The Pets at Home (LSE:PETS) share price has been surging recently. In 2020, the pet-services company saw its stock more than double. And looking back over the last 12 months, it’s up by around 70%. But what’s causing this high level of growth? And should I be adding this business to my portfolio?
The rising Pets at Home share price
I’ve previously discussed this business. But as a quick reminder, Pets at Home is a provider of pet supplies and veterinary services. It operates a network of over 450 physical locations offering more than 9,600 products. These items include toys, food, and kennels, among others. With more than half of its stores equipped with an on-site veterinary practice, the company has become the largest UK branded network of first-opinion clinics.
The pandemic brought about many societal changes. The most prominent of these was the shift towards working from home. As a result, many individuals decided to expand their family with the addition of a pet. In fact, according to the latest statistics published by the Pet Food Manufacturer’s Association (PFMA), the level of pet population exploded in 2020. Some 3.2m households have acquired a pet since the start of the pandemic. This is undoubtedly excellent news for the business. And while it has yet to publish its full-year results, a recent trading update revealed that the management team expects pre-tax underlying profits to be around £85m.
Comparing this figure to the previous year, it remains flat. But let’s not forget it also includes the £28.9m repayment of business rates relief and is significantly ahead of the original £77m estimate. Ignoring this one-time expense, the underlying profit increased by an impressive 32%. So, I’m not surprised that the Pets at Home share price is surging.
A potentially serious threat
The pet services industry is highly fragmented. But while the level of competition is high, I’m more concerned about the supply structure of this business. Its supply chain crosses international borders. This is not uncommon but does expose the firm to multiple currencies and thus foreign exchange risks. But my primary concern is how it distributes its products once they are in the UK.
The company only has two distribution centres to supply the north and south regions of the country. But as unlikely as it may be, the entire supply chain can be interrupted for a significant portion of its stores if one of these facilities suffers disruptions. As products begin to run out, customers may start questioning the reliability of the firm and then potentially switch to one of its many competitors.
The bottom line
Despite these risks, I believe that Pets at Home is worthy of being included in my portfolio, even after its recent share price appreciation. I think it’s fair to say that once the pandemic is over, the growth in the pet population will likely slow. But that doesn’t change the fact that all the acquired animals last year will still need care, food, and entertainment. Therefore I believe the Pets at Home share price has plenty more room for growth. I’d consider it for my portfolio.
