Petco (WOOF)

Pet-focused retailer Petco (NASDAQ:WOOF) met Wall Street’s revenue expectations in Q4 CY2024, but sales fell by 7.3% year on year to $1.55 billion. On the other hand, next quarter’s revenue guidance of $1.49 billion was less impressive, coming in 4.2% below analysts’ estimates. Its GAAP loss of $0.05 per share was significantly below 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 performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $6.12 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 grew its sales at a tepid 6.6% compounded annual growth rate over the last five years (we compare to 2019 to normalize for COVID-19 impacts) as its store footprint remained unchanged and it barely increased sales at existing, established locations.

This quarter, Petco reported a rather uninspiring 7.3% year-on-year revenue decline to $1.55 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 grow 2.5% over the next 12 months, a deceleration versus the last five years. This projection doesn't excite us and implies its products will see some demand headwinds.

Number of Stores

Petco has kept its store count flat over the last two years 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 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 been relatively stable over the last two years but was below most retailers. On average, the company’s same-store sales have grown by 1.1% per year. Given its flat store base over the same period, this performance stems from a mixture of increased foot traffic at existing locations and higher e-commerce sales as demand shifts from in-store to online.

In the latest quarter, Petco’s year on year same-store sales were flat. This was a meaningful deceleration from its historical levels. We’ll be watching closely to see if Petco can reaccelerate growth.

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 37.8% gross margin over the last two years. That means for every $100 in revenue, $62.19 went towards paying for inventory, transportation, and distribution.

This quarter, Petco’s gross profit margin was 38%, up 1.8 percentage points year on year and exceeding analysts’ estimates by 0.7%. 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 9.5% 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 19 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 Q4, Petco generated an operating profit margin of 1.1%, up 1.1 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Although Petco’s full-year earnings are still negative, it reduced its losses and improved its EPS by 3.9% annually over the last five years. The next few quarters will be critical for assessing its long-term profitability.

In Q4, Petco reported EPS at negative $0.05, up from negative $0.08 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Petco’s full-year EPS of negative $0.37 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, we can see that Petco failed to improve its margin over the last year. Its unexciting margin and trend likely have shareholders hoping for a change.

Petco’s free cash flow clocked in at $59.04 million in Q4, equivalent to a 3.8% margin. This result was good as its margin was 3.9 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.

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 2.5%, 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 $2.93 billion of debt exceeds the $165.8 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $336.5 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 were impressed by Petco’s EBITDA and full-year EBITDA guidance, which exceeded Wall Street’s estimates. On the other hand, its EPS missed and its revenue guidance for next quarter fell short. Zooming out, we think this was a decent quarter featuring some areas of strength but also some blemishes. The stock traded up 8.2% to $2.65 immediately following the results.

Updated: May 21, 2025 at 10:37 PM EDT

Before making an investment decision, investors should account for Petco’s business fundamentals and valuation in addition to what 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. For starters, 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 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 59.5x. This valuation tells us a lot of optimism is priced in - you can find better investment opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $3.53 on the company (compared to the current share price of $3.57).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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