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.
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Petco (WOOF) Q4 CY2024 Highlights:
- Revenue: $1.55 billion vs analyst estimates of $1.56 billion (7.3% year-on-year decline, in line)
- EPS (GAAP): -$0.05 vs analyst estimates of -$0.02 (significant miss)
- Adjusted EBITDA: $96.12 million vs analyst estimates of $93.66 million (6.2% margin, 2.6% beat)
- Revenue Guidance for Q1 CY2025 is $1.49 billion at the midpoint, below analyst estimates of $1.56 billion
- EBITDA guidance for the upcoming financial year 2025 is $382.5 million at the midpoint, above analyst estimates of $369.4 million
- Operating Margin: 1.1%, up from 0% in the same quarter last year
- Free Cash Flow was $59.04 million, up from -$2.04 million in the same quarter last year
- Same-Store Sales were flat year on year (-0.9% in the same quarter last year)
- Market Capitalization: $680.9 million
"Our results in the fourth quarter demonstrate the progress we've made to return Petco to retail operating excellence," said Joel Anderson, Petco's Chief Executive Officer.
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.
Specialty Retail
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.
Sales Growth
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, 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’s sales grew 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 is underwhelming and implies its products will see some demand headwinds.
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Store Performance
Number of Stores
A retailer’s store count influences how much it can sell and how quickly revenue can grow.
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.
Key Takeaways from Petco’s Q4 Results
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.
Big picture, is Petco a buy here and now? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.