Petco (WOOF)

Pet-focused retailer Petco (NASDAQ:WOOF) met Wall Streets revenue expectations in Q3 CY2025, but sales fell by 3.1% year on year to $1.46 billion. Its GAAP profit of $0.03 per share was significantly 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.

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $6 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 struggled to increase demand as its $6 billion of sales for the trailing 12 months was close to its revenue three years ago (we compare to 2019 to normalize for COVID-19 impacts). This was mainly because it closed stores.

This quarter, Petco reported a rather uninspiring 3.1% year-on-year revenue decline to $1.46 billion of revenue, in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. This projection doesn't excite us and suggests its newer products will not accelerate its top-line performance yet.

Number of Stores

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

Petco has generally closed its stores over the last two years, averaging 1.2% annual declines.

When a retailer shutters stores, it usually means that brick-and-mortar demand is less than supply, and it is responding by closing underperforming locations to improve 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 gives us insight into this topic because it measures organic growth for a retailer's e-commerce platform and brick-and-mortar shops that have existed 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 Petco is attempting to boost same-store sales by closing stores (fewer locations sometimes lead to higher same-store sales).

In the latest quarter, Petco’s same-store sales fell by 2.2% year on year. This decrease represents a further deceleration from its historical levels. We hope the business can get back on track.

At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.

Petco’s gross margin is slightly below the average retailer, giving it less room to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged a 38% gross margin over the last two years. Said differently, Petco had to pay a chunky $61.96 to its suppliers for every $100 in revenue.

Petco’s gross profit margin came in at 38.9% this quarter, in line with the same quarter last year. On a wider time horizon, Petco’s full-year margin has been trending up over the past 12 months, increasing by 1 percentage points. If this move continues, it could suggest the company has less pressure to discount products and is realizing better unit economics due to stable or shrinking input costs (such as labor and freight expenses to transport goods).

Petco was roughly breakeven when averaging the last two years of quarterly operating profits, inadequate for a consumer retail business. This result isn’t too surprising given its low gross margin as a starting point.

On the plus side, Petco’s operating margin rose by 1.9 percentage points over the last year.

This quarter, Petco generated an operating margin profit margin of 2%, up 1.7 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.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

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 2.3 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’s free cash flow clocked in at $60.65 million in Q3, equivalent to a 4.1% margin. This result was good as its margin was 4.8 percentage points higher than in the same quarter last year, building on its favorable historical trend.

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 2.6%, 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 $2.97 billion of debt exceeds the $237.4 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $398 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.

It was good to see Petco beat analysts’ EPS expectations this quarter. We were also glad its EBITDA outperformed Wall Street’s estimates. On the other hand, its EBITDA guidance for next quarter missed. Zooming out, we think this was a mixed quarter. The stock traded up 7.3% to $3.17 immediately after reporting.

Updated: December 4, 2025 at 9:42 PM EST

When considering an investment in Petco, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

We cheer for all companies serving everyday consumers, but in the case of Petco, we’ll be cheering from the sidelines. To kick things off, its revenue growth was weak over the last three years, and analysts don’t see anything changing 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 three 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 14.9x. This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $3.69 on the company (compared to the current share price of $3.08).

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.