Let’s take a look.
A seemingly promising trading update
As a quick reminder, Pets at Home provides pet supplies and veterinary services across the UK. Its vast portfolio of 452 stores makes it one of the largest branded networks in the British pet care space. This proved to be a valuable advantage during the pandemic. And it’s likely responsible for the soaring Pets at Home share price. Why? Because with more people staying indoors, the population of household pets skyrocketed. And many individuals turned to this business to get all the supplies and services they needed.
Last week, the firm released its first-quarter results for its 2022 financial year. And personally, I thought they were pretty impressive. Both its retail and veterinary service revenue increased by 29.1% and 44.7%, respectively, compared to pre-pandemic levels.
Meanwhile, its VIP loyalty programme memberships increased by 17%, reaching 6.6 million people. And at the same time, 1.3 million customers have signed up for one of the firm’s subscriptions plans. In total, that equates to roughly £100m of recurring revenue each year.
As a result of these encouraging figures, the management team expects pre-tax profits for 2022 to come in at around £130m. Not only is this at the higher end of analyst expectations, but it’s also a 49% increase compared to a year ago. So why did the share price fall on this news?
The falling Pets at Home share price
There are undoubtedly many contributing factors surrounding the strange decline of the share price. But the primary catalyst seems to be growing uncertainty surrounding the rising level of competition.
Pets at Home is far from the only business within its space. And the growing pressure from competitors when it comes to online sales may cause it to experience some slowdown in growth moving forward. The management team is fully aware of this. And has already begun expanding online sales capabilities. It’s launching a mobile app called Polestar for placing orders as well as booking vet appointments. And the development of a new distribution centre has begun. The latter is particularly exciting to me since it addresses a critical risk I’ve previously highlighted.
Unfortunately, the app won’t be fully rolled out for another 18 months. And the distribution centre won’t be completed until mid-2023. That leaves a lot of time for a competitor to start stealing online market share. So, I think it’s understandable that some investors have decided to take their profits. And in turn, this selling pressure pushed the Pets at Home share price down.
The bottom line
Mounting competition could be a precursor to trouble ahead. But I think the business’s size advantage should be able to absorb most of the damage until its new tools and facilities are operational. Therefore, to me at least, the drop in the Pets at Home share price looks like a buying opportunity for my portfolio.
