What happened
Shares of Petco Health & Wellness (WOOF -3.21%) are rising 7.7% this week, according to data compiled by S&P Global Market Intelligence, mostly as a result of a broad market rally earlier this week, but also after signing a partnership with insurer Nationwide, which bills itself as the first and largest provider of pet insurance.
The market had rallied hard on Monday and Tuesday, helping to lift Petco shares over 12% for the two-day period, but have given back 3.5% since then.
Image source: Getty Images.
So what
Pet ownership and care has long been a massive, rising trend, with spending on pets growing at an 11% compounded annual rate since 2018, hitting $123.6 billion last year. Over 90 million homes, or some 70% of all U.S. households, own a pet, mostly dogs and cats.
While pet food and treats is the largest expenditure, representing 40% of all spending, or $50 billion, insurance (as part of a broad "other services" category) is a growing percentage of total spending. In 2021, such services accounted for 28% of the total, or almost $35 billion, for a near-15% CAGR from four years ago, and it's notable that insurance was even mentioned back then.
Yet just like Chewy and other pet-oriented businesses, Petco is feeling the impact of current economic conditions as consumers cut back on discretionary purchases to save money. Petco reported second-quarter sales grew just 3.5% in August, down from 4.3% in the first quarter.
Now what
Fortunately, pet ownership has remained robust, and as the "humanization" trend continues of treating pets as part of the family, consumers are still willing to spend on vet services. Petco's services segment, which include veterinary hospitals -- Petco paid $35 million in May to buy out the remaining half of its Thrive vet joint venture -- saw revenue jump 13% in the quarter.
Pet insurance is a similarly growing market and has doubled in size in four years to $2.8 billion. Petco's partnership with Nationwide helps it tap into that opportunity and should make it a bigger part of its overall business.
