What happened
Petco (WOOF -1.82%) stock fell harder than the market on Wednesday. Shares of the pet supply retailer were down 12% by 1 p.m. ET, compared to a 0.1% drop in the S&P 500. The decline put Petco into negative territory so far in 2023, down 6% compared to the 4% increase in the wider market.
It was sparked by Petco's Q4 earnings announcement and management's updated 2023 outlook.
So what
The retailer revealed solid Q4 operating results before the market opened on Wednesday. Comparable-store sales rose 5.3% for the Q4 period that ran through late January, executives said, to mark an acceleration over the prior quarter's 4.1% increase. Petco has now grown comps for 17 consecutive quarters.
Management highlighted several financial wins in Q4, too, including a doubling of cash flow. "The pet category remains resilient and growing," CEO Ron Coughlin said in a press release. Yet Wall Street was more interested in Petco's conservative outlook for 2023.
Now what
Sales will land between $6.15 billion and $6.28 billion, executives project, which would mark just about a 2% increase from this past year's $6.04 billion result. The earnings picture is worse still, with adjusted earnings per share likely to decline. This step backwards on growth and profitability is occurring even though fiscal 2023 has an additional week of sales as compared to last year.
Part of the challenge is rising interest expenses, and that is one big reason why Petco is working to pay down its debt on an accelerated basis. Yet the retailer is likely seeing some of the same pressure that's been impacting Chewy lately as pet owners shift demand away from higher-margin pet supplies and toward essentials like food and other consumables.
The industry still appears set to expand even as economic growth rates slow. But Petco is expecting a tougher year ahead on profitability, so investors pushed shares lower in response.
