Petco (WOOF) Down 26% This Year So Far: What Should You Do?
Petco (WOOF) with its omni-channel distribution and a well-diversified product offering is strongly placed in the pet care industry, which is growing...
Shares of Petco Health and Wellness Company WOOF have declined 26.3% year to date after gaining 112% since the pandemic hit last year and caused a surge in pet adoption rates.
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The depreciation in the stock value this year should not be a cause for concern for long-term investors as the company’s strong growth in an attractive market will aid its price performance going ahead.
The $5-billion pet care company provides an entire ecosystem of care for pets both online and offline. It is well placed in an industry, which is growing fast and is resilient to economic cycles and macro trends. As a result, industry projections forecast accelerated growth for years to come, largely owing to the seismic 3-million plus incremental new pet households in 2020 and a heightened adoption activity, both of which are continuing into 2021.
Courtesy of the pet humanization trend, spend per pet increased 4%, annually, since 2015 with increasing pet ownership among the millennials, who have 29% higher average spend.
This combination of more pets and greater spend per pet led the industry experts to raise their forecasts in 2020 to as high as 7% through at least 2024 with higher growth projected in key growth areas like premium food, services, vet and digital where Petco has strength.
In the most recently reported quarter, the company’s earnings seemed healthy, underscored by 50% growth in recurring revenue customers, reflecting long-term predictability in the metric. The period marked the 11th consecutive quarter of comp sales growth, driven by recurring revenue offerings, rapidly expanding vet business and digital growth.
Top-line performance represented 19% adjusted EBITDA and 127% adjusted EPS growth. During the quarter, Petco added around 1 million customers, who are primarily millennials and Gen Z customers.
Along with growing its revenues, the company is focusing on deleveraging its balance sheet. Net debt was reduced to 1.5 billion from $3.1 billion a year earlier. A free cash flow of $103 million was generated in the first six months of 2021, up 142% year over year.
A guidance raise following the second-quarter earnings further reflects a strong business momentum. The company now expects revenue growth in the range of 14-16% to $5.6-$5.7 billion and EPS within 81-85 cents. Earlier, revenues were expected to grow 11-13% while the EPS was envisioned in the 73-76 cents band.
With its focus on omni-channel sales, Petco is uniquely positioned to lead the pet care market, which is witnessing increased pet ownership, greater spend per pet and the continued humanization and premiumization of pets.
Capital expenditures associated with the building of vet hospitals, digital innovation and supply chain will drive long-term growth.
The company with its wide product and service bouquet along with its omni-channel presence is perfectly poised to tap a growing pet care market. The market size for pet-care products surpassed $232 billion in 2020 and is poised to see a CAGR of more than 6.1% between 2021 and 2027.
Thus, Petco offers a good long-term option, which should be retained in an investment portfolio. The stock carries a Zacks Rank #3 (Hold), currently.
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