Half-year Report

RNS Number : 6090U

Pets At Home Group Plc

26 November 2019

FOR IMMEDIATE RELEASE, 26 NOVEMBER 2019

Pets at Home Group Plc: FY20 Interim Results
for the 28 week period to 10 October 2019

A strong first half; on track to deliver full year profit growth ahead of plan

· First anniversary of launching our pet care strategy, which continues to deliver strong results

· Sustained momentum in Retail business, with like-for-like^# (LFL) revenue growth of 7.8%

o Omnichannel revenues^# up 31.7% to £46.5m

o Stores delivering positive LFL^# revenue growth and a solid operating margin

· Vet Group underlying business performing well, with LFL^# revenue growth of 6.4%

o First Opinion customer sales^# growth across all vet practices of 11.8%, with Joint Venture (JV) practice LFL^# of 14.0% and mature practice sales again growing ahead of the market

o Planned changes to fee arrangements for Joint Venture practices starting to have positive impact: increasing practice profitability and improving our Group cash performance

o JV practice buy outs now complete: total of 57 sites, with 36 having subsequently closed

· We are introducing more customers to our complete pet care offer:

o Number of VIPs who purchase both products and a service has grown 22% year-on-year, and now represents c16% of all active members

o Number of subscription customers across the Group is now over 790,000

· Group underlying PBT, on a comparable pre-IFRS16 basis, up 18.9% year-on-year to £45.0m^1,#, driven by quality revenue growth in Retail converting strongly to profit

· Given progress in the first half, we remain confident about the rest of the year despite continued consumer uncertainty, and expect full year profit towards top end of current market consensus²

· After over 9 years as Chairman, succession plan for Tony DeNunzio commenced

£m	H1 FY20	H1 FY19	YoY change	LFL growth^#
Group revenue	546.3	499.3	9.4%	7.6%
Retail revenue	479.8	443.7	8.1%	7.8%
Vet Group revenue	66.5	55.6	19.6%	6.4%
Group underlying gross margin³	49.0%	50.3%	(132) bps
Group underlying PBT (including IFRS16)^4,#	41.7	37.9	10.2%
Group underlying PBT (excluding IFRS16)^1,4,#	45.0	37.9	18.9%
Group statutory PBT (including IFRS16)	34.0	8.0	327.3%
Group statutory PBT (excluding IFRS16)^1,#	37.3	8.0	368.8%

Group underlying free cashflow^#	24.9	27.3	(8.6)%
Group non-underlying charges^3,4	(7.7)	(29.9)	(74.2)%
Group non-underlying cash costs⁵	(15.8)	-	NM

# Alternative Performance Measures (APMs) are defined and reconciled to IFRS information, where possible, on pages 18 to 21. All H1 FY20 APMs exclude the impact of IFRS16 unless explicitly stated.

1. Adjusted financial metrics for H1 FY20, which exclude the impact of the transition of IFRS16, have been provided to aid comparability with the prior period

2. Company compiled consensus estimates for FY20 Group underlying PBT, before the impact of IFRS16, have a mean of £89m and a range of £87m to £93m

3. H1 FY20 non-underlying charges relating to costs incurred by the Group in buying out, and in some cases closing, JV practices include £7.6m charged against Vet Group, and Group, non-underlying gross margin (H1 FY19: £29.0m)

4. H1 FY20 non-underlying charges also include £0.1m relating to an accounting charge for the potential future acquisition of minority stakes owned by vet partners in the Specialist Referral centres, which has been charged against non-underlying operating costs (H1 FY19: £0.9m)

5. H1 FY20 non-underlying cash costs include £9.4m relating to practices that we have bought out (H1 FY19: £nil), plus £6.4m in relation to payments made to Shared Venture Partners in our Specialist Referral centres to acquire certain remaining minority stakes (H1 FY19: £nil)

Comment from Peter Pritchard, Group Chief Executive Officer

"I am very pleased with what we have achieved in the first half of the year. We have executed our plans well, and this has been reflected in the strong customer sales growth across the Group. Our commitment, and that of the Group's Joint Venture Partners, is to make sure pets and their owners get the very best advice, care and products; and this has led to record levels of VIPs, First Opinion practice clients and subscription customers. In short, our pet care strategy is working.

We have seen sustained momentum in Retail, with a 2-year like-for-like of 13%. This has been complemented by a meticulous delivery of our Vet Group recalibration. The programme to buy out a number of Joint Venture practices is already complete, whilst changes we have made to the fee arrangements for ongoing practices are already showing signs of positive progress and will be followed by further planned adjustments in the second half of the year.

All this provides a strong foundation, meaning we have much to look forward to in FY20 and beyond, and we now expect to return to profit growth a year ahead of our original plan. In the meantime, we will remain focussed on serving our customers, their pets and our partners better than ever before."

Outlook

We have been successful in sustaining profit growth in Retail and expect this to continue. In the Vet Group, the second half of FY20 will see the full impact of changes to the fee arrangements for ongoing JV practices, in line with our original plan. In addition, we will incur certain pre-opening costs associated with the capacity extension at Dick White Referrals, plus the opening of our fifth Specialist Referral centre in Scotland, all of which will reduce Vet Group underlying profit in the year.

Due to the progress we have made in the first half of FY20, we are confident about the rest of the year and now expect to deliver full year underlying profit growth, with Group underlying profit before tax^# on a pre-IFRS16 basis towards the top end of current market consensus.

We now expect full year Group underlying free cashflow to be broadly flat, despite the previously disclosed one-off outflow of £10.7m relating to a change in timing to Corporation Tax payments.

New openings will include up to five new stores, grooming salons and vet practices, and the one-off programme to buy out a number of JV practices is now complete.

Our focus remains on sustaining the return to profit growth and we expect to generate further underlying profit and free cashflow growth from FY21, despite the potential headwind posed to Retail gross margin by USD currency movements. Due to our current hedging position, such movements will not impact FY20 profit guidance issued below.

FY20 Group underlying guidance
Total revenue growth		Ahead of market
Depreciation & amortisation (excluding IFRS16)		£39-41m
Net finance expense (excluding IFRS16)		£4-5m
Underlying profit before tax (excluding IFRS16)^#		Towards the top end of current market consensus
Impact of IFRS16 on Group underlying profit before tax^#		Reduction of £6-7m
Underlying tax rate		c20%
Capital expenditure		Up to £40m
Underlying free cashflow^#		Broadly flat year on year
Dividend per share		In line with prior year

H2 FY20 non-underlying financial items relating to the Vet Group
Non-underlying income statement charge		Further accounting charge for Specialist Referrals of c£0.3m. We anticipate no further charges relating to the First Opinion business recalibration
Non-underlying cash costs		Up to £3m cash outflow relating to the completion of the First Opinion business recalibration

Results presentation

A presentation for analysts and investors will be held today at 10:00am at Numis Securities Limited, The London Stock Exchange Building, 10 Paternoster Square, London EC4M 7LT, attendance is by invitation only. An audio webcast and statement of these results will be available at http://investors.petsathome.com

Investor Relations Enquiries

Pets at Home Group Plc

Jonny Armstrong, Head of Investor Relations

Contact: +44 (0)161 486 6688 or irelations@petsathome.co.uk

Media Enquiries
Pets at Home Group Plc

Gill Hammond, Head of Media and Public Affairs

Contact: +44 (0)161 486 6688 or irelations@petsathome.co.uk

Maitland/AMO

Clinton Manning and Joanna Davidson

Contact: +44 (0)20 7379 5151 or PetsAtHome-Maitland@maitland.co.uk

About Pets at Home

Pets at Home Group Plc is the UK's leading pet care business; our commitment is to make sure pets and their owners get the very best advice, products and care. Pet products are available online or from our 452 stores, many of which also have vet practices and grooming salons. Pets at Home also operates a UK leading small animal veterinary business, with 439 First Opinion practices located both in our stores and in standalone locations, as well as four Specialist Referral centres. For more information visit: http://investors.petsathome.com

Disclaimer

This statement of preliminary financial results does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Pets at Home Group Plc shares or other securities nor should it form the basis of or be relied on in connection with any contract or commitment whatsoever. It does not constitute a recommendation regarding any securities. Past performance, including the price at which the Company's securities have been bought or sold in the past, is no guide to future performance and persons needing advice should consult an independent financial adviser.

Certain statements in this statement of interim financial results constitute forward-looking statements. Any statement in this document that is not a statement of historical fact including, without limitation, those regarding the Company's future plans and expectations, operations, financial performance, financial condition and business is a forward-looking statement. Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. These risks and uncertainties include, among other factors, changing economic, financial, business or other market conditions. These and other factors could adversely affect the outcome and financial effects of the plans and events described in this statement. As a result you are cautioned not to place reliance on such forward-looking statements. Nothing in this statement should be construed as a profit forecast.

Chief Executive Officer's Review

Key Performance Indicators

Financial KPIs		H1 FY20	H1 FY19	YoY change
Customer sales^#,1 (£m)		695.3	637.2	9.1%
Group underlying PBT (excluding IFRS16)^# (£m)		45.0	37.9	18.9%
Group underlying free cashflow^# (£m)		24.9	27.3	(8.6)%

Strategic KPIs	Measure	H1 FY20	H1 FY19	YoY change
Bring the pet experience to life	No. of customer transactions (m)	30.2	29.0	4.4%
50% of sales from pet care services	Customer sales^#,1 from services	35.4%	34.5%	99 bps
Use our data to better serve customers	VIP customer sales^#,1,2 (£m)	715.8	580.8	23.2%
Set our people free to serve	Customer sales^#,1 per colleague (£k)	100.7	95.3	5.6%

1. Customer sales include gross customer sales made by Joint Venture vet practices of £178.6m (H1 FY19: £166.8m), and therefore differs to the fee income recognised within Vet Group revenue

2. VIP customer sales are shown on a rolling 12 month basis rather than a year-to-date basis, and include gross spend at First Opinion vet practices

Strategic update: becoming the best pet care business in the world

One year on from launching our pet care strategy, it continues to deliver strong results. The UK pet care market is in structural growth and remains resilient against a backdrop of continued consumer uncertainty. By providing the complete pet care experience to customers, we are able to strengthen our position and deliver market share gains across all segments.

We have seen growth across our pet care ecosystem in H1 FY20 - whether that is in Puppy and Kitten Club members, online and offline transactions, subscription numbers or vet practice new client registrations; pet owners are shopping with us more than ever before.

Strategic pillar: Bring the pet experience to life

By making all aspects of pet care convenient and affordable for customers, we are able to capture a greater share of their overall spend. Within Retail we have maintained our competitive price position throughout the first half of the year, having remained within 5% of our most competitive online peer on all comparable items, and the same price when comparing the products we believe really matter. All parts of our omnichannel business continue to grow and around 60% of transactions involve a store-based colleague; demonstrating the benefit of having an integrated offer.

Having launched the first of our new pet care centre format at two existing stores at the end of FY19, we have extended this trial at a further three locations during the first half of this year. Initial feedback from customers and colleagues alike has been positive, proving that whilst we will continue to refine and optimise the format, investing in our store experience will provide us with a competitive advantage.

We have seen real strength in the performance of both our VIP Puppy and Kitten Clubs. These free-to-join clubs provide a programme of advice and offers designed to encourage shopping across product, grooming and vet services - acting as valuable long term customer acquisition tools and providing opportunities to take a greater share of overall spend by building brand loyalty. Early indications are that the spend uplift seen in Puppy Club members during the first 12 months continues to apply in to adulthood, demonstrating the potential to increase customer lifetime value.

Strategic pillar: Deliver 50% of sales from pet care services

In H1 FY20, 35.4% of customer sales^# came from pet care services. We have seen strong growth across the different subscription packages that we offer, and now have more than 790,000 customers on plans across our Group. In particular, our Pet Care Plan initiative, which rewards store colleagues for introducing customers to vet practices, continues to be successful at increasing the number of vet clients on a healthplan. We have also expanded the range of products available via our Easy Repeat online platform, where customers enjoy our very best prices, and there remains a significant opportunity to capture a greater share of customer spend across both food and accessories.

^{1 including gross customer sales made by First Opinion vet practices, revenue from our Specialist Referral centres, grooming services, subscriptions, pet sales and pet insurance commissions}

In the Vet Group, our programme of buying out certain Joint Venture (JV) First Opinion vet practices is now complete. Over the past 12 months we have bought out a total of 57 JV practices, of which 36 have closed and the remaining 21 have been retained as a company managed practice, controlled and operated by Pets at Home. Throughout this period, we have worked collaboratively with the Joint Venture Partners involved to ensure the best possible outcome has been reached in each case.

The planned changes to the fee arrangements for ongoing JV practices are progressing in line with our original expectations; we have already begun making adjustments for some practices and during the second half of the year we will extend this further as we look to make our fee structure simpler and fairer. Whilst this leads to an initial decrease in the JV fee income taken by Pets at Home, it will enable practices to become debt free sooner and also reduces the need for Pets at Home to provide additional funding support in the form of operating loans. Looking ahead, we expect to see fee income increase from FY21 as practices mature in a more sustainable way.

Customer sales^# across the entire First Opinion estate increased by 11.8%, and mature JV practices once again grew their customer sales ahead of the market, driven by the incentivisation of our shared ownership model. The underlying health of our First Opinion estate has improved year on year, giving us confidence that the actions we are taking will help release free cashflow as practices mature.

Elsewhere in the Vet Group, our Specialist Referral division has delivered revenue growth broadly in line with the underlying market, and we are pursuing ways in which we can optimise overall performance. At the same time, we are looking to grow our capacity and capability by expanding Dick White Referrals and opening our first greenfield site in Scotland during FY21.

Strategic pillar: Use our data to better serve customers

The health of our VIP loyalty club remains strong, with further new signs-ups and lower churn leading to a record number of active members at over 5 million. By capturing data specific to the individual pet, we are able to ensure that communications are personalised and relevant to the customer, helping to increase customer spend. Our work to take the management and analytics of the VIP data in-house and migrated on to a cloud-based platform, whilst building a team of data scientists to leverage that wealth of data, is progressing well. These are key enablers in allowing us to become increasingly sophisticated in our marketing approach as we look to encourage shopping across both products and services, where we know there is a significant opportunity.

We are continuing to use our data to optimise store-specific product ranging. Alongside our new pet care centre format, we have been able to deliver increased sales from less space and a fewer number of products. By applying this new approach to ranging in upcoming store re-fits, it will enable us to maximise sales whilst creating new experience and events areas within the store, giving customers even more reasons to visit.

Strategic pillar: Set our people free to serve

We continue to create operational efficiencies across our Group, whether that is in store, grooming salons, distribution centres or our Support Offices. In doing so, we are able to provide the very best service to our customers, colleagues and Partners. The impressive Retail like-for-like sales growth has been achieved despite operating off fewer colleague hours in store, and all whilst customer satisfaction scores continue to increase - testament to the quality service that our colleagues provide every single day.

Following the first phase of automated picking for our flea treatment subscription service at Northampton Distribution Centre last year, we have now extended this with packing automation for the rest of our online order fulfilment. This has doubled our maximum capacity, and ensures that we have the infrastructure in place to support the continued growth of our omnichannel business, where we expect the channel shift to online to continue.

The shortage of vets in the UK has been widely documented, and whilst the Government has now agreed to restore veterinary surgeons to the shortage occupation list, the continued uncertainty surrounding the UK's departure from the EU means these challenges are likely to persist in the short term. In the meantime, practices remain focused on their existing vets, where vacancy rates have been reduced and turnover stabilised. This has been achieved by adopting a flexible approach to working arrangements that reflect the modern day demands of personal and professional life, supporting graduates and providing more opportunities for career development. Alongside a commitment to clinical freedom, these initiatives will help practices become the employer of choice for small animal veterinarians.

Chairman succession planning

After over 9 years as Chairman and in accordance with the new Corporate Governance Code, Tony DeNunzio has advised the Board that now is an appropriate time to commence a succession plan. The Board has appointed recruitment consultants and will consider both external candidates as well as existing Non-Executive Board members, before making a formal recommendation. In order to facilitate an effective succession plan, Tony will remain as Chairman until the announcement and induction of his successor. In the meantime, he remains fully committed to the company and is supportive of our pet care strategy.

Peter Pritchard

Group Chief Executive Officer

26 November 2019

Chief Financial Officer's Review

The H1 FY20 period represents the 28 weeks to 10 October 2019. The comparative period represents the 28 weeks to 11 October 2018.

