67% of U.S. households own a pet, according to the 2019-2020 APPA National Pet Owners Survey.  The APPA estimates that In 2019, a whopping $95.7 billion was spent on pets in the U.S. And, according to Expert Market Research, the pet market is further expected to grow at a CAGR of 5.5% between 2021 and 2026 and be valued at $136.4 billion by 2026.

Capitalizing on this impressive growth are 2 pet retailers: Chewy (CHWY) and Petco Health & Wellness (WOOF).  Let’s take a look at both of these companies and determine which stock is a better buy.

Chewy

Chewy (CHWY) was founded in 2011 and is already valued at a market cap of $42 billion. In fiscal 2021, analysts expect the company to report sales of $7.06 billion, indicating a year over year growth of 45.7%. In fiscal 2022, its top-line is forecast to grow by 25% to $8.84 billion which means its price to sales multiple of 5.9x is quite reasonable.

In the U.S., pet spending rose to $99 billion in 2020, up from $95.7 billion in 2019, according to a report from the American Pet Products Association. We can see that Chewy is growing at a faster rate compared to the overall market.

Further, the transition to online sales in the pet category is all set to explode in the next few years. In 2014, online sales in the pet industry accounted for just 2% of total sales. This figure rose to 15% in 2019 and is forecast to touch 35% by the end of 2024. Additionally, the average person in the U.S. spends over $1,100 each year on pet services and products.

Chewy continues to expand its portfolio of services and is now venturing into the pet telehealth and pharmacy verticals. In the last earnings call, the company’s management confirmed they are looking at aggressive expansion plans and aim to create a marketplace for service providers including pet groomers and dog walkers.

In the first nine months of fiscal 2021, the company increased sales at an annual rate of 46% year over year and its customer base increased 40% to 17.8 million. These customers spent an average of $363 each year on the Chewy platform which is significantly lower than the national average. We can see Chewy has the opportunity to increase customer spending and drive top-line growth over the long-term.

Petco Health & Wellness

Shares of Petco Health & Wellness (WOOF) went public on January 13 this year. The company issued 48 million Class A shares priced at $18 which meant it raised $864 million in the IPO. This price was higher than the $14 to $17 range the company provided in its regulatory filings with the SEC.

Petco Health and Wellness stock touched a record high of $31.08 per share in intra-day trading shortly and is currently priced at $19.93. Similar to most other IPOs, investors should also expect Petco Health to remain volatile until market participants can make sense of its valuation.

In the last three years, Petco has expanded its products beyond the traditional pet supplies and food categories. It has now included veterinary services as well as pet insurance and pet grooming. The company is also focused on creating multiple subscription services including Petco Vital Care and PupBox.

In fiscal 2018 Petco’s same-store sales were down 1% and rose by 4% in 2019. In the first three quarters of fiscal 2021, same-store-sales were up 9.6% year over year. The company has also managed to lower its net loss to $24.8 million, compared with $94 million in the prior-year period.

In its prospectus, Petco management disclosed the net proceeds from the IPO will be used to pay down a portion of the company’s debt that stood at $1.8 billion. A strong balance sheet coupled with rising sales and profit margins makes it a strong bet for long-term investors.

The verdict

We can see that Chewy and Petco are both part of expanding addressable markets. The two companies are well poised to beat the overall market in 2021 and beyond. However, if you have to choose between the two stocks, I favor Chewy which is trading at an attractive valuation and growing at a rapid clip.  Further, because WOOF just recently became a publicly traded company there is little data available right now, which makes it even more difficult to make an informed investment decision.

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CHWY shares were trading at $103.29 per share on Monday afternoon, up $1.73 (+1.70%). Year-to-date, CHWY has gained 14.91%, versus a 4.17% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...

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