Petco Health & Wellness (WOOF -4.07%) is scheduled to report fourth-quarter and fiscal year 2021 earnings on March 8. Since the pandemic onset, when pet adoption gained popularity, the company has been thriving.
Folks spending more time at home and less time with friends, family, and coworkers craved the companionship a furry friend could provide. As a result, consumer spending on pets soared, and Petco went on a streak of six consecutive quarters of double-digit comparable-store sales growth.
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Sales are booming at Petco
Comp growth is sales at stores open for the previous 12 months and excludes the impacts of new store openings and closings. Interestingly, Petco's comp sales growth in the two quarters before the outbreak was a menial 1%. As mentioned earlier, it has boomed since the outbreak, reaching as high as 27% in the first quarter of 2021.
CEO Ron Coughlin thinks there is more to Petco's rising sales than consumer demand. Here's what Coughlin had to say in the press release that accompanied its third-quarter earnings: "Our focus on long-term, sustainable growth is powered by continued execution against our transformation, with one of the fastest veterinary expansions in history, further enhancement of our digital competitive advantages, expansion of our merchandise differentiation through powerful owned and exclusive brands, and our incredible Petco Partners who are improving more and more pet lives every single day in a challenging environment."
Indeed, Petco added 17 vet hospitals in the third quarter and now operates 172 total. Its services category is its fastest-growing -- expanding by 28% in the third quarter year over year. Still, it represents roughly 10% of its overall revenue. That said, establishing a more prominent presence in this category could allow Petco to benefit as pets adopted during the pandemic go through their life cycles.
Pet adoptions, which surged at the pandemic onset, are slowing, as evidenced by Petco's 6% growth in the segment, including companion animals. For the three quarters ended Oct. 30, 2021, the segment has grown by 15%, further signaling the slowdown.
What this could mean for Petco investors
Analysts on Wall Street expect Petco to report revenue of $1.49 billion and earnings per share (EPS) of $0.25. If the company meets those projections, it would see increases of 11% and 47.06%, respectively, from the same period the year before.
The earnings growth is partly fueled by a massive debt reduction. As of Oct. 31, 2020, Petco had $3.24 billion in total debt, which generated $53.8 million in interest expense in the quarter ended at the same time. In the quarter ended October 2021, Petco's debt had fallen to $1.6 billion, and the interest expense was reduced to $18.8 million. The company used its initial public offering funds to pay down the debt.
Sales and operating income growth are attributable to the rest of its impressive earnings growth. Regardless, the stock is down 12% year to date in 2022. The market fears a slowdown in pet adoption combined with inflationary pressure will hurt Petco in the near term.If management sounds optimistic about those two factors in the fourth-quarter earnings release, it could be the catalyst that turns the stock around.
This is likely the quarter Petco's streak of double-digit comp growth ends. Economic reopening means consumers have more choices on what to do with their time and money. As a result, Petco's comp growth could continue reverting to pre-pandemic rates, below double digits.
