Any good pet owner will treat their pets like family. This means taking care of them by making sure they have the food they need, the toys they enjoy, and even the healthcare offerings you would want. for your children. A company dedicated to providing health and wellness offerings like veterinary care, pet grooming and training, to nearly 1,500 pet care centers in the United States, Mexico and Puerto Rico, east Health and wellness company Petco (NASDAQ: WOOF). Basically speaking, the financial performance achieved by the company has been quite mixed lately. Revenues continue to climb, but profits have fallen compared to the same period last year. Investors were also nervous because management cut its forecasts across the board. This also seems to indicate even more downward revisions in the future. While I understand the market’s concern, I also believe that the company’s decline has been worse than warranted. This is especially true if management ends up being right about the current guidance for fiscal year 2022.
Petco stocks – not man’s best friend
At the end of May of this year, I wrote an article that took a rather bullish stance on Petco. I have been particularly impressed with the growth of the business in previous years and have also appreciated the guidance that management has offered for fiscal 2022. Ultimately, I have concluded that as long as the expectations were met or exceeded, the company would offer upside potential to investors. This led me to rate the company as a “buy”, reflecting my belief at the time that it would generate performance that would outpace a broader market for the foreseeable future. Unfortunately, things didn’t go exactly as planned. While the S&P 500 fell 7.2%, shares of Petco fell 28.8%.
In truth, some of this inconvenience was probably justified. But at the same time, I think the market overreacted based on the guidance provided by management. For example, let’s start with revenue. For the first half of fiscal 2022, sales were $2.96 billion. That’s 3.8% more than the $2.85 billion the company generated in the same time a year earlier. The main driver of this sales increase was a 4.4% increase in comparable sales data. This growth is driven by a 13.7% increase in sales of consumables and a 19.7% increase in revenues associated with services and other activities. On the services side and on the other side of the equation, the company benefited from an increase in activity at the company’s veterinary hospitals, with the number of locations increasing by 50 from 150 to 200 in course of the last year. Pet supplies and sales, meanwhile, fell 9.2% year-over-year. The company has also seen its online sales jump 10.2% over the past year, which to me is a very good sign. At the same time, however, the company was negatively affected by a reduction in the total number of pet care centers it had in operation at the end of last quarter. That number stood at 1,428, up from 1,451 the company had a year earlier.
Although revenue was up nicely, the company’s profits fell, with net profit falling from $82.7 million in the first half of 2021 to $38.1 million in the same period this year. The company suffered here from a number of factors, including a reduction in its gross profit margin from 42% to 40.7% following a change in product mix. Higher interest charges also affected the company, as did a significant change in other non-operating items. This particular category experienced a year-over-year change of $55.11 million, entirely due to a change in fair value associated with its investment in Rover Group, Inc. Other profitability measures of the The business also deteriorated, with cash flow from operations falling from $202.4 million to $100.1. million. But if we adjust for changes in working capital, it remained nearly flat, dropping from $387 million to $386.7 million. And over that same period, we also saw EBITDA drop slightly, from $280.8 million to $274.5 million. As you can see in the chart above, results for the second quarter of fiscal 2022 versus the same period of 2021 were very similar to what the company saw in the first half of the year. in general. At the very least, we are not seeing a deterioration in earnings or a significant decline in cash flow in this admittedly turbulent market.
For the long term, management is also taking some interesting steps. For example, at the end of August this year, the company unveiled its decision to extend its health and wellness plan to all species of pets, ranging from birds to reptiles to fish and more. The company is also making significant investments in its product line, such as announcing in late August the expansion of its popular WholeHearted Pet foods to include fresh human-grade dog foods. And in June, the company unveiled its new retail test concept in small towns and rural areas, which is supposed to be tailored to the health and well-being of not only traditional pets, but also farm animals. closed.
Sales this year are now expected to be between $5.975 billion and $6.05 billion. Previously, management was guiding sales between $6.15 billion and $6.25 billion. Although the company has struggled with the bottom line this year, management remains optimistic about what the rest of the year will look like. Currently, the company expects EBITDA to be between $580 million and $595 million. While this is lower than the previously forecast range of $630-645 million, it would be higher than the $448.9 million generated in 2021. Adjusted earnings per share is expected to be between $0.77 and $0.81 . While that’s down from my previously anticipated $0.97 per share to $1 per share, it would still translate to net profit of $210 million. This compares well to the $164.4 million reported for 2021. No guidance was given regarding cash flow from operations. But if we assume it will grow at the same rate as forecast EBITDA, we should expect a reading of $538.4 million. As part of my analysis, I compared Petco to five similar companies. Based on price to operating cash flow, these companies ranged from a low of 15 to a high of 6,321. And using the EV to EBITDA approach, the range was between 11.4 and 698.7. In both cases, our prospect was the cheapest of the bunch.
|Company||Price / Operating Cash||EV / EBITDA|
|Health and wellness company Petco||7.5||10.2|
|Central Garden & Pet Co. (CENT)||15.0||11.4|
|Pet Med Express (PETS)||18.2||14.1|
Current data suggests to me that Petco is going through a tough time from an earnings and cash flow perspective. On top of that, investors are likely worried that the guidance provided by management could be downgraded again. After all, one of the first things people are likely to cut in times of economic uncertainty is the amount of money they spend on their pets. That said, stocks look very affordable right now and could still be undervalued even if the company’s fundamental condition proves insufficient. Couple that with management’s consistently upbeat guidance, and I think the “buy” rating I previously gave the company is warranted.