The Group's results are shown as two segments that represent the size of the respective businesses and our internal reporting structures; Retail (includes products purchased online and in-store, pet sales, grooming services and insurance products) and Vet Group (includes First Opinion practices and Specialist Referral centres).

The financial statements for H1 FY20 have been prepared under the requirements of IFRS16 for the first time. To aid comparability with the prior period, adjusted financial information shown before the impact of IFRS16, are also shown in the table below. This will be presented throughout FY20 until the transition to IFRS16 is complete. The impact of IFRS16 on the Group interim financial statements has been to decrease underlying profit before tax by £3.3m, and is shown in further detail on page 12.

	H1 FY20 (post IFRS16)	H1 FY20 (pre IFRS16)	H1 FY19 (pre IFRS16)	YoY change (pre IFRS16)
Group like-for-like revenue growth^#	7.6%	7.6%	5.3%
Retail	7.8%	7.8%	4.7%
Vet Group	6.4%	6.4%	11.9%

Group revenue (£m)	546.3	546.3	499.3	9.4%
Retail	479.8	479.8	443.7	8.1%
Vet Group	66.5	66.5	55.6	19.6%

Group underlying gross margin¹	49.0%	49.0%	50.3%	(132) bps
Retail	49.9%	49.9%	51.0%	(106) bps
Vet Group¹	42.8%	42.8%	45.5%	(268) bps

Group underlying EBIT^2,3,# (£m)	51.7	47.2	39.8	18.6%
Retail	38.1	33.8	29.4	15.2%
Vet Group²	17.6	17.4	13.7	27.6%
Central	(4.0)	(4.0)	(3.2)	26.1%

Group underlying EBIT margin^2,3,#	9.5%	8.6%	8.0%	67 bps
Retail	7.9%	7.0%	6.6%	43 bps
Vet Group²	26.4%	26.2%	24.6%	165 bps

Group underlying PBT^3,# (£m)	41.7	45.0	37.9	18.9%
Group statutory PBT³ (£m)	34.0	37.3	8.0	368.8%
Underlying basic EPS^1,2,3,# (p)	6.7	7.2	6.1	17.5%
Statutory basic³ EPS (p)	5.1	5.7	1.2	354.2%

Group non-underlying charges^1,2 (£m)	(7.7)	(7.7)	(29.9)	(74.2)%
Group non-underlying cash costs⁴ (£m)	(15.8)	(15.8)	-	NM
Group underlying free cashflow^# (£m)	24.9	24.9	27.3	(8.6)%
Dividend (p)	2.5	2.5	2.5	-

Number of
Stores		452	451	1
Grooming salons		313	313	-
Joint Venture First Opinion vet practices		393	451	(58)
Company managed First Opinion vet practices		46	20	26

1. H1 FY20 non-underlying charges relating to costs incurred by the Group in buying out, and in some cases closing, JV practices include £7.6m charged against Vet Group, and Group, non-underlying gross margin (H1 FY19: £29.0m)

2. H1 FY20 non-underlying charges also include £0.1m relating to an accounting charge for the potential future acquisition of minority stakes owned by vet partners in the Specialist Referral centres, which has been charged against non-underlying operating costs (H1 FY19: £0.9m)

3. Adjusted financial metrics for H1 FY20, which exclude the impact of the transition of IFRS16, have been provided to aid comparability with the prior period. For further information on the impact of IFRS16, see page 12

4. H1 FY20 non-underlying cash costs include £9.4m relating to practices that we have bought out (H1 FY19: £nil), plus £6.4m in relation to payments made to Shared Venture Partners in our Specialist Referral centres to acquire certain remaining minority stakes (H1 FY19: £nil)

Impact of IFRS16 and Vet Group recalibration on the interim financial statements

The financial information in pages 8 to 13, and associated commentary, have been presented on a constant accounting basis and do not reflect the impact of IFRS16. The impact of IFRS16 on the Group interim financial statements is shown on page 12.

As part of the recalibration of the First Opinion vet business, a total non-underlying charge of £7.6m (H1 FY19: £29.0m) relating to any practice buy out commenced or completed in H1 FY20, has been recognised against Vet Group, and Group, gross profit. This accounts for all costs incurred by the Group relating to practices that we have bought out and/or closed during the period. In addition to this income statement charge in H1 FY20, an existing balance sheet provision of £23.5m from FY19 has been utilised.

Total cumulative non-underlying costs relating to the recalibration of the First Opinion vet business incurred since FY19 have been in line with previously issued guidance, and with the buy out programme now complete, no further non-underlying charges relating to our recalibration plans are expected in H2 FY20.

Revenue

Group revenue in H1 FY20 grew 9.4% to £546.3m (H1 FY19: £499.3m) and like-for-like (LFL) revenues grew 7.6%^#.

Retail revenues grew 8.1% to £479.8m (H1 FY19: £443.7m), including omnichannel revenue growth of 31.7% to £46.5m. LFL revenue growth in Retail was 7.8%^#. Food revenues grew by 9.8% to £261.1m (H1 FY19: £237.8m), reflecting strong performance across both dog and cat Advanced Nutrition (AN) lines, and also dog treats. AN revenues overall grew 12.7% to £122.4m (H1 FY19: £108.7m). Accessories revenues grew 5.6% to £193.9m (H1 FY19: £183.6m), with categories such as dog toys and cat litter performing well. Due to the hot and wet weather over the Summer months, we saw a particularly strong performance in our Health & Hygiene category.

Vet Group revenues grew 19.6% to £66.5m (H1 FY19: £55.6m), with LFL growth of 6.4%^#. Customer sales made by all First Opinion vet practices were up 11.8% to £190.2m^# (H1 FY19: £170.1m) despite ending the period with 32 fewer practices, driven by the continued maturation of practices. Total Joint Venture fee income increased by 2.8% to £29.7m (H1 FY19: £28.9m), whilst LFL fee income growth was 2.5%^# (H1 FY19: 14.7%). This LFL growth is lower than seen previously due to the fee adjustments which have been in place for some JV practices throughout the period.

Consistent with the accounting treatment during the comparative period, from the point at which any practice buy out was completed, the financial performance of that practice has been consolidated. (Please refer to Note 1 in the financial statements for more detail.) This has led to consolidated customer revenues from company managed First Opinion practices increasing significantly to £11.6m (H1 FY19: £3.3m).

Elsewhere in the Vet Group, we also saw growth of 8.4% in revenues from our Specialist Referral centres to £21.3m (H1 FY19: £19.7m).

Gross margin

Group underlying gross margin declined by 132 bps to 49.0% (H1 FY19: 50.3%), whilst Group statutory gross margin was 47.6% (H1 FY19: 44.5%).

Underlying (and statutory) gross margin within Retail was 49.9%, a reduction of 106 bps over the prior period (H1 FY19: 51.0%). This was driven by strong food transaction growth, both in store and online, creating an adverse margin mix effect but delivering an overall cash margin benefit due to the revenue performance. As our omnichannel business increases its participation of Retail revenues, this also contributes to gross margin dilution due to the greater mix of food product versus higher margin accessories.

Underlying gross margin within the Vet Group decreased by 268 bps to 42.8% (H1 FY19: 45.5%). This decrease reflects the impact of the planned fee adjustments, which have supressed Vet Group revenue whilst the costs which are charged against gross profit have remained stable. In addition, the consolidation of a number of practices which have been bought out and retained under a company managed model, which were not consolidated in the prior period, has had a dilutive impact on Vet Group gross margin. Finally, there was a lower charge of £0.6m (H1 FY19: £2.5m) made to the underlying provision held against operating loan funding provided to First Opinion vet practices we intend to retain as Joint Ventures.

Statutory Vet Group gross margin, after all non-underlying charges, was 31.3% (H1 FY19: (6.7)%). This reflects a total charge of £7.6m (H1 FY19: £29.0m) relating to costs incurred by the Group in buying out, and in some cases closing, certain JV practices during the period.

Operating profit and operating costs (pre-IFRS16)

Underlying Group EBIT was £47.2m^# (H1 FY19: £39.8m), with a margin of 8.6%^# (H1 FY19: 8.0%).

Underlying Retail EBIT was £33.8m^# (H1 FY19: £29.4m) with a margin of 7.0%^# (H1 FY19: 6.6%) and operating cost growth, excluding depreciation and amortisation, was 4.9% to £187.3m (H1 FY19: £178.6m). This margin expansion was achieved despite the slightly lower gross margin as noted above, and represents our success in controlling operating costs. Occupation costs (rent, service charges and other property costs) again declined as a percentage of sales due to our success in achieving rent reductions during lease renewal negotiations, as did colleague and distribution costs. Excluding IFRS16 right-of-use assets, depreciation and amortisation in Retail increased slightly to £18.3m (H1 FY19: £18.2m).

Underlying Vet Group EBIT was £17.4m^# (H1 FY19: £13.7m) with a margin of 26.2%^# (H1 FY19: 24.6%). Operating costs in the Vet Group, excluding depreciation and amortisation, were £9.4m (H1 FY19: £10.4m), a decline of 9.6% on the prior year. The year on year change in operating costs reflects the benefit of one-off project costs incurred in the prior period not being applicable in the current period, but offset by overhead costs relating to any bought out JV practice being recognised throughout H1 FY20, whereas these practices had not yet been consolidated in the prior period. Excluding IFRS16 right-of-use assets, depreciation and amortisation in the Vet Group increased to £1.6m (H1 FY19: £1.2m).

In the Vet Group, non-underlying operating costs totalling £0.1m were recognised in relation to the ownership structures and accounting treatment of the Specialist Referral centres (H1 FY19: £0.9m). During the period, we exercised options to purchase shareholdings from certain Partners in our Specialist Referral centres, at a total cash cost of £6.4m, in line with previously issued guidance, and which represented an average EBITDA multiple of >9x. As such, three of our four centres are now wholly owned, with the remaining one structured as a Shared Venture ownership model, where Pets at Home maintains a minimum 75% controlling share, with the remaining shares owned by multiple Shared Venture Partners (SVPs). Pets at Home has an option to buy the SVP shares in the future, with the value of these shares related to profit performance targets. The accounting treatment of such an option is therefore structured as a forward contract. Within the income statement, the discounted future value of the growth element of the SVP's shares is recognised as an expense over the period to which the option can be exercised, and recognised as a non-underlying expense.

Central costs, including Group overheads and colleagues, increased to £4.0m (H1 FY19: £3.2m).

Finance expense

Excluding IFRS16 interest charges, the net finance expense for the half year period increased slightly to £2.2m (H1 FY19: £2.0m).

Profit before tax

Excluding the impact of IFRS16, underlying pre tax profit was £45.0m^# (H1 FY19: £37.9m) and statutory pre tax profit, including all non-underlying items, increased significantly to £37.3m (H1 FY19: £8.0m). This increase in statutory pre tax profit reflects the strength of underlying trading in Retail, plus a reduced non-underlying charge of £7.7m (H1 FY19: £29.9m), largely relating to the recalibration of the First Opinion vet business.

Taxation, net income & EPS

After removing the impact of IFRS16, underlying total tax expense for the period was £9.1m^#, a rate of 20.1% on underlying pre tax profit.

Excluding the impact of IFRS16, underlying net income for the year, after tax, increased by 17.5% to £36.0m^# (H1 FY19: £30.6m). Underlying basic earnings per share were 7.2 pence^# (H1 FY19: 6.1 pence) and statutory basic earnings per share were 5.7 pence (H1 FY19: 1.2 pence).

Cash working capital

The cash movement in trading working capital for H1 FY20 was an inflow of £1.2m^#. This comprised of an £11.5m increase in payables offset by a £3.7m increase in inventory and a £6.6m increase in receivables.

Whilst we supported some ongoing Joint Venture First Opinion vet practices with operating loan funding in the period, we also saw some practices make repayments against existing loans such that the net cash inflow from these practices was £0.4m (H1 FY19: net cash outflow of £5.2m). This increased the overall Group cash working capital inflow to £1.6m.

The gross value of operating loans at the end of the period was £34.6m (H1 FY19: £46.9m). This was slightly lower than expected, and reflects the positive impact our fee remediation measures have had in terms of reducing the need to extend operating loans to Joint Venture practices. Following the completion of our buy out programme in H1 FY20, operating loans totalling £7.2m relating to these practices have been written off in full by utilising the 100% non-underlying provision established in FY19, and there are no remaining operating loan balances relating to any practice which has been bought out. As such, the total provision of £7.7m (H1 FY19: £23.0m) now held against the gross value of operating loans is entirely an underlying provision held against the balance of operating loans for practices which we expect to continue operating as Joint Ventures at an average of c22%.

Capital investment

Excluding IFRS16 right-of-use asset additions, capital investment was £16.8m (H1 FY19: £17.3m), where £5.6m (H1 FY19: £3.3m) is represented by the ongoing refurbishment and maintenance of our existing store estate, including rollout of our pet care centre trial at a further three stores. Investment in omnichannel and business systems totalled £4.1m (H1 FY19: £4.7m), as we continue to invest in our digital capabilities. Cash capital expenditure was £15.6m (H1 FY19: £20.3m).

Group underlying free cashflow

On a pre-IFRS16 basis, Group underlying free cashflow after interest, tax and before acquisitions decreased to £24.9m^# (H1 FY19: £27.3m), representing a cash conversion rate of 35.9%^# (H1 FY19: 44.6%). The decrease in free cashflow compared with the prior year is largely driven by the one-off additional outflow of £10.7m relating to a change in timing to Corporation Tax payments.

Group underlying free cashflow^# (£m)	H1 FY20	H1 FY19
Operating cashflow^#	65.9	60.5
Tax	(20.2)	(8.4)
Interest	(1.9)	(1.3)
Debt issue costs	-	(1.8)
Net capex	(15.9)	(19.9)
Purchase of own shares to satisfy colleague options	(3.0)	(1.8)
Group underlying free cashflow^#	24.9	27.3

H1 FY20 Group underlying free cashflow^#	Underlying FCF (£m)	FCF conversion
Retail	20.0	37.3%
Vet Group	12.3	63.4%
Central¹	(7.4)	NM
Group underlying free cashflow^#	24.9	35.9%

1. Includes central costs of £4.0m plus interest paid of £2.2m, a corporation tax credit of £1.5m, purchase of own shares of £3.0m and a credit relating to IFRS2 of £0.4m

The Group's net debt position at the end of the half year period was £136.3m, which represents a leverage ratio of 1.0x underlying EBITDA^# on a pre-IFRS16 basis.

Group net debt (£m) (pre-IFRS16)	H1 FY20	FY19
Opening net debt	(120.5)	(135.2)
Underlying free cashflow^#	24.9	63.6
Ordinary dividends paid	(24.8)	(37.2)
Acquisitions²	(1.3)	(2.8)
Net cash inflow upon completion of JV buy out programme	1.2	-
Non-underlying cash outflow³	(15.8)	(8.9)
Closing net debt	(136.3)	(120.5)
Leverage (Net debt/ underlying EBITDA^#)	1.0x	0.9x

2. FY19 includes the purchase of two mature, JV practices from Joint Venture Partners for £2.1m, which are now operated as company managed practices, £(0.3)m of net cash acquired by purchasing three other existing JV practices, and deferred consideration of £1.0m relating to one of our Specialist Referral centres. H1 FY20, includes an investment in Tailster.com and in certain company managed practices

3. H1 FY20 includes £9.4m relating to practices bought out during the period (FY19: £8.8m), plus £6.4m in relation to payments made to certain Shared Venture Partners in our Specialist Referral centres to acquire remaining minority stakes (FY19: £0.1m)

Capital allocation

Our capital allocation policy prioritises investing our cash generation in areas that will expand the Group and deliver appropriate returns. This includes organic investment and the working capital needs of our Vet Group, plus bolt-on acquisition opportunities where we consider the potential opportunity to drive incremental value as attractive. Our second priority is to maintain an ordinary dividend payment, where despite the reduction in profits due to the adoption of IFRS16, there is no impact on the cash value of the dividend we intend to pay. Finally, dependent upon our acquisition outlook, and should we not foresee any alternative investment uses, it is our intention to return surplus free cashflow to shareholders through a special dividend or share buyback.

Dividend

The Board has recommended an interim dividend of 2.5 pence per share, equal with the prior year. The interim dividend will be payable on 10 January 2020 to shareholders on the register at the close of trading on 6 December 2019.

