Is Petco Stock A Buy?

Petco Health and Wellness Company (NASDAQ:WOOF) is an American pet retail chain founded in 1965. Between then and now, it went public through three separate initial public offerings (IPOs). Now that it’s been listed for a year, is Petco stock a buy?

The third time could be a charm for investors seeking a value buy with a possible exit strategy. Prior IPOs in 1994 and 2002 ended in the company being acquired by private equity investors. This most recent IPO in January 2021 raised $817 million to pay off its debt load.

However, WOOF share price failed to perform. It dropped by nearly 30 percent from its highs, but this latest dip has investors wondering if that makes for a buying opportunity.

The Pet Retail Market Size Is $100 Billion+

An astonishing 70 percent of American households have a pet, with dogs and cats enjoying a healthy market lead. Over 90.5 million homes own a pet, with 69 million owning a dog and 45.3 million owning a cat.

Of course, there’s plenty of overlap, as many people own multiple pets. And ownership is popular across all age ranges. About 14 percent of Gen Z own a pet, while 24 percent of Gen X does. That has created to a $109.6 billion pet industry that includes pet food & treats, supplies, vet care, and more.

Everything in that category can be found at Petco (WOOF), which is essentially the Walmart (NYSE:WMT) of pets and pet supplies. Based in San Diego, California, the company operates over 1,500 stores. It also has a strong e-commerce presence through its website and app. It grew sales by 11 percent and cut its debt in half from $3.3 billion in January to $1.7 billion by year end.

Is The 3rd Woof IPO A Charm?

Even leading into the IPO, Petco was focused on cutting out debt. But by the fourth quarter of 2021, its total debt increased to $1.7 billion from $1.6 billion at the mid-year point. 

Unfortunately, the company has a high price-to-earnings ratio above 40x, which makes it pricey for retail. For comparison, Target Corporation (NYSE:TGT) trades under 20 P/E. However, it’s in line with retailers like Costco Wholesale Corporation (NASDAQ:COST) and Walmart (WMT).

Petco (WOOF) does offer services that cannot be conducted online though – like vet visits. Buying heavy bulk items like cat litter or dog food are better served also through brick and mortar locations versus online.

Altogether, this drove a relatively positive financial forecast for the company’s fiscal year.

Petco Top Line Is Growing By 11% 

Petco’s fiscal year guidance paints a rosy picture. It expects around $5.7 billion in net revenue, with $575 million adjusted EBITDA. That would leave it at about $0.85 earnings per share (EPS), assuming $80 million in interest expenses and a 26 percent tax rate.

Petco liquidity isn’t extensive: $221.5 million in cash and cash equivalents heading into the holiday season. It also has another $441 million of revolving credit available.

Profit margins continue to grow and operating income has increased by over 35 percent year over year. The company has assets totaling just under $6.5 billion, an increase of about $400 million from the start of 2021.

Should I Buy Petco Stock?

The Petco IPO was listed at $18.00 per share, much higher than the forecasted range of $14 to $17 per share. The the stock ballooned shortly thereafter. However, WOOF share price has been turbulent since, ranging from $17.86 to $31.08 over the 52-week period.

It has the financial strength to rise back to a $6 billion valuation, but it’s unclear if or when it will generate a 2x or 10x return for investors (if ever). At best a discounted cash flow forecast projection infers a share price of $25.70, representing almost 25% upside.

Petco has done what most retailers cannot. It has proven that it can combine brick-and-mortar distribution with e-commerce reach to create a successful business model. 

Petco Risk Factors

Pet retailers like Petco and PetSmart often find themselves in the crosshairs of organizations like PETA. The pro-animal-rights group protested the brands on multiple occasions for sales of exotic birds for example.

Just because it’s an established company doesn’t equate to a strong moat that protects it from rivals.

Chewy Inc (NYSE:CHWY) is up over 80 percent since its 2019 IPO. This online pet retailer offers many of the same products as Petco but lacks the on-site veterinary services. Of course, its parent company PetSmart (which owns 63.5 percent of the company) can provide this.

That could spell trouble for Petco as it attempts to expand in a highly competitive industry segment.

Is Petco Stock a Buy: The Bottom Line

Petco’s 2021 IPO is its third – that alone should be a warning sign to potential investors that the company has operational challenges that has historically led to a revolving door of going public and private multiple times.

The company operates in a tough market, but it has the financial resources to tackle competitors head-on. That could be enough to make it an attractive investment for those seeking value.

The price volatility is high which is a double-edged sword. It makes holding on difficult through the ups and downs, but it also translates to opportunity. With almost 25% upside at the time of research, value buyers can feel quite comfortable that there’s a margin of safety in their favor to ride an uptrend over the medium to long term.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.