At nearly 60 years in the business – about 418 years in dog years – Petco Health and Wellness Co. Inc.’s revenues remain on the upswing.
During an Aug. 24 earnings call with investors, Petco CEO Ron Coughlin said the company posted net revenue of $1.53 billion for its second quarter, up 3.4% year-over-year as part of its Q2 2023 financial results. Petco’s second quarter marked the San Diego company’s 19th consecutive quarter of comparable sales growth.
Petco’s positive second-quarter results were led by vigorous 30.6% year-over-year growth in its services and other business – particularly in veterinary care – and a 6.8% increase in sales of pet food, healthcare supplements and other consumables.
CEO
Petco
“Our veterinary business continues to scale and both vet and grooming are capturing more market share,” Petco CEO Ron Coughlin said during the call. “Our consumables business continues its solid growth trajectory. We believe the strength of our differentiated pet health and wellness offering and the value proposition of our unique 360-degree ecosystem and omnichannel delivery model is the right one to capture the long-term megatrends of humanization and premiumization and are fundamental pillars of our long-term strategy.”
Coughlin said the company’s services business “once again delivered exceptional performance, growing 17% and is now over a $700 million run rate business.”
Focused Profitability Plan
Not every part of Petco’s 360-degree ecosystem delivered as positively as its services business. The company reported its supplies and companion animal business shrunk 9.4% versus the prior year. Merchandise was also down 9% in the quarter.
“Categories like apparel, crates and toys remain soft as consumers slowed spending in these products,” Coughlin said. “We are taking targeted actions in this area to drive performance, including improving price competitiveness, screening the offering to more value-oriented initiatives, and expect stabilization over time.”
Coughlin pointed to a recent example of a targeted action that resulted in “capturing opportunities” for Petco.
“As a result of the extreme heat, we were able to drive our flea and tick business leading to RX sales up nearly 20% year-over-year,” he said.
Another challenge for Petco is a “bifurcation” of its pet food business with customers either migrating to more premium food products or going the other direction of “value seeking” with cheaper products, Coughlin said.
To address market challenges, Coughlin said Petco has a focused plan that will include taking additional actions to protect profitability, including tight cost controls, and programmatic initiatives across the business.
“We’re taking numerous strategic actions to strengthen our business, including initiatives to unlock a targeted $150 million in cost savings and productivity enhancements by the end of fiscal 2025 (from merchandise, supply chain, and general and administrative categories),” he said, adding that the company projects $40 million in savings by the end of year one.
He said that those actions, combined “with the enduring competitive advantages of our differentiated offering, will position us even better to deliver sustainable and profitable growth for the long term.”
In August Petco expanded its differentiated offerings by enhancing its partnership with DoorDash to make app-based ordering easier and by expanding its partnership with human-grade dog food company Ollie beyond direct-to-consumer ordering to include availability at 800 retail outlets nationwide.
Coughlin said the company pushes to drive operational excellence while investing for long-term, profitable growth, and that Petco remains “relentlessly focused on controlling our controllables to optimally navigate today’s consumer dynamic.”
One controllable Petco is looking to control is its debt. The company in Q2 paid down $25 million in principal on its term loan, and in August paid down an additional $15 million. Petco now has made a total of $75 million in principal payments year-to-date and is targeting a total of $100 million in principal payments for FY 2023.
Wall Street Reaction
Even with its cost-cutting plans in place, Petco reduced its FY 2023 guidance. The company is still forecasting revenue in the range of $6.15 billion to $6.27 billion, but lowered its EBITDA (earnings before interest, tax, depreciation and amortization) forecast from the $540-520 million range to a range of $480-460 million. Earnings per share were also forecast downward from $.40-.48 per share to $.24-.30 per share.
The new guidance sent Petco (NASDAQ: WOOF) shares tumbling down around 20% from around $6.60 per share to around $5.40.
Petco Health and Wellness Co. Inc.
FOUNDED: 1965
CEO: Ron Coughlin
HEADQUARTERS: Rancho Bernardo, San Diego
BUSINESS: Full-service company supporting pet care and wellness
REVENUE: $5.97 billion (2022)
STOCK: WOOF (NASDAQ)
EMPLOYEES: 27,000
WEBSITE: Petco.com
CONTACT: 858-453-7845
SOCIAL IMPACT: Petco’s Love foundation has raised more than $25 million helping reunite about 18,000 lost pets with their families and has granted $9 million to in-need shelters and animal welfare organizations.
NOTABLE: Petco’s Yummy Memorial Pet Cancer Fund that launched in February 2023 – named in memory of CEO Ron Coughlin’s beloved white English Labrador retriever named Yummy – helps support Petco partners unable to afford costly treatment for pets with cancer.
