Profits are soaring for the pet retailer Petco Health and Wellness (WOOF -3.53%). The company reported fourth-quarter and full-year 2021 results on March 8, and they were an inflection point.
The company was positive on the bottom line for both the quarter and a full year for the first time in its young history as a public company. The retailer is benefiting from a boom in pet spending since the onset of the pandemic and has used funds it received from its initial public offering (IPO) to pay down debt.
Image source: Getty Images.
Prudent financial management
In its fourth quarter, ended on Jan. 29, Petco reported earnings per share (EPS) of $0.11. That was up from a loss of $0.03 per share in the same quarter of the year prior. Analysts on Wall Street expected it to report EPS of $0.25. The lower-than-expected EPS in the quarter was due to rising expenses related to widespread inflation.
The company is spending more on everything from staff to shipping as the pandemic disrupts business activities worldwide. For instance, to secure enough staff to handle robust customer demand, Petco raised its minimum wage by $2 per hour; the average wage is now well above $17 per hour.
For the full year, Petco's EPS came in at $0.62, compared to a loss of $0.13 in the year prior. Overall, net profits soared to $164 million, up from a loss of $26.5 million a year ago. One significant improvement year over year was Petco's interest expense, which decreased from $219 million to $77 million. The reduction followed Petco's decision to use funds it received from its IPO to pay down its debt.
That decision has made a big difference. As of May 2, 2020, Petco held $3.5 billion in debt on its balance sheet. By Jan. 30, 2021, that had fallen by more than half to $1.6 billion -- and it remains today at about that level. A company's interest expense depends on both the weighted average cost of debt and the total debt balance. As total debt decreases, it lowers debt expense in most cases, and Petco was not an exception.
Rising sales also spurred Petco's profits. Pet spending has taken off since the pandemic's onset as folks adopted new companions to make the time away from friends and family more enjoyable. As a result, Petco has reported seven consecutive quarters of double-digit comparable-store sales (or comps) growth, culminating in a 14% increase in the quarter ended January.
Comps growth includes stores that were open for at least the previous 12 months and excludes the impact of new store openings and store closings. In the quarter before the outbreak, Petco grew comps by just 2%.
Petco's enhanced profitability can be sustained
It's an excellent sign to shareholders that management is using funds to pay down debt. There is no telling how long the good times will last for Petco. Sales are growing multiple times faster than before the pandemic, which is likely not sustainable.
By paying down debt and lowering its interest expense, Petco has reduced its fixed expenses for the long run. Even at lower revenue levels, Petco can still be more profitable than it was before the outbreak.
