Petco (WOOF)

Pet-focused retailer Petco (NASDAQ:WOOF) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 2.3% year on year to $1.49 billion. On the other hand, next quarter’s revenue guidance of $1.49 billion was less impressive, coming in 0.8% below analysts’ estimates. Its GAAP loss of $0.04 per share was $0.01 above analysts’ consensus estimates.

Company Overview

Historically known for its window displays of pets for sale or adoption, Petco (NASDAQ:WOOF) is a specialty retailer of pet food and supplies as well as a provider of services such as wellness checks and grooming.

Some retailers try to sell everything under the sun, while others—appropriately called Specialty Retailers—focus on selling a narrow category and aiming to be exceptional at it. Whether it’s eyeglasses, sporting goods, or beauty and cosmetics, these stores win with depth of product in their category as well as in-store expertise and guidance for shoppers who need it. E-commerce competition exists and waning retail foot traffic impacts these retailers, but the magnitude of the headwinds depends on what they sell and what extra value they provide in their stores.

Competitors that offer pet products and services include Chewy (NYSE:CHWY), Tractor Supply Company (NASDAQ:TSCO), and Academy Sports and Outdoors (NASDAQ:ASO) as well as private companies such as PetSmart.

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $6.08 billion in revenue over the past 12 months, Petco is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale.

As you can see below, Petco’s 6.4% annualized revenue growth over the last five years (we compare to 2019 to normalize for COVID-19 impacts) was tepid as it didn’t open many new stores.

This quarter, Petco reported a rather uninspiring 2.3% year-on-year revenue decline to $1.49 billion of revenue, in line with Wall Street’s estimates. Company management is currently guiding for a 2.5% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a deceleration versus the last five years. This projection is underwhelming and indicates its products will face some demand challenges.

Number of Stores

A retailer’s store count often determines how much revenue it can generate.

Over the last two years, Petco has kept its store count flat while other consumer retail businesses have opted for growth.

When a retailer keeps its store footprint steady, it usually means demand is stable and it’s focusing on operational efficiency to increase profitability.

Note that Petco reports its store count intermittently, so some data points are missing in the chart below.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at brick-and-mortar shops for at least a year.

Petco’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat. This performance isn’t ideal, and we’d be skeptical if Petco starts opening new stores to artificially boost revenue growth.

In the latest quarter, Petco’s same-store sales fell by 1.3% year on year. This decline was a reversal from its historical levels.

We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.

Petco’s unit economics are higher than the typical retailer, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it averaged a decent 37.7% gross margin over the last two years. That means for every $100 in revenue, $62.27 went towards paying for inventory, transportation, and distribution.

In Q1, Petco produced a 38.2% gross profit margin, in line with the same quarter last year and analysts’ estimates. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Although Petco was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 9.6% over the last two years. Despite the consumer retail industry’s secular decline, unprofitable public companies are few and far between. It’s unfortunate that Petco was one of them.

On the plus side, Petco’s operating margin rose by 20.3 percentage points over the last year, as its sales growth gave it operating leverage. Still, it will take much more for the company to show consistent profitability.

In Q1, Petco generated an operating margin profit margin of 1.1%, up 2.2 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Although Petco’s full-year earnings are still negative, it reduced its losses and improved its EPS by 10.5% annually over the last five years. The next few quarters will be critical for assessing its long-term profitability.

In Q1, Petco reported EPS at negative $0.04, up from negative $0.17 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street is optimistic. Analysts forecast Petco’s full-year EPS of negative $0.24 will reach break even.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Petco broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, an encouraging sign is that Petco’s margin expanded by 1.2 percentage points over the last year. We have no doubt shareholders would like to continue seeing its cash conversion rise as it gives the company more optionality.

Petco burned through $43.87 million of cash in Q1, equivalent to a negative 2.9% margin. The company’s cash burn was similar to its $41.06 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Petco’s five-year average ROIC was negative 3.1%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer retail sector.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Petco’s $2.92 billion of debt exceeds the $133.3 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $350.3 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Petco could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Petco can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We liked that Petco exceeded analysts’ EBITDA expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, both its revenue and EBITDA guidance for next quarter missed Wall Street’s estimates, and this is weighing on shares. The stock traded down 3.8% to $3.51 immediately following the results.

Updated: June 12, 2025 at 10:39 PM EDT

Before deciding whether to buy Petco or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Petco doesn’t pass our quality test. First off, its revenue growth was a little slower over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its declining EPS over the last four years makes it a less attractive asset to the public markets. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Petco’s P/E ratio based on the next 12 months is 18.9x. This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $3.68 on the company (compared to the current share price of $2.62).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.