Petco Health and Wellness: An Attractive Prospect for Pet Lovers
Every dedicated pet owner understands that your pet becomes part of your family. And just like you would with a family member, you want to make sure your pet has everything it needs. in order to live a happy, long and productive life. Today, there are a few publicly traded companies that are dedicated to making this goal a reality. Such a company is Health and wellness company Petco (NASDAQ: WOOF). Over the past several years, the management team at Petco Health and Wellness has been very successful in growing the company’s revenue. Overall performance, while mixed, was also generally positive. At first glance, the stock might look slightly expensive from an earnings perspective if we use 2021 data. But when we look at projections for 2022, the company looks quite affordable. There is some concern about the economy in general, as well as an intensification of competition from Amazon (AMZN). But as long as the company continues to achieve the kind of performance it has, the upside could be attractive.
A company focused on pets
Operationally, Petco Health and Wellness has been around for over 55 years. But over the past few years, the company has really worked to transform itself from a traditional retailer into an omnichannel provider of pet health and wellness offerings. Today, the company provides more than 24 million active customers with a diverse and differentiated portfolio of products and services aimed at optimizing the health and well-being of companion animals. These products and services are available at more than 1,500 pet care centers across the United States, Mexico and Puerto Rico. The company also has a digital channel through which offers are provided.
The service offerings provided by the company include veterinary care, pet grooming and training. The company achieves this, in part, through the more than 1,000 weekly mobile clinics it runs in the regions where it operates. The company also operates 197 full-service veterinary hospitals, with plans to expand these to around 900 at some point in the distant future. In addition to this, the company offers what it calls its Vital Care Membership Program. This program costs $19.99 per month and includes benefits such as 20% off each pet groomer, 10% off all nutritional products, additional 5% off nutritional products if you register for repeat delivery, $20 off pet boarding, dog walking, or pet sitting services, $15 Pals rewards each month, and unlimited routine vet exams at all Vetco Total locations Care. Customers can also join the company’s Pal Rewards loyalty program for free.
Over the past several years, the management team at Petco Health and Wellness has had a strong track record in growing the company’s revenue. Sales grew from $4.39 billion in 2018 to $5.81 billion in 2021. The strongest growth for the company came from 2020 to 2021, when sales soared 18% from one year to the next. Interestingly, this sales growth from 2020 to 2021 came at a time when the number of pet care centers the company owns in the United States and Puerto Rico increased from 1,454 to 1,433. Instead, the company really benefited from two things. First, it experienced an 18.9% increase in comparable sales. This is on top of the company’s 11.4% increase in comparable sales from 2019 to 2020. Second, the company has seen the number of veterinary practices it operates grow, from 125 to 197. The company’s strongest growth for the year came in the services and other category, where revenue jumped an impressive 43.2% thanks in large part to growing activity at veterinary hospitals across the country. company and the arrival of additional pets in its network. By comparison, supplies and pets saw more modest growth of 11.8%, while consumables sales jumped 19.3%.
During the same four-year window, the company’s net profits improved significantly. The company went from a net loss of $413.8 million in 2018 to a profit of $164.4 million last year. Operating cash flow also generally increased from $203.2 million in 2018 to $358.2 million in 2021. If we adjust for changes in working capital and non-cash lease costs, the The improvement was even greater, with the measure moving from minus $226.6 million to positive $411.4 million. Meanwhile, the company’s EBITDA also increased from $349.2 million to $448.9 million.
Looking to fiscal 2022, management has high expectations for the business. Revenue is expected to be between $6.15 billion and $6.25 billion. The company also expects adjusted earnings per share to be between $0.97 and $1. Halfway through, that would imply a net income of $263 million. Additionally, EBITDA is expected to be between $630 million and $645 million. If we assume adjusted cash flow from operations will grow at the same rate, it should be around $584.2 million for the year.
By taking this data, we can easily evaluate the company. Using our 2021 results, we can see that the company is trading at a price/earnings multiple of 26.4. That drops to 16.5 if management’s forecast for the year is correct. The price to adjusted operating cash flow multiple is expected to be 10.5, a figure that is expected to drop to 7.4 using 2022 estimates. And the EV/EBITDA multiple is expected to be 12. ,9. This should eventually drop to 9.1 if management forecasts are correct. To put the company’s pricing into perspective, I compared it to five other pet-focused companies. On a price/earnings basis, only three of these companies had a positive result, with multiples ranging from 15.4 to 2,198. Using our 2021 and 2022 results, two of the three companies were cheaper than Petco Health and Wellness . Using the price/operating cash flow approach, the range for these companies was 11.3 to 6,962. Whether we used 2021 or 2022 numbers, our prospect was the cheapest of the bunch. Finally, using the EV to EBITDA approach, the range was 10.6 to 3,813. Using 2021 data, two of the five companies were cheaper than our target. And using 2022 estimates, our prospect was the cheapest.
|Company||Prizes / Earnings||Price / Operating Cash||EV / EBITDA|
|Health and wellness company Petco||26.4||10.5||12.9|
|Freshpet (FRPT)||N / A||6,962||3,813|
|Central Garden & Pet Co (CENT)||15.4||23.4||10.6|
|Pet Med Express (PETS)||19.0||21.7||11.0|
|PetIQ (PETQ)||N / A||11.3||17.2|
Right now, the company’s stock looks quite attractive on a forward-looking basis. However, there are broader concerns about the state of the economy, and one of the first areas where people will cut spending on pets. However, the company continued to increase revenue during the pandemic. So I don’t see the impact there being that big. Perhaps the biggest concern for investors is the fact that Amazon recently held its first-ever Pet Day event, with deals on pet, home, and electronics products. Prime members were eligible for 10% cash back on pet products, and the company sold approximately 240 different SKUs in key items across all categories at an average discount of 26%. Some of these products were sold at discounts of up to 40%. Truth be told, it’s too early to tell if there will be any long-term damage for companies like Petco Health and Wellness. But with an addressable market of $119 billion, there’s likely plenty of room for multiple winners.
Based on the data provided, Petco Health and Wellness appears to be a truly quality company that is doing well in growing its revenue and bottom line. I understand there are short-term concerns about the company. But in the long run, I suspect the company will do just fine. Interestingly, the company is set to release its financial results covering the first quarter of its fiscal 2022 on May 24. Investors should pay close attention to this and see what type of revisions, if any, might need to be made to management guidelines. But in the absence of a significant change in expectations, I think the company offers attractive opportunities for value investors.