This Is A Sleeper Growth Story You Need To Know About

A Billion Dollar Industry, And Growing

There is a sleeper story within the retail sector I think you should know about. It’s worth a conservative $75 billion annually, more robust estimates put the industry at $225 billion, and growing. The growth is driven by demographic trends, supported by labor markets, boosted by consumer health and ready to deliver results for shareholders. What am I talking about? The pet care industry.

You might snicker but pet care trends show an acceleration in spending that is not expected to soon end. Total spending on U.S. pets totaled a mere $17 million in 1994 and has grown 344% in the time since. Over the last year spending jumped more than 4% to hit it’s record high and this is just the beginning. At 4% per year that’s more than $3 billion in new spending each year.

Most of the money is going toward food, about 41%, while the rest is spread between supplies, care, equipment, and the purchase of live animals. There is such a demand for products and high-quality products it is causing an expansion in sales as well as within each vertical. Take dog food for example. The demand for high-quality dog food has led the market to differentiate into premium brands including vegetarian, organic, and free-range options.

General Mills, Pets To The Rescue!

General Mills (GIS) just reported earnings that were juiced by notable strength in the pet segment. The company’s revenue grew 0.2% over the last year, just shy of consensus, while EPS came in above expectations. Revenue in the pet segment grew 16% and 1% above consensus which, in addition to product/pricing mix, contributed to the bottom-line results. Specifically, the addition of Blue Buffalo is driving growth. Blue Buffalo is the leading brand in the wholesome natural food category and seeing strong bottom-line growth in its core brands.

 

Shares of General Mills surged more than 2.0% on the news. The intraday action shows some indecision within the market but the outlook is bullish. General Mills is expecting to produce 1-2% organic sales growth over the next year across all segments with results led by pets. EPS growth is expected in the range of 3% to 5% depending on product mix and pricing. The stock pays a nice dividend so there is an incentive to buy. At today’s prices, the yield is about 3.75% and relatively healthy, the payout ratio is just above 58%.

A Pure Play On Pet Care And eCommerce

Chewy Inc (CHWY) made headlines earlier this year when it IPO’d. An eCommerce offshoot of Petsmart Inc, the pure-play has not performed so well since the IPO but times are changing. The 3Q earnings report reaffirmed the company's ability to make money and sparked a reversal in share prices.

Chewy’s revenue grew 40.1% over the past 12 months as growth strategies and consumer trends drive results. Product mix and pricing, especially in the fast-growing food category, helped deliver a 400 basis point improvement to the bottom line. The company posted a net loss for the quarter but that’s to be expected, Chewy is a growth stock and using all available funding to fuel acquisitions and expansions.

Chewy’s real strength lie in its cash flow. The company is capitalizing on its position at the nexus of pet-care and eCommerce to drive recurring revenue. Shoppers can choose to use the Auto-Ship feature to automatically send food and medicine on a monthly or even weekly basis. Over the last year, the active customer base grew 33%, spent 11% more per shopper, and accounted for 70% of total revenue.

The stock popped on the news, moving up more than 4% off the second of two bottoms. The move confirmed support at the short-term moving average as well and brought price action up to an important point of resistance. If broken, the $28.50 level will confirm reversal in this stock.