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Hold Petco (WOOF) as It Rides on Continued Demand for Pet Care

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The stock of Petco Health and Wellness Company (WOOF - Free Report) is poised for long-term growth on the back of surging demand for petcare.

The $5-billion pet care company provides an entire ecosystem of care for pets, both online and offline. In the recently reported quarter, its earnings delivered healthy figures, underscored by 50% growth in recurring revenue customers, which reflects customers’stickiness for its products and services and creates earnings stability since recurring nature of revenue will keep in flowing quarter after quarter.

This was the 11th consecutive quarter of comp sales growth, driven by recurring revenue offerings, rapidly expanding vet business and digital growth

The top-line performance reflected 19% adjusted EBITDA and 127% adjusted EPS growth. During the quarter, Petco added around 1 million customers, comprising millennials and Gen Z buyers, primarily.

Apart from 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. 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 2021 earnings results reflect a strong business momentum. The company now expects revenues to grow 14-16% to $5.6-$5.7 billion and EPS in the band of 81-85 cents. Earlier, revenues were expected to grow 11-13% and the EPS was estimated from 73 cents to 76 cents.

With its focus on omni-channel sales, Petco is uniquely positioned to lead the petcare market, which is witnessing an increased pet ownership, a greater spend per pet and the continued humanization and premiumization of the 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 for tapping a growing petcare market. The market size of petcare products surpassed the $232-billion mark in 2020 and is likely to see a CAGR of above 6.1% between 2021 and 2027.

Other companies that are relying on the pet wellness industry include PetIQ, Inc.(PETQ - Free Report) , IDEXX Laboratories, Inc. (IDXX - Free Report) and Phibro Animal Health Corp. (PAHC - Free Report) among others.

Petco currently has a Zacks Rank #3 (Hold) and declined 26.6% year to date after gaining 112% since the pandemic hit last year and shot up the pet adoption rates. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

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The share price depreciation this year so far should not raise a concern for long-term investors as the company’s strong growth in an attractive market will aid its stock price to appreciate going forward.