Shares in Pets at Home closed down 2.3 per cent after the company warned of higher costs due to the introduction of the National Living Wage next year.
The company, which has 405 shops as well as 353 veterinary practices and 191 grooming salons, said George Osborne's new wage of £7.20 per hour, which is being introduced in April, will impact costs by an incremental £2m in the next financial year to 2017.
Chief executive Nick Wood warned there would also be "a modest rise in prices" in the longer term to mitigate the costs.
Like-for-like merchandise sales edged up by just one per cent in the six months to 8 October, due to tough comparatives on the previous summer when a strong flea season meant more customers rushed out to buy products.
However, across its services division, like-for-like sales jumped by a better-than-expected 10.5 per cent, thanks to a rise in customers booking a grooming session or a vet appointment for their pets.
Pre-tax profits increased by 11.8 per cent to £425.2m compared with £40.5m in the first half of last year, thanks to a lift gross margins by 27 basis points to 54.1 per cent.
Pets at Home’s loyalty scheme, VIP club, has over 3.9m members after an extra 700,000 people signed up in the first half. That means that over a quarter of the UK cat population and a third of the UK dog population is now registered on its database.
Wood said the loyalty scheme was encouraging members to use other services in the business, with a 30 per cent rise in VIP Club customers using its veterinary practices as a result.
"Our core strategic drivers remain strong and I am pleased with the progress we have made in the first half of the year, highlighted by a 13.4 per cent rise in earnings per share.
"Pet services have again grown significantly, benefitting from sustained organic growth in both our vet and grooming businesses, together with encouraging results from the acquisition of our first specialist referral hospital. In Merchandise we continue to lead the market and grow our share in Advanced Nutrition foods," Wood said.
Analysts at Liberum reiterated "buy" but reduced their target price from 350p to 335p on the back of higher wage costs and investment in other parts of the business.
"We remain Buyers on the long term view that growth in services offers for a high quality investment case," Liberum said.