Petco swings to a profit and boosts forecast, citing customer growth, but shares fall

Petco Health and Wellness Company reported Thursday first-quarter earnings that outpaced Wall Street’s estimates as a surge in pet adoptions continues to help the retailer recruit new customers.

Despite the better-than-expected performance, and an increased earnings forecast, Petco shares fell almost 3% on Thursday.

“We’re attracting new customers and gaining market share in a growing category,” said Ron Coughlin, chairman and chief executive, in a press release.

Here’s what the company reported for the fiscal first quarter ended May 1, according to Refinitiv consensus estimates:

• Earnings per share: 17 cents adjusted vs. 9 cents expected
• Revenue: $1.4 billion vs. $1.27 billion expected

In the quarter, Petco reported net income of $7.56 million, or 3 cents per share, compared with a loss of $31.2 million, or 15 cents a share, a year ago.

Excluding items, the company earned 17 cents per share. Analysts polled by Refinitiv had expected earnings of 9 cents per share.

Total revenue grew by 27% to $1.41 billion from $1.11 billion a year ago, also outpacing estimates of $1.27 billion.

Petco’s same-store sales rose 28% from a year ago.

Petco said it gained 1.2 million net new customers during the quarter, which is a multiyear high.

“The category acceleration combined with a strengthening of our customer base give us confidence to raise our full year guidance,” Coughlin said.

The retailer expects revenue this year to be between $5.48 billion and $5.58 billion, up from a prior forecast of $5.25 billion to $5.35 billion.

Its outlook for earnings was lifted to a range of 73 cents to 76 cents per share, from a previous forecast of 63 cents to 66 cents per share.

Petco said its partnership with DoorDash to offer customers same-day deliveries has allowed it to compete with online retailers like Chewy because Petco’s cost to deliver from its stores is lower than the cost to ship.

“It’s a competitive advantage that our competitors have not been able to replicate,” Coughlin said on Petco’s earnings call.

Pet adoptions surged during the pandemic as consumers spent more time at home, giving them an opportunity to take on the new responsibilities that come with pet ownership. But unlike other pandemic trends, Petco doesn’t expect the boost to fade. The company said pet adoptions will be a long-term lift to sales because of recurring pet costs.

“You might get a Peloton once, you might redo your garage once, but once you have a new furry friend they are going to need to be fed, they are going to need to be groomed, they are going to need to be vaccinated for a decade or more,” Coughlin said on CNBC’s “Squawk on the Street.” “We call it the furry annuity.”

The company also saw a surge in demand for its pet training services.

The company brought in additional revenue due to increased spending from millennial and Gen Z pet owners when compared with pet owners in other age groups.

“When you look back on 2020, a lot of those new pets were taken by millennials and Gen Z-ers and guess what, those millennials and Gen Z-ers spend a lot more on their pets,” Coughlin said.

These younger pet owners spend their money on pricier natural pet food and luxurious pet apparel, including products like leather collars and puffer vests for pets.

“We have premium supplies that meet those customers needs,” Coughlin said, in a separate interview with CNBC. “[The more-natural food options] also have higher price points and higher trip frequency, which is good for our business.”

Petco saw that Americans moving out of cities and into suburbs and rural areas during the pandemic allowed them to adopt bigger dogs.

“The shift to the suburbs and rural, which a portion of which we think will be sustained, has resulted in larger dogs. And that’s a positive for us, because larger dogs have larger bowls with more food in it,” Coughlin said.

In terms of future growth, the company is working on increasing the goods and services it offers at its locations.

“We are very comfortable with our footprint and we even see some expansion in some of our high growth markets,” Coughlin said. “But the main area where we are focused is by increasing the foot per location by adding the vet, adding a just food for dog pantry and adding [our premium apparel and supplies line.]”

Correction: Petco beat Wall Street’s earnings expectations.