2023-06-15 09:23:20 ET
Summary
- Petco Health and Wellness sees little top line growth and a major decline in earnings.
- Petco has an omnichannel sales business model, however it is struggling to compete against larger and more digitally aligned peers.
- Cautious of decreasing gross profit margin and downward trending stock price.
The pet industry is booming; in 2022, Americans spent $136.8 billion on their pets, with sales of $143.6 billion projected for 2023. However, not all companies are successfully tapping into this opportunity. Although Petco Health and Wellness Company, Inc. ( WOOF ) beat EPS and revenue expectations in its latest earnings report, its performance appears weak compared to larger and smaller peers in the pet industry regarding fundamentals and its downward trending stock price.
One year stock trend versus peers (SeekingAlpha.com)
While they have physical pet care centers and newer full-service veterinary hospitals, as well as a small digital channel, their operations are not performing well despite the industry's favorable conditions. Due to this, I advise against investing in this stock and recommend a hold rating for now.
Company overview
Petco Health and Wellness is a well-established company founded in 1965 with over 25 million active customers, 1,428 pet care centers across the USA, Mexico and Puerto Rico and 257 full-service veterinary hospitals in addition to its digital channel. Petco is in an exciting growth industry that saw US-based consumers spend $136.8 billion on pets in 2022, an 11% YoY increase, of which $35.9 billion was related to vet care and product sale. It is predicted that this will increase to $37 billion in 2023.
Annual pet expenditure in the USA (americanpetproducts.org)
While Petco is clearly in a booming pet industry in which consumers spend increasingly large amounts on their pets, the company has soft guidance for its FY2023 due to consumer discretionary headwinds . If we look at the company's top-line growth, there is little to get excited about. YoY revenue growth has increased by 4.22% due to inflation rather than an increase in sales, with a 3-year CAGR of 11.17%.
Financial overview and valuation
When examining Petco's financials, it appears that their revenue has remained static while their earnings have decreased over time. The company's top line growth is not particularly impressive, with only a 4.22% increase in revenue year-over-year largely due to inflation. Looking at the past three years, there has been a CAGR of 11.17%.
Revenue TTM by quarter (SeekingAlpha.com)
The company indicates challenges due to the recessionary economic environment; however, if we compare its results to fellow peers in the industry, Petco is underperforming. Its largest competitor, Chewy ( CHWY ), reported double-digit growth YoY and across a 3-year revenue CAGR.
Relative peer comparison (SeekingAlpha.com)
Furthermore, we can see that the company's gross profit margin has reduced year on year from 43.37% in FY 2018 to 39.63% in the last TTM. Comparing gross profit margin to its peers, we see that although its margin has been reducing, it ranks amongst the top of its peers.
Annual gross profit (SeekingAlpha.com) Relative gross profit margin (SeekingAlpha.com)
A concerning issue for this company is the decline in their EPS. In the previous quarter, their non-GAAP EPS was $0.06, a decrease from $0.17 in Q1 2022. The actual EPS GAAP was negative $0.01. The management forecasts an EPS range of $0.40 to $0.48 for FY2023, which is below analyst predictions. They also anticipate sales to be approximately $6.15 to $6.275 billion for the entire year.
Normalised basic EPS (SeekingAlpha.com)
Petco posted a positive levered free cash flow of $59.85 million TTM, and below we can see its TTM balance sheet compared to fellow peers in the industry. We see a very high debt intake at $3.03 billion. The company has a revolving credit facility with up to $500 million , maturing on March 2026.
Balance sheet versus peers (SeekingAlpha.com)
When we examine the stock price performance of WOOF over the past year, we can see that its value has decreased by 45.38%. In contrast, its bigger competitor has provided investors with a return of 46.80%.
Relative one year price return (SeekingAlpha.com)
The stock has a high price-to-earnings ratio of 20.56 compared to the consumer discretionary sector median of 14.30. Its price-to-book ratio is attractive at 0.99. However, the downward trending earnings remain a significant concern, and we see little top-line growth. The stock has underperformed the S&P over the last year.
Quant rating (SeekingAlpha.com)
Risks and final thoughts
Petco, a company in the consumer discretionary sector, has been adversely affected by the current economic situation more than its competitors. This can be attributed to the increased competition in the industry and the company's relatively small digital presence compared to newer players in the market. Despite being a part of a thriving pet industry, Petco has consistently delivered unsatisfactory and downward-trending results. Sales have only marginally increased year on year, while earnings have significantly dropped. We are observing heightened competition in the industry from companies that are benefiting from a strong digital presence and brand loyalty. Although Petco has an omnichannel business model, we have not witnessed substantial growth, and management has provided a soft EPS guidance for FY2023. Therefore, I do not suggest purchasing WOOF stock and recommend a hold rating.
For further details see:
Petco Health and Wellness: Little Top Line Growth And Poor Earnings