Why Petco Stock Dropped 24% This Week

What happened

Shares of Petco Health and Wellness (WOOF -0.19%) were down 24.1% this week as of 11:30 a.m. ET Friday, according to data provided by S&P Global Market Intelligence, after the pet supplies retailer lowered its 2023 outlook despite posting fiscal second-quarter results that were roughly in line with expectations.

Indeed, the entirety of Petco’s drop this week came on Thursday morning after its quarterly update hit the wires.

So what

Petco’s headline numbers were decent. In the period, which ended on July 29, revenue climbed by 3.4% year over year to $1.53 billion, helped by a 3.2% increase in comparable-store sales. On the bottom line, that translated to adjusted (non-GAAP) net income of $16.3 million, or $0.06 per share, down from $0.16 per share in the year-ago period. But analysts, on average, had been expecting the same adjusted net income on slightly lower revenue of $1.52 billion.  

Petco also significantly improved its cash flows on a year-over-year basis. Quarterly operating cash flow more than doubled  to $96.6 million, while free cash flow swung to $44.6 million this quarter from negative $27.7 million in the prior-year period.

CEO Ron Coughlin praised the company’s execution “through an uncertain environment,” with particular strength in its vet consumables and services products.

However, Coughlin also warned that consumer discretionary spending faces continued pressures. As such, Petco reiterated its fiscal 2023 outlook to call for net revenue in the $6.15 billion to $6.275 billion range, but lowered its adjusted EBITDA guidance to the $460 million to $480 million range from $520 million to $540 million previously, and cut its forecast for adjusted earnings per share to a range of $0.24 to $0.30, down from $0.40 to $0.48 before.

Now what

The company is undertaking several strategic initiatives with a goal of achieving $150 million in cost and efficiency savings by the end of fiscal 2025 — specifically from its merchandise, supply chain, and general and administrative expense categories. Petco noted it recorded $6 million in “headcount reduction-related charges” stemming from those initiatives in fiscal Q2, and plans to achieve $40 million in cost savings by the end of the initiatives’ first year.

This might well position Petco to emerge as a stronger business when all is said and done. But for now, with management lowering its profitability outlook and sending out obvious warning bells regarding consumer discretionary spending trends, it’s no surprise to see shares falling this week.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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