What happened
Petco Health and Wellness (WOOF -3.21%) shareholders saw big declines on Wednesday. The pet supply retailer's shares were down more than 20% by noon, compared to a 0.9% decline in the S&P 500. This slump put Petco's stock in negative territory for 2023, down roughly 16%.
Wednesday's drop was sparked by the retailer's first-quarter earnings report.
So what
Petco managed to continue boosting sales in the selling period that ran through late March. However, there were signs of more weakness in the industry. Comparable-store sales were up 5%, which was on pace with the prior quarter's increase. But pet owners are focusing their spending on essentials rather than on discretionary products.
This shift is pressuring earnings. Gross profit margin declined, and Petco posted a slight drop in its adjusted margin as well.
Investors are also concerned about the retailer's significant debt, which is exposing the business to higher interest payments. Executives are aiming to reduce this debt burden over time, with $100 million of loan payoffs targeted in fiscal 2023.
Now what
Petco reaffirmed the company's key outlook projections that call for modest adjusted sales and earnings growth this year in a tougher environment for pet supplies. Revenue will still land at about $6.2 billion, it forecasts, and adjusted earnings are still on track to fall between $520 million and $540 million.
Given that context, the stock's decline on Wednesday seems like an overreaction. Petco's wider growth picture isn't materially worse for 2023, even though earnings trends are weaker than they were during the pandemic.
Petco stock is exposed to risks around rising interest rates and slowing consumer spending, but the company has dealt with these challenges for several quarters now. Investors should expect continued volatility in the stock, but the wider outlook is positive for the pet supply retailer.