Persons Discharging Managerial Responsibility (PDMRs)

Pets at Home is pleased to confirm that two members of the Executive Management Team, Jane Balmain, Chief Operating Officer of the Vet Group, and David Robinson, Chief Operating Officer of Retail, are each to be considered PDMRs. As at the date of this announcement, Jane has a beneficial interest in a total of 122,791 Pets at Home Group Plc ordinary shares ("Shares") together with 116,301 options/awards held under the Company's share plans. The number of Shares over which David holds options/awards under the Company's share plans is 164,383.

Transition to IFRS16

The financial statements for H1 FY20 have been prepared under the requirements of IFRS16 for the first time. Implementation of IFRS16 has had no effect on how the business is run, nor on cash flows generated. It has, however, had an impact on the assets, liabilities and income statement of the Group, as well as the classification of cash flows relating to lease contracts.

IFRS16 seeks to align the presentation of leased assets more closely to owned assets. In doing so, a right-of-use asset and lease liability are brought onto the balance sheet, with the lease liability recognised at the present value of future lease payments. Whilst the right-of-use asset is matched in value to the lease liability at inception, it differs in value through the life of the lease. The total value of the discounted lease liability under IFRS16 on the Group's Balance Sheet at the end of the half year period is £488.7m.

IFRS16 permits a choice on the method of implementation and after careful consideration the Group has applied the modified retrospective approach. Under this method, all prior year comparative balances have not been restated, but the cumulative effect of adopting IFRS16 has been recognised as an adjustment to the opening balance sheet for FY20. Both the right-of-use asset and lease liability are recognised as the present value of future lease payments as of the date of transition, adjusted for any remaining deferred income relating to landlord incentives and rent free periods, outstanding prepayments or provisions for onerous leases.

In Retail, the application of IFRS16 results in all store and distribution centre rent no longer being included within operating costs but replaced instead by an additional depreciation charge. On a post-IFRS16 basis, Retail operating costs including depreciation were £201.3m with an operating margin of 7.9%. Including all IFRS16 right-of-use assets, total depreciation and amortisation was £55.3m.

In the Vet Group, right-of-use assets relate predominantly to our four Specialist Referral centres. On a post-IFRS16 basis, Vet Group operating costs including depreciation were £10.9m with an operating margin of 26.4%. Including all IFRS16 right-of-use assets, total depreciation and amortisation was £2.8m.

Including all IFRS16 interest charges, the net finance expense for the period was £10.0m.

The net impact of IFRS16 in the half year period was to reduce Group underlying and statutory profit before tax by £3.3m to £41.7m and £34.0m respectively.

In order to clearly show the impact of transitioning to IFRS16, we show a reconciliation for Group underlying profit before tax and cashflow as follows.

£m	Pre IFRS16	Exclude rent	Include depreciation	Include interest	Post IFRS16
Revenue	546.3	-	-	-	546.3
Operating lease rentals	(42.7)	42.7	-	-	-
Depreciation & amortisation	(19.9)	-	(38.2)	-	(58.1)
Underlying operating profit^#	47.2	42.7	(38.2)	-	51.7

Finance income	0.2	-	-	-	0.2
Finance expense	(2.4)	-	-	(7.8)	(10.2)
Underlying PBT^#	45.0	42.7	(38.2)	(7.8)	41.7

£m	Pre IFRS16	Add back rent	Replace with interest & capital repayment	Post IFRS16
Operating cashflow^#	65.9	42.7	-	108.6

Tax	(20.2)	-	(7.8)	(28.0)
Interest	(1.9)	-	-	(1.9)
Repayment of lease obligations	-	-	(34.9)	(34.9)
Net capex	(15.9)	-	-	(15.9)
Purchase of own shares	(3.0)	-	-	(3.0)

Group underlying free cashflow^#	24.9	42.7	(42.7)	24.9

Impact of the UK's exit process from the EU

We continue our work to assess and mitigate the likely impact of the United Kingdom's exit from the European Union (EU). Given the range of possible scenarios it is impossible for us to be specific, however, we are keeping the following areas under review:

1) Consumer demand - although we expect the UK pet care market to remain resilient, we will be vigilant to signs that consumer demand is being adversely affected, so that we may seek to respond appropriately and expediently.

2) Although pet products are unlikely to 'spoil' as a result of any border delays, there is a risk that our supply chain becomes disrupted. In such circumstances, we may consider increasing our inventory holding to mitigate the potential impact on our Retail division.

3) We do not currently expect to see a material tariff impact, as the majority of our products are imported from outside the EU.

4) Exchange rates - the exit process may prompt movements in the USD/GBP exchange rate. The Group purchases products from Asia to a value of around US$70m each year. Our policy is to use a mix of foreign exchange forward contracts to hedge our USD requirement to cover the next 18 months. Our hedging requirements for FY20 are in place at an average rate of 1.34 USD:GBP, and any foreign exchange impact is included within our financial guidance. Looking ahead to FY21, forward contracts are already in place for approximately 50% of our total requirement at an average rate of 1.27 USD:GBP, and we will monitor exchange rates closely as we look to mitigate any pressure on Retail gross margin.

5) A significant number of colleagues, particularly within our Vet Group and distribution centres, are non-UK EU nationals. Whilst Brexit may result in changes to UK immigration policy which could increase the risk around the availability, recruitment and retention of these individuals, it may also make it easier to recruit highly skilled workers. Although it is a positive step that the Government has accepted the Migration Advisory Committee's recommendation that veterinary surgeons be restored to the shortage occupation list, we will continue to work closely with professional bodies including the Royal College of Veterinary Surgeons and the British Veterinary Association to assess the potential impact of restrictions on free movement for EU nationals.

Mike Iddon

Chief Financial Officer

26 November 2019

Risks and Uncertainties

An effective risk management process has been adopted to help the Group achieve its strategic objectives and enjoy long term success. The Board does not consider that the principal risks and uncertainties have changed since the publication of the annual report for the year ended 28 March 2019. These comprise:

· Protecting reputation

· Competition with other retailers and vet practices, including other pet specialists, supermarkets, discounters, and online retailers

· Stores and services expansion and rollout

· Retaining and developing engaged colleagues

· Keeping core business systems up to date and with the capability to support the Group's growth plans

· Supply chain and sourcing risk

· Liquidity and credit risk

· Treasury and financial risk from exposure to US dollar fluctuations, in respect of goods sourced from Asia

· Regulatory and compliance risk

· Extreme weather, where prolonged unusual weather patterns can impact footfall to stores

The Board continues to review the risks and opportunities that may arise as a result of Brexit. Mitigation plans are continuing to be developed in the following areas:

· Our people

· Supply chain and sourcing

· Treasury and finance

A detailed explanation of these risks can be found on pages 38 to 45 of the 2019 Annual Report which is available at http://investors.petsathome.com.

During the year ended 28 March 2019, the Financial Reporting Council ("FRC") Corporate Review team began a review of our Annual Report and Accounts for the year to March 2018. The Corporate Review team entered into correspondence with the Group, which is ongoing. All correspondence received to date and our responses have been discussed with the Audit and Risk Committee. The correspondence covers accounting for investments in Joint Venture veterinary practices, practice loans provided to those practices, and impairment testing, including goodwill and investments in subsidiaries. As a result of the FRC's review, we have, and will continue to, improve the clarity of disclosure, including the related judgements and estimates, in relation to these areas in our Annual Report and Accounts.

Responsibility Statement

We confirm that to the best of our knowledge:

· the condensed set of financial statements has been prepared in accordance with IAS 34

Interim Financial Reporting as adopted by the EU;

· the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of

important events that have occurred during the first 28 weeks of the financial year

and their impact on the condensed set of financial statements; and a description of

the principal risks and uncertainties for the remaining 24 weeks of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party

transactions that have taken place in the first 28 weeks of the current financial year

and that have materially affected the financial position or performance of the entity

during that period; and any changes in the related party transactions described in the

last annual report that could do so.

By order of the Board on 25 November 2019

Peter Pritchard, Chief Executive Officer

Mike Iddon, Chief Financial Officer

Disclaimer

This statement of interim financial results does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Pets At Home Group Plc shares or other securities nor should it form the basis of or be relied on in connection with any contract or commitment whatsoever. It does not constitute a recommendation regarding any securities. Past performance, including the price at which the Company's securities have been bought or sold in the past, is no guide to future performance and persons needing advice should consult an independent financial advisor.

Certain statements in this statement of interim financial results constitute forward-looking statements. Any statement in this document that is not a statement of historical fact including, without limitation, those regarding the Company's future expectations, operations, financial performance, financial condition and business is a forward-looking statement. Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. These risks and uncertainties include, among other factors, changing economic, financial, business or other market conditions. These and other factors could adversely affect the outcome and financial effects of the plans and events described in this statement of interim financial results. As a result you are cautioned not to place reliance on such forward-looking statements. Nothing in this statement should be construed as a profit forecast.

INDEPENDENT REVIEW REPORT TO PETS AT HOME GROUP PLC

Conclusion

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the 28 week period ended 10 October 2019 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated cash flow statement, the condensed consolidated statement of changes in equity and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the 28 week ended 10 October 2019 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

The impact of uncertainties due to the UK exiting the European Union on our review

Uncertainties related to the effects of Brexit are relevant to understanding our review of the condensed financial statements. Brexit is one of the most significant economic events for the UK, and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown. An interim review cannot be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

The annual financial statements of the group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

Stuart Burdass

for and on behalf of KPMG LLP

Chartered Accountants

1 St Peter's Square

Manchester

M2 2AE

Alternative Performance Measures ("APMs")

Guidelines on Alternative Performance Measures (APMs) issued by the European Securities and Markets Authority came into effect for all communications released on or after 3 July 2016 for issuers of securities on a regulated market.

In the reporting of financial information, the Directors have adopted various APMs of historical or future financial performance, position or cash flows other than those defined or specified under International Financial Reporting Standards (IFRS).

The Directors measure the performance of the Group based on the following financial measures which are not recognised under EU-adopted IFRS, and consider these to be important measures in evaluating the Group's strategic and financial performance. The Directors believe that these APMs assist in providing additional useful information on the underlying trends, performance and position of the Group.

APMs are also used to enhance the comparability of information between reporting periods, by adjusting for non-underlying items to aid the user in understanding the Group's performance.

Consequently, APMs are used by the Directors and management for performance analysis, planning, reporting and incentive setting purposes and have remained consistent with prior year.

All APMs relate to the current period's results and comparative periods where provided. Where the current period APM has been amended to exclude the impact of transition to IFRS 16, this has been set out in the definition below.

A full glossary of APMs is included in the most recent Annual Report & Accounts.

The key APMs used by the Group are:

'Like-for-like' sales growth comprises total revenue in a financial period compared to revenue achieved in a prior period for stores, online operations, grooming salons, vet practices & specialist referral centres that have been trading for 52 weeks or more, excluding fee income from Joint Venture practices where the Group has bought out the Joint Venture Partners or will offer to buy out the Joint Venture Partners in the future.

Omni-channel revenue: Revenue net of discounts and VAT from online sales, subscriptions and order to store.

Underlying EBITDA: Earnings before interest, tax, depreciation & amortisation before the effect of non-underlying items in the period.

Underlying free cash flow: Net cash from operating activities, after tax, less net cash used in investing activities (excluding acquisitions), less interest paid & debt issue costs before the effect of non-underlying items in the period.

Underlying CROIC: Cash return on invested capital, represents cash returns divided by the average of gross capital invested (GCI) for the last twelve months. Cash returns represent underlying operating profit before property rentals and share based payments subject to tax, then adjusted for depreciation and amortisation. GCI represents gross property, plant and equipment plus software and other intangibles excluding the goodwill created on the acquisition of the Group by KKR (£906,445,000) plus net working capital, plus capitalised rent multiplied by a factor of 8x, before the effect of non-underlying items in the period.

Non-underlying items: Certain costs or incomes that derive from events or transactions that fall outside the normal activities of the Group, and are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group.

References to Underlying GAAP measures and Underlying APMs throughout the interim statements are measured before the effect of non-underlying items.

Alternative Performance Measures ("APMs") (continued)

APM

Definition

Reconciliation

Cash EBITDA

Underlying EBITDA (see below) adjusted for IFRS 16 transactions and share based payment charges.

Cash EBITDA (£m)	HY19	HY20	Note
Underlying EBITDA	59.2	109.8	2
Effect of IFRS 16 on EBITDA	-	(42.7)
EBITDA before IFRS 16	59.2	67.1
Share based payment charge	1.9	2.4	3
Cash EBITDA	61.1	69.5

Underlying CROIC

Cash return on invested capital, represents cash returns divided by the average of gross capital invested (GCI) for the last twelve months. Cash returns represent underlying operating profit before property rentals and share based payments subject to tax, then adjusted for depreciation and amortisation. GCI represents gross property, plant and equipment plus software and other intangibles excluding the goodwill created on the acquisition of the Group by KKR (£906,445,000) plus net working capital, plus capitalised rent multiplied by a factor of 8x. CROIC is stated before the impact of IFRS 16 as it is based on a 12 month rolling average.

Underlying CROIC (£m)	HY19	HY20	Note
Cash returns:
Underlying operating profit	84.5	100.6
Property rental costs	76.5	77.3
Share based payment charges	3.6	3.9
	164.6	181.8
Effective tax rate	20%	20%
Tax charge on above	(32.9)	(36.4)
	131.7	145.4
Depreciation and amortisation	35.8	37.4
Cash returns	167.5	182.8
Gross capital invested (GCI):
Gross property, plant and equipment	275.4	296.8	8
Intangibles	1,020.9	1036.1	10
Less KKR goodwill	(906.4)	(906.4)
Investments	15.1	13.3
Net working capital	(109.5)	(98.0)	see definition
Capitalised operating leases	612.0	618.6	8x
GCI	907.5	960.4
Average	917.6	947.6
Underlying CROIC	18.3%	19.3%

Underlying EBITDA

Earnings before interest, tax, depreciation and amortisation before the effect of non-underlying items in the period.

Underlying EBITDA (£m)	HY19	HY20	Note
Statutory operating profit	9.9	44.0	2
Depreciation and amortisation	19.4	58.1	3
Non-underlying items	29.9	7.7	3
Underlying EBITDA	59.2	109.8

Underlying free

cash flow

Net cash from operating activities, after tax, less net cash used in investing activities (excluding acquisitions), less interest paid & debt issue costs before the effect of non-underlying items in the period.

Underlying free cash flow (£m)	HY19	HY20	Note
Underlying free cash flow	27.3	24.9
Dividends	(24.8)	(24.8)	CFS
Acquisition of subsidiary	(2.1)	(0.3)	CFS
Investments	-	(1.0)	CFS
Proceeds from new loan	195.1	36.0	CFS
Repayment of borrowings	(195.0)	(36.0)	CFS
Non-underlying cash flow
Proceeds from sale of PPE	-	0.3	CFS
Settlement of put & call	-	(6.4)	CFS
Acquisition of subsidiary	-	(3.8)	CFS
Repayment of borrowings	-	(5.9)	CFS
Non-underlying working capital	-	1.2	CFS
Net increase/(decrease) in cash	0.5	(15.8)
CFS = Consolidated Statement of Cash Flows

Alternative Performance Measures ("APMs") (continued)

Like-for-like

Like-for-like sales growth comprises total revenue in a financial period compared to revenue achieved in a prior period for stores, online operations, grooming salons, vet practices & specialist referral centres that have been trading for 52 weeks or more, excluding fee income from Joint Venture practices where the Group has bought out the Joint Venture Partners or will offer to buy out the Joint Venture Partners in the future.

Not applicable.

2-year like-for-like

2-year like-for-like sales growth comprises total revenue in a financial period compared to revenue achieved in the financial period before the prior period for stores, online operations, and grooming salons that have been trading for 104 weeks or more.

Not applicable.

Underlying basic EPS

Underlying basic earnings per share (EPS) is based on earnings per share after the impact of IFRS 16, but before the impact of certain costs or incomes that derive from events or transactions that fall outside the normal activities of the Group, and are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group.

Underlying basic EPS (p)	HY19	HY20	Note
Underlying basic EPS	6.1	6.7	4
Non-underlying items	(4.9)	(1.6)	4
Basic earnings per share	1.2	5.1

Underlying operating profit

Underlying operating profit is based on operating profit before the impact of certain costs or incomes that derive from events or transactions that fall outside the normal activities of the Group, and are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group.

Underlying operating profit (£m)	HY19	HY20	Note
Underlying operating profit	39.8	51.7	2
Non-underlying items	(29.9)	(7.7)	3
Operating profit	9.9	44.0

Underlying profit before tax

Underlying profit before tax (PBT) is based on pre-tax profit before the impact of certain costs or incomes that derive from events or transactions that fall outside the normal activities of the Group, and are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group.

