Petco Health And Wellness Company Pulls Back After Strong Quarter

Petco Health Is A Buy On Earnings Strength And Outlook 

Petco Health (NASDAQ: WOOF) is not a new business but it is a new stock having IPO’d just 4 months ago. That said, it is one of the best-positioned petcare company’s on the market and offers incredibly diversified exposure to the industry. If you weren’t aware, the pet care industry is worth billions globally and growing at a high single-digit pace the analysts predict will persist for many years. Not only are more of us turning to pets, but those of that do tend to have more than one and spend lots of money taking care of them. As for Petco, its business spans every vertical in the industry including eCommerce, the single biggest winner of the pandemic. 

"We entered 2021 with momentum, and delivered record quarterly sales in Q1 driven by our strong execution and unique model across digital and in our Pet Care Centers," said Ron Coughlin, Chairman and Chief Executive Officer of Petco. "We're attracting new customers and gaining market share in a growing category through our unique end to end health and wellness ecosystem. There are more pets in homes than ever and the 1.2 million net new customers we gained in the quarter is a multi-year high, that provides an annuity for years to come.”

Petco Health Blows Past The Consensus 

Petco Health had a great quarter proving not only the strength of the industry but the strength of the business model. The company reported $1.41 billion in net revenue which is up 27% from last year, 30% over the past two years, and beat the consensus by $.014 billion or about 1100 basis points. The gains were driven by a strong net add of 1.2 million new customers, the 3rd quarter with gains above 1 million and the 10th quarter of YOY growth. 

Moving down, the company’s margins turned positive in the quarter with net income rising more than $38 million to $7.6 million. This includes a non-cash charge of $20 related to debt refinancing aimed at enhancing profitability in future quarters. Adjusted EBITDA increased by 45% to $125.7 million driving positive cash flow and free cash flow. On the bottom line, the $0.03 in GAAP earnings missed by a $0.04 but is mitigated by the debt reduction. The adjusted $0.17 beat $0.08. 

The Q1 results were strong enough for the company to feel comfortable raising guidance. Execs are now predicting revenue and earnings in a range well above the previous and the consensus estimates. This leads us to believe the analysts will soon be upping their ratings and price targets and we think the guidance is low. The $5.25 to $5.35 billion in revenue forecast by the company assumes sequential deceleration/steady business over the next four quarters and we just don’t see that happening. 

Petco Health Improves The Balance Sheet Health 

Petco Health made some big moves in terms of the balance sheet over the past quarter and we are impressed. The company used a combination of proceeds from the IPO and FCF to pay down 50% of the debt. This brings total debt down to $1.7 billion greatly improving both the company’s leverage and coverage ratios. While there is still work to be done this goes a long way toward strengthening the company’s position and ability to fuel growth in the coming years. 

The Technical Outlook: Petco Is Trending Higher 

Shares of Petco pulled back after the Q1 earnings report but have already hit bottom and bounced higher. The price action confirms support at the short-term moving average and the budding uptrend. The indicators are consistent with upward price action so we are confident the stock will retest the $26 level at least. A break above the $26 level would be bullish and could take the price up to $28 and $30 by the end of the summer.