Pets at Home becoming "very over-spaced", says Morgan Stanley

3rd Jul 2014 09:30

Morgan Stanley has started coverage of Pets at Home with an 'underweight' rating, highlighting concerns that the business is "becoming very over-spaced"."We think that Pets at Home is a solid business. Its record over the last circa 15 years is very impressive, reflecting, we believe, both an attractive customer proposition and a strong competitive position, driven by an experienced management team," the US bank said.However, with one of the largest out-of-town store estates in the UK retail sector and its sales densities peaking in 2010, Pets at Home's categories are "vulnerable to Internet channel shift", Morgan Stanley explained.What's more, the retailer, run by Chief Executive Nick Wood, plans to continue opening 20-25 new stores every year, which are usually on 15-year leases.The bank also believes that the group's margins may prove to be "unsustainably high". It said that an operating profit margin of 13.4% in the most recent financial year "seems very high for a business that obtains almost 50% of sales from pet food".The stock was given a 155p target price, representing substantial downside from Thursday morning's share price of around 203p.BC