Underlying PBT (£m)	HY19	HY20	Note
Underlying PBT	37.9	41.7	CIS
Non-underlying items	(29.9)	(7.7)	3
PBT	8.0	34.0

CIS = Consolidated Income Statement

Underlying profit after tax

Underlying profit after tax (PAT) is based on post tax profit before the impact of certain costs or incomes that derive from events or transactions that fall outside the normal activities of the Group, and are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group.

Underlying PAT (£m)	HY19	HY20	Note
Underlying PAT	30.6	33.3	CIS
Non-underlying items	(24.4)	(7.7)	CIS
PAT	6.2	25.6

Underlying total tax expense

Underlying total tax expense is based on the statutory tax expense for the period (being the net of current tax and deferred tax) before the impact of certain costs or incomes that derive from events or transactions that fall outside the normal activities of the Group, and are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group.

Underlying total tax expense (£m)	HY19	HY20	Note
Underlying tax expense	7.2	8.4	5
Non-underlying items	(5.5)	-	5
Tax expense	1.7	8.4

Alternative Performance Measures ("APMs") (continued)

Underlying net working capital

Net working capital movement is a measure of the cash required by the business to fund its inventory, receivables and payables.

The change year on year reflects the cash in/outflow in relation to changes in the working capital cycle excluding non-underlying items.

The change in working capital is a key component of the free cash flow measure of the Group.

Underlying net working capital movement (£m)	HY19	HY20	Note
Net working capital per cash flow statement	(0.6)	2.2	CFS

Being:
Movement in trade and other receivables	(6.5)	(6.6)	CFS
Movement in inventories	(4.9)	(3.7)	CFS
Movement in trade and other payables	12.2	13.4	CFS
Movement in provisions	1.2	(1.9)	CFS
Trading working capital movement	2.0	1.2
Movement in gross operating loans	(5.2)	0.4
Cash working capital movement	(3.2)	1.6
Underlying allowance for expected credit losses against operating loans	2.6	0.6
Net working capital movement	(0.6)	2.2
CFS = Consolidated statement of cash flows
(£m)	HY19	HY20	Note
Receivables	69.2	66.3
Inventory	65.4	72.2
Trade and other payables	(226.1)	(200.4)
Provisions	(13.9)	(4.2)
Non-current provisions	(3.1)	(1.2)
Net working capital	(108.5)	(67.3)

Underlying cash working capital

Working capital before increase/decrease in gross operating loans to Joint Venture practices

Underlying cash working capital (£m)	HY19	HY20	Note
Net working capital (above)	(0.6)	2.2
Net loans and borrowings	2.6	(1.0)	14
Underlying cash working capital	2.0	1.2

Omni-channel revenue

Revenue net of discounts and VAT from core online, sales, subscriptions and order to store.

Omni-channel revenue (£m)	HY19	HY20	Note
Omnichannel revenue	35.3	46.5

Underlying EBIT

Earnings before interest and tax agreed to operating profit relating to underlying trading.

Underlying EBIT (£m)	HY19	HY20	Note
Operating profit relating to underlying trading (EBIT)	39.8	51.7	2

Retail underlying EBIT

Earnings before interest and tax agreed to operating profit relating to underlying trading for the Retail division.

Retail underlying EBIT (£m)	HY19	HY20	Note
Retail operating profit relating to underlying trading (EBIT)	29.4	38.1	2

Vet Group underlying EBIT

Earnings before interest and tax agreed to operating profit relating to underlying trading for the Vet Group division.

Vet Group underlying EBIT (£m)	HY19	HY20	Note
Vet Group operating profit relating to underlying trading (EBIT)	13.7	17.6	2

Net debt

Cash and cash equivalents less loans and borrowings.

Net debt (£m)	HY19	HY20	Note
Cash and cash equivalents	60.3	44.7	CBS
Loans and borrowings	(195.1)	(181.0)	11
Net Debt	(134.8)	(136.3)

CBS = Consolidated balance sheet

Customer sales

Customer sales being statutory Group revenue, less Joint Venture veterinary practice fee income (which forms part of statutory revenue within the Vet Group), plus gross customer sales made by Joint Venture veterinary practices.

Customer sales (£m)	HY19	HY20	Note
Statutory Group revenue	499.3	546.3
Fee income	(28.9)	(29.7)	2
Sales by Joint Venture veterinary practices	166.8	178.7
Customer sales	637.2	695.3

Condensed consolidated income statement

	Note	28 week period ended 10 October 2019			28 week period ended 11 October 2018
	Note	Underlying trading £000	Non-underlying items (note 3) £000	Total £000	Underlying trading £000	Non-underlying items (note 3) £000	Total £000
Revenue	2	546,338	-	546,338	499,345	-	499,345
Cost of sales		(277,857)	(7,925)	(285,782)	(247,935)	(12,800)	(260,735)
Impairment losses on receivables	3	(600)	305	(295)	-	(16,230)	(16,230)
Gross profit		267,881	(7,620)	260,261	251,410	(29,030)	222,380
Selling and distribution expenses		(165,794)	-	(165,794)	(168,138)	-	(168,138)
Administrative expenses		(50,389)	(91)	(50,480)	(43,450)	(880)	(44,330)
Operating profit	2	51,698	(7,711)	43,987	39,822	(29,910)	9,912
Financial income		253	-	253	463	-	463
Financial expense		(10,233)	-	(10,233)	(2,415)	-	(2,415)
Net financing expense		(9,980)	-	(9,980)	(1,952)	-	(1,952)
Profit before tax		41,718	(7,711)	34,007	37,870	(29,910)	7,960
Taxation	5	(8,431)	-	(8,431)	(7,254)	5,516	(1,738)
Profit for the period		33,287	(7,711)	25,576	30,616	(24,394)	6,222

All activities relate to continuing operations.

Basic and diluted earnings per share attributable to equity shareholders of the Company:

Note

28 week period ended

10 October 2019

28 week period ended

11 October 2018

Equity holders of the parent - basic

5.1p

1.2p

Equity holders of the parent - diluted

5.1p

1.2p

Condensed consolidated statement of comprehensive income

	28 week period ended 10 October 2019 £000	28 week period ended 11 October 2018 £000
Profit for the period	25,576	6,222
Other comprehensive income
Items that are or may be recycled subsequently into profit or loss:
Foreign exchange translation differences	(17)	(70)
Cash flow hedges - reclassified to profit and loss	(1,034)	1,173
Effective portion of changes in fair value of cash flow hedges	502	1,912
Other comprehensive income for the period, before income tax	(549)	3,015
Income tax on other comprehensive income	97	(586)
Other comprehensive income for the period, net of income tax	(452)	2,429
Total comprehensive income for the period	25,124	8,651

The notes on pages 26 to 62 form an integral part of these consolidated interim financial statements.

Condensed consolidated balance sheet

	Note	At 10 October 2019 £000	At 11 October 2018 £000	At 28 March 2019 £000
Non-current assets
Property, plant and equipment	8	119,939	126,741	123,684
Right-of-use assets	9	452,336	-	-
Intangible assets	10	1,001,235	995,619	1,000,726
Other non-current assets		19,952	19,623	18,653
		1,593,462	1,141,983	1,143,063
Current assets
Inventories		72,181	65,396	68,209
Other financial assets		2,469	2,255	1,610
Trade and other receivables		66,280	69,175	68,886
Cash and cash equivalents		44,747	60,295	60,534
		185,677	197,121	199,239
Total assets		1,779,139	1,339,104	1,342,302
Current liabilities
Trade and other payables		(196,370)	(186,803)	(196,071)
Lease liabilities	9	(84,106)	-	-
Provisions		(4,250)	(13,900)	(15,353)
Other financial liabilities		(694)	(1,487)	(7,333)
		(285,420)	(202,190)	(218,757)
Non-current liabilities
Other interest-bearing loans and borrowings	11	(179,044)	(192,614)	(178,778)
Other payables		(238)	(37,769)	(33,579)
Lease liabilities	9	(404,568)	-	-
Provisions		(1,162)	(3,098)	(1,687)
Other financial liabilities		(3,326)	(8,448)	(2,497)
Deferred tax liabilities		(2,620)	(4,683)	(4,028)
		(590,958)	(246,612)	(220,569)
Total liabilities		(876,378)	(448,802)	(439,326)
Net assets		902,761	890,302	902,976
Equity attributable to equity holders of the parent
Ordinary share capital		5,000	5,000	5,000
Consolidation reserve		(372,026)	(372,026)	(372,026)
Merger reserve		113,321	113,321	113,321
Translation reserve		(53)	(30)	(36)
Cash flow hedging reserve		402	1,549	837
Retained earnings		1,156,117	1,142,488	1,155,880
Total equity		902,761	890,302	902,976

The notes on pages 26 to 62 form an integral part of these consolidated interim financial statements.

Condensed consolidated statement of changes in equity

	Share capital £000	Consolidation reserve £000	Merger reserve £000	Cash flow hedging reserve £000	Translation reserve £000	Retained earnings £000	Total equity £000
Balance at 28 March 2019	5,000	(372,026)	113,321	837	(36)	1,155,880	902,976
Total comprehensive income for the period
Profit for the period	-	-	-	-	-	25,576	25,576
Other comprehensive income	-	-	-	(435)	(17)	-	(452)
Total comprehensive income for the period	-	-	-	(435)	(17)	25,576	25,124
Transactions with owners, recorded directly in equity
Equity dividends paid	-	-	-	-	-	(24,771)	(24,771)
Share based payment charge	-	-	-	-	-	2,380	2,380
Purchase of own shares	-	-	-	-	-	(2,948)	(2,948)
Total contributions by and distributions to owners	-	-	-	-	-	(25,339)	(25,339)
Balance at 10 October 2019	5,000	(372,026)	113,321	402	(53)	1,156,117	902,761

	Share capital £000	Consolidation reserve £000	Merger reserve £000	Cash flow hedging reserve £000	Translation reserve £000	Retained earnings £000	Total equity £000
Balance at 29 March 2018	5,000	(372,026)	113,321	(950)	40	1,160,967	906,352
Total comprehensive income for the period
Profit for the period	-	-	-	-	-	6,222	6,222
Other comprehensive income	-	-	-	2,499	(70)	-	2,429
Total comprehensive income for the period	-	-	-	2,499	(70)	6,222	8,651
Transactions with owners, recorded directly in equity
Equity dividends paid	-	-	-	-	-	(24,807)	(24,807)
Share based payment charge	-	-	-	-	-	1,951	1,951
Purchase of own shares	-	-	-	-	-	(1,845)	(1,845)
Total contributions by and distributions to owners	-	-	-	-	-	(24,701)	(24,701)
Balance at 11 October 2018	5,000	(372,026)	113,321	1,549	(30)	1,142,488	890,302

The notes on pages 26 to 62 form an integral part of these consolidated interim financial statements.

Condensed consolidated statement of cash flows

	28 week period ended 10 October 2019 £000	28 week period ended 11 October 2018 £000
Cash flows from operating activities
Profit for the period	25,576	6,222
Adjustments for:
Depreciation and amortisation	58,130	19,395
Non-underlying impairment	4,005	-
Financial income	(253)	(463)
Financial expense	10,233	2,415
Settlement of 'put & call' liabilities (growth element)	(750)	-
Share based payment charges	2,380	1,951
Taxation	8,431	1,738
	107,752	31,258
Increase in trade and other receivables	(5,581)	(9,084)
Increase in inventories	(3,670)	(4,867)
Increase in trade and other payables	13,409	12,174
(Decrease)/increase in provisions	(1,935)	1,163
Increase in working capital relating to non-underlying items	1,178	29,910
	111,153	60,554
Tax paid	(20,208)	(8,402)
Net cash flow from operating activities	90,945	52,152
Cash flows from investing activities
Proceeds from sale of property, plant and equipment	260	441
Interest received	253	463
Investment in other financial assets	(1,000)	-
Acquisition of subsidiaries, net of cash acquired (non-underlying)	(3,764)	(2,100)
Repayment of borrowings owed by Joint Venture practices in advance of acquisition of subsidiaries	(5,898)	-
Acquisition of subsidiaries, net of cash acquired (underlying)	(350)	-
Acquisition of property, plant and equipment and other intangible assets	(15,633)	(20,323)
Net cash used in investing activities	(26,132)	(21,519)
Cash flows from financing activities
Equity dividends paid	(24,771)	(24,807)
Proceeds from new loan	36,000	195,086
Repayment of borrowings	(36,000)	(195,000)
Debt issue costs	-	(1,790)
Capital lease payments	(37,067)	-
Settlement of 'put & call' liabilities (minimum amount)	(5,639)	-
Purchase of own shares	(2,948)	(1,845)
Finance lease obligations	(208)	(36)
Interest paid	(2,169)	(1,770)
Interest paid on lease obligations	(7,798)	-
Net cash used in financing activities	(80,600)	(30,162)
Net (decrease)/increase in cash and cash equivalents	(15,787)	471
Cash and cash equivalents at beginning of period	60,534	59,824
Cash and cash equivalents at end of period	44,747	60,295

Notes (forming part of the condensed consolidated interim financial statements)

1 Accounting policies

The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements.

Basis of preparation

Pets at Home Group Plc (the Company) is a company incorporated in the United Kingdom and its registered office is Epsom Avenue, Stanley Green, Handforth, Cheshire, SK9 3RN. The Company is listed on the London Stock Exchange.

The condensed consolidated interim financial statements as at and for the 28 week period ended 10 October 2019 comprise the Company and its subsidiaries (together referred to as the Group).

The consolidated financial statements of the Group as at and for the 52 week period ended 28 March 2019 are available on request from the Company's registered office and via the Company's website.

The interim financial statements are prepared under the historical cost convention, as modified by the revaluation of derivative financial instruments to fair value, and in accordance with those parts of the Companies Act 2006 applicable to companies reporting under IFRS as adopted by the European Union.

Statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 Interim Financial Reporting as adopted by the EU. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at and for the 52 week period ended 28 March 2019.

The financial information included in this interim statement of results does not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006 (the "Act"). The statutory accounts for the 52 weeks ended 28 March 2019 have been reported on by the Company's auditors and delivered to the Registrar of Companies. The auditor's report was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

Going concern

The Directors of Pets at Home Group Plc, having made appropriate enquiries, consider that adequate resources exist for the Group to continue in operational existence for the foreseeable future and that, therefore, it is appropriate to adopt the going concern basis in preparing the condensed consolidated interim financial statements as at and for the 28 week period ended 10 October 2019.

Significant accounting policies

The accounting policies adopted in preparation of the condensed consolidated interim financial statements as at and for the 28 week period ended 10 October 2019 are consistent with the policies applied by the Group in its consolidated financial statements as at and for the 52 week period ended 28 March 2019, except as described below:

· Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual profit or loss

· The adoption of IFRS 16 (described below)

The Group has initially adopted the following IFRS's from 29 March 2019 and these have been applied in these interim financial statements.

IFRS 16 Leases (effective date 1 January 2019)

IFRS 16 Leases is effective for the Group from 29 March 2019 and replaces existing lease guidance under IAS 17 Leases. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17.

i) Leases in which the Group is a lessee

The majority of the Group's trading stores, standalone veterinary practices, specialist referral centres, distribution centres and support offices are leased. The Group also has a number of non-property leases relating to vehicles, equipment and material handling equipment. The commitments as at 28 March 2019 and 29 March 2018 are disclosed in note 24 of the annual financial statements.

Under IFRS 16, the Group recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. The lease liability is initially measured at the present value of the remaining lease payments, discounted using the interest rate implicit in the lease, or if that rate cannot be readily determined the Group's incremental borrowing rate. The rate implicit in the lease cannot be readily determined and therefore a rate based on the Group's incremental borrowing rate is used. This rate is adjusted to take into account the risk associated with the length of the lease. A higher discount rate is applied to a longer lease. Lease payments will include any fixed payments including as a result of stepped rent increases.

The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the lease commencement date, any lease incentives received or premiums paid.

Under IAS 17, the Group recognised operating lease expenses on a straight line basis over the term of the lease, and recognised assets and liabilities only to the extent that there was a timing difference between actual lease payments and the expense recognised. Lease incentives received or paid are recognised as an integral part of the total lease expense over the term of the lease. Rent prepayments are disclosed within prepayments and deferred income in respect of landlord incentives on property leases are disclosed within trade and other payables. Under IFRS 16, the current rent charge is replaced by a depreciation charge for the right-of-use asset and an interest expense on the lease liability.

