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Could Petco Health & Wellness Help You Become a Millionaire by 2040?

By Rich Duprey – Dec 18, 2021 at 10:00AM

Key Points

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This pet care leader is a top dog, but competition is nipping at its heels.

Petco Health & Wellness (WOOF 5.67%) started off as the leader of the pack when it went public in January of this year, chasing a 50% gain on the first day of trading. Since then, however, the pet food and services provider has pretty much been in the doghouse, with shares down 26% from its opening price.

Yet, the stock performance is not indicative of the business, which is actually doing quite well. Sales are growing rapidly, with comps up by double-digit rates for six consecutive quarters, and have been positive for the last 12 quarters. Recurring customer revenue is also showing strength, up 60% year over year, giving Petco a measure of predictability for this stream.

Its performance this past quarter allowed it to raise its outlook for the year, suggesting it's only a matter of when the market catches up to the business. So, let's see whether Petco Health & Wellness has what it takes to help you become a millionaire by 2040.

Pocketwatch lying on $100 bills.

Image source: Getty Images.

Pet care exhibits unstoppable growth 

Pet ownership had grown at a reliable 1% annual growth rate for the last 20 years until the pandemic created a massive uptick in pet ownership. Some 11 million Americans purchased a pet for the first time, and the number of U.S. households with a pet grew from 67% in 2019 to 70% last year (and up from 56% in 1988 when the American Pet Products Association first began conducting the survey).

Last year marked the first time ever Americans spent over $100 billion on their pets, mostly on pet food (40%), but also on vet care (30%) and supplies (21%). That represents a tremendous opportunity for Petco, which is addressing each of those markets.

Petco says it is the No. 1 pet specialty retailer in the fresh and frozen food category, and its Just Food for Dogs kitchens and pantries are now in 468 pet care centers. It operates over 1,500 Petco locations across the U.S., Mexico, and Puerto Rico, along with more than 150 in-store veterinary hospitals.

Yet, the pet market is rapidly evolving. Online sales of pet products now account for 30% of the total, up from just 8% six years ago. And data from Packaged Facts shows that of pet owners who buy products online, 59% order from, 41% do so from Chewy, and 33% order from Walmart.

Cat lying on its back on a blanket.

Image source: Getty Images.

Changing consumer preferences present challenges

It's likely this change in how consumers buy goods impacts Petco's performance, though it's still able to hold its own.

Petco believes it maintains a competitive advantage over its online-only competition because its combination of digital assets and brick-and-mortar stores delivers an omnichannel experience that meets consumers where they shop.

Last quarter, the pet retailer's digital business posted a two-year revenue increase of 159% on top of the 150% gain recorded in the prior quarter. And 90% of its online customers are choosing same-day delivery or the buy online, pick up in store option.

Wall Street expects revenue to grow on a compounded basis over 10% annually for the next five years, hitting $7.3 billion in 2026. Free cash flow, or the money that's left over after paying all the bills and that can then be reinvested in the business, is expected to triple.

Every dog must have its day

So, is Petco Health & Wellness a millionaire-maker? The humanization of pets is only going to continue, and that should ensure a stable, growing business for Petco even amid rising competition.

Because pet care is a relatively slow-growth, mature industry, investors shouldn't expect Petco to turn them into millionaires overnight. Having the right long-term mindset and thinking in terms of owning the stock for decades will help investors achieve their goals.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns and recommends Amazon and Chewy, Inc. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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