Why Petco (WOOF) Stock Is Falling Today

Jabin Bastian /
2024/04/02 10:41 am EDT

What Happened:

Shares of pet-focused retailer Petco (NASDAQ:WOOF) fell 10.6% in the after-market session after the company received a double rating downgrade as Bank of America analysts downgraded the stock's rating from Buy to Underperform (Sell) and lowered the price target from $5 to $1.5. The analysts cited some of the reasons for the shift in sentiment, adding, "We expect weak P&L for Petco to deteriorate further into the first half of this year, adding to eleven straight quarters of declining profitability... Another worrisome sign: Petco has slowed opening new vet hospitals, an initiative that helps lift sales and differentiate the company vs. peers."

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Petco? Access our full analysis report here, it's free.

What is the market telling us:

Petco's shares are somewhat volatile and over the last year have had 40 moves greater than 5%. But moves this big are very rare even for Petco and that is indicating to us that this news had a significant impact on the market's perception of the business. 

The biggest move we wrote about over the last year was 4 months ago, when the stock dropped 11.6% on the news that the company reported third quarter results, which missed analysts' expectations on nearly every key metric we track: revenue growth, same-store sales growth, gross margin, adjusted EBITDA, EPS, and free cash flow. Management acknowledged the challenges posed by the current consumer environment and expressed a commitment to swiftly address these issues by enhancing customer appeal, implementing cost controls, and managing capital more tightly. It's worth noting a significant decline in GAAP operating income and EPS, thanks to a one-time $1.22 billion goodwill impairment charge. Even when adjusting for the non-recurring expense, this was still a bad quarter for Petco.

Petco is down 37.2% since the beginning of the year, and at $1.99 per share it is trading 81.4% below its 52-week high of $10.73 from May 2023. Investors who bought $1,000 worth of Petco's shares at the IPO in January 2021 would now be looking at an investment worth $67.52.

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