There are recognition exemptions for low-value assets and short-term leases with a lease term of 12 months or less. Any leases under a short term licence agreement are excluded as they fall into the lease term of 12 months or less. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the term of the lease. The total value of leases where the Group has taken a recognition exemption is disclosed in note 9.

ii) Leases in which the Group is a lessor

Lessor accounting remains similar to current accounting under IAS 17. At lease inception, lessors will determine whether each lease is a finance lease or an operating lease. To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is considered to be the case, then the lease is recognised as a finance lease, if not then it is recognised as an operating lease. As part of this assessment, the Group considers certain factors such as whether the lease is for the major part of the economic life of the asset.

The Group has a small number of leases where it is an intermediate lessor. For these leases, it accounts for its interest in the head lease and sub-lease separately. It assesses the lease classification of the sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset.

The Group has reassessed the classification of sub-leases in which the Group is a lessor. Under IAS 17, the subleases were classified with reference to the underlying asset which resulted in all subleases being classified as operating leases. The Group will reclassify a small number of sub-leases as a finance lease, resulting in recognition of a finance lease receivable of £2.4m as at 29 March 2019. Under IFRS 16, the finance lease is assessed by reference to the right-of-use asset under the head lease rather than the underlying asset. There will be no change to the accounting for the remaining subleases which continue to be accounted for as an operating lease, and income from these leases will continue to be recognised on a straight-line basis over the term of the lease, as disclosed in note 3.

The Group currently receives rental income from related Joint Venture veterinary practices which are located within the Group's retail stores. These rental incomes are disclosed in note 3. Under IFRS 16, the lease classification of sub-leases is assessed by reference to the right-of-use asset under the head lease rather than the underlying asset. Therefore there will be no change in accounting for this rental income, which will continue to be accounted for within operating expenses.

iii) Transition

The Group has adopted IFRS 16 on 29 March 2019 using the modified retrospective approach. The cumulative effect of adopting IFRS 16 has been recognised as an adjustment to the opening balance sheet as at 29 March 2019 with no restatement of comparable information. There is no impact to the statement of changes in equity. Further details and the impact of changes are disclosed in note 15.

Accounting estimates and judgments

The preparation of the condensed consolidated interim financial statements in conformity with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 Interim Financial Reporting as adopted by the EU requires management to make judgments, estimates and assumptions concerning the future that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. These judgments are based on historical experience and management's best knowledge at the time and the actual results may ultimately differ from these estimates. Estimates and underlying assumptions are reviewed on an on-going basis and revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

The estimates and assumptions that have significant risk of causing a material adjustment to the carrying value of assets and liabilities are discussed below.

Impairment of goodwill and other intangibles (significant estimate)

Determining whether goodwill and other intangibles are impaired requires an estimation of the value in use of the cash-generating units to which goodwill and other intangible assets have been allocated. The value in use calculation requires estimation of future cash flows expected to arise from the cash-generating unit (CGU) and a suitable discount rate in order to calculate present value.

Joint Venture receivables (significant estimate)

The Group provides operating loans and other loans to a number of Joint Venture veterinary practices to cover their cash flow requirements and support their longer term growth. The loans advanced to the practices are interest free and either repayable on demand or repayable within 90 days of demand. As detailed in these notes, provisions for expected credit losses are held in respect of operating and other loans to Joint Venture veterinary practices. In line with IFRS 9, judgement is applied in determining both the definition of default and the qualitative and quantitative risk-related criteria used to allocate loans into bands based on the probability of default, and in estimating an appropriate provision to apply to each loan by applying the expected credit loss criteria including the effective interest rate. In assessing the qualitative and quantitative information the Group takes into account factors including current performance against business plan and change in customer numbers. The revenue and profit expectations of the practices are taken into account in determining the length of time that the practice is expected to take in order to repay the loans. This is also the period over which losses are estimated should default occur within the contractual period. The provision is based on forward-looking information, taking into account expected credit losses giving due consideration to the Joint Venture's business plan, as well as macro-economic factors such as growth in the size of the veterinary market, availability of veterinary practitioners and cost inflation within the industry. These judgements are made by management based on their experience and knowledge of the practices. The quantum of Joint Venture receivables and the provision made against these receivables is disclosed in notes 15, 16 and 27 in the annual consolidated financial statements.

Assessment of control with regard to Joint Ventures (significant judgement)

The Group has assessed, and continually assesses whether the level of an individual Joint Venture veterinary practices' indebtedness to the Group, particularly those with high levels of indebtedness, implies that the Group has the practical ability to control the Joint Venture, which would result in the requirement to consolidate. In making this judgement, the Group reviewed the terms of the Joint Venture agreement and the question of practical ability as a provider of working capital to control the activities of the practice. This included consideration of barriers to the Group's ability to exercise such practical or other control, which include difficulty in replacing Joint Venture Partners due to the shortage of veterinarians in the UK and reputational damage within the veterinary network should the Group attempt to exercise control, as well as potential barriers to the Joint Venture Partner exercising their own power over the activities of the practice. We note that under the terms of the Joint Venture agreement, our partners run their practices with complete clinical freedom. The Group is satisfied that on the balance of evidence from the Group's experience as shareholder and provider of working capital support to the practices, it does not have the current ability to exercise control over those practices to which operating loans are advanced and therefore non consolidation is appropriate.

Put and call options (significant estimate)

The Group recognises put and call options over non-controlling interests (NCI) in its subsidiary undertakings as a liability in the consolidated balance sheet. The nature of the Group's option agreements are such that there is an element that is a minimum amount, and a growth element to reward and retain key individuals employed by the acquired business, who are also non-controlling shareholders, and which is linked to improvements in the results of the acquired business. The growth element would be forfeited under certain conditions by the NCI, including if they ceased to be employed by the Group.

Upon initial recognition, the minimum amount is recognised as a liability at fair value, which is estimated as the present value of the future exercise price based upon the fair value of the business at acquisition. For the growth element, the expected amount is charged to the income statement as employment costs over the option period within non-underlying items. The financial liability is valued based on management's best estimate of the future pay out, which is based on the estimated future earnings. The charge is spread over the financial years before the put and call can be exercised for the first time.

The Group consider that no reasonably possible change in assumptions underlying the carrying value of the put and call options would result in a material range of estimation uncertainty in the next 12 months. Therefore, the carrying value of the options is not considered a significant estimate as at 10 October 2019.

Carrying value of inventory (significant estimate)

A provision is made for those items of inventory where the net realisable value is estimated to be lower than cost. Net realisable value is based on both historical experience and assumptions regarding future selling values and disposal channels, and is consequently a source of estimation uncertainty. At 10 October 2019 the inventory provision amounted to £2.6m (11 October 2018: £2.5m). The value of inventory against which an ageing provision is held is £1.9m (11 October 2018: £1.6m). Management consider the range of reasonably possible estimation uncertainty to be immaterial given the value of the provision, the value of inventory against which the provision is held, and the degree of historical accuracy in the provisioning policy. Therefore, the carrying value of inventory is not considered a significant estimate as at 10 October 2019.

IFRS 16 Leases (significant judgement)

Under IFRS 16, the Group recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. The lease liability is initially measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate, adjusted to take into account the risk associated with the length of the lease which ranges between 1 and 27 years. The Group have therefore made a judgement to determine the incremental borrowing rate used. As a result of the significant impact the transition to IFRS 16 has had on the Group's opening balance sheet (£473.2m right of use asset and £506.1m lease liability recognised as at 29 March 2019), the discount rate is considered to be a significant judgement. The discount rate applies ranges between 2.3% and 3.3% dependent on the length of the lease term.

2 Segmental reporting

The Group has two reportable segments, Retail and Vet Group, which are the Group's strategic business units. The Group's operating segments are based on the internal management structure and internal management reports, which are reviewed by the Executive Directors on a periodic basis. The Executive Directors are considered to be the Chief Operating Decision Makers.

The Group is a pet care business with the strategic advantage of being able to provide products, services and advice, addressing all pet owners' needs. Within this strategic umbrella, the Group has two reportable segments, Retail and Vet Group, which are the Group's strategic business units, and a central support function. The strategic business units offer different products and services, are managed separately and require different operational and marketing strategies.

The operations of the Retail reporting segment comprise the retailing of pet products purchased online and in-store, pet sales, grooming services and insurance products. The operations of the Vet Group reporting segment comprise First Opinion practices and specialist referral centres. Central includes Group costs and finance expenses. Revenue and costs are allocated to a segment where reasonably possible.

The following summary describes the operations in each of the Group's reportable segments. Performance is measured based on segment operating profit, as included in the management reports that are reviewed by the Executive Directors. These internal reports are prepared in accordance with IFRS accounting policies consistent with these interim financial statements. All material operations of the reportable segments are carried out in the UK and all revenue is from external customers.

	28 week period ended 10 October 2019
Income Statement	Retail £000	Vet Group £000	Central £000	Total £000
Revenue	479,842	66,496	-	546,338
Gross profit	239,428	28,453	-	267,881
Underlying operating profit/(loss)	38,128	17,581	(4,011)	51,698
Non-underlying items	-	(7,711)	-	(7,711)
Segment operating profit/(loss)	38,128	9,870	(4,011)	43,987
Net financing expenses	(7,260)	(287)	(2,433)	(9,980)
Profit/(loss) before tax	30,868	9,583	(6,444)	34,007

IFRS 16 has been adopted during the 28 week period ended 10 October 2019 and has had a significant impact on the Group's income statement. Further details of the impact of transition to IFRS 16 'Leasing' has been disclosed in note 15.

	28 week period ended 11 October 2018
Income Statement	Retail £000	Vet Group £000	Central £000	Total £000
Revenue	443,731	55,614	-	499,345
Gross profit	226,121	25,289	-	251,410

Underlying operating profit/(loss)	29,352	13,651	(3,181)	39,822
Non-underlying items	-	(29,910)	-	(29,910)
Segment operating profit/(loss)	29,352	(16,259)	(3,181)	9,912
Net financing expenses	-	-	(1,952)	(1,952)
Profit/(loss) before tax	29,352	(16,259)	(5,133)	7,960

Non-underlying items are explained in note 3.
	28 week period ended 10 October 2019
Reconciliation of EBITDA before non-underlying items	Retail £000	Vet Group £000	Central £000	Total £000
Underlying operating profit/(loss)	38,128	17,581	(4,011)	51,698
Depreciation of property, plant and equipment	13,599	1,368	-	14,967
Depreciation of right-of-use assets	36,978	1,207	-	38,185
Amortisation of intangible assets	4,736	242	-	4,978
Underlying EBITDA	93,441	20,398	(4,011)	109,828

	28 week period ended 11 October 2018
Reconciliation of EBITDA before non-underlying items	Retail £000	Vet Group £000	Central £000	Total £000
Underlying operating profit/(loss)	29,352	13,651	(3,181)	39,822
Depreciation of property, plant and equipment	14,390	1,174	-	15,564
Depreciation of right-of-use assets	-	-	-	-
Amortisation of intangible assets	3,790	41	-	3,831
Underlying EBITDA	47,532	14,866	(3,181)	59,217

EBITDA before non-underlying items is defined on page 19.

	28 week period ended 10 October 2019
Segmental revenue analysis by revenue stream	Retail £000		Vet Group £000	Central £000	Total £000
Retail - Food	261,092		-	-	261,092
Retail - Accessories	193,883		-	-	193,883
Retail - Services	24,867		-	-	24,867
Vet Group - First Opinion fee income	-		29,662	-	29,662
Vet Group - Company managed practices	-		11,646	-	11,646
Vet Group - Other income	-		3,888	-	3,888
Vet Group - Specialist	-		21,300	-	21,300
Total	479,842		66,496	-	546,338


		28 week period ended 11 October 2018
Segmental revenue analysis by revenue stream		Retail £000	Vet Group £000	Central £000	Total £000
Retail - Food		237,854	-	-	237,854
Retail - Accessories		183,628	-	-	183,628
Retail - Services		22,249	-	-	22,249
Vet Group - First Opinion fee income		-	28,867	-	28,867
Vet Group - Company managed practices		-	3,350	-	3,350
Vet Group - Other income		-	3,744	-	3,744
Vet Group - Specialist		-	19,653	-	19,653
Total		443,731	55,614	-	499,345

3 Expenses

Included in operating profit are the following:

	28 week period ended 10 October 2019 £000	28 week period ended 11 October 2018 £000
Non-underlying items
Write off and provisions for operating loans, initial set-up loans, and trading balances with Joint Venture veterinary practices	(305)	16,230
Other costs associated with the purchase of Joint Venture veterinary practices	3,920	12,800
Impairment of right-of-use assets following acquisition of Joint Venture veterinary practices	2,209	-
Impairment of property, plant & equipment and intangible assets relating to the review and recalibration exercise of the First Opinion veterinary practices	1,796	-
Increase in fair value of put and call liability	91	880
Total non-underlying items	7,711	29,910
Underlying items
Impairment losses on receivables	600	-
Depreciation of property, plant and equipment	14,967	15,564
Amortisation of intangible assets	4,978	3,831
Depreciation of right-of-use assets	38,185	-
Interest on lease liability	7,798	-
Rentals under operating leases:
Hire of plant and machinery	-	2,809
Property	39	41,297
Operating lease income from third party sublets	(142)	(524)
Rental income from related parties	(3,939)	(4,088)
Share based payment charges	2,380	1,951

Non-underlying items

During the 28 week period ended 10 October 2019 and the 52 week period ended 28 March 2019 the Group completed a review and recalibration exercise of the First Opinion veterinary practices. As part of this review, the Group has completed a buy out of the 'A' shares from the Joint Venture Partners in a total of 51 Joint Venture veterinary practices, with 24 of these occurring in the 28 week period ending 10 October 2019. In addition the Group acquired a total of 8 further practices which did not form part of this review, with 3 of these occurring in the 28 week period ending 10 October 2019.

The non-underlying operating expenses in the period ended 10 October 2019 of £7.7m relate to:

- (£0.3m) in relation to the release of allowances for expected credit losses for operating loans, initial set-up loans, and trading balances to Joint Venture veterinary practices (made by the Group in the 52 week period ended 28 March 2019), which are no longer expected to be recoverable, and therefore were provided for under IFRS 9. At 10 October 2019, all of the outstanding loans with these practices have been written off resulting in a balance of £nil on the balance sheet.

- £3.9m in relation to exit and closure costs (provided for under IAS 37) payable in relation to Joint Venture veterinary practices which the Group has acquired. The release of negative goodwill and impairment of goodwill arising on the acquisition of the Joint Venture veterinary practices, as detailed in note 10, has been included within these costs. This balance includes £0.1m in relation to the profit from the disposal of assets acquired in the 52 week period ended 28 March 2019.

- £2.2m in relation to the write down of right of use assets to their expected recoverable amount, relating to First Opinion veterinary practices acquired in the period with the intention of being closed. Further details are disclosed in note 9.

- £1.8m relating to the impairment of property, plant and equipment and intangible assets relating to the review and recalibration exercise of the First Opinion veterinary practices. Further details are disclosed in notes 8 and 10.

- £0.1m of non-underlying operating expenses relate to an increase in the financial liability for put and call options over shares held by clinicians in Dick White Referrals Limited. The charge represents an increase in the equity 'option' value held by those clinicians based on the Board's best estimate of the future settlement on exercise of the put and call. The charge is classified within operating expenses as a clinician is required to remain an employee of the Group in order to access the full equity value of the option at the time of the exercise.

Income or costs considered by the Directors to be non-underlying are disclosed separately to facilitate year on year comparison of the underlying trade of the business. The Directors consider that changes to the fair value of the put and call liabilities warrant separate disclosure due to the nature of these arrangements as they do not relate to the underlying trade of the business.

The non-underlying operating expenses in the period ended 11 October 2018 of £29.9m relate to:

- £16.2m of additional expected credit losses for operating loans, initial set-up loans, and trading balances (made by the Group) to Joint Venture veterinary practices, which were no longer expected to be recoverable, and therefore which were provided for under IFRS 9;

- £10.3m of additional expected credit losses for guarantees to third parties on bank loans, overdrafts and lease obligations payable by Joint Venture veterinary practices which the Group intended to offer to buy out from Joint Venture Partners after 11 October 2018, and therefore which were provided for under IFRS 9;

- £2.5m of additional provisions for operating cash outflows forecast to be incurred by the Group from 12 October 2018 until the date at which A shares in those Joint Venture veterinary practices which the Group intended to offer to buy out from Joint Venture Partners after 11 October 2018 are acquired, and therefore which were provided for under IAS 37;

- £0.9m of non-underlying operating expenses relate to an increase in the financial liability for put/call options over shares held by clinicians in three specialist referral centres.

