Why Petco Could Be a Surprise Winner in Pet Stocks

You might think of Petco (WOOF -3.21%) as a ho-hum, brick-and-mortar pet retailer, but the company is reinventing itself as a one-stop shop for pet owners.

In this episode of "Upgrade or Topgrade," recorded on Oct. 15, Fool contributors Parkev Tatevosian and Jeremy Bowman and Millionacres Editor Deidre Woollard discuss Petco's changing business model and how it could help the company build a competitive advantage.

Deidre Woollard: That's why I'm going to argue the third one, which is the third challenge to Chewy that I see, which is Petco, which is ticker WOOF, W-O-O-F, which was adorable. It's a relatively new, I believe Petco was public a while ago and then IPO'd again recently. They really are playing up that experiential retail angle in the way that I think is interesting. They're really trying to go through that full-on omnichannel thing. There's some advantages to that. One of them certainly is, I don't think I've ever gone into a Petco without seeing an actual pet in there. Someone taking their dogs there to go look at toys. I feel like that is an interesting thing for them. They focused on making their stores pet destinations and that I think is one of the reasons that I'm looking at them as an interesting competitor to Chewy.

Part of that is because there's so much more that they offer in terms of grooming, wellness. They're growing their hospitals, treats, things like that. One of the things that they're doing is they are creating this thing called, the Vital Care program. They just launched this recently. They're already seeing between two to three times more spend from the customers. The Vital Care program, it's like a loyalty program but it basically tracks all of the wellness factors for your pet, grooming, they have vet visits, things like that. They are really seeing that customer growth from that angle. They recently announced that they've got the highest number of groomers they've ever had.

One of the things that they're seeing is, their CEO said that the more that a customer is omnichannel, the more value they get from them. They're really seeing that value by growing e-commerce and stores. They're getting those tailwinds from my favorite acronym BOPIS, buy online pick up in store. That's become huge for them. Another thing I like about them is that they're getting into insurance and offering Petco insurance and pet insurance. Pet insurance is interesting. I know there's Trupanion and a couple of others out there. I haven't delved too much into the pet insurance sector but my instincts tell me that sector is just going to be huge going forward. Either of you have pet insurance?

Jeremy Bowman: I have in the past and I don't currently have it though.

Parkev Tatevosian: I have and every time I check for pet insurance, there is a lot of restrictions with pre-existing conditions. Many things fit into pre-existing conditions that insurance didn't cover. It might have changed recently though.

Bowman: I think our dog chewed gum a few too many times when we got kicked off of it. [laughs].

Woollard: Your dog sounds like a lot of work I got to say.

Tatevosian: Yeah Jeremy.

Bowman: He's an old dog he's a pain. [laughs] They're your dog so got to do what you can.

Woollard: Exactly. That's one of the things that's been interesting with the pandemic, too. There's a few examples of people deciding if they didn't want their dog or something like that. But overall, once you're in, you're pretty much in and that's something that Petco talked about to the same way that Chewy did about the lifecycle of the pet. I want to dive into a couple of things they said about their total addressable market. They see the total addressable market for prescription food being $3 billion, total addressable market for drugs $8 billion. For Q2 they had 4 million customers, 700,000 grooming and nutrition customers. They reported revenue of $1.4 billion with gross margin of 41.8%. They're seeing a lot of growth, especially now as people are going back into stores. But they are really looking at it from that wider perspective of they call it a health and wellness ecosystem. One of the things that they've done is they've changed their branding and the way that they talk about the company from being a pet store, they call themselves the health and wellness company. You guys have probably seen the commercials where they've got people acting as dogs in like different cocktail parties scenarios and things like that, which is cute. But the overall idea is that they're bringing up that idea of you treating your animals with the same amount of health and wellness support that you treat yourself?