San Diego, Calif.-based Pet products retailer Petco Health and Wellness Company, Inc.’s (WOOF) revenues rose 19% year-over-year to $1.40 billion in its fiscal second quarter ended July 31, surpassing the $1.37 billion consensus estimate. This can be attributed to a 20% rise in comparable sales. Its adjusted EBITDA came in at $155.10 million, up 19% from the same period last year. And its net income rose 1062% from the prior-year quarter to $74.86 million. Its EPS improved 696% from its year-ago value to $0.28, which is 40% higher than the Street’s $0.20 estimate.

Shares of WOOF have gained 10.2% since the company reported its quarterly results on August 19. However, the stock has declined 26.2% in price since its stock market debut on January 14. It is currently trading 21% above its all-time low of $17.86, which it hit on March 5. Moreover, the stock is trading below its $22.36 200-day moving average.

The weak price performance reflects depressed investor optimism regarding the stock, owing to its low-profit margins. WOOF’s 5.87% trailing-12-month ROE is 65.5% lower than the 17.03% industry average.

Here’s what could shape WOOF’s performance in the near term:

Growing Pet Market and Competition

U.S. pet industry expenditures came in at $103.60 billion in 2020, surpassing the $100 billion mark for the first time. This can be attributed to higher pet adoption rates last year as people were locked down at home. This trend will likely continue in the current year. The American Pet Products Association expects pet expenditures to rise 5.8% year-over-year to $109.60 billion in 2021.

The pet industry is expected to grow at a stable rate over the long term due to the humanization of pets and premiumization of pet products because  pets  tend to be treated as family members. While specialty retailer WOOF is expected to benefit from the overall growth of this industry, the company should face stiff competition from its peers and mass retailers of pet products. According to Moody’s Senior Credit Officer Mickey Chadha, approximately 50% of the pet industry share is held by retail behemoths such as Walmart Inc. (WMT) and Target Corporation (TGT). In addition, Amazon.com, Inc. (AMZN) holds an approximately 6%-7%  market share. Thus, WOOF has a long way to go to become a dominant player in the industry.

Mixed Valuation

In terms of non-GAAP forward P/E, WOOF is currently trading at 25.53x, which is 62.7% higher than the 15.70x industry average. In addition, its 14.40 forward EV/EBITDA ratio  is 36.2% higher than the 10.57 industry average.

However, the stock’s 0.90 non-GAAP forward PEG multiple  is 14.1% lower than the 1.05 industry average. In addition, its forward Price/Sales, Price/Book, and Price/Cash Flow ratios of 1, 2.60, and 13.29, respectively, compare with 1.27, 3.67, and 13.81 industry averages.

Consensus Rating and Price Target Indicate Potential Upside

Of the nine Wall Street analysts that rated WOOF, seven rated it Buy, while one rated it Hold and one rated it Sell. The $26.38 12-month median price target indicates a 21.4% potential upside. The price targets range from a low of $16.00 to a high of $31.00.

POWR Ratings Reflect Neutral Prospects

WOOF has an overall C rating,  which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

The stock has a C grade for Value and Momentum. Its mixed valuation justifies the Value grade. In addition, the stock is currently trading above its 50-day moving average of $20.40 but below its 200-day moving average of $22.36, which is in sync with the Momentum grade.

Of the 72 stocks in the D-rated Consumer Goods industry, WOOF is ranked #47.

Beyond what we’ve stated above, we have rated WOOF for Growth, Quality, Sentiment, and Stability. Get all WOOF ratings here.

Bottom Line

WOOF is a burgeoning company in the pet industry with promising short-term growth prospects. However, in a highly competitive industry, its relatively low-profit margins could hinder its long-term growth. Furthermore, e-commerce behemoth AMZN, which holds a 6-7% pet market share, is entering the retail industry by opening brick-and-mortar stores across the country. This will likely impact WOOF’s market share adversely unless it takes active steps to expand its customer base. Thus, we think investors should wait until WOOF strengthens its market reach and improves its profit margins before investing in the stock.

How Does Petco Health and Wellness Company (WOOF) Stack Up Against its Peers?

While Petco Health and Wellness Company, Inc. (WOOF) has an overall C (Neutral) rating, one might want to consider looking at its peers Ennis, Inc. (EBF), The Swatch Group AG (SWGAY), and Kering (PPRUY) that have  overall B (Buy) ratings.

WOOF shares were trading at $21.82 per share on Wednesday afternoon, up $0.20 (+0.93%). Year-to-date, WOOF has declined -25.78%, versus a 20.90% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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