Underlying items

The rentals under operating leases disclosed in relation to the 28 week period ended 10 October 2019 relate to leases under short term agreements. These fall under the short-term exemption so are excluded from the requirements of IFRS 16 Leases on the basis that the lease terms are 12 months or less.

In the 28 week period ended 11 October 2018 rentals under operating leases were included within underlying operating expenses. In the 28 week period ended 10 October 2019 rental costs of £42.7m relating to plant and machinery and property, offset by income from sublets, have been replaced by depreciation of the right-of-use assets of £38.2m and interest on the lease liabilities of £7.8m.

4 Earnings per share

Basic earnings per share is calculated by dividing the net profit for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.

Diluted earnings per share is calculated by dividing the net profit for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on the conversion of all dilutive potential ordinary shares into ordinary shares.

	28 week period ended 10 October 2019		28 week period ended 11 October 2018¹
	Underlying trading	After non-underlying items	Underlying trading	After non-underlying items
Profit attributable to equity shareholders of the parent (£000s)	33,287	25,576	30,616	6,222

Basic weighted average number of shares (000s)	500,000	500,000	500,000	500,000
Dilutive potential ordinary shares (000s)	3,887	3,887	2,496	2,496
Diluted weighted average number of shares	503,887	503,887	502,496	502,496
Basic earnings per share	6.7p	5.1p	6.1p	1.2p
Diluted earnings per share	6.6p	5.1p	6.1p	1.2p

¹The comparative period's dilutive potential ordinary shares have been restated to exclude the number of shares held by the EBT, as disclosed in note 6.

5 Taxation

Recognised in the income statement

	28 week period ended 10 October 2019 £000	28 week period ended 11 October 2018 £000
Current tax expense
Current period	9,762	2,134
Adjustments in respect of prior periods	-	(45)
Current tax expense	9,762	2,089
Deferred tax expense
Origination and reversal of temporary differences	(1,395)	(371)
Impact of difference between deferred and current tax rates	64	20
Deferred tax expense	(1,331)	(351)
Total tax expense	8,431	1,738

The UK corporation tax standard rate for the period was 19% (2018: 19%). The March 2016 budget announced a further reduction in the corporation tax rate to 17% from 1 April 2020. Deferred tax at 10 October 2019 has been calculated based on the rate of 17% which is the blended rate at which the majority of items are expected to reverse.

Deferred tax recognised in comprehensive income

28 week period ended

10 October 2019

£000

28 week period ended

11 October 2018

£000

Effective portion of changes in fair value of cash flow hedges

(97)

586

Reconciliation of effective tax rate

	28 week period ended 10 October 2019			28 week period ended 11 October 2018
	Underlying trading £000	Non-underlying items £000	Total £000	Underlying trading £000	Non-underlying items £000	Total £000
Profit for the period	33,287	(7,711)	25,576	30,616	(24,394)	6,222
Total tax expense	8,431	-	8,431	7,254	(5,516)	1,738
Profit excluding taxation	41,718	(7,711)	34,007	37,870	(29,910)	7,960
Tax using the UK corporation tax rate for the period of 19% (28 week period ended 11 October 2018:19%)	7,926	(1,465)	6,461	7,195	(5,683)	1,512
Impact of change in tax rate on deferred tax balances	64	-	64	20	-	20
Expenditure not eligible for tax relief	441	1,465	1,906	84	167	251
Adjustments in respect of prior periods	-	-	-	(45)	-	(45)
Total tax expense	8,431	-	8,431	7,254	(5,516)	1,738

6 Dividends paid and proposed

	28 week period ended 10 October 2019 £000	28 week period ended 11 October 2018 £000
Declared and paid during the period
Final dividend of 5.0p per share (2018: 5.0p per share)	24,771	24,807
Proposed for approval by shareholders at the AGM
Interim dividend of 2.5p per share (2018: 2.5p per share)	12,353	12,385

The trustees of the following holdings of Pets at Home Group Plc shares under the Pets at Home Group Employee Benefit Trusts have waived or otherwise foregone any and all dividends paid in relation to the period ended 10 October 2019 and to be paid at any time in the future (subject to the exceptions in the relevant trust deed) on its respective shares for the time being comprised in the trust funds:

Computershare Nominees (Channel Islands) Limited (holding at 10 October 2019: 5,887,997 shares, holding at 11 October 2018: 4,601,947 shares).

7 Business combinations

Acquisition of Joint Venture veterinary practices

In the 28 week period ended 10 October 2019, the Group has acquired 100% of the 'A' shares of 27 veterinary practices, which were previously accounted for as Joint Venture veterinary practices. These practices were previously accounted for as Joint Venture veterinary practices as the Group only held 100% of the non-participatory 'B' ordinary shares equating to 50% of the total shares. Acquisition of the 'A' shares has led to the control and consolidation of these practices. A detailed explanation for the basis of consolidation can be found in note 1.4 of the annual consolidated financial statements for the 52 week period ended 28 March 2019.

In the 28 week period ended 10 October 2019, £7.1m operating loans, £1.1m initial loans and £0.7m other loans relating to these practices were written off in advance of the acquisitions. In addition £5.9m of bank loans owed by these Joint Venture veterinary practices were repaid by the Group in advance of the acquisitions.

The practices have been categorised into the following groups:

· Joint Venture veterinary practices acquired with the exchange of significant cash consideration, with the intention of trading as a going concern

· Joint Venture veterinary practices acquired without the exchange of significant cash consideration, with the intention of trading as a going concern

· Joint Venture veterinary practices acquired without the exchange of significant cash consideration, with the intention of being closed

Joint Venture veterinary practices acquired with the exchange of significant cash consideration, with the intention of trading as a going concern

In the 52 week period ended 28 March 2019, the entities listed below were all accounted for as a Joint Venture veterinary practice where the Group held 100% of the non-participatory 'B' ordinary shares. On the dates listed below, the Group acquired 100% of the 'A' shares of the practices, leading to control and consolidation.

Subsidiaries acquired

	Principal activity	Date of acquisition	Proportion of voting equity instruments acquired	Total proportion of voting equity instruments owned following the acquisition	Cash consideration transferred £000
Market Harborough Vets4Pets Limited	Veterinary practice	14 August 2019	50%	100%	1
Leicester St Georges Vets4Pets Limited	Veterinary practice	14 August 2019	50%	100%	1
Doncaster Vets4Pets Limited	Veterinary practice	5 September 2019	50%	100%	248

Assets acquired and liabilities recognised at the date of acquisition

The provisional amounts recognised in respect of identifiable assets and liabilities relating to the acquisitions are as follows. The acquisition disclosures have been combined as each acquisition is considered to be individually immaterial to the Group.

	Book value of assets and liabilities acquired £000		Adjustments on acquisition £000	Fair value of assets and liabilities acquired £000
Current assets
Cash and cash equivalents		2	-	2
Trade and other receivables		398	-	398
Inventories		63	-	63
Non-current assets
Tangible fixed assets		643	(340)	303
Current liabilities
Bank loans and overdrafts		(100)	-	(100)
Trade and other payables		(267)	-	(267)
Net assets		739	(340)	399

Goodwill arising on acquisition

	£000
Consideration	250
Less: Fair value of assets acquired	(399)
Negative goodwill arising on acquisition	(149)
Release of negative goodwill	149
Carrying value of goodwill	-

Joint Venture veterinary practices acquired without the exchange of significant cash consideration, with the intention of trading as a going concern

In the 28 week period ended 10 October 2019 the Group has acquired the following veterinary practices, which were previously accounted for as Joint Venture veterinary practices, with the intention of trading as company managed practices.

Subsidiaries acquired

	Principal activity		Date of acquisition		Proportion of voting equity instruments acquired		Total proportion of voting equity instruments owned following the acquisition	Cash consideration transferred for shares £000
Companion Care (Perth) Limited		Veterinary practice		15 April 2019		50%	100%	-
Companion Care (Stevenage) Limited		Veterinary practice		15 April 2019		50%	100%	-
Barnwood Vets4Pets Limited		Veterinary practice		23 April 2019		50%	100%	-
Pentland Vets4Pets Limited		Veterinary practice		24 April 2019		50%	100%	-
Prescot Vets4Pets Limited		Veterinary practice		2 September 2019		50%	100%	-
Leeds Kirkstall Vets4Pets Limited		Veterinary practice		4 October 2019		50%	100%	-
Bearsden Vets4Pets Limited		Veterinary practice		9 October 2019		50%	100%	-

Assets acquired and liabilities recognised at the date of acquisition

The provisional amounts recognised in respect of identifiable assets and liabilities relating to the acquisition are as follows. The acquisition disclosures have been combined as each acquisition is considered to be individually immaterial to the Group.

	Book value of assets and liabilities acquired £000		Adjustments on acquisition £000	Fair value of assets and liabilities acquired £000
Current assets
Cash and cash equivalents		3	-	3
Trade and other receivables		308	-	308
Inventories		73	-	73
Non-current assets
Tangible fixed assets		617	(128)	489
Right of use assets		515	-	515
Non-current liabilities
Lease liabilities		(515)	-	(515)
Current liabilities
Bank loans and overdrafts		(388)	-	(388)
Trade and other payables		(427)	-	(427)
Net assets		186	(128)	58

Goodwill arising on acquisition

	£000
Consideration	150
Less: Fair value of assets acquired	(58)
Goodwill arising on acquisition	92
Impairment of goodwill	(92)
Carrying value of goodwill	-

The consideration shown within the table above relates to the cash settlement of 'A' shareholder Joint Venture Partner loans, which were repaid to the 'A' shareholder at the point of acquisition.

Joint Venture veterinary practices acquired without the exchange of significant cash consideration, with the intention of being closed

In the 28 week period ended 10 October 2019 the Group has acquired the following veterinary practices, which were previously accounted for as Joint Venture veterinary practices. The Group's intention is to close these practices.

Subsidiaries acquired

	Principal activity	Date of acquisition	Proportion of voting equity instruments acquired	Total proportion of voting equity instruments owned following the acquisition	Cash consideration transferred for shares £000
Companion Care (Newport) Limited	Veterinary practice	15 April 2019	50%	100%	-
Davidsons Mains Vets4Pets Limited	Veterinary practice	15 April 2019	50%	100%	-
Marlborough Vets4Pets Limited	Veterinary practice	15 April 2019	50%	100%	-
Sheldon Vets4Pets Limited	Veterinary practice	15 April 2019	50%	100%	-
Thamesmead Vets4Pets Limited	Veterinary practice	15 April 2019	50%	100%	-
Wokingham Vets4Pets Limited	Veterinary practice	15 April 2019	50%	100%	-
Wellingborough Vets4Pets Limited	Veterinary practice	17 April 2019	50%	100%	-
Andover Vets4Pets Limited	Veterinary practice	23 April 2019	50%	100%	-
Bonnyrigg Vets4Pets Limited	Veterinary practice	24 April 2019	50%	100%	-
Musselburgh Vets4Pets Limited	Veterinary practice	24 April 2019	50%	100%	-
Haverfordwest Vets4Pets Limited	Veterinary practice	29 April 2019	50%	100%	-
Linlithgow Vets4Pets Limited	Veterinary practice	28 May 2019	50%	100%	-
East Kilbride (South) Vets4Pets Limited	Veterinary practice	24 June 2019	50%	100%	-
Clitheroe Vets4Pets Limited	Veterinary practice	11 July 2019	50%	100%	-
Carmarthen Vets4Pets Limited	Veterinary practice	15 July 2019	50%	100%	-
Inverurie Vets4Pets Limited	Veterinary practice	24 July 2019	50%	100%	-
Uttoxeter Vets4Pets Limited	Veterinary practice	19 August 2019	50%	100%	-

Assets acquired and liabilities recognised at the date of acquisition

	Book value of assets and liabilities acquired £000		Adjustments on acquisition £000	Fair value of assets and liabilities acquired £000
Current assets
Cash and cash equivalents		19	-	19
Trade and other receivables		357	-	357
Inventories		166	-	166
Non-current assets
Tangible fixed assets		2,610	(2,610)	-
Right of use assets		2,209	-	2,209
Non-current liabilities
Lease liabilities		(2,209)	-	(2,209)
Current liabilities
Bank loans and overdrafts		(305)	-	(305)
Trade and other payables		(691)	-	(691)
Net liabilities		2,156	(2,610)	(454)

Goodwill arising on acquisition

	£000
Consideration	466
Less: Fair value of liabilities acquired	454
Goodwill arising on acquisition	920
Impairment of goodwill	(920)
Carrying value of goodwill	-

The tangible assets have been written down to their expected recoverable amount.

The consideration shown within the table above relates to the cash settlement of 'A' shareholder Joint Venture Partner loans, which were repaid to the 'A' shareholder at the point of acquisition.

In line with IFRS 3, the right of use asset has been brought on at a value equal to the lease liability, adjusted for any unfavourable market conditions. These leases relate to standalone veterinary practices. Subsequent to the acquisition, the right-of-use assets have been fully impaired as the Group does not expect to receive any benefit from these assets. This is disclosed in note 9.

Other acquisitions

On 26 July 2019 the Group acquired the 25% minority interest in Anderson Moores Veterinary Specialists Limited for a consideration of £4.0m leading to 100% of the share capital now being owned.

On 10 September 2019 the Group also acquired a further 15% minority interest in Dick White Referrals Limited for a consideration of £2.4m leading to 91% of the share capital now being owned.

These acquisitions have not impacted goodwill.

Other investments

On 26 June 2019, the Group acquired a 12% minority interest in Tailster.com for a consideration of £1.0m. This has been accounted for as an investment, measured at fair value through other comprehensive income.

8 Property, plant and equipment

	Freehold Property £000	Short leasehold property £000	Fixtures, fittings, tools and equipment £000	Total £000
Cost
Balance at 28 March 2019	2,517	59,402	222,850	284,769
Additions	-	2,679	9,568	12,247
Assets acquired on acquisition	-	465	327	792
Disposals	(150)	(401)	(467)	(1,018)
Balance at 10 October 2019	2,367	62,145	232,278	296,790
Depreciation
Balance at 28 March 2019	275	22,541	138,269	161,085
Depreciation charge for the period	21	2,253	12,693	14,967
Impairment of assets (non-underlying)	-	1,277	413	1,690
Disposals	(23)	(350)	(518)	(891)
Balance at 10 October 2019	273	25,721	150,857	176,851
Net book value
At 28 March 2019	2,242	36,861	84,581	123,684
At 10 October 2019	2,094	36,424	81,421	119,939

	Freehold Property £000	Short leasehold property £000	Fixtures, fittings, tools and equipment £000	Total £000
Cost
Balance at 29 March 2018	2,517	53,715	206,868	263,100
Additions	7	2,341	10,379	12,727
Assets acquired on acquisition	-	57	58	115
Disposals	-	(314)	(187)	(501)
Balance at 11 October 2018	2,524	55,799	217,118	275,441
Depreciation
Balance at 29 March 2018	238	18,717	114,241	133,196
Depreciation charge for the period	31	2,121	13,412	15,564
Disposals	-	(15)	(45)	(60)
Balance at 11 October 2018	269	20,823	127,608	148,700
Net book value
At 29 March 2018	2,279	34,998	92,627	129,904
At 11 October 2018	2,255	34,976	89,510	126,741

9 Leases

As Lessee

Property, plant and equipment comprise owned and leased assets that do not meet the definition of investment property.

The majority of the Group's trading stores, standalone veterinary practices, specialist referral centres, distribution centres and support offices are leased under operating leases, with remaining lease terms of between 1 and 27 years. The Group also has a number of non-property operating leases relating to vehicle, equipment and material handling equipment, with remaining lease terms of between 1 and 6 years.

Information about leases for which the Group is a lessee is presented below.

