Petco Plunges 13% Despite Solid Q3 Results


Despite reporting better-than-expected third-quarter results, shares of American pet retailer Petco Health and Wellness Company, Inc. (WOOF) plunged 13.2% and closed at $21.45 on November 18. The company also increased its full-year fiscal 2021 guidance aided by strong underlying performance and economic recovery.

Better-Than-Expected Results

WOOF’s adjusted earnings increased a whopping 185.7% year-over-year to $0.20 per share, outpacing analyst estimates of $0.17 per share.

Furthermore, the company earned $1.44 billion in net revenue, up 15% against the year-ago quarter, outpacing analysts’ estimates of $1.37 billion. Also, comparable sales climbed 15% year-over-year, backed by accelerating vet business, digital growth, recurring revenue programs, and solid consumable sales.

Management Comments

Ron Coughlin, Chairman and CEO of Petco, said, “Our focus on long-term, sustainable growth is powered by continued execution against our transformation, with one of the fastest veterinary expansions in history, further enhancement of our digital competitive advantages, expansion of our merchandise differentiation through powerful owned and exclusive brands, and our incredible Petco Partners who are improving more and more pet lives every single day in a challenging environment.”

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Increased Guidance

Based on the current economic environment and business momentum, Petco increased its full-year fiscal 2021 outlook.

Petco now expects FY21 net revenue to be between $5.725 billion and $5.775 billion against the consensus estimate of $5.67 billion.

Additionally, FY21 adjusted earnings are expected to fall in the range of $0.86 per share to $0.88 per share against the consensus estimate of $0.86 per share.

Analysts’ View

Responding to Petco’s solid beat and raise performance, Wells Fargo analyst Zachary Fadem said, “WOOF is clearly taking share, and flow-through was in line vs. Q2 levels. As we look at the event path from here, we see another beatable Q4 outlook, a Q1 analyst day on deck (likely laying out long-term opportunities/ targets), and FY22 estimates that we view as overly conservative (flat/down EPS growth). All in, we see an entry point, as Q3 print reactions are proving increasingly out of whack, estimates are moving higher, and we see value at 12x 2022E EV/EBITDA”

Fadem reiterated his Buy rating on the stock with a price target of $30, which implies upside potential of 39.9% to current levels.

Overall, the stock commands a Strong Buy consensus rating based on 6 Buys and 2 Holds. The average Petco Health and Wellness price target of $28 implies 30.5% upside potential to current levels. Shares have lost 16.7% over the past six months.

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