Petco Health & Wellness, a leading pet goods retailer, is experiencing a decline in discretionary spending at its stores, leading to concerns among investors. In fact, the company's shares (ticker: WOOF) are on track to reach a record-low close since its initial public offering in January 2021. After the release of its second-quarter financial results, Petco's stock plummeted by 23% to $5.07, according to Dow Jones Market Data.
Analysts at Wells Fargo expressed their pessimism about the results. Although Petco's adjusted earnings met Wall Street's expectations and its net revenue of $1.53 billion surpassed estimates and showed year-over-year growth, there was a significant problem in the company's supplies and companion-animal business. This particular segment experienced a 9.4% decline in revenue compared to the previous year.
Wells Fargo analysts, taking into account this decline and concerns regarding gross margins, lowered their price target for Petco's stock from $11 to $7 in a recent report. They also adjusted their earnings forecasts for the 2023 and 2024 fiscal years but maintained an Overweight rating on the stock.
During an earnings call, Chief Financial Officer Brian LaRose addressed the issue of declining discretionary spending. He explained that the company anticipated stabilization in this area, but it has yet to materialize. Consequently, gross margins are under pressure.
In light of these challenges, Petco has revised its outlook for fiscal 2023. The company now expects earnings before interest, taxes, depreciation, and amortization (EBITDA) in the range of $460 million to $480 million, compared to its previous forecast of $520 million to $540 million. Additionally, the company has lowered its expectations for earnings per share.
LaRose assured investors that cost-saving measures are being implemented to mitigate the impact of these challenges, and early signs indicate some quick wins. While the primary benefits of these cost actions will be seen in 2024 and 2025, there will be some modest benefit in 2023.
Despite these reassurances, Wells Fargo analysts remain cautious. They believe that while pressure may ease and cost savings will contribute to improvement, further cuts may be necessary. As a result, they anticipate that Petco's shares will continue to face challenges.
In conclusion, Petco Health & Wellness is grappling with declining discretionary spending, which has impacted its revenue and gross margins. The company is taking steps to address these issues, but it remains to be seen how quickly the situation will improve.
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