Right-of-use assets

	Property £000	Equipment £000	Total £000
Cost
Balance at 29 March 2019	463,029	10,090	473,119
Additions	14,294	2,593	16,887
On acquisition	2,724	-	2,724
Disposals	-	-	-
Balance at 10 October 2019	480,047	12,683	492,730
Depreciation
Balance at 29 March 2019	-	-	-
Depreciation charge for the period	35,861	2,324	38,185
Impairment (non-underlying)	2,209	-	2,209
Disposals	-	-	-
Balance at 10 October 2019	38,070	2,324	40,394
Net book value
At 29 March 2019	463,029	10,090	473,119
At 10 October 2019	441,977	10,359	452,336

The costs relating to leases for which the Group applied the practical expedient describes in paragraph 5a of IFRS 16 (leases with a contract term of less than 12 months) amounted to £0.4m in the 28 week period ended 10 October 2019.

The following table sets out the maturity analysis of lease payments, showing the undiscounted lease payments to be received after the reporting date:

Maturity analysis - contractual undiscounted cash flows

	At 10 October 2019 £000	At 29 March 2019 £000
Less than one year	84,106	82,654
Between one and five years	276,255	282,578
More than 5 years	194,974	208,278
Total undiscounted lease liabilities	555,335	573,510
Carrying value of lease liabilities included in the statement of financial position	488,674	506,130
Current	84,106	82,654
Non-current	404,568	423,476

Surplus leases

The Group has a small number of leases on properties from which it no longer trades. A small number of these properties are currently vacant or the sublet is not for the full term of the lease and there is deemed to be a risk on the sublet.

On transition to IFRS 16, the Group has elected to apply the relief option which allows it to adjust the right-of-use asset by the amount of any provision for an onerous lease. £2.7m of the onerous lease provision has been offset against the opening right-of-use asset as at 29 March 2019. The remaining onerous lease provision relates to rates, service charge and other costs and will remain classified within provisions. In the 28 week period ended 10 October 2019, the Group has charged a further £2.2m within non-underlying costs in relation to expected lease obligations (under IFRS 16). This provision has been offset against the right-of-use assets.

The non-underlying impairment loss recognised in the period relates to the veterinary practices acquired in the period with the intention of being closed. In line with IAS 36, the carrying value of these right-of-use assets was assessed for indicators of impairment and the planned closure was considered to be an indicator of impairment. The right-of-use asset has been written down to its expected recoverable value and costs of £2.2m have been charged in the year within non-underlying costs.

Operating leases

The Group has a small number of leases on properties from which it no longer trades, or a subsection of a trading retail store. These properties are sublet to third parties at contracted rates. The Group has classified these leases as operating leases, because they do not transfer substantially all the risks and rewards incidental to ownership of the right-of-use asset.

In line with IAS 36, the carrying value of the right-of-use asset will be assessed for indicators of impairment and an impairment charge will be recognised if necessary. Under IAS 17 an onerous lease provision was recognised where management believed there was a risk of default or where the property remained vacant for a period of time. As part of this review the Group has assessed the ability to sub-lease the property and the right-of-use asset has been written down to £nil where the Group does not consider a sublease likely.

10 Intangible assets

	Goodwill £000	Customer list £000	Software £000	Total £000
Cost
Balance at 28 March 2019	981,322	1,664	47,515	1,030,501
Additions	-	-	5,593	5,593
Balance at 10 October 2019	981,322	1,664	53,108	1,036,094
Amortisation
Balance at 28 March 2019	-	300	29,475	29,775
Amortisation charge for the period	-	77	4,901	4,978
Impairment of assets (non-underlying)	40	66	-	106
Balance at 10 October 2019	40	443	34,376	34,859
Net book value
At 28 March 2019	981,322	1,364	18,040	1,000,726
At 10 October 2019	981,282	1,221	18,732	1,001,235

	Goodwill £000	Customer list £000	Software £000	Total £000
Cost
Balance at 29 March 2018	979,845	771	33,766	1,014,382
Additions	-	-	4,661	4,661
Assets acquired on acquisition	1,860	-	-	1,860
Balance at 11 October 2018	981,705	771	38,427	1,020,903
Amortisation
Balance at 29 March 2018	-	148	21,305	21,453
Amortisation charge for the period	-	41	3,790	3,831
Balance at 11 October 2018	-	189	25,095	25,284
Net book value
At 29 March 2018	979,845	623	12,461	992,929
At 11 October 2018	981,705	582	13,332	995,619

Amortisation and impairment charge

The amortisation charge is recognised in total in operating expenses within the income statement.

Impairment testing

The group of cash generating units (CGUs) are considered to be aligned to the two operating segments as disclosed in note 2. Within the Retail reporting segment, these groups comprise the stores, company website, grooming operations and insurance operations. Within the Vet Group, the groups comprise the First Opinion practices and specialist referral centres.

As at 10 October 2019 and 11 October 2018, the Group is deemed to have two overall groups of CGUs as follows:

	Goodwill
	At 10 October 2019 £000	At 11 October 2018 £000
Retail	586,088	586,088
Vet Group	395,194	395,617
Total	981,282	981,705

The recoverable amount of the CGU group has been calculated with reference to its value in use. The key assumptions of this calculation are shown below:

	28 week period ended 10 October 2019			28 week period ended 11 October 2018
	Retail		Vet Group	Retail	Vet Group
Period on which management approved forecasts are based (years)		5	5	5	5
Growth rate applied beyond approved forecast period		2.0%	3.5%	2.0%	3.5%
Discount rate (pre-tax)		10.9%	10.4%	12.0%	11.0%
Like-for-like sales growth		3.7%	10.7%	4.0%	9.0%
Gross profit margin		47.8%	49.4%	49.0%	51.0%

The goodwill is considered to have an indefinite useful economic life and the recoverable amount is determined based on 'value-in-use' calculations. These calculations use a post-tax cash flow projection based on a five-year plan approved by the Board. For the purposes of intangible asset impairment testing, the model removes all cash flows associated with business units (for example stores or practices yet to open, but within the planning horizon) which the Group has a strategic intention to invest capital in, but has not yet done so, thus ensuring that the future cash flows used in modelling for impairment exclude any cash flows where the investment is yet to take place, in accordance with the requirements of IAS 36 to exclude capital expenditure to improve asset performance. Contributions from and costs associated with new stores and veterinary practices which are already operational at the impairment test date are included in the cash flows. This approach is consistent with impairment reviews carried out in the 2019 financial statements.

The discount rate was estimated based on past experience and a market participant weighted average cost of capital. A post tax discount rate was used within the value in use calculation. The related pre-tax discount rate is disclosed above in line with IAS 36 requirements.

The key assumptions in the business plans for both the Retail and Vet Group CGUs are like-for-like sales growth and gross profit margin. The Retail forecast assumptions reflect continual innovation and our deep understanding of our customers, incorporating assumptions based on past experience of the industry, products and markets in which the CGU operates, in order to generate the detailed assumptions used in the annual budget setting process, and five year strategic planning process. The Vet Group forecast assumptions are based on a deep understanding of the maturity profile of the practices and their performance, incorporating assumptions based on past experience of the industry, services and markets in which the CGU operates, in order to generate the detailed assumptions used in the annual budget setting process, and five year strategic planning process. The projections are based on all available information and growth rates do not exceed growth rates experienced in prior periods. A different set of assumptions may be more appropriate in future years depending on changes in the macro-economic environment and the industry in which each CGU operates.

The Directors have assumed a growth rate projection beyond the five-year period based on market growth rates based on past experience within the Group taking into account the economic growth forecasts within the relevant industries.

The total recoverable amount in respect of goodwill for the CGU group as assessed by the Directors using the above assumptions is greater than the carrying amount and therefore no impairment charge has been recorded in each period, with the exception of the goodwill impaired immediately following the acquisition of certain First Opinion veterinary practices as part of the recalibration exercise (see note 7).

Within the Retail CGU, a number of sensitivities have been applied to the assumptions in reaching this conclusion including:

- Reduction in growth rate applied beyond forecast period by 100 bps

- Increasing the discount rate by 100 bps

- Reduction in gross margin percentage of 100 bps

None of the above, considered reasonably possible changes in assumptions, would result in impairment when applied either individually or collectively.

Within the Vet Group CGU, a number of sensitivities have been applied to the assumptions in reaching this conclusion including:

- Reduction in growth rate applied beyond forecast period by 100 bps

- Increasing the discount rate by 100 bps

- Reduction in gross margin percentage of 100 bps

The directors consider that it is not reasonably possible for the assumptions to change so significantly as to eliminate the excess of the recoverable amount over the carrying value.

11 Other interest-bearing loans and borrowings

	At 10 October 2019 £000	At 11 October 2018 £000	At 28 March 2019 £000
Non-current liabilities
Unsecured bank loans	179,044	192,614	178,778

Terms and debt repayment schedule

At 10 October 2019

Currency

Nominal interest rate

Year of maturity

Face

value

£000

Carrying amount

£000

Revolving credit facility

GBP

LIBOR +1.15%

2023

181,000

179,044

At 11 October 2018

Currency

Nominal interest rate

Year of maturity

Face

value

£000

Carrying amount

£000

Revolving credit facility

GBP

LIBOR +1.40%

2023

195,086

192,614

The Group has a revolving facility of £248.0m, which expires in 2023.

The drawn amount was £181.0m (£195.1m at 11 October 2018) and this amount is reviewed each month. Interest is charged at LIBOR plus a margin based on leverage (net debt: EBITDA). Face value represents the principal value of the revolving credit facility. The facility is unsecured.

Interest-bearing borrowings are recognised initially at fair value, being the principal value of the loan net of attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at a carrying value, which represents the amortised cost of the loans using the effective interest method.

The analysis of repayments on the loans is as follows:

	At 10 October 2019 £000	At 11 October 2018 £000	At 28 March 2019 £000
Within one year or repayable on demand	-	-	-
Between one and two years	-	-	-
Between two and five years	181,000	195,086	181,000
	181,000	195,086	181,000

Pets at Home Group's policy with regard to interest rate risk is to hedge the appropriate level of borrowings by entering into fixed rate agreements. The Group has entered into one fixed rate interest rate swap agreement over a total of £167.5m of the senior facility borrowings at the balance sheet date at a fixed rate of 0.814%, which expires on 30 March 2020. The Group has a further fixed interest rate swap agreement over a total of £137.6m of the senior facility borrowings at the balance sheet date at a fixed rate of 0.918% which commences on 31 March 2020 and expires on 31 March 2021.

The hedges are structured to hedge at least 70% of the forecast outstanding debt for the next 12 months.

12 Financial instruments

Fair value hierarchy

The table below shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy.

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices)

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs)

At 10 October 2019
Carrying amount	Fair value - hedging instruments		FVOCI - equity instruments		Financial assets at amortised cost	Other financial liabilities	Total carrying amount
	£000	£000		£000		£000	£000
Financial assets measured at fair value
Other investments	-	1,040		-		-	1,040
Forward exchange contracts used for hedging	1,794	-		-		-	1,794
	1,794	1,040		-		-	2,834

Financial assets not measured at fair value
Current trade and other receivables	-	-		29,412		-	29,412
Amounts owed by Joint Venture veterinary practices - funding, trading and operating loans	-	-		27,623		-	27,623
Cash and cash equivalents	-	-		44,747		-	44,747
Loans to Joint Venture veterinary practices - initial set up loans	-	-		13,165		-	13,165
Loans to Joint Venture veterinary practices - other loans	-	-		4,045		-	4,045
Other receivables	-	-		870		-	870
	-	-		119,862		-	119,862

Financial liabilities measured at fair value
Fuel forward contract used for hedging	(40)	-		-		-	(40)
Forward exchange contracts used for hedging	(485)	-		-		-	(485)
Interest rate swaps used for hedging	(747)	-		-		-	(747)
	(1,272)	-		-		-	(1,272)
Financial liabilities not measured at fair value
Finance lease liability	-	-		-		(146)	(146)
Trade payables	-	-		-		(109,671)	(109,671)
Amounts owed to Joint Venture veterinary practices	-	-		-		(1,836)	(1,836)
Put and call liability	-	-		-		(2,603)	(2,603)
Other interest-bearing loans and borrowings (note 11)	-	-		-		(179,044)	(179,044)
	-	-		-		(293,300)	(293,300)

At 10 October 2019
Fair value	Level 1		Level 2	Level 3	Total
	£000		£000	£000	£000
Financial assets measured at fair value
Other investments	-		-	1,040	1,040
Forward exchange contracts used for hedging	-		1,794	-	1,794
Financial assets not measured at fair value
Amounts owed by Joint Venture veterinary practices - funding, trading and operating loans	-		-	27,623	27,623
Loans to Joint Venture veterinary practices - initial set up loans	-		-	13,165	13,165
Loans to Joint Venture veterinary practices - other loans	-		-	4,045	4,045
Other receivables	-		-	870	870

Financial liabilities measured at fair value
Fuel forward contract used for hedging	-		(40)	-	(40)
Forward exchange contracts used for hedging	-		(485)	-	(485)
Interest rate swaps used for hedging	-		(747)	-	(747)
Financial liabilities not measured at fair value
Put and call liability	-		-	(2,603)	(2,603)
Other interest-bearing loans and borrowings (note 11)		-	(181,000)	-	(181,000)

At 11 October 2018
Carrying amount			Fair value - hedging instruments		FVOCI - equity instruments		Financial assets at amortised cost	Other financial liabilities		Total carrying amount
			£000	£000		£000		£000		£000
Financial assets measured at fair value
Other investments			-	112		-		-		112
Fuel forward contract used for hedging			29	-		-		-		29
Forward exchange contracts used for hedging			1,802	-		-		-		1,802
Interest rate swaps used for hedging			423	-		-		-		423
			2,254	112		-		-		2,366

Financial assets not measured at fair value
Current trade and other receivables			-	-		18,139		-		18,139
Amounts owed by Joint Venture veterinary practices - funding, trading and operating loans			-	-		25,077		-		25,077
Cash and cash equivalents			-	-		60,295		-		60,295
Loans to Joint Venture veterinary practices - initial set up loans			-	-		12,700		-		12,700
Loans to Joint Venture veterinary practices - other loans			-	-		5,458		-		5,458
Other receivables			-	-		910		-		910
			-	-		122,579		-		122,579

Financial liabilities measured at fair value
Forward exchange contracts used for hedging			(312)	-		-		-		(312)
			(312)	-		-		-		(312)
Financial liabilities not measured at fair value
Current other financial liability			-	-		-		(1,134)		(1,134)
Finance lease liability			-	-		-		(41)		(41)
Trade payables			-	-		-		(87,743)		(87,743)
Amounts owed to Joint Venture veterinary practices			-	-		-		(9,620)		(9,620)
Put and call liability			-	-		-		(8,448)		(8,448)
Other interest-bearing loans and borrowings (note 11)			-	-		-		(192,614)		(192,614)
			-	-		-		(299,600)		(299,600)
	At 11 October 2018
	Fair value	Level 1					Level 2	Level 3	Total
		£000					£000	£000	£000
	Financial assets measured at fair value
	Other investments	-					-	112	112
	Fuel forward contract used for hedging	-					29	-	29
	Forward exchange contracts used for hedging	-					1,802	-	1,802
	Interest rate swaps used for hedging	-					423	-	423
	Financial assets not measured at fair value
	Amounts owed by Joint Venture veterinary practices - funding, trading and operating loans	-					-	25,077	25,077
	Loans to Joint Venture veterinary practices - initial set up loans	-					-	12,700	12,700
	Loans to Joint Venture veterinary practices - other loans	-					-	5,458	5,458
	Other receivables	-					-	910	910
	Financial liabilities measured at fair value
	Forward exchange contracts used for hedging	-					(312)	-	(312)
	Financial liabilities not measured at fair value
	Current other financial liability	-					-	(1,134)	(1,134)
	Put and call liability	-					-	(8,448)	(8,448)
	Other interest-bearing loans and borrowings (note 11)		-				(195,086)	-	(195,086)

		At 28 March 2019
		Carrying amount				Fair value - hedging instruments	FVOCI - equity instruments	Financial assets at amortised cost		Other financial liabilities		Total carrying amount
						£000	£000	£000		£000		£000
		Financial assets measured at fair value
		Other investments				-	112	-		-		112
		Fuel forward contract used for hedging				6	-	-		-		6
		Forward exchange contracts used for hedging				1,604	-	-		-		1,604
						1,610	112	-		-		1,722

		Financial assets not measured at fair value
		Current trade and other receivables				-	-	22,935		-		22,935
		Amounts owed by Joint Venture veterinary practices - funding, trading and operating loans				-	-	28,229		-		28,229
		Cash and cash equivalents				-	-	60,534		-		60,534
		Loans to Joint Venture veterinary practices - initial set up loans				-	-	13,265		-		13,265
		Loans to Joint Venture veterinary practices - other loans				-	-	3,923		-		3,923
		Other receivables				-	-	948		-		948
						-	-	129,834		-		129,834

		Financial liabilities measured at fair value
		Forward exchange contracts used for hedging				(451)	-	-		-		(451)
		Interest rate swaps used for hedging				(124)	-	-		-		(124)
						(575)	-	-		-		(575)
		Financial liabilities not measured at fair value
		Current other financial liability				-	-	-		(6,638)		(6,638)
		Current finance lease liabilities				-	-	-		(120)		(120)
		Trade payables				-	-	-		(108,827)		(108,827)
		Amounts owed to Joint Venture veterinary practices				-	-	-		(3,971)		(3,971)
		Put and call liability				-	-	-		(2,263)		(2,263)
		Other interest-bearing loans and borrowings (note 11)				-	-	-		(178,778)		(178,778)
						-	-	-		(300,597)		(300,597)
	At 28 March 2019
	Fair value			Level 1				Level 2		Level 3	Total
					£000			£000		£000	£000
	Financial assets measured at fair value
	Other investments				-			-		112	112
	Fuel forward contract used for hedging				-			6		-	6
	Forward exchange contracts used for hedging				-			1,604		-	1,604
	Financial assets measured at fair value
Amounts owed by Joint Venture veterinary practices - funding, trading and operating loans			-					-	28,229		28,229
Loans to Joint Venture veterinary practices - initial set up loans			-					-	13,265		13,265
Loans to Joint Venture veterinary practices - other loans			-					-	3,923		3,923
	Other receivables				-			-	948		948
	Financial liabilities measured at fair value
	Forward exchange contracts used for hedging				-			(451)	-		(451)
	Interest rate swaps used for hedging				-			(124)	-		(124)
	Financial liabilities not measured at fair value
	Current other financial liability				-			-	(6,638)		(6,638)
	Put and call liability				-			-	(2,263)		(2,263)
	Other interest-bearing loans and borrowings (note 11)				-			(181,000)	-		(181,000)

Measurement of fair values

The following table shows the valuation techniques used in measuring Level 2 and Level 3 fair values at the balance sheet dates, as well as the significant unobservable inputs used.

