Pets at Home hit a record low on Thursday amid fears of a profit warning with its full-year results this month.
Morgan Stanley slashed earnings forecasts for Pets at Home’s 2018 financial year to reflect margin pressure, continued weak sales and rising costs.
So-called “category killer” specialist retailers need high gross margins to be economically viable because they suffer from low sales densities and slow stock turn, said Morgan Stanley. However, the same products are typically 20 per cent cheaper online or at general discounters such as B&M, meaning category killers such as Pets At Home, Dunelm and Halfords “face a bleak future”, it argued.
All three retailers trade at more than 12 times earnings even though they carry debt and have mostly leased store estates, which gives them no asset backing if earnings continue to fall, Morgan Stanley argued. It saw Pets at Home most at risk going into full-year results due May 25, as consensus forecasts still bake in modest earnings growth for 2018 yet management has openly acknowledged it has a “value perception” problem.
Pets at Home closed 7.6 per cent lower at 164.5p. Since flotation in early 2014 the stock has fallen 32 per cent.
In the wider market, a lot of ex-dividends offset gains for the energy and mining stocks to leave the FTSE 100 barely changed at 7,386.63.
Centrica, which was trading at an 8.4p ex-dividend, was down 5.4 per cent to 192.2p. JPMorgan Cazenove turned negative on the British Gas owner based on fears that new entrant Engie was starting a price war. Three of the big six energy suppliers have cut tariffs after Engie last month undercut the market average by about 15 per cent with a dual fuel offer at less than £900 a year.
“This fresh round of heavy discounting does not auger well for portfolio margins with price regulation on the horizon,” said JPMorgan.
Hikma Pharmaceuticals dropped 8.2 per cent to £17.95 after confirming that the US Food and Drug Administration had requested more data on its generic version of GlaxoSmithKline’s top-selling Advair inhaler, which will probably push its launch into next year. Vectura, which licenses its inhaler system to Hikma, dropped 9 per cent to 131.9p while GSK (trading at an 19p ex-dividend) added 0.2 per cent to £16.28.
BT Group dropped 4.5 per cent to 297.9p after ditching its target of at least 10 per cent dividend growth target and cutting cash flow guidance.
Ladbrokes was down 1.9 per cent to 123.9p. After the close, shareholders Apollo and Cerberus began selling a 3.2 per cent stake in the bookmaker.