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Another mixed bag from the UK retail sector this morning as Q3 updates help Pets at Home shares climb 8% while N Brown falls by 12%. Both reported positive revenue growth, with strength in online, and both reiterated full year guidance. All good so far.
Pets at Home has been able to reassure shareholders with strong growth in every segment and leave all pre-exceptional guidance unchanged, producing a combination of relief rally and short squeeze (#7 most shorted UK stock; 10.6% short interest).
N Brown, however, has been forced to divulge that whilst overall full year guidance is unchanged, the shape of the results will be different. And here-in lies the problem as this new shape means a significant deterioration in the key Products gross margin, due to bigger discounting, being offset by improvement Financial Services margins. And for a retailer, growth should really dominate from the former, not the latter. Especially amid concerns about an already over-leveraged UK consumer. Furthermore, Q3 showed continued slowing in quarterly revenue growth, although Xmas did at least see a pick-up.
N Brown shares are testing December lows, trading their worst since May 2017, although they may benefit from rising support from post-referendum lows, just 4% below. PETS has made a strong breakout to trade their best since mid-October, Bulls now eyeing last year’s highs of 220p (+12%).
Mike van Dulken, Head of Research, 23 Jan
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