Type	Valuation technique	Significant unobservable inputs	Inter-relationship between significant unobservable inputs and fair value measurement


Investment in equity securities	The fair value of investments in unlisted equity securities are considered to be their carrying value as the impact of discounting future cash flows has been assessed as not material and the investment is non-participatory.	Not applicable	Not applicable

Forward exchange contracts and interest rate swaps	Market comparison technique - the fair values are based on broker quotes. Similar contracts are traded in an active market and the quotes reflect the actual transactions on similar instruments.	Not applicable	Not applicable
Other financial liabilities	Other financial liabilities include the fair values of the put and call options over the non-controlling interests of subsidiary undertakings and contingent consideration in relation to acquisitions. The fair values represent the best estimate of amounts payable based on future earnings performance discounted to present value.	Future earnings performance	Fair value linked to increase or decrease in the best estimate of the future earnings performance

Hedge accounting

Cash flow hedges

At 10 October 2019 and 11 October 2018, the Group held the following instruments to hedge exposures to changes in foreign currency and interest rates.

	Maturity
	1-6 months		6-12 months	More than 1 year	1-6 months	6-12 months	More than 1 year
	2019		2019	2019	2018	2018	2018
Foreign currency risk
Forward exchange contracts
Net exposure (£000)		31,050	19,049	-	35,450	31,500	17,900
Average GBP-USD forward contract rate		1.32	1.25	-	1.38	1.38	1.32
Average GBP-EUR forward contract rate		1.11	1.12	-	1.12	-	-

Interest rate risk
Interest rate swaps
Net exposure (£000)		167,500	-	137,600	142,100	-	-
Average fixed interest rate		0.814%	-	0.918%	0.183%	-	-

13 Seasonality of operations

The Group's sales can be sensitive to periods of extreme weather conditions. The Group sometimes sees a reduction in sales during periods of hot weather in the UK, due to reduced customer footfall and reduced demand as pets eat less and generally spend more time outdoors, reducing the need for essentials such as food and cat litter. If temperatures are extremely high for a prolonged period, declines in sales can be material. The number of customers visiting Pets at Home's stores also declines during periods of snow or extreme weather conditions affecting the local catchment area. In addition, the sales of certain products and services designed to address pet health needs, such as flea and tick problems, can also be seasonal, increasing in times of warm and wet weather.

Traditionally the financial performance of the Group in the four-week period to the end of December is marginally stronger than in the other periods, due to Christmas purchasing. Purchasing of Accessories is also more prevalent during this season. Timing of the holiday season and any adverse weather conditions that may occur during that season impacting delivery may adversely affect sales in our stores.

14 Related parties

Veterinary practice transactions

The Group has entered into a number of arrangements with third parties in respect of veterinary practices.

The transactions entered into during the period, and the balances outstanding at the end of the period are as follows:

	10 October 2019 £000	11 October 2018 £000	28 March 2019 £000
Transactions
- Fees for services provided to Joint Venture veterinary practices	30,632	30,039	55,071
- Rental and other occupancy charges to Joint Venture veterinary practices	6,613	6,819	12,671
Total income from veterinary practices	37,245	36,858	67,742
Acquisitions
- Consideration for Joint Venture veterinary practices acquired (note 7)	866	-	3,149
Balances
Included within trade and other receivables:
- Funding for new practices	735	1,236	291
- Operating loans
- Gross value of operating loans	34,588	46,876	42,207
- Allowance for expected credit losses held for operating loans	(7,700)	(23,035)	(14,269)
- Net operating loans	26,888	23,841	27,938
Included within other financial assets and liabilities:
- Loans to Joint Venture veterinary practices - initial set up loans
- Gross value of initial set up loans	13,165	15,190	14,345
- Allowance for expected credit losses for loans to Joint Venture veterinary practices	-	(2,490)	(1,080)
- Net initial set up loans	13,165	12,700	13,265
- Loans to other related parties (other loans)
- Gross value of other loans	4,045	5,458	5,002
- Allowance for expected credit losses held for other loans	-	-	(1,079)
- Net other loans	4,045	5,458	3,923
Included within trade and other payables:
- Trading balances	(1,836)	(9,620)	(3,971)
- Total amounts receivable from veterinary practices (before provisions)	50,697	59,140	57,874

Fees for services provided to related party veterinary practices are included within revenue and relate to charges for support services offered in such areas as clinical development, promotion and methods of operation as well as service activities including accountancy, legal and property. In accordance with IFRS 15, revenue in the 28 week period ended 10 October 2019, the 52 week period ended 28 March 2019 and the 28 week period ended 11 October 2018 excludes irrecoverable fee income from Joint Venture veterinary practices.

Funding for new practices represents the amounts advanced by the Group to support veterinary practice opening costs. The funding is short term and the related party Joint Venture veterinary practice draws down their own bank funding to settle these amounts outstanding with the Group shortly after opening.

Trading balances represent costs incurred/income received by the Group in relation to the services provided to the veterinary practices that have yet to be recharged.

Operating loans represent amounts advanced to related party Joint Venture veterinary practices to cover working capital requirements and support their longer term growth. The loans advanced to the practices are interest free and either repayable on demand or repayable within 90 days of demand. No facility exists and the levels of loans are monitored in relation to review of the practices performance against business plan. Based on the projected cash flow forecast on a practice by practice basis, the funding is often expected to be required for a number of years. As practices generate cash on a monthly basis it is applied to the repayment of brought forward operating loans. For immature practices, loan balances may increase due to operating requirements. Based on a projected cash flow forecast on a practice by practice basis, the funding is expected to be required for a number of years. The balances above are shown net of allowances for expected credit losses held for operating loans of £7.7m (28 March 2019: £14.3m, 11 October 2018: £23.0m).

In the 28 week period ended 10 October 2019, the value impairment losses recognised in the income statement amounted to £8.9m, which relates to operating loans (£7.1m), initial set up loans (£1.1m) and other loans (£0.7m). In the 52 week period ended 28 March 2019 the value of impairment losses recognised in the income statement amounted to £12.6m, which relates to operating loans (£10.7m), initial set up loans (£1.5m) and other loans (£0.4m).

At 10 October 2019, the Group has committed to provide funding to related party Joint Venture companies of £nil (28 March 2019: £nil).

The Group is a guarantor for the leases for veterinary practices that are not located within Pets at Home stores.

15 IFRS 16 transition note

The Group has adopted IFRS 16 Leases on 29 March 2019 using the modified retrospective approach. The cumulative effect of adopting IFRS 16 has been recognised as an adjustment to the opening balance sheet as at 29 March 2019, with no restatement of comparable information and no impact on retained earnings.

Under the modified retrospective approach the opening right-of-use asset can be measured one of two ways;

a) as if the Group had applied IFRS 16 since the commencement date using its incremental borrowing rate at the date of initial application.

b) measured at an amount equal to the lease liability at the date of initial application.

The Group elects to measure the right-of-use asset at an amount equal to the lease liability at the date of initial application. The opening right-of-use asset is adjusted for remaining deferred income relating to landlord incentives and rent free periods, in addition to any outstanding prepayments in relation to the leases.

As part of the initial transition, the Group has elected to apply the relief option which allows it to adjust the right-of-use asset by the amount of any provision for onerous leases recognised in the balance sheet, immediately before the date of initial application.

The Group applies the practical expedient, not to reassess whether a contract is or contains a lease at the date of initial application. This means the Group applies IFRS 16 to all contracts entered into before 29 March 2019 and identified as leases in accordance with IAS 17 and IFRIC 4.

The Group has elected to use the exemptions proposed by the standard on lease contracts for which the lease term ends within 12 months as of the date of initial application, except for leases which are expected to be renewed or replaced by a lease with a term greater than 12 months. These leases are accounted for as short-term leases and the lease payments associated with them are recognised as an expense.

The impact on the consolidated income statement in the 28 week period ended 10 October 2019 is as follows:

	Note	28 week period ended 10 October 2019 (excluding IFRS 16 adjustments)				28 week period ended 10 October 2019 (including IFRS 16 adjustments)
	Note	Underlying trading £000	Non-underlying items (note 3) £000	Total £000	IFRS 16 adjustment £000	Underlying trading £000	Non-underlying items (note 3) £000	Total £000
Revenue	2	546,338	-	546,338	-	546,338	-	546,338
Cost of sales		(277,857)	(7,925)	(285,782)	-	(277,857)	(7,925)	(285,782)
Impairment losses on receivables	3	(600)	305	(295)	-	(600)	305	(295)
Gross profit		267,881	(7,620)	260,261	-	267,881	(7,620)	260,261
Selling and distribution expenses		(170,287)	-	(170,287)	4,493	(165,794)	-	(165,794)
Administrative expenses		(50,389)	(91)	(50,480)	-	(50,389)	(91)	(50,480)
Operating profit	3	47,205	(7,711)	39,494	4,493	51,698	(7,711)	43,987
Financial income		220	-	220	33	253	-	253
Financial expense		(2,402)	-	(2,402)	(7,831)	(10,233)	-	(10,233)
Net financing expense		(2,182)	-	(2,182)	(7,798)	(9,980)	-	(9,980)
Profit before tax		45,023	(7,711)	37,312	(3,305)	41,718	(7,711)	34,007
Taxation	5	(9,059)	-	(9,059)	628	(8,431)	-	(8,431)
Profit for the period	(i)	35,964	(7,711)	28,253	(2,677)	33,287	(7,711)	25,576

The impact on the statement of financial position as at 29 March 2019 is as follows:

		At 28 March 2019 £000	IFRS 16 adjustment	At 29 March 2019 £000
Non-current assets
Property, plant and equipment		123,684	-	123,684
Right-of-use assets	(ii)	-	473,119	473,119
Intangible assets		1,000,726	-	1,000,726
Other non-current assets	(iii)	18,653	1,738	20,391
		1,143,063	474,857	1,617,920
Current assets
Inventories		68,209	-	68,209
Other financial assets	(iii)	1,610	675	2,285
Trade and other receivables	(v)	68,886	(9,385)	59,501
Cash and cash equivalents		60,534	-	60,534
		199,239	(8,710)	190,529
Total assets		1,342,302	466,147	1,808,449
Current liabilities
Trade and other payables	(v)	(185,833)	4,946	(180,887)
Corporation tax		(10,238)	-	(10,238)
Lease liabilities	(iv)	-	(82,654)	(82,654)
Provisions	(v)	(15,353)	1,929	(13,424)
Other financial liabilities		(7,333)	-	(7,333)
		(218,757)	(75,779)	(294,536)
Non-current liabilities
Other interest-bearing loans and borrowings		(178,778)	-	(178,778)
Other payables	(v)	(33,579)	32,335	(1,244)
Lease liabilities	(iv)	-	(423,476)	(423,476)
Provisions	(v)	(1,687)	773	(914)
Other financial liabilities		(2,497)	-	(2,497)
Deferred tax liabilities		(4,028)	-	(4,028)
		(220,569)	(390,368)	(610,937)
Total liabilities		(439,326)	(466,147)	(905,473)
Net assets		902,976	-	902,976
Equity attributable to equity holders of the parent
Ordinary share capital		5,000	-	5,000
Consolidation reserve		(372,026)	-	(372,026)
Merger reserve		113,321	-	113,321
Translation reserve		(36)	-	(36)
Cash flow hedging reserve		837	-	837
Retained earnings		1,155,880	-	1,155,880
Total equity		902,976	-	902,976

(i) Income statement

Under previous lease accounting standards (IAS 17), lease costs were recognised on a straight line basis over the term of the lease. The Group recognised these costs within operating expenses and costs of £43.8m would have been recognised in the 28 week period ended 10 October 2019 if IAS 17 had still been applied. Under IFRS 16 these costs have been removed and replaced with depreciation of the right-of-use assets, which has resulted in a depreciation charge of £38.2m and a net impact to profit before tax of £3.3m for the 28 week period ended 10 October 2019.

The impact on net financing expense in the 28 week period ended 10 October 2019 was £7.8m.

The net impact of applying IFRS 16 to the profit for the period in the 28 week period ended 10 October 2019 was a reduction of £2.7m after tax.

This difference to profit for the period represents a timing difference in the recognition of costs under IFRS 16 compared to IAS 17. IAS 17 recognises costs on a straight line basis, whereas under IFRS 16, finance charges are recognised in relation to the value of the lease liability and costs will therefore reduce as the liability reduces.

(ii) Right-of-use assets

A right-of-use asset is recognised under IFRS 16, representing the Group's contractual right to access an identified asset under the terms of the lease contract.

(iii) Other non-current assets

Sublease assets have been recognised in respect of finance leases under IFRS 16 for a number of the properties which are subleased to third parties. The finance lease is assessed by reference to the right-of-use asset under the head lease rather than the underlying asset. A number of subleases continue to be accounted for as operating leases which has resulted in no change to their accounting treatment under IFRS16.

(iv) Lease liabilities

A lease liability is recognised under IFRS 16, representing the Group's contractual obligation to minimum lease payments during the lease term. The lease liability is initially measured at the present value of the remaining lease payments, discounted using the rates based on the Group's incremental borrowing rate. The weighted average discount rate used to discount the lease liability as at 10 October 2019 was 2.8%. The element of the liability payable in the next 12 months is shown within current liabilities, with the balance shown in non-current liabilities.

(v) Working capital

Under IAS 17, balances relating to lease incentives, rent prepayments, accruals, onerous leases and similar balances were held within other receivables, other payables and provisions. Under IFRS 16 these balances are reflected in either the right-of-use asset or the lease liability. On transition to IFRS 16, the Group has elected to apply the relief option which allows it to adjust the right-of-use asset by the amount of any provisions for onerous leases. At 29 March 2019, £2.7m of the onerous lease provision has been offset against the opening right-of-use asset. The Group has used the C10(b) practical expedient for onerous leases.

The following table details the reconciliation between the operating lease obligations as at 28 March 2019 and the opening lease liability balance at 29 March 2019:

Maturity analysis - contractual undiscounted cash flows

	Land and buildings £000	Other £000	Total £000
Operating lease obligations as at 28 March 2019	571,897	9,910	581,807
Working capital movements	(8,989)	-	(8,989)
Relief option for leases of low value	-	-	-
Other	-	692	692
Gross lease liabilities at 29 March 2019	562,908	10,602	573,510
Discounting	(66,727)	(653)	(67,380)
Total lease liabilities at 29 March 2019	496,181	9,949	506,130

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