While Americans may love their furry friends, that sentiment failed to deliver for Petco (NASDAQ:WOOF) and its second-quarter earnings report, sending WOOF stock plunging Wednesday morning. Shares slipped 6% earlier today before extending losses to about 8% in the early afternoon. Petco disappointed Wall Street, missing expectations for the top and bottom lines. Adding insult to injury, management cut its full-year outlook.
For Q2, Petco posted net income of $14.35 million, or 5 cents per share. This figure contrasted sharply and unfavorably with the year-ago quarter’s result of $75.11 million, or 28 cents per share. In addition, Petco’s adjusted per-share earnings came out to 19 cents, below FactSet’s consensus target of 22 cents.
On the revenue front, the pet retailer rang up $1.48 billion. Here, the sales tally represented a lift of 3% from the year-ago result of nearly $1.44 billion. Unfortunately, this figure also missed Wall Street’s expectations, which on average called for just under $1.5 billion.
However, the real pain stemmed from the company’s outlook. Given the tough macroenvironment, Petco now expects full-year adjusted earnings per share of 77 cents to 81 cents on sales of $5.98 billion to $6.05 billion. According to MarketWatch, the “FactSet consensus is for EPS of 89 cents and revenue of $6.107 billion.”
WOOF Stock is Howling in the Rain
Per Barron’s, Petco’s leadership team didn’t disclose why it revised its guidance in its Q2 press release. However, CEO Ron Coughlin stated the pet category is still resilient against economic volatility. Further, the company is currently expanding its veterinary network and capabilities.
Certainly, Coughlin has ample reason to be optimistic. According to the American Pet Products Association (APPA), the broader pet and associated products and services industry posted $123.6 billion in sales last year. This impressive tally represented a lift of 19.3% against 2020’s result of $103.6 billion.
In turn, despite the devastating disruption of the coronavirus pandemic, 2020 revenue still managed year-over-year (YOY) growth of 6.7%. Pet care represented one of the few segments that enjoyed solid growth in 2020, though it wasn’t exempt from headwinds. The growth in the sector from 2018 to 2019 was 7.3%.
Theoretically, WOOF stock should enjoy a large, growing and relevant total addressable market. At the same time, shares are down 28% this year. For context, the benchmark S&P 500 index is down about 14% during the aforementioned period.
One possible concern for WOOF stock focuses on competition, particularly from big-box retailers like Walmart (NYSE:WMT) and Target (NYSE:TGT). Essentially, Petco might suffer from the trade-down effect. As inflationary pressures rise, big-box retailers’ lower prices (through superior economies of scale) may steal away customers from Petco.
Why It Matters
While Americans’ love for their pets clearly shows in the APPA sales reports, the industry isn’t infallible. One of the gut-wrenching scenes from the Great Recession centered on abandoned pets. Therefore, WOOF stock might be recession-resistant, but this in combination with the aforementioned factors doesn’t bode well.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.